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What if the Fed reverses course and raises rates this year? · The Financial Exchange Show

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Speaker 1: This is the Financial Exchange with Chuck Zada and Mark Fandetti.
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Speaker 2: It is Chuck, Mark and Tucker with you on a
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Speaker 2: CPI Wednesday, And at eight thirty this morning, we got
1:23
Speaker 2: the CPI data from the fine folks at the Bureau
1:28
Speaker 2: of Labor Statistics, and what it showed was that month
1:32
Speaker 2: over month, the headline inflation rate increased point four percent
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Speaker 2: as expected. The core inflation rate, we little bit better,
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Speaker 2: came in at point two percent. In terms of that
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Speaker 2: core number, it was something that when we look at
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Speaker 2: the unrounded version, because again they give you two decimal points,
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Speaker 2: but all that gets published is one. When you look
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Speaker 2: at the unrounded version, they came in at point two two.
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Speaker 2: So it's not something like it came in a like
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Speaker 2: point two four five and got rounded down. It was,
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Speaker 2: you know, pretty darn close to point two. And so
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Speaker 2: that's always good to see when you know, you go
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Speaker 2: out one more decimal point and you're not really surprised
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Speaker 2: by anything there. And so on this uh, you've got
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Speaker 2: the ten year US treasury dropping thirteen basis points to
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Speaker 2: four point six six one percent from four point you
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Speaker 2: know seven nine ish, okay, And ultimately, you know, it
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Speaker 2: seems to me that sure these you know, the core
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Speaker 2: reading was better. I mean, it annulyzes to around two
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Speaker 2: seven if you, you know, think you're gonna get twelve
2:39
Speaker 2: more of these, which is better. Like there, there's nothing
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Speaker 2: wrong there. Uh. But ultimately, I don't know that you
2:46
Speaker 2: can really look at this data and be like, hey,
2:49
Speaker 2: we whipped inflation. Good.
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Speaker 3: You know, don't let market reaction color your interpretation of
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Speaker 3: the data. Try to if you're into this kind of stuff,
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Speaker 3: if you don't care, and you probably care a little
2:58
Speaker 3: bit because you're listening, but you don't have to care
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Speaker 3: that much because it's only one month's worth. But I
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Speaker 3: think we all have a tendency to look at what
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Speaker 3: the market did, and it either amplifies or mutes or
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Speaker 3: warps our interpretation of the data. The immediate reaction to
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Speaker 3: core CPI, which is headline all items, less food and energy.
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Speaker 3: Why food and energy? Because there were big contributors to
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Speaker 3: random shocks during the nineteen seventies, core was a little
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Speaker 3: bit more moderate than expected. Bond market went bonkers, as
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Speaker 3: you pointed out, Chuck, I think right before this show.
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Speaker 3: It was probably because everybody was on the other side
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Speaker 3: of that.
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Speaker 2: Yeah. No, no one's wanted to own bonds for the
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Speaker 2: last month or so, and so everyone's kind of all
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Speaker 2: bared up on bonds and you get something that is
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Speaker 2: even marginally in the other direction, and it's, oh, gee,
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Speaker 2: maybe we're wrong about this, and all this money has
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Speaker 2: to run in the other direction in order to not
3:46
Speaker 2: be off size.
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Speaker 3: So that was ready to tip. It was sort of
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Speaker 3: teetering that recent. The momentum was bound to abate there.
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Speaker 3: But that causes i'll just say, less informed market commentators.
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Speaker 3: Sorry if that sounds snobby, but it's totally true to
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Speaker 3: let the markets reaction color their spin or their interpretation
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Speaker 3: because they're a little bit, you know, weak minded. They
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Speaker 3: don't have firm views or a model for inflation in mind,
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Speaker 3: and then they run with that because it's the easy
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Speaker 3: thing to do, and it starts getting amplified Bloomberg, CNBC,
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Speaker 3: they all repeat the same headline, and it's annoying.
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Speaker 2: And I think where I continue to land at this
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Speaker 2: point is there's pretty ample evidence that core inflation is
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Speaker 2: stalling out somewhere in the high twos to low threes.
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Speaker 2: Exactly where does it really matter? But there's pretty good
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Speaker 2: evidence that core inflation is stalling out there. And why
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Speaker 2: that matters is not because we don't think that. You know,
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Speaker 2: it's not because we're sitting here going, hey, all you plubs,
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Speaker 2: you don't really need food and fuel. No, it's not that.
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Speaker 2: It's that. Look, food and fuel prices they tend to
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Speaker 2: be self correcting, and that if gas prices go up
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Speaker 2: a ton, economic activity slows and gas prices come back down,
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Speaker 2: so that it's not something that is typically a long
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Speaker 2: term trend. It tends to be kind of it regresses
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Speaker 2: to the mean over time with you know, some some
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Speaker 2: long term you know growth built in in prices just
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Speaker 2: because of you know, general labor inflation and things like that.
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Speaker 2: But the the core inflation piece to me is one
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Speaker 2: where look, for much of the twenty tens, core inflation
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Speaker 2: was basically hanging out in like the one five to
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Speaker 2: one seven area. There wasn't much inflation present in that decade,
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Speaker 2: and that's largely because economic growth was completely anemic during
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Speaker 2: much of the twenty tens. Where we sit today is, hey,
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Speaker 2: there isn't really evidence that we have that you're gonna
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Speaker 2: get core inflation back down to two percent, And as such,
5:55
Speaker 2: maybe you need to prepare for a world in which
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Speaker 2: it's not you know, sitting like it was in twenty
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Speaker 2: twenty two when it's like six, But maybe you need
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Speaker 2: to prepare for a world where it's sitting closer to
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Speaker 2: three than two. And what does that look like.
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Speaker 3: Yeah, in the long run, CORE and headline. First of all,
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Speaker 3: CORE came out of the seventies because there were supply
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Speaker 3: shocks to both food and energy, multiple shocks that distorted
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Speaker 3: the trend in inflation. And that's what the FED focus
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Speaker 3: is on and what they can control. The FED controls
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Speaker 3: the supply of money, which in the long run, controls inflation.
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Speaker 3: We use trend inflation core as a synonym for that.
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Speaker 3: There are other measures that try to get at the
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Speaker 3: trend in inflation, other measures, to be even more confusing
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Speaker 3: about it, other measures of CORE, like median and trimming outliers.
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Speaker 3: We'll get some of those later today. We'll see what
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Speaker 3: they say. But I think it's important to keep in
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Speaker 3: mind that the Fed's job is to control long term inflation.
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Speaker 3: Movements in food, energy, or insurance premiums or cell phone premiums.
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Speaker 3: They can distort the trend that the FED needs to
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Speaker 3: focus on, which is why we report both numbers. But
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Speaker 3: in the long run, the Fed's not targeting core inflation.
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Speaker 3: Journalists get this wrong. Core is just a way to
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Speaker 3: remove the noise from the monthly signal. Separate monthly noise
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Speaker 3: from signal. In the long run, the Fed's job is
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Speaker 3: headline inflation, and it remains if you look at the
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Speaker 3: past twelve months for what it's worth, and over longer
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Speaker 3: periods at one time, fleeting shocks to food, energy, cell
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Speaker 3: phone bills or whatever they do, get they do get
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Speaker 3: removed in the wash. Headline inflation remains elevated, and so
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Speaker 3: does median and other measures of core for that.
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Speaker 2: Matter, in terms of and I also just want to
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Speaker 2: just give a little bit of context on this because
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Speaker 2: again we've talked about why the Fed's two percent target
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Speaker 2: is a dumb target, and I'm not trying to excuse
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Speaker 2: the Fed. It's much more. Hey, there isn't really evidence
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Speaker 2: that they can hit that, you know, over the long term.
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Speaker 2: But it's something where if we look back at let's
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Speaker 2: look like the last forty years of data, so since
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Speaker 2: the mid nineteen eighties. I'm going to exclude the nineteen
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Speaker 2: seventies where we obviously had some big, big spikes in inflation,
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Speaker 2: but let's go back to you know, one one nineteen
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Speaker 2: eighty five, and look at what we have seen as
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Speaker 2: far as inflation goes annually. The forty year average for
8:24
Speaker 2: CPI is two point eight two percent. We're sitting here
8:29
Speaker 2: right now at two point eight nine. I think the
8:31
Speaker 2: point I'm trying to make is not that, hey, the
8:36
Speaker 2: FED like, I'm not trying to excuse the FED and
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Speaker 2: be a FED apologist. It's much more I don't know
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Speaker 2: that we have facts and evidence that we can conclusively
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Speaker 2: target two percent in the long term for inflation. The
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Speaker 2: Feds existed during this entire time span. They have not
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Speaker 2: had an explicit two percent inflation target until whind Bernanke
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Speaker 2: put in place twenty twelve. Was that early twenty twelve,
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Speaker 2: So for the last thirteen years they've had that. But effectively,
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Speaker 2: the inflation that we've seen over the last twelve months
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Speaker 2: now is pretty much in line with the forty year
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Speaker 2: average for inflation. And if you go and take a
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Speaker 2: look at US core CPI and say, okay, what does
9:23
Speaker 2: you know, what does that look like in terms of again,
9:28
Speaker 2: same thing, when when you look at the forty year
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Speaker 2: average for core CPI it's two point eight four percent.
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Speaker 3: Yeah, they should be say we are at tent.
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Speaker 2: In the long term, we are at you know, three
9:39
Speaker 2: point twenty five now, so you can make a case
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Speaker 2: that we're higher. But also the main reason that that
9:44
Speaker 2: core CPI number is higher right now is because of
9:48
Speaker 2: shelter costs, which are continuing to trend down. Because it's
9:50
Speaker 2: such a lad series in there, like by the end
9:53
Speaker 2: of this year, pretty good chance that core CPI is
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Speaker 2: somewhere in the high twos, two eight, two nine, somewhere
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Speaker 2: around there, you know, unless you get some kind of
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Speaker 2: weird you know, shocked to the system or something like that.
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Speaker 2: So where I'm going with this is we're condition now
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Speaker 2: over the last decade to expect two percent inflation, because look,
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Speaker 2: for the twenty tens, the big problem was not too
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Speaker 2: much inflation from the as the FED viewed it, it was, hey,
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Speaker 2: we're getting too little, Like inflation was running like one
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Speaker 2: and a half for much of the twenty tens. And
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Speaker 2: I think we need to be honest with ourselves when
10:31
Speaker 2: we say that period's probably the outlier and not the
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Speaker 2: norm of what we have seen through human history and
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Speaker 2: even through like the recent you know, last couple of generations.
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Speaker 3: YEA, In the long run, it doesn't matter whether the
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Speaker 3: target is two, three or four percent. Money's neutral. There's
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Speaker 3: some economists who disagree with that statement. They think that
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Speaker 3: monetary that changes in the money supply can have long
10:53
Speaker 3: run effects on the economy through persistence of things like unemployment.
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Speaker 3: But let's just pretend money's neutral. Generally not controversial, so
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Speaker 3: it really doesn't matter what the FED alects. Some inflation
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Speaker 3: is probably a good thing. Most economists would say that
11:08
Speaker 3: gives the FED room the lower real race when a
11:10
Speaker 3: shock hits, when something bad happens. It also gives the
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Speaker 3: labor market some leeway because it's easier to say, raise
11:20
Speaker 3: somebody's nominal wage and let their real wage fall than
11:24
Speaker 3: it is to cut somebody's real wage. And I can
11:27
Speaker 3: that sounds more technical than it is, but just accept no.
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Speaker 2: It's basically we have egos. It's a lot easier for
11:33
Speaker 2: us to say, hey, I'm giving you a five percent
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Speaker 2: raise when inflation's running six percent. Yeah, then hey, price
11:39
Speaker 2: is dropped by three percent, so I'm cutting your salary
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Speaker 2: by two percent.
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Speaker 3: And the example you just gave. But we're getting at
11:43
Speaker 3: here in case this is an unfamiliar concept. In the
11:46
Speaker 3: example you just gave, you get a five percent raise.
11:48
Speaker 3: But prices went up by six, you were standard of
11:50
Speaker 3: living went down by one. But it doesn't feel that way.
11:52
Speaker 3: You still go home and you said, babe, I got
11:54
Speaker 3: a five percent raise. Okay, Well that's you know, not
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Speaker 3: what we were hoping for, but it's okay.
11:59
Speaker 2: On the other hand, hey, if prices go down three.
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Speaker 3: Same suppose we had zero inflation, which sounds like a
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Speaker 3: good goal. Go ahead.
12:06
Speaker 2: Yeah. If if prices stay the same and your employer says, hey,
12:10
Speaker 2: take a one percent pay cut, they're like no, you no, Like,
12:14
Speaker 2: screw you. I'm not taking a pay cut. You're taking
12:17
Speaker 2: a pay cut.
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Speaker 3: So that's that's the main argument. I think from a
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Speaker 3: labor economists point of view that some inflation is a
12:22
Speaker 3: good thing, but reasonable people differ on that. Some go
12:24
Speaker 3: some want zero, some want five.
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Speaker 2: How much inflation do you want?
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Speaker 3: Mark low and stable? We've always said that so that
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Speaker 3: we're not even aware of happening.
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Speaker 2: What number like when when you go to sleep at
12:36
Speaker 2: night counting inflation? Yeah, of course, what what number do
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Speaker 2: you see? I see one point.
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Speaker 3: I'm a hard money guy. I'm a zero guy. I'm
12:45
Speaker 3: in the zero camp because I don't trust government to
12:47
Speaker 3: run the money supply in a time consistent way. So
12:50
Speaker 3: it's it's political with what it comes down to your ideology.
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Speaker 3: I think sure, like I would have been for the
12:54
Speaker 3: gold standard, even though it's absurd, it's absurdly ineffective at
12:59
Speaker 3: running a modern economy. So it comes down to your ideology,
13:02
Speaker 3: I think. And how much of a how much of
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Speaker 3: a stiff you are?
13:06
Speaker 2: Interesting?
13:06
Speaker 3: Yeah, f I'm a pretty big stiff.
13:09
Speaker 2: I like that about you. Let's take a quick break.
13:12
Speaker 2: When we come back, let's talk a little bit. I
13:15
Speaker 2: think that's enough inflation to talk for now. Let's talk
13:17
Speaker 2: about the FED though, and what they potentially do over
13:21
Speaker 2: the course of twenty twenty five.
13:23
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14:29
Speaker 1: Mark.
14:30
Speaker 2: I'm old enough to remember Jeremy Siegel last September coming
14:36
Speaker 2: out and yelling at me, not me personally, but through
14:41
Speaker 2: my TV, yelling at me that the Federal Reserve needed
14:47
Speaker 2: to do an emergency seventy five basis point rate cut
14:51
Speaker 2: and then cut seventy five basis points the next meeting.
14:55
Speaker 2: I'm also old enough to remember this piece from the
14:57
Speaker 2: Wall Street Journal from yesterday by James Macintosh, and it's
15:02
Speaker 2: titled what if the fed U turns and raises rates
15:04
Speaker 2: this year? And by golly, I am so sick of
15:09
Speaker 2: us extrapolating two to three month trends in what's going
15:14
Speaker 2: on in the economic data into what is ultimately going
15:18
Speaker 2: to happen over the next three years, because that's what
15:22
Speaker 2: we've done in each of these cases. Yea, in September,
15:24
Speaker 2: it was, well, we've had a tough summer of you know,
15:27
Speaker 2: employment data, and the SAM rule triggered, and so everybody
15:30
Speaker 2: panic and Jeremy Siegel was leading the freaking panic, which
15:35
Speaker 2: is two bad. Is Jeremy Siegel generally a really smart guy,
15:38
Speaker 2: but he was an absolute mess after that employment report
15:42
Speaker 2: that we got for August. In this case, it's not Siegel,
15:45
Speaker 2: it's a whole bunch of other people that are running
15:47
Speaker 2: around now going, oh, we're gonna have to raise rates.
15:50
Speaker 2: The economy is too hot. And ultimately neither of these
15:55
Speaker 2: are probably right because in every economy you see these
15:59
Speaker 2: fluctuations over two and three month periods because it's never stable,
16:03
Speaker 2: it's never stagnant, it never just sits where you want
16:05
Speaker 2: it to. It's always evolving. And just to look at well,
16:10
Speaker 2: you know, employments, you know, not good for a few months,
16:13
Speaker 2: or hey, bond yields are selling off right now, does
16:15
Speaker 2: that mean that you know inflation's back? For Sometimes you
16:20
Speaker 2: can just not do anything, and that's perfectly fine.
16:25
Speaker 3: We don't understand a lot about inflation. Unfortunately economists don't.
16:30
Speaker 3: They admit this. Academic researchers are the first to admit it.
16:34
Speaker 3: And I think seagulls, alarmism and hyperventilating is a good reminder.
16:40
Speaker 3: And you all know this. Take predictions from so called experts.
16:46
Speaker 3: And he is one Yale PhD buddies with Robert Schiller
16:50
Speaker 3: who want to nobel. I mean, these guys are top
16:52
Speaker 3: notch yes searchers, teachers in an ivy League school. Siegel
16:55
Speaker 3: does wrote a very popular.
16:56
Speaker 2: Way no dummy book.
16:57
Speaker 3: This is Yeah, you you already made this point. I'm
16:59
Speaker 3: just in it on a little thick I guess. But
17:02
Speaker 3: in our domain, finance, more generally economics, forecasts are problematic,
17:11
Speaker 3: I'll just say, much more so than in say the
17:14
Speaker 3: hard sciences economics, finance. They're so they're softer sciences, they're
17:18
Speaker 3: social sciences.
17:19
Speaker 2: To the gen zers listening, the shorthand is math is hard, yo.
17:23
Speaker 3: You might put it that way. Forecasting is certainly hard
17:26
Speaker 3: in soft sciences like this one, and serious people know
17:30
Speaker 3: not to do it. I think sometimes even serious people
17:33
Speaker 3: can get carried away. But anybody listening knows to take
17:36
Speaker 3: economic or market predictions with a huge grain of salt.
17:41
Speaker 2: When we talk about the case for the Federal Reserve hiking,
17:45
Speaker 2: I'll lay out in my case in which it would
17:48
Speaker 2: be reasonable to discuss this, and that is, if you
17:53
Speaker 2: see an uptick in core CPI beyond where it is today,
17:58
Speaker 2: in a meaningful uptick over the course of this year,
18:01
Speaker 2: to the point where we're sitting there at three two
18:03
Speaker 2: five right now, if you get core CPI somehow accelerating
18:07
Speaker 2: to foreign change four four one four two, okay, case
18:13
Speaker 2: to be made that, Yeah, the Fed ass to have
18:15
Speaker 2: a real serious conversation about hiking. But the question that
18:19
Speaker 2: I'll ask to anyone listening and to you, Mark, is okay,
18:22
Speaker 2: what's the case for core CPI accelerating from?
18:26
Speaker 3: So you have to think about the process of inflation,
18:28
Speaker 3: and the way researchers generally think about it is it's
18:30
Speaker 3: composed of a core or underlying component. I'm using core here,
18:33
Speaker 3: not in the ex food and energy sense. I'm using
18:34
Speaker 3: it in the more general sense. It's driven by too
18:37
Speaker 3: much money being It's driven by output departing from its potential,
18:41
Speaker 3: the economy exceeding its speed limit. That's one part of
18:44
Speaker 3: core in modern macroeconomic models. The other part is expectations,
18:49
Speaker 3: and then all inflation can be explained by those two things,
18:52
Speaker 3: plus the supply shock component, oil prices, productivity, any number
18:56
Speaker 3: of things that can shift those relationships around. So if
19:01
Speaker 3: the economy suddenly sped up, or if inflation expectations continued
19:04
Speaker 3: to creep up like they did this month, probably in
19:07
Speaker 3: response to energy, but they did, nevertheless, the FED might
19:09
Speaker 3: want to get ahead of that. If there's an outside
19:11
Speaker 3: shock like we had during COVID, the FED might this
19:14
Speaker 3: time want to get ahead of that and respond a
19:16
Speaker 3: little more severely. So there are ways beyond looking at
19:19
Speaker 3: core or headline inflation, huck, which is a rearview, mirror
19:22
Speaker 3: perspective that could motivate the FED to act or not.
19:28
Speaker 2: Take a quick break. When we come back, it's time
19:30
Speaker 2: for Wall Street Watch.
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20:01
Speaker 4: Market's are rallying as Wall Street reacts to the Consumer
20:03
Speaker 4: Price Index this morning for the latest reading on inflation,
20:07
Speaker 4: where consumer prices climb two point nine percent on an
20:10
Speaker 4: annual basis, in line with expectations. Month over month prices
20:14
Speaker 4: climb zero point four percent, also in line with forecasts.
20:18
Speaker 4: Traders are also sifting through strong bank earnings posted ahead
20:23
Speaker 4: of the opening bell this morning. Right now, the Dow
20:26
Speaker 4: is up by one in two thirds of a percent,
20:28
Speaker 4: or seven hundred points. S and P five hundred also
20:31
Speaker 4: up one in two thirds of percent or ninety eight points,
20:35
Speaker 4: Nasdaq surging over two percent higher or four hundred and
20:38
Speaker 4: twenty eight points, Russell two thousand, up nearly two and
20:41
Speaker 4: a half percent higher, are fifty three points, Tenure Treasure
20:44
Speaker 4: will pulling back by fourteen basis points at four point
20:47
Speaker 4: six three percent, and crude oil is up two percent higher,
20:51
Speaker 4: trading just above seventy nine dollars a barrel. JP Morgan, Chase,
20:56
Speaker 4: and Wells Fargo impressed on their fourth quarter results, as
20:59
Speaker 4: boltans beat earnings and revenue expectations. JP Morgan saw strong
21:04
Speaker 4: performances from its fixed income and investment business, while Wells
21:08
Speaker 4: Fargo said it expects net interest income to increase one
21:11
Speaker 4: to three percent in twenty twenty five from a year ago.
21:15
Speaker 4: JP Morgan up by one percent, while Wells Fargo stock
21:18
Speaker 4: is up by five percent. Other banks, including Goldman Sachs,
21:22
Speaker 4: black Rock, and City Group are also seeing gains after
21:24
Speaker 4: posting strong fourth quarter results. Elsewhere, Microsoft announced its new
21:29
Speaker 4: Quantum Ready program for businesses, saying quote, we are at
21:32
Speaker 4: the advent of the reliable quantum computing era. Shares in
21:37
Speaker 4: quantum stocks, including We're Getting Computing, d Wave, Quantum, and
21:41
Speaker 4: ion Q are jumping on the news. Shares in Meta
21:44
Speaker 4: up by nearly four percent following news that the social
21:47
Speaker 4: media giant is readying to cut about five percent of
21:50
Speaker 4: its workforce, focusing on Meta's lowest performing staffers. In a
21:54
Speaker 4: memo to employees, CEO Mark Zuckerberg said twenty twenty five
21:59
Speaker 4: will be an intense year, and tomorrow morning we'll see
22:02
Speaker 4: more bank earnings from Bank of America and Morgan Stanley.
22:05
Speaker 4: United Health will also report ahead of the opening bell.
22:09
Speaker 4: I'm Tucker Silvan. That's Wall Street Watch.
22:12
Speaker 2: Can we take a quick detour? Mark? Okay, I want
22:17
Speaker 2: to talk about quantum computing.
22:19
Speaker 3: Oh jeez, No, I can't think of something I know
22:22
Speaker 3: less about.
22:23
Speaker 2: Well, I can think of lots that you know less about.
22:27
Speaker 2: I don't know if that's good or bad. Look here
22:30
Speaker 2: here's the deal. For anyone listening and wondering what quantum
22:34
Speaker 2: computing is, here's the basic rundown of it. A normal
22:38
Speaker 2: computer has processors that have billions of transistors. A transistor
22:43
Speaker 2: is quite simply something that either is it's either open
22:46
Speaker 2: or closed, it's one or zero, and the combination of
22:49
Speaker 2: ones and zeros in the binary language end up telling
22:52
Speaker 2: the computer to do something. It might be you know
22:54
Speaker 2: the letter A, put a pixel here, do this do that.
22:57
Speaker 2: You don't need to know the exact specifics of it
22:59
Speaker 2: other than and transistors are binary. They can either be
23:02
Speaker 2: open or closed. They can't be both the same time.
23:05
Speaker 2: And so as an example, the reason why encryption works
23:10
Speaker 2: is because if you have an encryption key that is
23:14
Speaker 2: really freaking long, you have to try every single combination
23:18
Speaker 2: in sequence, and you can't break that sequence for trillions
23:22
Speaker 2: of years if you're using the right kind of encryption,
23:25
Speaker 2: because you have to go through each option one at
23:29
Speaker 2: a time, even doing millions a minute. If there are
23:31
Speaker 2: trillions of options, it takes you freaking forever. Quantum computing,
23:36
Speaker 2: the premise is simple. You are able to use what
23:40
Speaker 2: are called cubits, which are I'll be honest, I don't
23:45
Speaker 2: know exactly what they are, but the premise of them
23:48
Speaker 2: and how they actually work is, rather than having to
23:51
Speaker 2: cycle through everything sequentially, they can both be a one
23:55
Speaker 2: and a zero at the same time, and so you
23:58
Speaker 2: can compute all of these possibilities. Is not necessarily instantly
24:01
Speaker 2: because it doesn't really work like that, but much much
24:04
Speaker 2: faster in something that might take trillions of years might
24:08
Speaker 2: take ten minutes instead. And so Google made some noise
24:13
Speaker 2: back in what was it December where they said, oh,
24:16
Speaker 2: like we've seen, like, you know, massive improvement on quantum
24:18
Speaker 2: computing blah blah blah, and it touched off this whole
24:21
Speaker 2: like quantum computing cycle in stocks here. Here's the thing
24:28
Speaker 2: quantum computers. And this is from people that I know
24:32
Speaker 2: that actually know what they're talking about on this stuff.
24:36
Speaker 2: It is at least a decade away from even being
24:41
Speaker 2: viable to try to use these commercially, and probably two
24:46
Speaker 2: to three decades away from any kind of mass adoption.
24:49
Speaker 2: So when I go to Microsoft's azer page where it's
24:53
Speaker 2: titled this for me yesterday twenty twenty five, the year
24:55
Speaker 2: to become quantum ready, I'm just gonna read some quotes
24:59
Speaker 2: here as we look forward to the next twelve months.
25:02
Speaker 2: The pace of quantum research and development is only going
25:04
Speaker 2: to accelerate, making this a critical and catalyzing time for
25:06
Speaker 2: business leaders to act. In a business decision maker study,
25:11
Speaker 2: twelve percent of business decision makers said their organizations were
25:15
Speaker 2: prepared to assess quantum opportunities. What freaking business is looking
25:19
Speaker 2: at quantum opportunities this year? There is no one at
25:23
Speaker 2: all who woke up on January first and said, you
25:26
Speaker 2: know what my business needs this year? Some quantum computers.
25:31
Speaker 2: No one said that. I am not believing that twelve
25:34
Speaker 2: percent of people said that they were prepared to assess
25:38
Speaker 2: quantum opportunities this year. That is complete crap and it
25:45
Speaker 2: should be treated as such. Now. I get that Microsoft
25:48
Speaker 2: has seen, you know, a whole bunch of benefit from
25:51
Speaker 2: being on the cutting edge of AI, and their stock's
25:53
Speaker 2: done very nicely over the last couple of years, and
25:55
Speaker 2: obviously you need to deliver the what's next to your
25:58
Speaker 2: shareholders to keep the ball rolling. But these are tied together.
26:04
Speaker 2: In my opinion, you're doing the weave. If we're really
26:09
Speaker 2: so convinced, and if Microsoft and Google and Meta and
26:14
Speaker 2: everyone is really so convinced that AI is this productivity
26:18
Speaker 2: game changer that's gonna usher in like, hey, we can
26:21
Speaker 2: have so much more growth. Why are they not laying
26:26
Speaker 2: off more people and specifically salesforce. Who is a company
26:34
Speaker 2: that's like supposedly at the forefront of Lake They have
26:37
Speaker 2: all these AI agents that they're rolling out. Why did
26:40
Speaker 2: Mark Benioff, the CEO, announced they were hiring two thousand
26:44
Speaker 2: more salespeople at the end of last year to sell AI?
26:47
Speaker 2: Why can't your AI agents do the selling? Is it
26:51
Speaker 2: maybe because they can't do what you're saying they can do?
26:56
Speaker 2: Because all I know is if I had access to
26:58
Speaker 2: all of these tools internally and they were really as
27:01
Speaker 2: good as as I was claiming them to be, Well,
27:05
Speaker 2: why do I need either A? Why do I need
27:07
Speaker 2: the headcount that I have because they can do the work?
27:11
Speaker 2: Or B? Why am I going out and hiring a
27:13
Speaker 2: whole bunch of people to sell the AI tools? Why
27:15
Speaker 2: am I not just building AI to sell the AI tools?
27:19
Speaker 3: It should be self evident that it will help your business.
27:21
Speaker 3: They should just show you the software.
27:23
Speaker 2: So I guess where I'm kind of at to tie
27:25
Speaker 2: this all back together. Is the reason that we're starting
27:29
Speaker 2: to see all of this quantum computing talk from the
27:32
Speaker 2: big AI guys. Is it because the promise of AI
27:35
Speaker 2: is going to fall flat on its face in the
27:37
Speaker 2: next year or two? Is the question that I'm asking.
27:42
Speaker 3: I'm snorting because you're piling fantasy, though grounded in reality,
27:48
Speaker 3: upon fantasy. It's like when AI stopped pushing your stock up.
27:51
Speaker 3: You found that throwing quantum and a few press releases
27:54
Speaker 3: gave you a boost. So does it feel like that?
27:57
Speaker 3: Not the first time. There's a great Jeremy Siegels book chronicle.
28:01
Speaker 3: Brandon Burton mal Kyle's book Random Walk Down Wall Street
28:06
Speaker 3: goes back decades. A lot of many of you read
28:08
Speaker 3: it in college. You may have forgotten it, but pick
28:10
Speaker 3: it up again. He chronicles the tech boom, the tronics boom,
28:14
Speaker 3: excuse me of the sixties when businesses started suffixing their
28:20
Speaker 3: names with tronics because they realized that they could push
28:23
Speaker 3: up there's your price just by seeming to be avant
28:26
Speaker 3: garde or cutting edge. So this is not new in
28:30
Speaker 3: my experience. When people in finance with MBAs, even though
28:33
Speaker 3: they're really smart, start talking about a technology, they generally
28:37
Speaker 3: don't understand it and they're just trying to sell you
28:39
Speaker 3: something or push up their stock price. Look, I'm not
28:42
Speaker 3: denying that there could be enormous productivity and thus economic
28:46
Speaker 3: growth benefits from something like AI. But you don't have
28:51
Speaker 3: to be a savvy investor to avail yourselves of them.
28:55
Speaker 3: Just buy an index fund and you'll benefit passively as
28:59
Speaker 3: they're engineered to do from any of those innovations.
29:03
Speaker 2: Becoming quantum ready is both a business and global imperative.
29:08
Speaker 3: Maybe, I don't know.
29:09
Speaker 2: In fact, the United Nations announced twenty twenty five as
29:13
Speaker 2: the International Year of Quantum Science and Technology Parentheses IYQ,
29:19
Speaker 2: reflecting the transformative impact quantum mechanics has had in the
29:24
Speaker 2: past century and setting the stage for the next wave
29:27
Speaker 2: of quantum innovation.
29:30
Speaker 3: Yeah. I mean, if you're really curious, there are some
29:32
Speaker 3: good lectures on Amazon Prime about physics and quantum mechanics
29:36
Speaker 3: for lay people like.
29:37
Speaker 2: Yeah, I think it's really interesting stuff. I think that
29:40
Speaker 2: what we're talking about here in terms of you know, oh,
29:44
Speaker 2: companies need to use this year to get serious about
29:46
Speaker 2: quantum computing. No, they don't.
29:50
Speaker 3: I don't know. Maybe in retrospect, this will have been
29:52
Speaker 3: the year to make room for that big quantum computer
29:54
Speaker 3: in the kitchen. I don't I don't know, don't. I
29:56
Speaker 3: don't put it on the board, Tucker. No one is
29:59
Speaker 3: selling a quantum computer in twenty twenty five. Someone might
30:04
Speaker 3: make one and use it internally, but no one is
30:07
Speaker 3: selling one.
30:08
Speaker 4: What about twenty twenty six.
30:11
Speaker 2: Fine, you can put that on the book, till I
30:13
Speaker 2: was trying to I know you normally don't like really
30:15
Speaker 2: long term things.
30:17
Speaker 4: That's short enough because you're saying this year in next
30:20
Speaker 4: it's fine.
30:21
Speaker 2: You usually do like a decade out predictions. I know
30:24
Speaker 2: I'm trying ridiculous. I'm trying to be better. Yeah, two years.
30:27
Speaker 2: If I can get a little better each day, that's
30:29
Speaker 2: all I'm trying to do. Just take a quick break.
30:32
Speaker 2: When we come back, we'll talk a little bit about
30:35
Speaker 2: banker ans, JP, Morgan, Wells, Fargo, Goldman, Sachs, whole bunch
30:38
Speaker 2: of reporting. We got a couple of them that will
30:40
Speaker 2: cover when we return.
30:42
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30:48
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30:53
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31:02
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31:15
Speaker 2: All right, so we're right in the middle of bank
31:16
Speaker 2: earning season. JP Morgan reported earnings. What did Senor Diamond
31:23
Speaker 2: tell us this morning?
31:25
Speaker 3: Oh, I was just looking at the results. I wasn't
31:28
Speaker 3: paying too much attention to his editorializing. But what strikes
31:33
Speaker 3: me about JP Morgan is operational I'll just call it efficiency.
31:38
Speaker 3: They're very high Roe return on equity relative to competitors.
31:43
Speaker 3: It seems like all financial services companies have benefited from
31:47
Speaker 3: the lush and favorable financial conditions we've experienced over the
31:51
Speaker 3: past year. You see that with Goldman, you see that
31:53
Speaker 3: with Morgan, you see that with the Bank of A
31:56
Speaker 3: pretty much across the board. So when you get when
32:01
Speaker 3: you get iye popping results like they seem to be
32:03
Speaker 3: delivering this quarter, you got to wonder how much of
32:06
Speaker 3: it is due to favorable conditions, how much of it
32:08
Speaker 3: is due to i't's call it skill in management. And
32:12
Speaker 3: Morgan in particular, since you asked, seems to be able
32:14
Speaker 3: to generate consistently high ROE relative to competitors. The one
32:18
Speaker 3: metric notable to me is someone who doesn't you know,
32:21
Speaker 3: follow this space that closely and again that's not due
32:27
Speaker 3: to just a favorable backdrop, that's due to skill in management.
32:32
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Speaker 1: The proceeding was paid for and the views expressed are
33:22
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33:31
Speaker 2: Wells Fargo also reporting they took a six hundred and
33:34
Speaker 2: forty seven million dollars severance charge for the quarters. They're
33:37
Speaker 2: continuing to try to cut their head count, but overall,
33:42
Speaker 2: when you look at Wells Fargo again trying to I think,
33:48
Speaker 2: get their feet under them after a decade in the
33:51
Speaker 2: twenty tens that I think can best be described as
33:54
Speaker 2: like very out of character and very bad for a
33:57
Speaker 2: bank that was typically thought of, as you know, operating
34:01
Speaker 2: at a high level, not taking big risks, and generally
34:03
Speaker 2: being pretty well thought of, had a number of different
34:06
Speaker 2: scandals related largely to a lack of internal control within
34:10
Speaker 2: the company, and now trying to get themselves kind of
34:16
Speaker 2: back on their feet as they go through the twenty twenties.
34:20
Speaker 2: So it's hard for me to find a bank that
34:24
Speaker 2: saw its starfall more than them during the twenty tens
34:29
Speaker 2: and again just trying to get themselves squared away. Here,
34:34
Speaker 2: I think is the message that that I get out
34:37
Speaker 2: of this.
34:38
Speaker 3: Yeah, apparently their investment banking business, just reading from the
34:41
Speaker 3: headlines today contributed It's not clear whether it's most or
34:46
Speaker 3: a disproportionate share of its most recent jump in profit
34:50
Speaker 3: or net income, depending on how you want to measure it.
34:53
Speaker 3: I do you have any sense for whether they're their
34:56
Speaker 3: core business banking, Yes, has sort of stable, lot Ston
35:00
Speaker 3: is growing at the rate that they or investors have expected.
35:07
Speaker 3: Nor are they Yeah, Yeah, I don't know. I'm sorry,
35:09
Speaker 3: I don't know either. I asked a question, I don't
35:11
Speaker 3: know the answer.
35:12
Speaker 2: They're there. I haven't like see. I think the one
35:18
Speaker 2: thing that you can say, it doesn't seem like there
35:20
Speaker 2: has been any new scandal recently, because for much of
35:25
Speaker 2: the twenty tens, like you were seeing stuff popping up
35:29
Speaker 2: quite honestly on kind of an annual basis. So I
35:32
Speaker 2: do think that's good. Remember Wells Fargo was the company
35:35
Speaker 2: that had the big cross selling scandal. They also had
35:39
Speaker 2: I'm trying to think of all the different ones that
35:40
Speaker 2: they had. I just want to make sure that I
35:43
Speaker 2: don't ascribe something to them that was someone else. Okay,
35:48
Speaker 2: here we go. They also had the fake account scandal,
35:52
Speaker 2: so that was in September of twenty sixteen, where they
35:56
Speaker 2: created more than one point five million fake deposit accounts
35:59
Speaker 2: in five hundred thousand fake credit cards in customers' names
36:02
Speaker 2: without their permission. So these were affecting like customer credit
36:05
Speaker 2: reports and things like that. And this was in order
36:09
Speaker 2: to be able to you know, have bank you know,
36:13
Speaker 2: loan originators hitting their bogies. In September of that year,
36:17
Speaker 2: they were improperly repossessing service members cars. So these are
36:24
Speaker 2: military service members that they were repossessing without basically with
36:28
Speaker 2: like when they should not have been other things. In
36:31
Speaker 2: March of seventeen, they found more fake accounts that they
36:35
Speaker 2: had previously not found in the first round when they
36:39
Speaker 2: went through. They also had a lawsuit in August of
36:43
Speaker 2: seventeen for overcharging small business retailers. Let's see what else
36:48
Speaker 2: did they.
36:49
Speaker 3: Have for I go out of business if you're a
36:50
Speaker 3: big bank.
36:51
Speaker 2: March twenty eighteen, Wells Farger reported that the Justice Department
36:55
Speaker 2: was investigating their wealth management business. In April of twenty eighteen,
36:59
Speaker 2: they agreed to a billion settlement for mortgage locks and
37:02
Speaker 2: auto loan issues. Let's see May of twenty eighteen, they
37:06
Speaker 2: altered business information like social security numbers and dates of
37:09
Speaker 2: birth without client knowledge. Let's see what else did they
37:13
Speaker 2: have here. July twenty eighteen, they had to issue refunds
37:17
Speaker 2: on add ons like pet insurance and legal services without
37:21
Speaker 2: cut that they had put on products without customers full
37:24
Speaker 2: understanding and consent. Let's see again, it was like just
37:29
Speaker 2: all over the place. It was like a NonStop thing.
37:32
Speaker 2: So I guess that the thing that you can say,
37:34
Speaker 2: I don't think I've seen too much on that side recently,
37:38
Speaker 2: which is good.
37:38
Speaker 3: What didn't they do during that period? Any shenanigans they
37:42
Speaker 3: didn't try might be a shorter list.
37:44
Speaker 2: Well, again, to be fair, it wasn't like every single
37:48
Speaker 2: thing they did was a problem, but it was a
37:51
Speaker 2: long Listen, and by the way, I didn't even August
37:54
Speaker 2: twenty eighteen, this one's bad too. They foreclosed on hundreds
37:57
Speaker 2: of homes due to a computer glitch where people were
38:01
Speaker 2: incorrectly denied loan modifications. So four hundred foreclosures happened that
38:05
Speaker 2: should not have. It's pretty bad. Like it's pretty bad
38:10
Speaker 2: losing your home when you shouldn't have. Let's take a
38:12
Speaker 2: quick break. Hour two coming up in a bit