Latest / The Financial Exchange Show / Markets on Edge: Iran Headlines, Oil Shocks & the Recession Question

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Markets on Edge: Iran Headlines, Oil Shocks & the Recession Question · The Financial Exchange Show

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1:03
Speaker 1: This is the Financial Exchange with Mike Armstrong and Paul Lane.
1:09
Speaker 2: Good morning here on the Financial Exchange. If you liked
1:13
Speaker 2: what you saw in markets yesterday, then I do not
1:15
Speaker 2: have great news for you today as we're getting a
1:19
Speaker 2: bitter of a verse course here in early trade and
1:22
Speaker 2: to mark what's gone on for the last two days.
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Speaker 2: Obviously over the weekend, the President delivered the ultimatum to
1:28
Speaker 2: Iran of negotiate or we will be striking energy facilities.
1:34
Speaker 2: Through back channels. It's been insinuated that there have been
1:38
Speaker 2: some productive conversations. Actually it's not been insinuated. It's been
1:41
Speaker 2: plainly stated by the President that there's been some back
1:43
Speaker 2: channel and productive conversations with who in Iran. It's hard
1:49
Speaker 2: to say because there's a lot of lack of clarity
1:51
Speaker 2: about who specifically might have any sort of authority to
1:54
Speaker 2: negotiate anything in Iran, but enough to convince the present
2:00
Speaker 2: that strikes should hold off on energy infrastructure. That was
2:03
Speaker 2: announced very early Monday morning, right around seven seven fifteen
2:08
Speaker 2: am via truth Social Post. Immediately markets reverse course. Yesterday
2:13
Speaker 2: you had futures off about seven tenths of a percent.
2:15
Speaker 2: They immediately swung up about two and a half percent,
2:18
Speaker 2: but calmed down during trading and we finished the day
2:22
Speaker 2: up around one to one and a quarter percent, depending
2:26
Speaker 2: on which major index you're looking at. Oil prices also
2:30
Speaker 2: came down, but again what happened was midway through trading yesterday,
2:36
Speaker 2: Iranian press said there was no conversation, there is no
2:40
Speaker 2: productive meetings, YadA, YadA, YadA. So investors today, I think,
2:45
Speaker 2: are again behaving somewhat logically here. The thing that matters
2:49
Speaker 2: with all of this just to see through all of
2:52
Speaker 2: the potential bs, because there's probably a lot of it
2:55
Speaker 2: at the moment. Seeing through all the potential bs. The
2:58
Speaker 2: thing that matters is does traffic flow through the straight
3:03
Speaker 2: of Foremos right now? The answers no, and so equity
3:06
Speaker 2: markets I think are taking a pause. Here. We are again,
3:10
Speaker 2: you know, right now, off about a third of a
3:12
Speaker 2: percent on the S and P five hundred, So we're
3:15
Speaker 2: a fair bit above where we were on Friday of
3:18
Speaker 2: last week, but not substantially. You know, we're up less
3:21
Speaker 2: than one percent of where we were closing on Friday.
3:24
Speaker 2: And I think the answer is the status quo hasn't
3:26
Speaker 2: changed a whole lot. I think the one thing you
3:28
Speaker 2: can point to is that the worst fears that you
3:32
Speaker 2: had on Saturday or Sunday of oh, are we potentially
3:35
Speaker 2: going to strike some infrastructure that can't really come back
3:39
Speaker 2: from and then Iran reaches out and strikes at energy
3:42
Speaker 2: infrastructure and at their neighbors. That worst case scenario was
3:45
Speaker 2: taken offline, but we didn't know about that worst case
3:47
Speaker 2: scenario on Friday, and so I think equity markets are
3:50
Speaker 2: kind of continuing their slog of will this shut down
3:55
Speaker 2: of energy infrastructure lead to you know, the worst case
4:00
Speaker 2: scenario for a number of economies across the globe, probably
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Speaker 2: not the United States, but you know, the worst case
4:07
Speaker 2: scenario in places like Singapore, Pakistan and other countries that
4:11
Speaker 2: do not have strategic patrollium reserves and have already begun
4:14
Speaker 2: rationing energy in some cases.
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Speaker 3: And it also just further enforces the general concern that
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Speaker 3: you have with the longer this lingers on, the more
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Speaker 3: the impacts will be of greater significance to the global economy.
4:27
Speaker 3: And there was, of course, the reason for the market
4:29
Speaker 3: rally yesterday is some optimism out that that perhaps this
4:32
Speaker 3: would get resolved sooner or later. It seems like a
4:35
Speaker 3: lot of that optimism has been called today, as you mentioned,
4:38
Speaker 3: with markets selling off a little bit here. It's hard.
4:41
Speaker 3: It's hard to have too much that is innovative or
4:45
Speaker 3: you know, interesting to say on this because it is
4:47
Speaker 3: so nobody knows anything. Nobody knows anything, and it's so
4:51
Speaker 3: binary to your point of are things moving through that
4:54
Speaker 3: straight or are they not? And it's obviously our job
4:58
Speaker 3: here to keep everyone in price of what is going on.
5:00
Speaker 3: But other than that, it's just we are in a
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Speaker 3: bit of a stand still at the moment, and it
5:05
Speaker 3: seems like Mike Equity markets could care less about anything
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Speaker 3: besides this, And I'm not saying that's wrong, but gone
5:13
Speaker 3: are the days of any discussion on really anything else
5:16
Speaker 3: regarding AI. We are you know, any other market caallust
5:20
Speaker 3: Those have all been put by the way side.
5:22
Speaker 2: And we continue to see evidence that there's just a
5:24
Speaker 2: lot of different interested parties in everything going on in Iran.
5:29
Speaker 2: Over the course of last week, around Thursday morning, you
5:32
Speaker 2: had foreign ministers from Egypt, Turkey, Saudi Arabia and Pakistan
5:36
Speaker 2: gathering to try and find some diplomatic solutions toward the
5:40
Speaker 2: war going on. One of their struggles, of course, was
5:44
Speaker 2: who exactly can we reach out to to negotiate with?
5:48
Speaker 2: Who is going to have any sort of power to
5:51
Speaker 2: negotiate with any authority here on de escalating in Iran,
5:56
Speaker 2: given you know, the decapitation that has generally occurred to
6:00
Speaker 2: leadership across Iran. And to that end, you know, it
6:04
Speaker 2: raises the question, does Israel see, you know, cessation of
6:09
Speaker 2: hostilities the same way that we do. They continue to
6:12
Speaker 2: strike at leaders some that have you know, at least
6:17
Speaker 2: been hung out there by other Middle Eastern leaders as
6:20
Speaker 2: potential negotiating counterparts. Right, the National Security chief who was assassinated,
6:27
Speaker 2: you know, was considered maybe a viable partner. And so
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Speaker 2: I keep going back to a few things. One I
6:34
Speaker 2: do genuinely believe, based on his actions, that the President
6:39
Speaker 2: ties a lot of his how do I phrase this?
6:45
Speaker 2: Our president ties a lot of his views of his
6:47
Speaker 2: own success to the market, to the equity markets and
6:50
Speaker 2: the oil markets. I think both those things are very
6:52
Speaker 2: important to him in terms of what he views as
6:56
Speaker 2: his legacy. And we have seen several occasions, both in
6:59
Speaker 2: the first administ as well as in this administration, when
7:02
Speaker 2: equity markets become genuinely panicked, as they were kind of
7:08
Speaker 2: looking that way on Sunday evening into Monday, right, a
7:11
Speaker 2: two and a half percent one day drop on US
7:13
Speaker 2: major indices is a fairly significant thing that can cause
7:17
Speaker 2: some other things to blow up. He has pivoted in
7:21
Speaker 2: order to benefit markets. I think that is true. At
7:25
Speaker 2: the same time, I think the important piece that investors
7:30
Speaker 2: may not be fully appreciating here is he's not the
7:34
Speaker 2: only one in control of this in the same way
7:36
Speaker 2: that it was with tariffs.
7:38
Speaker 3: Couldn't agree with you more. In prep for the show
7:40
Speaker 3: this morning, there was I believe it was in a
7:42
Speaker 3: tiexas manager who was quoted in saying that this is
7:45
Speaker 3: the first time that it's not a one sided gambit,
7:48
Speaker 3: and I really highlighted that because that is truly the
7:50
Speaker 3: biggest takeaway here is we've emphasized before that there has
7:53
Speaker 3: been a focus from President Trunk to act to equity
7:56
Speaker 3: markets and try to ease some of the concerns. But
7:58
Speaker 3: when you're talking about callbacks toiration day last year, when
8:02
Speaker 3: you're talking about assessing tariffs on specific nations, that's something
8:06
Speaker 3: that he has very direct control over. It can reverse
8:09
Speaker 3: course on say you know what, it's not fifty percent,
8:11
Speaker 3: it's twenty percent or whatever the car beouts end up
8:14
Speaker 3: being this time. It's two different people. If you and
8:17
Speaker 3: I are in an argument or in some sort of dispute,
8:20
Speaker 3: two people have to come to an amends. And that
8:23
Speaker 3: is really a key point to make here.
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Speaker 2: Very different for the Liberation Day of twenty twenty five.
8:28
Speaker 2: You know, Iran demanding restitutions for strikes, I guarantee by
8:32
Speaker 2: Israeli in the United States that they won't strike in
8:34
Speaker 2: the future, and basically collecting toll payments in the straight
8:38
Speaker 2: up hormones seems like a series of considerations that the
8:44
Speaker 2: United States and Israel would not be willing to come to,
8:46
Speaker 2: and so it is significantly different from these other events. Nonetheless,
8:51
Speaker 2: equity investors do continue to hang on to this seeming
8:55
Speaker 2: threat of hope that hey, this may not spill over,
8:59
Speaker 2: Hey this could be resolved quickly, and I think hence
9:03
Speaker 2: that's why they're keeping equity markets at this stage around
9:06
Speaker 2: five percent below where they were on Friday, February twenty seventh.
9:11
Speaker 2: We've been hanging out around those levels. Yeah. Oil markets
9:14
Speaker 2: have shot higher because of the facts on the ground there.
9:17
Speaker 2: You know, if you want to buy a barrel of
9:18
Speaker 2: oil in the Middle East right now, you're not paying
9:22
Speaker 2: ninety bucks a barrel. You're paying like one hundred and
9:24
Speaker 2: sixty bucks a barrel. The actual price at the moment
9:27
Speaker 2: compared to the futures contracts that we quote are very different,
9:30
Speaker 2: and you know it's different than pricing in the equity
9:33
Speaker 2: market risk for US companies. But again going back to
9:37
Speaker 2: what matters here, there's going to be a lot of
9:38
Speaker 2: fog of war. Did conversations occur between anyone in Iran
9:43
Speaker 2: directly to the president? Did they occur through some back
9:46
Speaker 2: channel diplomacy through neighboring countries who have a better relationship. Honestly,
9:51
Speaker 2: it matters to track the tone coming from Israel, Iranian
9:57
Speaker 2: leadership and our president, detecting changes and tones or what
10:02
Speaker 2: US markets are going to reply to to some degree,
10:05
Speaker 2: But if you want evidence of a resolution, it is
10:09
Speaker 2: ships moving through the street.
10:10
Speaker 3: Actions speak louder than words.
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Speaker 2: Actions are going to speak louder than words here because
10:14
Speaker 2: we are talking about physical shortages of all sorts of goods,
10:17
Speaker 2: and so that's what we're going to be keeping our
10:19
Speaker 2: eyes on. Easy to get distracted and the day to
10:21
Speaker 2: day moves here, especially when the moves are three percentage
10:25
Speaker 2: points in either direction for US stocks, But keep your
10:28
Speaker 2: eye on the ball here. That is what ultimately matters,
10:30
Speaker 2: rather than what Iranian state media says, is Raeli media,
10:34
Speaker 2: or US media says about the president's actions. That's what
10:37
Speaker 2: we've got to keep eyes on the ball on. Let's
10:40
Speaker 2: take a quick break. When we come back. I want
10:44
Speaker 2: to talk about this, you know, kind of dual shock
10:47
Speaker 2: that we may be facing that investors are you know,
10:50
Speaker 2: if you talk about the real concern the investors have
10:52
Speaker 2: about this event in Iran, the war in Iran, it's
10:56
Speaker 2: this dual shock to both prices and potentially growth. We'll
10:59
Speaker 2: be covering that next year on the Financial Exchange.
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12:01
Speaker 2: I love when we've got pieces like this back to back.
12:03
Speaker 2: So the first one from both from Bloomberg in fact
12:07
Speaker 2: War Knox global economy with dual shock to growth and prices,
12:11
Speaker 2: basically the threat of stagflation in the global economy, paired
12:16
Speaker 2: with a piece from Jonathan Levine and Bloomberg. Are US
12:19
Speaker 2: recessions going extinct? So he, by the way, concludes probably not.
12:24
Speaker 2: That's that's you know, people do talk about this phenomena.
12:27
Speaker 2: I've been asked questions about it because it has been
12:29
Speaker 2: a while, but.
12:31
Speaker 1: It was a long list.
12:33
Speaker 3: There's still risks the market going down.
12:36
Speaker 2: So let's talk about the first piece though, and talk
12:39
Speaker 2: about you know, going into twenty twenty six, there were
12:42
Speaker 2: some pre existing threats to the US. I want to
12:45
Speaker 2: focus on the US economy. I know this is about
12:47
Speaker 2: the global economy. I think those threats are a little
12:49
Speaker 2: bit more obvious to you know, Singapore, for instance, doesn't
12:53
Speaker 2: have much of economy if it can't get its hand
12:55
Speaker 2: on bunker fuel to fuel ships that go all over
12:58
Speaker 2: the world. Pakistan can't have much of an economy if
13:02
Speaker 2: they can't run their electric grid. That's a pretty obvious threat.
13:05
Speaker 2: Inflation isn't really a problem there. It might be, but
13:09
Speaker 2: for right now, if you can't power your grid, you
13:11
Speaker 2: have bigger problems than inflation. Here in the United States,
13:14
Speaker 2: we were facing an economy well, I think, just defining
13:18
Speaker 2: what we were looking at, we had GDP that was
13:21
Speaker 2: running weaker than anticipated. Initial thoughts were that we were
13:26
Speaker 2: going to be running in the high two s, low threes,
13:28
Speaker 2: and it came in a fair bit lower than expected
13:31
Speaker 2: once we got the readings on it. For twenty twenty
13:33
Speaker 2: five employment in the United States, the unemployment rate had
13:37
Speaker 2: been heading up slightly, but that wasn't really this concerning
13:41
Speaker 2: piece about the labor market. The concerning piece about the
13:43
Speaker 2: labor market was at the pace of hiring had just
13:46
Speaker 2: been essentially going down. I had been slowing to a halt.
13:50
Speaker 2: To Paul's point, wet net in twenty twenty five, I
13:53
Speaker 2: think added one hundred and fifteen thousand jobs to the
13:56
Speaker 2: US labor market.
13:58
Speaker 3: And we were cranking out too, two hundred twenty five
14:01
Speaker 3: thousand a month back in the peak of twenty one
14:03
Speaker 3: and twenty two.
14:04
Speaker 2: Yeah, yeah, I mean, you know, in twenty twenty four,
14:06
Speaker 2: I think there were one point five million jobs added
14:09
Speaker 2: in twenty twenty three, two and a half million, So
14:11
Speaker 2: there there was a slow down occurring there in the
14:14
Speaker 2: labor market. And you know, there are a number of
14:17
Speaker 2: theories as to why that could be happening. It might
14:19
Speaker 2: be all immigration related. It could be related to improvements
14:23
Speaker 2: in AI and companies being hesitant to hire because of that.
14:27
Speaker 2: It could be a number of other factors around private
14:31
Speaker 2: credit worries or worries about how any number of things
14:35
Speaker 2: are going to disrupt trade is going to disrupt the economy.
14:37
Speaker 2: So there was notwithstanding a concern about growth going into
14:41
Speaker 2: twenty twenty six, which is why the FED lowered interest
14:44
Speaker 2: rates at the end of you know, second half of
14:46
Speaker 2: twenty twenty five. Even with the Fed president who seems
14:49
Speaker 2: to disagree with a lot of things that President Trump
14:52
Speaker 2: has to say about the economy, they still lowered interest
14:54
Speaker 2: rates in the second half of twenty twenty five. You
14:57
Speaker 2: now pair that with this price shock and Iran because
15:01
Speaker 2: of the events in Iran, and it's easy to get
15:05
Speaker 2: to a point where you talk about stagflation. And when
15:09
Speaker 2: we talk about stagflation, most people think about the nineteen seventies,
15:12
Speaker 2: but I'll point out that we've dealt with short periods
15:14
Speaker 2: of stagflation here in the US. If anybody remembers twenty
15:18
Speaker 2: twenty two, it's only a few years ago. I hope
15:20
Speaker 2: all of you listening remember twenty twenty two. The state
15:24
Speaker 2: of the economy was pretty visibly problematic. You did have
15:30
Speaker 2: a labor market that continued growing, So that was the
15:32
Speaker 2: exception to the rule, is the labor market was actually
15:35
Speaker 2: showing signs that was okay, which is probably the only
15:39
Speaker 2: reason we didn't get a recession call for twenty twenty two.
15:42
Speaker 2: But GDP declined for two straight quarters. You had earnings
15:45
Speaker 2: coming down, and you had inflation running the worst numbers
15:48
Speaker 2: that you had seen since the nineteen seventy four I
15:52
Speaker 2: think was the actual year. So by most accounts, that
15:55
Speaker 2: was especially in the first half of twenty twenty two,
15:57
Speaker 2: a stagflationary environment. The concern right now is not a
16:02
Speaker 2: repeat of twenty twenty two. I don't think. I think
16:05
Speaker 2: it's very difficult in my mind to get to a
16:07
Speaker 2: point where inflation runs nine percent. I think the concern
16:11
Speaker 2: that I would have about this moment in time is
16:14
Speaker 2: do we run the risk of the multitude of shocks
16:19
Speaker 2: that we saw in the nineteen seventies repeating themselves over
16:23
Speaker 2: and over again here for the mid twenty twenties. Right
16:26
Speaker 2: We've had the price We've had the twenty twenty two
16:28
Speaker 2: inflation shock. We then had a labor market that came down.
16:33
Speaker 2: We had a business decision freeze and hiring freeze due
16:38
Speaker 2: to threat of tariffs that you know, kind of paused
16:41
Speaker 2: all productive hiring and firing for a good six to
16:45
Speaker 2: nine months as businesses navigated it. And now we are
16:48
Speaker 2: having what could result in a supply chain shock. We
16:51
Speaker 2: are not there yet, no, but we you know what
16:54
Speaker 2: the events right now the threat to the United States.
16:58
Speaker 2: Everybody likes to talk about gas prices, that to me
17:01
Speaker 2: is not the biggest threat from all of this. Like, frankly,
17:05
Speaker 2: if gas prices sit at four to five dollars a
17:09
Speaker 2: gallon for a year, nobody's gonna be happy, but that
17:12
Speaker 2: probably the in and of itself, doesn't land you in
17:14
Speaker 2: a recession. What could land you in a recession and
17:16
Speaker 2: a stagflationary environment would be prices for fertilizer and everything
17:21
Speaker 2: else increasing at a pretty substantial and unpredictable pace, So
17:25
Speaker 2: that we're dealing with the type of environment that people
17:29
Speaker 2: remember in twenty twenty and twenty twenty one, where you
17:32
Speaker 2: would order something online and it might not ever show
17:36
Speaker 2: up because of the supply chain disruptions that we're getting.
17:38
Speaker 2: So that that is, again, if you're worried about the
17:41
Speaker 2: real threat of this for the US economy, that to
17:45
Speaker 2: me is what it could result in. If this lasts again,
17:48
Speaker 2: this would be months. This is not Oh, if it
17:51
Speaker 2: goes on another week, then I'm worried about Americans not
17:53
Speaker 2: being able to get their hands on grills and refrigerators again.
17:56
Speaker 2: But if it lasts a couple months, that is the
18:00
Speaker 2: type ofest ruption you're talking about.
18:01
Speaker 3: The biggest distinction in this point's been made previously twenty
18:05
Speaker 3: twenty two versus where we sit today is the amount
18:08
Speaker 3: of consumer demand out there. Twenty twenty two, everyone was
18:11
Speaker 3: sitting extremely flushed in terms of the post pandemic era,
18:14
Speaker 3: there have been trillions of dollars infused into the economy.
18:16
Speaker 2: Nobody's paying student loans, and.
18:19
Speaker 3: Consumers had the money to buy the grills, to buy
18:21
Speaker 3: patio furniture, et cetera. So that just exacerbated all the
18:24
Speaker 3: supply chain issues that we were dealing with because there
18:27
Speaker 3: was so much demand for from all that we can
18:29
Speaker 3: see now in terms of the state of the consumer,
18:31
Speaker 3: we've talked about this bifurcated consumer that we've had over
18:35
Speaker 3: the last year and a half or so, where the
18:38
Speaker 3: wealthy income earners have been spending, but the lower income
18:40
Speaker 3: earners have not been spending and have been much more
18:44
Speaker 3: discerning about their purchases. So if you were to see
18:47
Speaker 3: this environment where prices increase, I would imagine I would
18:51
Speaker 3: push back a little bit lesser of a concern on
18:54
Speaker 3: the stagflation front, because I just don't know if we'd
18:56
Speaker 3: have the requisite demand to continue to push prices up,
19:00
Speaker 3: because I feel like the appetite for consumption would would
19:04
Speaker 3: drop more so now than it was in twenty two
19:06
Speaker 3: just because the consumer is in a different place. But
19:09
Speaker 3: some of the issues you're speaking to are more business driven.
19:12
Speaker 3: And perhaps the consumer impact like fertilizer. Those are things
19:15
Speaker 3: that we need and they're not luxury items like patio
19:19
Speaker 3: furniture a grill, so perhaps it would be harder to
19:22
Speaker 3: avoid that.
19:23
Speaker 2: Let's take a quick break when we return. Wall Street
19:26
Speaker 2: Watch full market update coming up next.
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19:51
Speaker 2: Time out full.
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20:02
Speaker 4: All markets are giving back gains from yesterday's rebound, driven
20:05
Speaker 4: by President Trump's social media posts about the US and
20:08
Speaker 4: Iran having productive talks. However, sentiment waned after Iran denied discussions.
20:13
Speaker 4: Right now, the die was down by seventy four points
20:16
Speaker 4: over a tenth of a percent, SMP five hundred down
20:19
Speaker 4: about a third of four percent, Nasdaq down nearly eight
20:22
Speaker 4: tenths of one percent or one hundred and seventy one points,
20:25
Speaker 4: RUSS two thousand down over half a percent, Tenure treas
20:28
Speaker 4: reeled up four basis points at four point three eight
20:32
Speaker 4: two percent, and Oil up four percent higher, trading just
20:36
Speaker 4: below ninety two dollars a barrel. Tesla reported its first
20:40
Speaker 4: monthly sales increase in Europe in more than a year,
20:43
Speaker 4: where faces strong competition from Chinese ev maker Byd. Tesla
20:48
Speaker 4: stock today is up by one percent. Meanwhile, the Financial
20:51
Speaker 4: Tabs reported that Japan's second largest lender, Somtomo Mitsui Financial Group,
20:57
Speaker 4: is working on plans for a possible takeover of investment
21:00
Speaker 4: bank Jeffreys. Jeffrey stock is rising nearly two percent. Elsewhere,
21:04
Speaker 4: Apollo Global Management stock falling nearly five percent after filing
21:09
Speaker 4: with the SEC revealed the asset management company will limit
21:13
Speaker 4: withdrawals from its flagship private credit fund to less than
21:16
Speaker 4: half of request ast latter to share sinking over nine
21:19
Speaker 4: percent after the Wall Street Journal report of the Beauty
21:22
Speaker 4: Giant is in talks to acquire Spanish perfume maker Puigue Brands,
21:27
Speaker 4: and video game retailer game Stop will report earnings after
21:31
Speaker 4: today's closing bell. I'm Tucker Silva in that is Wall
21:35
Speaker 4: Street Watch.
21:37
Speaker 2: Massachusetts home sales are down more than ten percent to
21:40
Speaker 2: start the year, and I think we can file this
21:43
Speaker 2: under interesting but probably not relevant yet. So my take
21:49
Speaker 2: on this would be concerning if this lasts through midway
21:53
Speaker 2: this year, because look, interest rates are a good three
21:57
Speaker 2: quarters of percent lower than they were during the last
21:59
Speaker 2: spring home sales season. But guess what it is midway
22:05
Speaker 2: through March, and basically for January and February, nobody was
22:09
Speaker 2: buying homes because we were all snowed into our homes.
22:12
Speaker 2: So you weren't hiring somebody to clean out your home,
22:14
Speaker 2: You couldn't hire anybody to put a pod in front
22:16
Speaker 2: of your house because there was, you know, eight feet
22:18
Speaker 2: of snow. And so the idea that home sales are
22:21
Speaker 2: down like unsurprising to me. And then oh, by the way,
22:24
Speaker 2: the snow finally melted and we invaded Iran and interest
22:27
Speaker 2: rates shot up. So all of those lead me to
22:29
Speaker 2: believe that, hey, this would be a normal course of
22:32
Speaker 2: action for fewer home sales to be occurring because people
22:35
Speaker 2: are suddenly worried about the rate they're going to pay.
22:37
Speaker 2: They couldn't go and to a home, they couldn't get
22:39
Speaker 2: their home ready for sale. We will have to see post,
22:44
Speaker 2: I would say, right through, home sales through July fourth,
22:47
Speaker 2: to me are the interesting barometer for how we stack
22:50
Speaker 2: up compared to last year. And I don't think anything
22:52
Speaker 2: about home sales being down for the first couple of
22:54
Speaker 2: months indicate that we won't see an uptick in the
22:57
Speaker 2: second second quarter of the year. So I would say
23:00
Speaker 2: pump the brakes on this. This might not be relevant you, no,
23:02
Speaker 2: But the two.
23:02
Speaker 3: Areas of concern that I would have is the homes
23:05
Speaker 3: that were sold were at a two point six percent
23:08
Speaker 3: higher price than they were last year, So the medium
23:12
Speaker 3: price of homes sold at the end of February twenty
23:15
Speaker 3: twenty five jumped to five ninety five five hundred ninety
23:18
Speaker 3: five thousand from five hundred and eighty thousand the year before.
23:21
Speaker 3: And then also on the building side of things, we
23:24
Speaker 3: saw new permits for private housing units in twenty twenty
23:28
Speaker 3: five from Polmary data from the US Census Bureau that
23:30
Speaker 3: would be down fifteen point six percent from where they
23:34
Speaker 3: were in terms of units authorized in twenty four, so
23:37
Speaker 3: prices on the median side going up. Granted, I get it,
23:40
Speaker 3: January and February aren't the most robust months of home sales,
23:44
Speaker 3: and lesser homes built through twenty five versus twenty four.
23:48
Speaker 3: Those dynamics are frustrating. It's just the continuing trend of
23:52
Speaker 3: housing and Massachusetts not being affordable.
23:55
Speaker 2: If you want further bad news on that affordability side.
23:57
Speaker 2: According to Mortgage News Daily, the average thirty year fixed
24:01
Speaker 2: rate mortgage now going for six point four to nine
24:04
Speaker 2: percent as of yesterday. And where do we have bond
24:08
Speaker 2: rates going today? Bond yields moving up again pretty significantly today,
24:13
Speaker 2: so I expect that to be over six and a
24:15
Speaker 2: half when we measure it tomorrow. That compares to this
24:18
Speaker 2: time last year where rates were running around six and
24:22
Speaker 2: three quarters or percent. So you know, the mortgage situation
24:25
Speaker 2: that everyone was banking on getting some help from this
24:27
Speaker 2: year is not materializing in time for the Northeast spring
24:31
Speaker 2: housing market. But don't worry. We've got the perfect ballot
24:35
Speaker 2: initiative to fix all of the affordability concerns coming to
24:39
Speaker 2: the state of Massachusetts, Paul, that you too will get
24:41
Speaker 2: to vote on if you live if you're a resident
24:43
Speaker 2: of Massachusetts, which is rent control coming on down. There's
24:47
Speaker 2: also a tax cut proposal that we'll that will preview here,
24:51
Speaker 2: but the rent control is the one that we've been
24:54
Speaker 2: talking a fair bit about. They want to put rent
24:57
Speaker 2: control filed by the Homes for all Massachusetts, which is
25:01
Speaker 2: not what will happen but the initiative would limit annual
25:04
Speaker 2: rent hikes to the rate of inflation as measured by
25:07
Speaker 2: the CPI, with a cap of five percent. So if
25:10
Speaker 2: inflation's run a nine to two bad, you get five.
25:12
Speaker 2: That's all you can do. Landlords would be barred from
25:14
Speaker 2: raising rents again if a tenant leaves during the year
25:17
Speaker 2: the owner occupied. Buildings with four or fewer units would
25:20
Speaker 2: be exempt, and it would apply to new buildings during sorry.
25:28
Speaker 2: New buildings would also be exempt during their first ten
25:30
Speaker 2: years after being built. So if you couldn't detect it,
25:35
Speaker 2: that was sarcasm. I think this would do only bad
25:39
Speaker 2: things for affordability in Massachusetts because, as Paul just mentioned,
25:44
Speaker 2: building permits are down. Builders are not looking to increase
25:48
Speaker 2: the pace of construction, and why would I If building
25:53
Speaker 2: a new building, a new apartment complex would result in
25:58
Speaker 2: me being subject to rent control ten years after I
26:01
Speaker 2: finished construction, I just this makes no sense.
26:06
Speaker 3: This is there are case studies out here on this.
26:08
Speaker 3: They tried to do this in Saint Paul, Minnesota back
26:10
Speaker 3: in twenty twenty one, where the property values fell. The
26:15
Speaker 3: losses were driven by this idea that if you own
26:17
Speaker 3: a building, you can't get higher as expected future rents
26:22
Speaker 3: from this type of proposal, and it has ripple effects.
26:25
Speaker 3: And the problem with this mic is there's such a
26:26
Speaker 3: big disconnect between what a voter would just see on
26:29
Speaker 3: the piece of paper versus the true understanding, the true
26:32
Speaker 3: economic impact. Oh, lower rents, rent control. That sounds good
26:36
Speaker 3: for the consumers, but ultimately it has the adverse effect,
26:40
Speaker 3: It has the reverse effect of that. And I don't
26:42
Speaker 3: think the wording it has to be very clear on
26:45
Speaker 3: a balance if I don't know if you can get
26:47
Speaker 3: there to really explain that, Hey, property values are going
26:49
Speaker 3: to drive down, less tax revenue in the area. There's
26:51
Speaker 3: going to be all these ripple effects that are just
26:55
Speaker 3: going to make things worse, and it's frustrating.
26:57
Speaker 2: I mean, it's going to lead to obvious circumstances. Price
27:00
Speaker 2: controls lead to shortages. So will there be demand for
27:03
Speaker 2: rent controlled units? Absolutely, there will be because they're going
27:07
Speaker 2: to be, you know, charging below market rent. Likewise, will
27:10
Speaker 2: you be able to get the landlord in that building
27:11
Speaker 2: to do anything to your you know, improvements there's a
27:14
Speaker 2: hole in the wall. Yeah, too bad, live with it,
27:17
Speaker 2: because guess what, I can't raise rent if I put
27:19
Speaker 2: in a new appliance or do anything. So forget it.
27:22
Speaker 2: I'm not going to respond to your calls. I'm not
27:23
Speaker 2: going to do anything there. Likewise, again, just in our
27:27
Speaker 2: interest of driving wealthy residents out of the Commonwealth. Let's
27:31
Speaker 2: say I own twenty properties and I'm going to be
27:33
Speaker 2: subject to new rent control. I'm already paying a nine
27:37
Speaker 2: percent millionaire's tax because guess what if I own twenty
27:40
Speaker 2: rental units, I'm probably making some dough and now I'm
27:43
Speaker 2: going to be subject to this new rent control. You
27:47
Speaker 2: know what, I'm going to put my buildings up for sale.
27:49
Speaker 2: I'm going to ten thirty one exchange all of it. Because,
27:52
Speaker 2: by the way, you can, if you're not familiar, you
27:54
Speaker 2: can sell a piece of real estate and completely avoid
27:58
Speaker 2: any capital gains tax or mass choose its millionaires tax
28:01
Speaker 2: by taking advantage of a section of the IRS Code
28:04
Speaker 2: called ten thirty one exchange where you just take the
28:06
Speaker 2: proceeds and buy another property somewhere else, which, if you
28:09
Speaker 2: own twenty units, you're probably familiar with how to do
28:11
Speaker 2: that and avoid the mass choose its millionaire's tax and
28:15
Speaker 2: move out of the state, and yeah, just take my
28:18
Speaker 2: capital elsewhere.
28:19
Speaker 3: Putting way more imagary on the markets, thus driving market
28:21
Speaker 3: value down of real estate, which thus drives down tax
28:25
Speaker 3: revenue in the area.
28:27
Speaker 2: Yeah. So well, I'll get to vote on it later
28:30
Speaker 2: this fall. Maybe again. The mass Choosets population is among
28:33
Speaker 2: the most educated in the country. I'm going to hold
28:36
Speaker 2: out hope that they do some reading on how rent
28:40
Speaker 2: control affects real estate markets across the country.
28:42
Speaker 3: But this was pushback previously right within Massachusetts.
28:47
Speaker 2: Yeah yeah, in years prior we outlawed rent control, and
28:51
Speaker 2: you know, like with anything else, frankly, like with tariffs,
28:54
Speaker 2: we seem to want to test the ideas every thirty
28:57
Speaker 2: forty fifty years or so and just see how they
28:59
Speaker 2: work out for us. And I suspect that we will
29:01
Speaker 2: be doing the same here. Let's take quick break when
29:04
Speaker 2: we come back. Are US recessions going extinct? That's so
29:08
Speaker 2: two thousand and three. We'll be asking that question next.
29:11
Speaker 2: On the Financial Exchange.
29:12
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29:45
Speaker 2: Jonathan Levina Bloomberg asks, are US recessions going extinct? Is
29:50
Speaker 2: a long winded way of saying almost definitely not. But
29:54
Speaker 2: here's what he brings up. And I was having this
29:56
Speaker 2: exact conversation with a investment sure in their fifties yesterday,
30:03
Speaker 2: who really, you know, just barely started investing around twenty ten.
30:10
Speaker 2: And so for that person's experience, who has spent the
30:13
Speaker 2: last sixteen years investing, in only the last sixteen years investing,
30:17
Speaker 2: there isn't a lot of evidence of prolonged recessionary environments. Yeah,
30:24
Speaker 2: plain and simple, right. I mean, this person worked in education,
30:27
Speaker 2: so they had a pretty stable job at that point
30:29
Speaker 2: in time. They didn't have a lot of saved assets,
30:31
Speaker 2: so you know, the financial crisis was real. They saw
30:36
Speaker 2: the families or the kids they cared for going through it,
30:38
Speaker 2: but it was not a situation where it dramatically affected them.
30:41
Speaker 2: And since then they've only seen markets go straight upwards.
30:46
Speaker 2: And so I've heard this echoed of Hey, you know,
30:49
Speaker 2: I might think it's here's the statement I've heard from
30:52
Speaker 2: people who are you know, worried about the long term
30:55
Speaker 2: outlook of the US government and our deficits. It's been Hey,
31:00
Speaker 2: we seem to have gotten a lot better at addressing
31:03
Speaker 2: big economic downturns. The FED just immediately steps in floods
31:07
Speaker 2: the system with cash, rescues companies that need to be rescued.
31:12
Speaker 2: Congress recognizes that they need to pass bills like TARP
31:16
Speaker 2: and worst case scenario, it results in some painful inflation
31:18
Speaker 2: at the end of the day, but we avoid some
31:21
Speaker 2: of the worst outcomes from recessions like we saw during
31:26
Speaker 2: the Great Recession, or god forbid, like we saw during
31:28
Speaker 2: the Great Depression. And I'll acknowledge for a moment that
31:31
Speaker 2: we may have better safety social nets in place today
31:36
Speaker 2: compared to eight and compared to the nineteen thirties. As
31:40
Speaker 2: listening to an interview with Ken Burns, the History Guy
31:44
Speaker 2: the other day, he was asked about the Great Depression
31:47
Speaker 2: during the Great Recession, and his point was, well, you know,
31:50
Speaker 2: during the Great Depression, we closed all the zoos, slaughtered
31:53
Speaker 2: the animals, and distributed the meat to the poor. So
31:55
Speaker 2: like it doesn't feel like we're quite in the same environment.
31:58
Speaker 2: And he makes a good point that, yeah, none of
32:01
Speaker 2: these events directly repeat themselves, but I would have a
32:07
Speaker 2: very tough time convincing myself or anybody else that that
32:11
Speaker 2: means that we're not going to have a prolonged market
32:14
Speaker 2: downturn ever again in the future, alongside a very difficult
32:18
Speaker 2: time for the economy.
32:19
Speaker 3: No, I'm right with you. It's just naive to just
32:23
Speaker 3: think that we can just skate along, that we've fixed
32:25
Speaker 3: the problem. And what's outlining this piece in Bloomberg is
32:28
Speaker 3: back in two thousand and three, there was a University
32:32
Speaker 3: of Chicago economist Robert Lucas who declared that we had
32:36
Speaker 3: succeeded and accomplished our goal of curbing the risk to
32:39
Speaker 3: a macroeconomic disaster, and then oops, oops, shortly shortly thereafter,
32:45
Speaker 3: we had one. Ultimately, you mentioned the Federal Reserve and
32:50
Speaker 3: the efforts taken by the government to backstop the US
32:53
Speaker 3: economy in a lot of different situations. I've always wondered aloud,
32:56
Speaker 3: and I don't know if this is an issue tomorrow,
32:58
Speaker 3: but at some point in time time they're not going
33:01
Speaker 3: to be able to successfully backstop or as successfully backstop
33:05
Speaker 3: the US economy. We've talked a lot on this program
33:07
Speaker 3: about how much debt the country has. At some point
33:09
Speaker 3: it becomes problematic where there is the inability to just
33:13
Speaker 3: princh your way out of it.
33:14
Speaker 2: Even if you don't buy the debt piece being the problem,
33:18
Speaker 2: because there are plenty even in economic circles, who don't
33:20
Speaker 2: look at the deficit as the real problem here. If
33:23
Speaker 2: the US economy were to dive into a bad recession
33:27
Speaker 2: right now and the FED were to take action not
33:30
Speaker 2: necessarily because of the deficit, there would be an enormous
33:32
Speaker 2: inflationary risk to it. Yep. Right, So you know, even
33:36
Speaker 2: if you do buy that, oh yeah, the FED is
33:38
Speaker 2: not going to let us go through the through a
33:40
Speaker 2: bad economic moment like we did in No. Eight ever again,
33:43
Speaker 2: which I would debate, then you're gonna have to buy
33:46
Speaker 2: into the idea that, yeah, recession wasn't as bad, but
33:50
Speaker 2: we ended up dealing with some of the worst inflation
33:52
Speaker 2: that we've once again seen in decades. And so I
33:54
Speaker 2: again go back to will we ever see an exact
33:57
Speaker 2: repeat of two thousand and eight or two thousand and
33:59
Speaker 2: one or nonineteen thirty nine? No, likely not, But we'll
34:03
Speaker 2: see echoes of all of them in the next financial crisis.
34:05
Speaker 2: And there will always be another recession. There will always
34:08
Speaker 2: be another market downturn caused by something that we don't
34:11
Speaker 2: fully understand. Today.
34:12
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34:15
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34:19
Speaker 4: to unintended consequences consequences. Cushing and Dolan have a new
34:23
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34:27
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34:30
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34:34
Speaker 4: of include the five year Medicaid look back, where the
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34:41
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35:05
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35:07
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35:17
Speaker 2: The financial media seems to be finally picking up on
35:19
Speaker 2: the severity of the private credit situation, and they not
35:23
Speaker 2: a day goes by now, even with the conflict and
35:25
Speaker 2: IRN that we don't see some new headline about the
35:28
Speaker 2: private credit industry. This one was really interesting to me,
35:31
Speaker 2: which is the conflicts that big banks seem to have
35:35
Speaker 2: with private credits. So in one side of their business
35:38
Speaker 2: they are sometimes lending money directly to private credit firms.
35:42
Speaker 2: They're making a bunch of fees when those private credit
35:44
Speaker 2: or private equity firms list their funds or their companies
35:49
Speaker 2: on public markets. So these are big customers of THEIRS.
35:52
Speaker 2: At the same time, they have investment managers and analysts
35:55
Speaker 2: whose job is to spot risk in the markets and
35:57
Speaker 2: call it out, and supposed to have these firewalls, these
36:01
Speaker 2: Chinese walls between the two, but not only not always
36:06
Speaker 2: does it go quite as well. And here is an example. So,
36:10
Speaker 2: along with JP Morgan, Bank of America created a strategy
36:14
Speaker 2: for some of their clients to bet against stocks with
36:17
Speaker 2: exposure to private credit. So it was like, hey, we've
36:20
Speaker 2: developed this whole strategy and here's how we're going to
36:23
Speaker 2: outline it. Quickly, the bank retracted it and apologized for
36:27
Speaker 2: the idea with their research analysts later attributing the continuing
36:30
Speaker 2: downturn to quote media attention. So here's how to read
36:36
Speaker 2: that if you're not sure how to read that. A
36:38
Speaker 2: bunch of people at Bank of America thought that there
36:40
Speaker 2: would be a financial product that they could sell to
36:43
Speaker 2: customers that would allow them to target and short and
36:46
Speaker 2: sell companies with exposure to private credit, and somebody higher
36:52
Speaker 2: up in the bank said, don't do that. That's going
36:54
Speaker 2: to piss off our private credit clients. Yeah, that's problematic.
36:59
Speaker 1: It is. It is.
37:00
Speaker 2: So I'm gonna make this for a moment about you know,
37:03
Speaker 2: the investing industry for a moment here. When you deal
37:07
Speaker 2: with a giant financial institution as an individual investor, it
37:12
Speaker 2: is difficult to comprehend all of the conflicts that exist
37:16
Speaker 2: within those giant financial organizations, but boy do they exist.
37:22
Speaker 2: And this one is again, I don't necessarily think that
37:25
Speaker 2: a financial product that's designed to allow people to bet
37:30
Speaker 2: against certain types of stocks is necessarily a good idea
37:34
Speaker 2: for most investors. But the mere fact that somebody in
37:36
Speaker 2: Bank America rolled it out and then was forced to
37:38
Speaker 2: kill it based on the customer base, I think is
37:42
Speaker 2: a perfect example of the problems you get with these
37:44
Speaker 2: giant fin institutions when they're trying to act in the
37:46
Speaker 2: best interest of some of their customers.
37:48
Speaker 3: The same thing with the housing market right back in
37:50
Speaker 3: two thousand and eight. They created, you know, derivative instruments
37:53
Speaker 3: to bet against it too, which would go against the
37:55
Speaker 3: whole foundation of a lot of their businesses. So one
37:58
Speaker 3: thing is always true, Mike all Street is always willing
38:01
Speaker 3: to make a buck.
38:02
Speaker 2: Always willing to make a buck, and always willing to
38:05
Speaker 2: favor that big customer sometimes over the smaller ones market
38:09
Speaker 2: stage in a rebound. Here we had the S and
38:11
Speaker 2: P briefly flash positive. It's back in the red at
38:14
Speaker 2: the moment, but we'll have a lot more, including a
38:17
Speaker 2: full recap for you on the second hour of the
38:19
Speaker 2: Financial Exchange