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Warsh Loses the Market After Fed Pause · The Financial Exchange Show

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Speaker 1: Zada and Mike Armstrong.
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Speaker 2: Chuck. Mike and Chuck are with you here today. And
1:13
Speaker 2: if you didn't like yesterday's movements and equities, the good
1:17
Speaker 2: news is that you've pretty much reversed them today, which
1:21
Speaker 2: is great and a little whild The bad news is
1:24
Speaker 2: that if you didn't like yesterday's moves and bonds, you're
1:27
Speaker 2: not really getting much help there. So we'll talk about,
1:30
Speaker 2: you know, specifically what's going on in those markets shortly,
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Speaker 2: But I want to start off by talking a little
1:37
Speaker 2: bit about yesterday's FED meeting and what went down during it.
1:41
Speaker 2: I happened to be in the car during it, so
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Speaker 2: I wasn't watching. I was listening. Though. The nice thing about,
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Speaker 2: you know, modern technology is that you can hear Kevin
1:53
Speaker 2: worsh basically anywhere. It's great. And so I listened in
1:58
Speaker 2: the car, and then I came in this morning and
2:02
Speaker 2: I watched the press conference, so I actually went through
2:05
Speaker 2: it twice. Hey, V, gotta be honest. What's that one
2:10
Speaker 2: that's from up? Okay, gotta be honest. I don't recommend
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Speaker 2: watching a FED press conference twice. It's just not ideal.
2:20
Speaker 2: But I always take notes on these things, and obviously
2:23
Speaker 2: I'm not taking notes in the car, so I was like, well,
2:26
Speaker 2: I gotta do it. So to be fair, I did
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Speaker 2: watch it on one point five x speed this morning
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Speaker 2: so that I got through it in you know, less
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Speaker 2: than the forty five minutes that it took. So here's
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Speaker 2: the big thing. Worst comes out yesterday and first of all,
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Speaker 2: give us a seven minute speech before he takes questions.
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Speaker 2: What Powell us to do? Powell, you's just read the
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Speaker 2: FED statement and then take questions. Worsley kind of talked,
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Speaker 2: you know, more about you know, what he wanted to
2:55
Speaker 2: do with this and that, and he reiterated, you know,
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Speaker 2: we will deliver price stability like that. It's the paramount
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Speaker 2: you know thing that we're focused on here, and went
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Speaker 2: through a bunch of stuff about you know, we're really
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Speaker 2: looking at all these different things and we're trying to determine,
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Speaker 2: you know, the best way to go about this. Okay,
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Speaker 2: that's great. So Worris kicks off his press conference and
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Speaker 2: you know, again he gets asked these different questions and
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Speaker 2: the first one came from Steve Leisman from I think
3:24
Speaker 2: Leastman's CNBC, right, right, yeah, And so.
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Speaker 3: So far in this press conference he's been talking for
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Speaker 3: the seven minutes and markets have not fallen apart yet.
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Speaker 2: No, markets didn't really do much of anything at first,
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Speaker 2: and Leasman asked the question, which is, hey, you know,
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Speaker 2: you said that you don't want to send a message
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Speaker 2: to the market, but you want to hear what the
3:41
Speaker 2: market's saying, like, tell us what you think the market's saying,
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Speaker 2: and he basically just poo poos that he's like, you know,
3:48
Speaker 2: rather being like, well, the market's telling me this. His
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Speaker 2: quote is what I'm trying to do is get an
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Speaker 2: unfiltered message from the market and what buyers and sell
3:54
Speaker 2: us for treasuries tell us how we're doing. And Leashman
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Speaker 2: follows up, well, okay, how do you think get you
4:00
Speaker 2: know it says that you're doing. And this is the
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Speaker 2: first place where things get kind of interesting, is he goes,
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Speaker 2: we've seen a material tightening, not just in nominal rates,
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Speaker 2: but in real rates. So remember when we talk about
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Speaker 2: interest rates, it's two ways that you can look at.
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Speaker 2: The first is nominal, which is, hey, the tenure went
4:18
Speaker 2: from four five to four six. The second is real
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Speaker 2: netting out inflation or inflation expectations. What's happening to interest rates? Otherwise,
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Speaker 2: And over the last couple of weeks, real interest rates
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Speaker 2: have been going up, and so Wors said, you know,
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Speaker 2: we've seen a material tightening in not just in nominal rates,
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Speaker 2: but in real rates. And we like this because the
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Speaker 2: market is, you know, is doing the work for us
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Speaker 2: that that you know, we want to see. And again
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Speaker 2: I always put like my notes in here after you
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Speaker 2: know the quotes, and my note says well, in his
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Speaker 2: first meeting, he said he was encouraged by rates falling
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Speaker 2: after he took over, specifically real and nominal. So I'm
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Speaker 2: which is it, like right off the bat, I'm sitting
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Speaker 2: there and I'm going so in your first meeting, you
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Speaker 2: said you like the fact that interest rates were coming
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Speaker 2: down because the market was understanding that you were serious
5:10
Speaker 2: about inflation. Now you're saying that you like that interest
5:14
Speaker 2: rates are going up because the market is tightening for
5:16
Speaker 2: you so that you don't have to.
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Speaker 3: And important background here Again we've talked about this at length,
5:21
Speaker 3: but this is a FED chair who walked into the
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Speaker 3: job with more credibility concerns than I think any FED
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Speaker 3: chair in recent modern history. Like again, because of the
5:33
Speaker 3: nomination process, because of the things that the president has
5:37
Speaker 3: been saying in the background, there were some very big
5:40
Speaker 3: questions asked during his during his confirmation hearing and by
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Speaker 3: financial media about credibility, how serious are you about combating inflation.
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Speaker 2: So that's kind of the backdrop for all of this.
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Speaker 2: So again, even through this, markets held up just fine,
5:58
Speaker 2: like there were no made your problems or anything. In fact,
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Speaker 2: if you look at like basically during his his seven
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Speaker 2: minutes and then like the seven minutes after markets rallied
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Speaker 2: like it was okay, like that's that's fine. And then
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Speaker 2: something happened at starting it around like two forty five
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Speaker 2: or so, where markets leveled off and where this was.
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Speaker 2: I went back and you know, kind of looked at
6:24
Speaker 2: the time stamp on this and matched up you know
6:27
Speaker 2: what it is, and he basically here, here's where he
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Speaker 2: lost the market yesterday is Someone asked him, you know,
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Speaker 2: you guys are kind of just waiting, like what are
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Speaker 2: you what are you waiting for? Like you're talking about
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Speaker 2: you know, high inflation and wanting to get it down,
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Speaker 2: Like what are you waiting for? And he goes, this
6:47
Speaker 2: is a period of watchful thinking, not watchful waiting. And
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Speaker 2: I heard that in the car and I like almost
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Speaker 2: threw up Kevin like I was just like, my dude, Like,
6:56
Speaker 2: I know that you're the fed chair and everything, but
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Speaker 2: if you're not doing anything ultimately, like you are choosing
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Speaker 2: to wait, I don't care how hard you're thinking. Like
7:05
Speaker 2: if if you were a teacher at a school and
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Speaker 2: a kid came in and you're like, hey, Kevin, where's
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Speaker 2: your homework, and he's like, well, I didn't not do it.
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Speaker 2: I was just still thinking about it. You'd be like, well,
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Speaker 2: you didn't turn in your homework, like you ultimately didn't
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Speaker 2: do it. And so this is kind of where things
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Speaker 2: started to go downhill, and it gets followed up like
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Speaker 2: five minutes later where someone asks, okay, so like you're
7:29
Speaker 2: not waiting, but can you characterize like whether this was
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Speaker 2: like a hawkish pause or a duvish pause, like the
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Speaker 2: question was like something along those lines, and he goes, well,
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Speaker 2: I wouldn't characterize what we did as anything like a pause.
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Speaker 2: I would characterize it as a rigorous review of the
7:44
Speaker 2: economic situation in big hard questions. Min is just but
7:48
Speaker 2: you paused, yeah, like you didn't raise or cut interest
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Speaker 2: rates like you did nothing, Like no one cares how
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Speaker 2: hard you're thinking. They care about what you're doing. And
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Speaker 2: this is what we said like heading into this, is
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Speaker 2: that ultimately markets are gonna judge warsh If he doesn't
8:05
Speaker 2: want to be judged based on forward guidance and what
8:07
Speaker 2: he's saying about what they're going to do, then he's
8:09
Speaker 2: gonna get judge based on what they are doing. And
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Speaker 2: what they did yesterday was not hike. They paused, which
8:15
Speaker 2: is fine, like I don't think it's the end of
8:17
Speaker 2: the world.
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Speaker 3: But markets seem to take that moment though as a
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Speaker 3: don't piss on me and tell me it's raining moment,
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Speaker 3: like yes, don't don't tell me that it's not a
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Speaker 3: pause when you didn't do anything.
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Speaker 2: And so from here what we ended up with is
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Speaker 2: the S and P five hundred right as he said,
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Speaker 2: that was at like seventy four fifty. It then fell
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Speaker 2: almost two percent from that point till the end of
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Speaker 2: the day and closed, you know down. I forget exactly
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Speaker 2: how much, like one hundred and thirteen points or something
8:47
Speaker 2: like over one and a half percent, which again it's
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Speaker 2: it's one day. Let's let's not make too big of
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Speaker 2: a deal out of this. But bigger part is what
8:56
Speaker 2: was going on in the bond market, in my opinion, yeah,
8:59
Speaker 2: very much where and again, like you can look at
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Speaker 2: the tape and see this like right on you know,
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Speaker 2: the money and everything where pretty much. And remember the
9:13
Speaker 2: actual you know, bond market for treasuries doesn't close at four,
9:17
Speaker 2: closes at three, so you don't get the same you know,
9:19
Speaker 2: read through the exact same way. But basically the tenure
9:23
Speaker 2: during that time went from four to six two up
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Speaker 2: to four seven, so he lost eight basis points in
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Speaker 2: an hour, which is a large move for that period
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Speaker 2: of time.
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Speaker 3: This is moves that are similar to what we were
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Speaker 3: seeing in April of twenty twenty four, sorry twenty five,
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Speaker 3: when the President was rolling out his tariff plan, like
9:43
Speaker 3: a couple of days, bonds moved so dramatically that the
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Speaker 3: president himself acknowledged that we had to change policy because
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Speaker 3: it moves so much.
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Speaker 2: And specifically, it's not just that the long bond got hit.
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Speaker 2: It's bond sold off, which normally began high yields then
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Speaker 2: attracts you know, money into your currency because you're offering
10:04
Speaker 2: more in terms of yields. Yeah, but the dollar sold
10:07
Speaker 2: off and gold caught a bid, which normally, like higher
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Speaker 2: rates will typically be okay. Higher rates. Great, I want
10:14
Speaker 2: to go to that currency and gold gets pummeled because
10:17
Speaker 2: I can get higher rates and I don't need to
10:19
Speaker 2: worry about, you know, holding on the purchasing power because
10:22
Speaker 2: I'm getting paid more interest.
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Speaker 3: So I mentioned at the beginning that he went in
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Speaker 3: there with credibility concerns. Yesterday's meeting was plain and simple,
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Speaker 3: a FED credibility trade.
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Speaker 2: There are two possibilities as to what happened yesterday. The
10:40
Speaker 2: first is that Worris's credibility is shot and the market
10:47
Speaker 2: is going to put it to the test over you know,
10:48
Speaker 2: the next couple FED meetings. The second is that this
10:52
Speaker 2: is intentional, because it is actually true to a certain
10:56
Speaker 2: extent that one possibility of the long end blowing out
11:00
Speaker 2: is higher interest rates on the long end are going
11:03
Speaker 2: to raise the cost of borrowing for businesses and households
11:07
Speaker 2: and in doing so potentially slow the economy. So like
11:11
Speaker 2: you can't ask the question like was this by design?
11:15
Speaker 2: The counter to that is there are better ways to
11:17
Speaker 2: get the long end to move up than just doing this. Specifically.
11:21
Speaker 2: You could commit through forward guidance to we're going to
11:24
Speaker 2: raise rates probably the next four to five meetings, and
11:28
Speaker 2: that'll push the short end up, you know, one and
11:30
Speaker 2: a quarter percent, and the long end might go up
11:33
Speaker 2: half a percent as a result, but you could still
11:35
Speaker 2: like do it. It's not that the long end just
11:37
Speaker 2: like stays put during that and that doesn't screw your currency.
11:41
Speaker 2: And the other piece that you have questions about on
11:43
Speaker 2: this is okay, it's fine that the long end goes up.
11:47
Speaker 2: Is it going to move up in terms of real
11:50
Speaker 2: rates net of inflation or do we start to see
11:53
Speaker 2: inflation expectations become unanchored because they don't trust the FED
11:57
Speaker 2: to rein in inflation because the lack of action is troubling.
12:01
Speaker 2: So these are things that we'll have to watch. I
12:03
Speaker 2: want to take a quick break, but there's more to
12:05
Speaker 2: one pack on this. I have three page seven to
12:09
Speaker 2: eight more thoughts. I have three pages of notes that
12:11
Speaker 2: I need to get through, and you're all gonna listen
12:13
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Speaker 2: All right. So we're talking about Kevin Worsh's second FED
13:04
Speaker 2: meeting yesterday, and I think ultimately where I land is this.
13:11
Speaker 2: We've now been through two meetings and the warsh FED
13:14
Speaker 2: hasn't undertaken any monetary policy action. They haven't done anything. True,
13:19
Speaker 2: Just fine, you don't have to do anything. Worsh continues
13:22
Speaker 2: to talk about we will restore price stability, and you know,
13:25
Speaker 2: price stability is the most important thing to him, and
13:30
Speaker 2: at some point, in my opinion, I think we started
13:32
Speaker 2: to see it yesterday, but I think the next you know,
13:34
Speaker 2: two to three months, the market is going to test Okay,
13:37
Speaker 2: are you actually serious about what you're saying and are
13:41
Speaker 2: you going to back it up with action. It's one
13:44
Speaker 2: thing to say, hey, you know, I want to listen
13:46
Speaker 2: to the market and I want the you know, market
13:48
Speaker 2: participants to engage with each other. But remember, part of
13:51
Speaker 2: the reason why the Treasury curve gets priced the way
13:53
Speaker 2: it does is because it's ultimately pricing in FED action
13:56
Speaker 2: on you know, certain possibilities of what could happen. And
14:00
Speaker 2: so we still don't really understand what the new Feds
14:04
Speaker 2: what's called their reaction function. Basically, if why happens, will
14:08
Speaker 2: they do X or Z. We don't understand what that
14:11
Speaker 2: framework looks like. And so that does mean, and we've
14:13
Speaker 2: talked about this, that you probably need a little bit
14:16
Speaker 2: more of a premium built into bonds because there's more
14:21
Speaker 2: risk if you don't know exactly what they're gonna do.
14:23
Speaker 2: We said this at the outset of Worsh, you know,
14:26
Speaker 2: coming on. So I think my view is look yesterday,
14:32
Speaker 2: I from being one hundred percent honest, pretty bad day
14:35
Speaker 2: for Kevin Worsh, I don't think he was particularly strong.
14:38
Speaker 2: I don't think he was particularly convincing. Basically, everyone that
14:42
Speaker 2: I respect who follows monetary policy more closely than I do,
14:47
Speaker 2: kind of looked at yesterday and was like this isn't good,
14:50
Speaker 2: Like this isn't it.
14:52
Speaker 3: Yeah, to be clear, if you are a FED chair
14:57
Speaker 3: who is basing a lot of your on what market,
15:01
Speaker 3: how markets react to you, and encouraging markets to react
15:05
Speaker 3: to you. Yesterday, markets gave you an f right, So
15:09
Speaker 3: that's that's the problem.
15:10
Speaker 2: We don't like this.
15:11
Speaker 3: If you want to say a bunch of stuff and
15:13
Speaker 3: then the markets react unexpectedly to what you say, that's
15:15
Speaker 3: one thing. But when you basically tell the press and
15:19
Speaker 3: the general public, hey, I'm going to let markets dictate
15:22
Speaker 3: and determine how we're doing. Yesterday, investors gave him.
15:26
Speaker 2: A very bad grade aillien meeting. So I think it
15:31
Speaker 2: doesn't mean that like Worsh's tenure is going to be good, bad,
15:35
Speaker 2: or ugly, like I don't know it's true. Again, as
15:38
Speaker 2: he said himself, it's been like two months. Yeah, so
15:41
Speaker 2: I'm not here saying okay, this is going to be
15:44
Speaker 2: like horrible. What I am saying is, yeah, yesterday was bad,
15:48
Speaker 2: and if you continue to get that kind of performance,
15:52
Speaker 2: it's going to be a problem. If I were Kevin Worsh,
15:54
Speaker 2: the things that I would do, and I would do
15:56
Speaker 2: them quickly, very very quickly. Number one, I would find
16:00
Speaker 2: like one of my tasks force. I believe he has
16:02
Speaker 2: a communications task force. I would have them wrap their
16:05
Speaker 2: work up and say we're getting rid of the after
16:09
Speaker 2: meeting press conferences and we're getting rid of the summary
16:12
Speaker 2: of economic projections because I don't think they're useful for
16:15
Speaker 2: what he wants to do. I think if he really
16:19
Speaker 2: wants the market to, you know, base its moves on hey,
16:22
Speaker 2: what are we doing, not what are we saying? Then
16:25
Speaker 2: take those get have the task force recommend that you're
16:29
Speaker 2: not going to do the press conference anymore. He's not
16:31
Speaker 2: required to, he's not, But I would love to see
16:34
Speaker 2: the market reaction to that announcement. It can't be worse
16:38
Speaker 2: than him actually talking yesterday. I'm with you, you know,
16:41
Speaker 2: like the marker might actually be like, Okay, great, we
16:44
Speaker 2: don't have to do that again. Yeah, because it was again,
16:46
Speaker 2: I was messy, It was not pretty. Other things though,
16:52
Speaker 2: And this is the piece that I think you have
16:54
Speaker 2: to come back to. Is core PCE right now is
16:57
Speaker 2: at three point four percent, rased at three and a
17:00
Speaker 2: half to three seven five based in basically every rule
17:03
Speaker 2: that you have out there about where monetary policy should
17:06
Speaker 2: be set. Fed funds rate should be higher at some
17:10
Speaker 2: point if inflation continues to remain in this range, specifically
17:13
Speaker 2: core inflation, the market is gonna say you're not serious
17:17
Speaker 2: about this unless you're hiking. And maybe that comes at
17:20
Speaker 2: the next meeting in September. Maybe it's the November one.
17:23
Speaker 2: I don't know, is it November October? I can't remember
17:27
Speaker 2: exactly where it falls this year, But in any case,
17:30
Speaker 2: it feels like we're going to get that test for
17:35
Speaker 2: for warh sometime in the next three to four months,
17:39
Speaker 2: and every FED chair gets tested. Powell did during his
17:42
Speaker 2: first year or so when he was like, yep, the
17:44
Speaker 2: balance sheet runofs on autopilot. Market's tanked heading into the
17:48
Speaker 2: end of twenty eighteen, Powell was forced to pivot on
17:51
Speaker 2: that he didn't hike interest rates. Again. It was like
17:53
Speaker 2: it was a whole thing. So the market will test
17:56
Speaker 2: the FED chair just as they test everyone his story.
18:00
Speaker 2: It's not a new thing, just with warsh and he's
18:03
Speaker 2: going to have to prove that he can navigate that.
18:05
Speaker 3: The President's comments weren't immensely helpful yesterday afternoon either for
18:10
Speaker 3: anyone that missed them. He was quoted like, as worsh
18:15
Speaker 3: was speaking about being serious on inflation, the President said, quote,
18:18
Speaker 3: I know he'd love to see lower interest rates, but
18:20
Speaker 3: he's got a board, and it's a political board, and they.
18:23
Speaker 2: Want to keep rates up.
18:24
Speaker 3: So again, that's not helpful if you're worst trying to,
18:28
Speaker 3: you know, insist on independence. But we have thirty seconds, Chuck,
18:33
Speaker 3: I have to insist on talking about why this really
18:35
Speaker 3: matters to the people that didn't watch Kevin Worsh's press
18:37
Speaker 3: conference and don't invest in thirty year bonds, Like, Yes,
18:41
Speaker 3: this is critically important because.
18:43
Speaker 2: Mortgage rates will be higher today than they were yesterday.
18:46
Speaker 3: Yeah, But more importantly, an independent central bank that's credible
18:49
Speaker 3: on inflation is critical to the inner workings of our
18:52
Speaker 3: entire financial system and why the United States gets all
18:56
Speaker 3: the advantages it gets in financial markets.
18:58
Speaker 2: It's why we can borrow or less.
19:00
Speaker 3: It's why we, you know, are the default currency for
19:03
Speaker 3: all sorts of trade, and nothing that Kevin Worsh said
19:07
Speaker 3: yesterday is a threat to any of that. But that's
19:09
Speaker 3: why this is critically important. That's why an independent and
19:13
Speaker 3: credible central bank is integral to the entire US financial system.
19:18
Speaker 2: Look plain and simple, if investors don't believe you're going
19:21
Speaker 2: to be credible against inflation, they will demand higher interest
19:24
Speaker 2: rates from you in order to lend you money. Because
19:28
Speaker 2: they know that otherwise more of it will be eaten
19:29
Speaker 2: away by inflation. Plain and simple, quick break here, We've
19:33
Speaker 2: got Wall Street Watch next.
19:41
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19:49
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19:53
Speaker 1: Street Watch treking the stocks, the dato and the headlines
19:57
Speaker 1: driving markets so far today right here on the Financial
20:00
Speaker 1: Exchange Radio Network.
20:02
Speaker 4: Busy day on Wall Street as investors react to the
20:04
Speaker 4: FED leaving rates unchanged, remarks from FED chairman Kevin Wars
20:08
Speaker 4: that left some uncertainty about the path of rates moving forward.
20:11
Speaker 4: We also saw a tale of two earnings reports from
20:14
Speaker 4: tech giants. Right now, the Dow is up two thirds
20:17
Speaker 4: of percent, or three hundred and thirty two points higher,
20:19
Speaker 4: SMP five hundred up one point two percent or ninety
20:23
Speaker 4: three points hired, Nasdaq rallying over two and a half
20:26
Speaker 4: percent or six hundred and fifty two points, RUSS two
20:29
Speaker 4: thousand is up four tenths of a percent, Tenure Treasure
20:32
Speaker 4: Real up three basis points at four point sixty six percent,
20:36
Speaker 4: and oil pulling back modestly, trading at eighty four dollars
20:39
Speaker 4: a barrel. Microsoft rallying fifteen percent after it beat earnings
20:44
Speaker 4: and revenue expectations driven by robust cloud growth. The company's
20:47
Speaker 4: a zer service topped one hundred billion dollars in revenue
20:51
Speaker 4: for the first time. Meanwhile, Meta sinking nine percent after
20:55
Speaker 4: eight reported earnings that missed estimates in posted a revenue
20:58
Speaker 4: guidance that disappointed. Investors are showing more concerns over the
21:02
Speaker 4: companies spending on AI. We'll see more big tech earnings
21:06
Speaker 4: after today's close, where Apple and Amazon will report. Elsewhere,
21:10
Speaker 4: Young Brands reported mixed second quarter results and said the
21:13
Speaker 4: cyclospora outbreak link to Taco Bell impacted its sales in July. However,
21:18
Speaker 4: the stock is up over two percent. Teladoc tumbling twenty
21:22
Speaker 4: nine percent after the healthcare services company posted revenue that
21:26
Speaker 4: came up short and also lowered its full year revenue guidance,
21:30
Speaker 4: and Starbucks is up over two percent after the coffee
21:33
Speaker 4: chain raised its full year outlook and reported growth in
21:36
Speaker 4: same store sales of seven point nine percent. I'm Tucker
21:41
Speaker 4: Silva and that is Wall Street Watch.
21:43
Speaker 2: Let's see, we've got some earning stuff to get do.
21:45
Speaker 2: Can we do a little GDP talk first?
21:47
Speaker 1: Sure?
21:48
Speaker 2: So this morning we got GDP that came out, and
21:53
Speaker 2: I saw like widespread disappointment that it came in weaker
21:57
Speaker 2: than anticipated. GDP for Q two, this is the first
22:01
Speaker 2: reading came in at one point five percent versus expectations
22:04
Speaker 2: of two point one to two point two percent, and
22:07
Speaker 2: so naturally you get, you know, okay, like what does
22:11
Speaker 2: this mean? And here's my take on it is when
22:18
Speaker 2: you look at the underlying data inside of there, the
22:23
Speaker 2: weakness that is in this quarter is coming from areas
22:27
Speaker 2: that are probably not likely to repeat. And also if
22:31
Speaker 2: you look at kind of the core, you know what
22:34
Speaker 2: I think most people would qualify as like core GDP,
22:37
Speaker 2: I knowe like that doesn't exist, but real final sales
22:41
Speaker 2: to domestic purchasers basically how much our businesses and households
22:46
Speaker 2: actually like buying and transacting for you know, economic activity.
22:50
Speaker 2: That number came in at three point nine percent, which
22:52
Speaker 2: is the highest that we've seen since Q one of
22:55
Speaker 2: twenty twenty three. So I look at this and my
23:01
Speaker 2: takeaway is not, hey, like Q two GDP was bad,
23:04
Speaker 2: it's much more. Hey, there were some one off things
23:06
Speaker 2: with inventories and imports and exports that drag this down
23:10
Speaker 2: and inflation was much higher than you'd like to see
23:13
Speaker 2: during the period. But the underlying you know, activity that
23:17
Speaker 2: you saw in terms of again real final sales to
23:20
Speaker 2: domestic purchasers, so netting out inflation and you know what
23:23
Speaker 2: you're seeing there, indicated that you had a nice bounce
23:25
Speaker 2: back after two week quarters. So I think the headline
23:28
Speaker 2: number on GDP not great again, one point five percent.
23:33
Speaker 2: It's not like that's awful. It's it's slower than you'd
23:35
Speaker 2: like to see, but it's you know, again, we're talking
23:38
Speaker 2: a country that doesn't really have much in the way
23:40
Speaker 2: of population growth right now, and you need productivity to
23:44
Speaker 2: kind of pick up the torch. Hey, if you can
23:46
Speaker 2: do one point five percent, that's fine in that kind
23:50
Speaker 2: of environment, because there are two ways that you can
23:52
Speaker 2: grow GDP productivity or more hours worked, and if you're
23:56
Speaker 2: not growing the population, hours worked is kind of tough
23:58
Speaker 2: to pull. You don't really see many many moves upward
24:02
Speaker 2: in that direction because people are generally working as much
24:06
Speaker 2: as they want to or choose to at any particular
24:08
Speaker 2: point in time in the aggregate. So I actually didn't
24:13
Speaker 2: think this was a very bad GDP report. I know
24:15
Speaker 2: that you look at the headline number, and you're like, oh,
24:17
Speaker 2: one point five percent, what gives? I think that the
24:20
Speaker 2: underlying data suggest some additional strength beyond that headline, and
24:25
Speaker 2: I think it's totally fine. So I am not someone
24:28
Speaker 2: who looks at that guy number and says, oh, this
24:31
Speaker 2: is a problem. I think it is a perfectly cromulent number, uh,
24:36
Speaker 2: and am happy to ride with it. Let's talk about
24:40
Speaker 2: earnings now, which ones you want to do first? Good
24:43
Speaker 2: or bad? Bad? All right, dear Mark Zuckerberg, stop spending
24:49
Speaker 2: money on crap. Yeah, that's the message that the market
24:53
Speaker 2: is sending to Meta who's stock as of this very
24:57
Speaker 2: moment in time. I want to make sure they get
24:59
Speaker 2: the number right. Yep, it's nine percent.
25:00
Speaker 3: Still, so the spending, like Alphabets ticked up, revenue is
25:08
Speaker 3: weaker compared to the other companies that are increasing their spending.
25:13
Speaker 3: And furthermore, the story about how this spending is going
25:17
Speaker 3: to pay off for you among all of the big
25:21
Speaker 3: hyperscalers Metas is most confusing, and in fact, Zuckerberg seemingly
25:25
Speaker 3: acknowledged that a bit when he said that they might
25:28
Speaker 3: be selling they're getting bids to sell some of their
25:31
Speaker 3: excess compute capacity that they could sell today at very
25:35
Speaker 3: favorable rates compared to what they built it out for.
25:39
Speaker 3: And so yeah, I look at this kind of similar
25:42
Speaker 3: to some of the other trends, like the investment in
25:44
Speaker 3: the metaverse over the last few years, which is you're
25:47
Speaker 3: pouring money into something. Fortunately for you, you can actually resell
25:52
Speaker 3: it to other people that know what to do with it,
25:53
Speaker 3: but you don't want to know what to do with
25:54
Speaker 3: it right now?
25:55
Speaker 2: They can. Yeah, and this is the thing, you know,
25:58
Speaker 2: they're like, well, what are you going to do like
25:59
Speaker 2: with with you know, your your compute capacity that you're
26:02
Speaker 2: building out. Well, maybe we'll sell more of it to
26:05
Speaker 2: other people. So you're a utility company, Maybe it'll help
26:08
Speaker 2: us to sell more ads because we can use AI
26:11
Speaker 2: to do that. Maybe we'll develop our own models that
26:14
Speaker 2: people want to buy. Well, which is it? Because right
26:16
Speaker 2: now none of this is working for you. It's not
26:19
Speaker 2: showing up. And here's the problem is that, Well it's
26:23
Speaker 2: actually there. There are quite a few problems, and I
26:25
Speaker 2: guess they they kind of dovetail into the big one.
26:30
Speaker 2: But when you look at what meta is telling you,
26:35
Speaker 2: it's okay, we're raising the lower end of our expense outlook,
26:39
Speaker 2: so we're gonna spend more than we thought we were
26:41
Speaker 2: going to previously, but we're also issuing a lower than
26:45
Speaker 2: expected sales outlook. So we're spending more and bring and
26:50
Speaker 2: selling less. But yeah, of course my stock's gonna be
26:53
Speaker 2: down nine percent. If that's the message that I send
26:55
Speaker 2: to people, you can trast that with the lovely micro
27:00
Speaker 2: to be fair. Has had just a brutal run over
27:04
Speaker 2: the last year or so, going from you know, five
27:08
Speaker 2: hundred and fifty bucks a share, down at one point
27:10
Speaker 2: to three forty nine, but now up fifteen percent today,
27:13
Speaker 2: back in the four to fifty range.
27:15
Speaker 3: So Microsoft, on the other hand, tells you we are
27:19
Speaker 3: not changing how much we're spending.
27:20
Speaker 2: We're keeping our spending in line. We're saying, disciplined on
27:23
Speaker 2: the Capex side of things, or at least relatively speaking,
27:26
Speaker 2: and our sales are going up. Correct, That's why you're
27:30
Speaker 2: up fifteen percent today instead of down nine.
27:32
Speaker 3: So I want to focus on just two narrow parts
27:36
Speaker 3: of this. Microsoft says we are not spending more on Capex.
27:42
Speaker 3: Meta says we are spending a lot more on Capex.
27:45
Speaker 3: I know there are other things to these earnings that
27:47
Speaker 3: are contributing to them being up and down. Microsoft the
27:51
Speaker 3: one who said we are not spending more and they
27:53
Speaker 3: are showing cost discipline, stock up fifteen percent, Meta saying
27:57
Speaker 3: we are spending more, stock down nine percent. I have
28:02
Speaker 3: a tough time writing that with the rest of the
28:06
Speaker 3: market right now, which is showing semiconductors up massively, semiconductor
28:10
Speaker 3: equipment up massively, computer hardware up massively, and then the
28:14
Speaker 3: rest of the tech sector just kind of struggling along.
28:17
Speaker 1: Right.
28:17
Speaker 3: You just rewarded a company who said we are not
28:21
Speaker 3: accelerating our spend on all the stuff that is benefiting
28:25
Speaker 3: in the market right now. I know I shouldn't read
28:27
Speaker 3: too much in a single day moves, but like that
28:29
Speaker 3: was the message that I took away was investors are
28:32
Speaker 3: rewarding companies that are being more disciplined on their capex.
28:35
Speaker 2: So there are a few things going on that I
28:37
Speaker 2: think make it tough to get accurate signal today. The
28:40
Speaker 2: first is that semiconductor stocks as a whole have gotten
28:43
Speaker 2: bludgeoned in the last two months. Like you talk about
28:48
Speaker 2: the semiconductor and Dix, I think it was off like
28:50
Speaker 2: thirty five percent from its peak as of yesterday, Like
28:53
Speaker 2: the Korean market I think was down like forty percent
28:55
Speaker 2: in the last month. So well, part of this is just, hey,
29:00
Speaker 2: he's kind of got washed out over the last month. Yea.
29:03
Speaker 2: As part of that, we got to talk about the
29:06
Speaker 2: dangers of just like anointing heroes based on a few
29:10
Speaker 2: months of performance and stuff. How many of y' all
29:14
Speaker 2: listening have ever heard of someone named Leopold Ashenbrenner. Oh Leo? Yeah, yeah,
29:19
Speaker 2: good old, good old Leo Ashenbrenner. So the answer is
29:22
Speaker 2: none of you. Okay. I heard of him like two
29:25
Speaker 2: months ago because everyone was tooting his horn because he
29:28
Speaker 2: started a hedge fund. He's a former I think Open
29:30
Speaker 2: Ai guy, and he started a hedge fund investing in
29:33
Speaker 2: AI companies with a bunch of leverage and was up
29:35
Speaker 2: like four hundred percent in the first quarter this year
29:37
Speaker 2: or something like that. Let me know if you've heard
29:39
Speaker 2: that story. People were like, wow, Leopold's a genius. It
29:43
Speaker 2: comes out today that yesterday he had to liquidate his
29:47
Speaker 2: entire book, Like, we didn't know this when I woke up.
29:50
Speaker 2: It was just well, he had to make like some
29:52
Speaker 2: big liquidations. Now it's and this is the headline from
29:55
Speaker 2: CNBC AI investor Leopold Ashenbrener forced to unwind all public
29:59
Speaker 2: stock positions after steep losses. You just got margin called
30:03
Speaker 2: not just margin, like had to sell your liverything, and
30:06
Speaker 2: that was hunting for more capital because all the money's gone,
30:10
Speaker 2: Like that's the deal. And so part of this is, look,
30:14
Speaker 2: once the bodies start washing up on shore after you
30:17
Speaker 2: have hedge fund blow ups, okay, like people start picking
30:20
Speaker 2: through the wreckage and they're like, okay, we can buy this,
30:22
Speaker 2: we can buy that. So combination of semiconductors have been
30:26
Speaker 2: the worst place to be in markets for the last
30:28
Speaker 2: month and a half, and you just had a very
30:30
Speaker 2: public hedge fund blow up specifically focused on that area. Yeah,
30:36
Speaker 2: does it make sense to me that Micron's up fifteen
30:39
Speaker 2: percent today not in the context of like nothing with
30:42
Speaker 2: their business materially changed. But whenever you have these big washouts,
30:46
Speaker 2: you can get these big bounces. The problem that you
30:49
Speaker 2: have volatility and upward direction is still volatility. It doesn't
30:53
Speaker 2: suggest investors have any confidence in where this stuff is valued.
30:57
Speaker 2: This is easy come, easy go money like that is
31:01
Speaker 2: that's what this is, yea. And so if you're willing
31:04
Speaker 2: to buy on a day when this stuff is up
31:05
Speaker 2: fifteen percent, then hey, when it goes down fifteen you're
31:08
Speaker 2: gonna be the first trying to sell it then, because you,
31:11
Speaker 2: like you don't have any conviction, you're just buying because
31:13
Speaker 2: everyone else is so trying to reconcile all of this.
31:18
Speaker 2: I think that the message that markets are trying to
31:20
Speaker 2: send is, hey, we're going to reward CAPEX discipline. The
31:23
Speaker 2: other thing that I do want to point out, Microsoft
31:27
Speaker 2: yesterday made a change in their depreciation schedule for their
31:30
Speaker 2: data centers, extending the depreciation on the actual buildings by
31:33
Speaker 2: ten years from fifteen to twenty five. That makes me
31:37
Speaker 2: feel like the P and L statement is becoming opinion.
31:40
Speaker 2: We're starting to get into some funny money stuff here,
31:44
Speaker 2: and eventually remember what ultimately matters isn't P and L,
31:48
Speaker 2: it's cash flow. We got to take a break. I
31:50
Speaker 2: don't think we have to, but we should. We should,
31:52
Speaker 2: We should take a break.
31:53
Speaker 3: I don't think we're done talking about this, Yeah, I
31:55
Speaker 3: think we got to continue talking a little bit more
31:56
Speaker 3: about these earnings and then the earnings that are coming tonight.
31:59
Speaker 2: Yeah, quick break will back with that next.
32:01
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33:09
Speaker 2: Mike, anything else that you want to say about Microsoft
33:11
Speaker 2: or Meta before we move on to today's party, which
33:15
Speaker 2: is Apple and Amazon.
33:18
Speaker 3: I think the main takeaway here was, amongst other things,
33:22
Speaker 3: Microsoft is being rewarded for cost discipline around AI spending.
33:27
Speaker 3: If that is a trend that holds, and I'm not
33:28
Speaker 3: sure it will because there is a lot other stuff
33:31
Speaker 3: that was wrong with Meta's earnings. But if that theme
33:34
Speaker 3: begins to take hold, that spells problems for the rest
33:37
Speaker 3: of the AI industry. Yes, right, Again, the reason that
33:41
Speaker 3: all these companies are being treated as winners is because
33:44
Speaker 3: recently they have been If you can make a semiconductor,
33:46
Speaker 3: whether it's a good one or a bad one, somebody
33:49
Speaker 3: is willing to buy it. And investors this morning are
33:55
Speaker 3: telling Meta and Microsoft that they are going to reward
33:59
Speaker 3: them for return on investment, They're going to reward them
34:03
Speaker 3: for discipline. And if that is the case, then there's
34:08
Speaker 3: just a lot of companies out there that are selling
34:09
Speaker 3: garbage that are not likely to continue to be.
34:13
Speaker 2: Able to do so.
34:14
Speaker 3: So that's that's my main takeaway, and I'm not sure
34:18
Speaker 3: it's the right conclusion to draw, because, like I said,
34:21
Speaker 3: there is a lot of other stuff that's wrong with
34:23
Speaker 3: Meta's earnings rather than them just spending too much money.
34:25
Speaker 3: But it's two giant companies in a row who got
34:28
Speaker 3: their stock hit for being for lacking discipline on their spending.
34:33
Speaker 2: Can we go back to the uh hedge fund blow
34:36
Speaker 2: up for a second? Al so, just because it's kind
34:37
Speaker 2: of related. So again, this this hedge fund called you
34:43
Speaker 2: can't make this stuff up called Situational Awareness.
34:47
Speaker 3: Uh yeah, bro, that's the funniest name for a hedge
34:52
Speaker 3: fund that just got blown up.
34:54
Speaker 2: I'm sorry.
34:54
Speaker 4: That's something you see in a scouting report for an
34:57
Speaker 4: NFL player.
34:58
Speaker 2: You can't make this stuff up. That that that's what
35:00
Speaker 2: it's called. So that this hedge fund that was run
35:03
Speaker 2: by this guy Leopold Ashton Brenner, who's twenty five, who's
35:06
Speaker 2: twenty five, here's the deal that's not for me in
35:12
Speaker 2: twenty five. Okay, but no, that's an old man name.
35:15
Speaker 4: I just wishing that up.
35:17
Speaker 2: No, here's what I'm going to poop poo him for.
35:19
Speaker 2: Because again, when you when you take other people's money
35:24
Speaker 2: like this and then blow up, it's it's one thing
35:26
Speaker 2: to do with your own money. I have sympathy for
35:28
Speaker 2: that because it's kind of like it sucks like I've
35:32
Speaker 2: been there, like I've I've I've lost my own money,
35:34
Speaker 2: and you're like, ugh, that really sucks. When you do
35:37
Speaker 2: it for other people, you start asking questions, And one
35:40
Speaker 2: of the questions that I think is reasonable is the
35:43
Speaker 2: S and P five hundred is three percent off its
35:45
Speaker 2: all time high. How do you blow up a hedge
35:49
Speaker 2: fund that invests in equities with the S and P
35:52
Speaker 2: three percent off it's all time high. The answer is
35:54
Speaker 2: way too much leverage investing in way too risky areas.
36:00
Speaker 2: That is a person who probably needs to go through
36:02
Speaker 2: like five to ten years of growth and repentance before
36:05
Speaker 2: they should be managing money for institutional investors or large investors. Again,
36:10
Speaker 2: I don't have all of that much.
36:11
Speaker 3: Pretty Again, I don't know this guy's full bio, but
36:14
Speaker 3: you said that he was a former open AI executive.
36:18
Speaker 2: Well, so here's the thing his path is actually so
36:22
Speaker 2: this is technically his second blow up. He also I
36:28
Speaker 2: don't know exactly the work that he did, but he
36:32
Speaker 2: was somehow tied into FTX prior to their blow up
36:36
Speaker 2: as well. So I'm just gonna say, when you have
36:40
Speaker 2: two blow ups in four years, you should probably sit
36:43
Speaker 2: the next one out.
36:44
Speaker 3: Well, yeah, I'm also gonna say, you know who gave
36:47
Speaker 3: you money kind of on kind of on that institution
36:51
Speaker 3: or whoever it is that said hey, go invest this
36:54
Speaker 3: money for me.
36:56
Speaker 2: Yeah, we know. Actually I'm pulling from Wikipedia here, So
37:02
Speaker 2: it looks like he was backed by the Collisons. Who
37:08
Speaker 2: they who? What do they do? They're they're from Ireland
37:13
Speaker 2: and it looks like, okay, one of them is the
37:16
Speaker 2: founder of Stripe. They're both they're the founders of Stripe. Okay, okay,
37:21
Speaker 2: So again like not dummies, like founders of probably the
37:25
Speaker 2: biggest fintech payments platform in the last twenty years, So
37:29
Speaker 2: not dummies. Someone by the name of Daniel Gross who
37:34
Speaker 2: co founded a company Q that was then bought by
37:38
Speaker 2: Apple to help out with AI there. And someone named
37:42
Speaker 2: Nat Friedman who is currently the head of product that
37:45
Speaker 2: Meta Superintelligence Labs, but Situational Awareness managed twenty billion dollars
37:50
Speaker 2: in investor capital, so a lot of wealthy people gave
37:53
Speaker 2: him a lot of money to manage and it doesn't
37:55
Speaker 2: sound like it went well. Like again like buyer beware
38:01
Speaker 2: and everything. But when you blow up three percent away
38:05
Speaker 2: from all time highs, yeah, it suggests a lack of
38:08
Speaker 2: robustness and risk management in your approach. Yeah, everyone investing
38:15
Speaker 2: loses money. You don't blow up three percent from all
38:17
Speaker 2: time highs. Quick Break hour two coming up in a
38:20
Speaker 2: bit