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AI Sell-Off Tests Wall Street’s Most Expensive Bet · The Financial Exchange Show

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  Speaker 1: making a donation Today. Face is the Financial Exchange with
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  Speaker 1: Mike Armstrong and Mark Vandetti.
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  Speaker 2: Good morning, Happy Tuesday, Welcome back to the Financial Exchange.
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  Speaker 2: It's Mike, Mark and Tucker with you on a bit
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  Speaker 2: of a bit of a selloff week to kick off
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  Speaker 2: the summer here. When was the official kickoff a summer
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  Speaker 2: or two? Two days ago with the equinox I guess
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  Speaker 2: and you know that sell in May and go away
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  Speaker 2: adage is not exactly working quite so far, because we
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  Speaker 2: had a pretty.
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  Speaker 3: Darn good May.
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  Speaker 2: But we're kicking things off here with some global volatility,
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  Speaker 2: and it is global. We had foreign markets much more
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  Speaker 2: volatile than US markets. Here on what seems to be
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  Speaker 2: a focus on the same things that contributed to such
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  Speaker 2: a high flying beginning of the year. AI stocks, chip stocks,
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  Speaker 2: space exploration stocks all feeling some volatility and downward pressure.
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  Speaker 3: As I hate attributing anything to this stuff.
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  Speaker 2: Right Like, I'm unconvinced that all of a sudden people
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  Speaker 2: are waking up to the valuation concerns of these companies.
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  Speaker 2: That seems unlikely to me, but some elevated concern out
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  Speaker 2: there in markets, and very specifically we saw it focused
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  Speaker 2: on those AI companies. So the what's the South Korean Index?
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  Speaker 2: The costp index was off a good nine percent. We
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  Speaker 2: had the largest European company ASML down big yesterday, and
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  Speaker 2: US stocks generally speaking off considerably over.
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  Speaker 3: The course of the last two days.
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  Speaker 2: And we're starting kicking the show off with the Nasdaq
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  Speaker 2: down about one and a quarter percent, which is not great,
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  Speaker 2: but it was off about two point six percent in
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  Speaker 2: pre market trading this morning when I was looking before
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  Speaker 2: the open. So a little bit of by the dip,
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  Speaker 2: by the dip mentality here bringing averages back in line,
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  Speaker 2: but clearly some pressure on markets as again, maybe renewed
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  Speaker 2: concern about interest rates, maybe concern about valuations and the
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  Speaker 2: promises of these AI companies. It's really hard to attribute
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  Speaker 2: any direct cause to these single day moves that we're
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  Speaker 2: seeing right now.
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  Speaker 4: Yeah, I agree completely. These explanations that try to identify trigger,
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  Speaker 4: they're totally unsatisfactory.
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  Speaker 3: They're generic, well because they work through praise them at anything.
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  Speaker 4: Yeah, and they also they explain everything, they explain nothing.
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  Speaker 2: Yeah, Oh, everyone's suddenly concerned about the AI trade until
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  Speaker 2: stocks skyrocket tomorrow.
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  Speaker 4: But that that's that raises more questions, So it's not
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  Speaker 4: a final answer. It's like when rates go up, interest
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  Speaker 4: rates go up and people talk about deficit.
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  Speaker 3: Fears, sure, debt warriors.
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  Speaker 4: It's just very generic. It's what the media and us
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  Speaker 4: do for that matter, because we have to.
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  Speaker 2: We'd like to anthropomorphize things, right, We like to describe
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  Speaker 2: human attributes to things that are very much not human.
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  Speaker 3: In the stock market is not human. It doesn't have feelings.
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  Speaker 2: It is an average of millions of different people participating
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  Speaker 2: with their own views on things.
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  Speaker 4: On any giving hand, it's pretty well documented that stock
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  Speaker 4: price changes day over day or returns. Daily returns are
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  Speaker 4: pretty random in like a statistical sense. So your best
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  Speaker 4: guess of what stocks will do today is what they
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  Speaker 4: did yesterday. That's going to be wrong. But even that
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  Speaker 4: naive process, if that was your forecasting process, which it
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  Speaker 4: wouldn't be because that's wrong headed, but that's still better
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  Speaker 4: than some sort of fancy, fundamental or even technical model.
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  Speaker 4: Fact is, prices are random because news arrives randomly. You
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  Speaker 4: don't know what the news is going to be. By definition,
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  Speaker 4: it's new information, and people trade based on that or
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  Speaker 4: based on chips and sentiment. We just don't know, Mike.
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  Speaker 2: Like you said, as we head into the summer, I
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  Speaker 2: think it's always good for us to just kind of
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  Speaker 2: keep track of where where markets are right now. I
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  Speaker 2: think everybody generally understands that they are quite expensive. I
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  Speaker 2: think most people understand that they are not as expensive
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  Speaker 2: as they've ever been.
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  Speaker 4: Depend on how you measure it, Yeah, even worth splitting
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  Speaker 4: airs a well.
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  Speaker 3: It depends on It depends on how you measure it.
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  Speaker 2: Right, if you're looking at purely right now PE ratios
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  Speaker 2: not adjusted for inflation and things like that, not ten
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  Speaker 2: years address on a pure play SMP five You know,
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  Speaker 2: pure play s and P five hundred PE ratio.
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  Speaker 3: Back in two thousand and one, we hit forty six.
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  Speaker 4: Your play, What are you talking about?
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  Speaker 2: So forgive me, but we're looking at trailing twelve months. Okay,
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  Speaker 2: so trailing twelve months S and P five hundred price
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  Speaker 2: to earnings. We're at thirty two right now, which is
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  Speaker 2: extraordinarily elevated compared to almost any time in history other
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  Speaker 2: than right before the dot com bubble bopped, when it
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  Speaker 2: was at forty six.
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  Speaker 4: Yeah, then the market had a huge heart. Like that's
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  Speaker 4: like saying I'm not the fattest guy in the world.
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  Speaker 4: I mean, it's just it's not comforting. Forgive me, I'm
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  Speaker 4: not saying these valuations won't end up in retrospect looking
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  Speaker 4: reasonable if AI's promise is realized. I have my doubts,
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  Speaker 4: but I don't know.
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  Speaker 3: I'm right there with you. I think.
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  Speaker 2: I mainly bring this up to point out that, wow,
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  Speaker 2: we are at an incredibly elevated level that can go higher. Yeah, sure, right,
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  Speaker 2: Like there is no cap, there's no ceiling to any
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  Speaker 2: of these things. Suffice to say, prices on stocks are
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  Speaker 2: extraordinarily high, and more and more investors have been piling
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  Speaker 2: into the general concept that artificial intelligence is going to
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  Speaker 2: be such a revolutionary technology that it's going to change
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  Speaker 2: the world, and justify the amount of spending that has
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  Speaker 2: been put into it over the course of the last
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  Speaker 2: few years and is being promised to be put into
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  Speaker 2: it in the future.
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  Speaker 3: We've described some of the problems there.
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  Speaker 2: We've also described some of the accounting methodologies that go
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  Speaker 2: into to how companies spend on things like semiconductors, and
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  Speaker 2: how that could become problematic over the next few years
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  Speaker 2: when companies have to realize the depreciation that they have
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  Speaker 2: not yet realized.
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  Speaker 3: We've covered all of those things.
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  Speaker 2: I saw it put pretty well in terms of one
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  Speaker 2: individual synopsis of how three ways the markets could.
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  Speaker 3: Bear out of the next few years.
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  Speaker 2: Option one, which was the very optimistic one, was that
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  Speaker 2: the technological advances that are being made are in fact
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  Speaker 2: so revolutionary that they justify the spending that's being put
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  Speaker 2: into it, and earnings grow to justify the current valuations. Okay,
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  Speaker 2: you have to really buy into what AI is going
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  Speaker 2: to do to buy that. A bare case scenario might
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  Speaker 2: be that, you know, as happens with most technologies, it
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  Speaker 2: eventually becomes commoditized. Prices need to come down. Some companies
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  Speaker 2: are efficient enough to survive that, others are not. In
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  Speaker 2: either case, their earnings decrease over time, therefore their stock
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  Speaker 2: prices decrease, and we might have a truly revolutionary technology
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  Speaker 2: that in fact only has a few really successful players
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  Speaker 2: and a bunch of companies that weren't terribly efficient with
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  Speaker 2: their spending don't do so well in the future, and
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  Speaker 2: any painting a really pessimistic third case scenario where hey,
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  Speaker 2: these companies kind of like in twenty twenty one, are
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  Speaker 2: pouring money into this thing mainly because investors are cheering
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  Speaker 2: them on for doing it, without any real fundamental plans
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  Speaker 2: about how they're going to use this technology. It's all
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  Speaker 2: being overhyped and it all comes crashing down. I don't
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  Speaker 2: know which way we're going, but I can see those
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  Speaker 2: three paths, and frankly, I think the first one is
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  Speaker 2: probably the least likely to me, where hey, every company
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  Speaker 2: is a beneficiary of all of this. It seems to
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  Speaker 2: me we're going to land in one of the latter
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  Speaker 2: two camps. But it's hard to say when that shakeout
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  Speaker 2: might begin, and we're barely seeing any signs of expense
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  Speaker 2: concern on behalf of Major Techo.
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  Speaker 4: Look at the Internet, it was revolutionary. Life is a
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  Speaker 4: lot different now than it was. I'll say, I'll just
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  Speaker 4: call nineteen ninety two pre internet, because yeah, that's fair.
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  Speaker 4: I think people started subscribing to dial up. If you remember,
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  Speaker 4: if you're old enough and you remember.
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  Speaker 3: Products and was AOL and like that stuff.
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  Speaker 4: Yeah, Prodigy I think was ninety two, ninety three. I
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  Speaker 4: only know that because that's how I found out. Well,
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  Speaker 4: that's how I found out Reggie Lewis passed away. Terrible memory.
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  Speaker 4: That's my first Internet news memory, and that's how I
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  Speaker 4: date the sort of prevalence of that medium. Anyway, I
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  Speaker 4: think it was ninety two.
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  Speaker 3: Right, I guess my first Internet real exposure would.
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  Speaker 5: Have been AOL was really like the ninety five to
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  Speaker 5: ninety Yeah, well.
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  Speaker 2: Prodigy was, Prodier was the precursor MAOL. Instant Messenger was
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  Speaker 2: May of ninety seven. Yeah, so I think everybody's got
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  Speaker 2: different exposure, so that's different.
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  Speaker 4: Okay, Sorry, I get off on a tangent.
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  Speaker 3: No, it's kind of fun to talk about it.
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  Speaker 4: My point is the world's different. Everything's different than the
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  Speaker 4: pre Internet. Work is different, plays different, et cetera. But
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  Speaker 4: it didn't change any trend lines. The economy, in fact,
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  Speaker 4: has grown more slowly since its introduction, not because of it,
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  Speaker 4: because of other factors. Probably would have grown even more
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  Speaker 4: slowly had it not been for those breakthroughs. So you
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  Speaker 4: don't know who the winners will be. And it's also
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  Speaker 4: dangerous to make comments about how it will change the
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  Speaker 4: trend in growth and trending growth just a fancy way
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  Speaker 4: of saying living standards, will they grow more quickly less
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  Speaker 4: quickly about the same. In the case of the Internet,
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  Speaker 4: it was slightly less quickly for a while and slightly
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  Speaker 4: lower than about the same on average. You just don't know, Mike.
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  Speaker 2: Let's go ahead and take a quick break when we
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  Speaker 2: come back, let's talk a bit about the biggest IPO
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  Speaker 2: of the year, the biggest IPO of history.
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  Speaker 3: Let's chat SpaceX. When we return.
• 10:53
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  Speaker 2: Well, all eyes, I think continue to get a lot
• 11:42
  Speaker 2: of attension over at SpaceX. The stock went public just
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  Speaker 2: over a week ago. Now there's been about a week
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  Speaker 2: of trading in this thing. IPO price was I think
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  Speaker 2: one hundred and thirty five dollars a share, if I'm
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  Speaker 2: not mistaken. Started trading that day that Friday, June twelfth day,
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  Speaker 2: around one hundred and fifty to one hundred and sixty
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  Speaker 2: dollars per share shot up by Tuesday of last week,
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  Speaker 2: all the way to over two hundred bucks a share.
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  Speaker 2: At that point it was being you know, price, the
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  Speaker 2: market capitalization of SpaceX at that point in time was
• 12:16
  Speaker 2: above Amazon and briefly over Microsoft. So again, we spent
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  Speaker 2: a lot of time going through the two companies on
• 12:24
  Speaker 2: the program. At that point, they do not have a
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  Speaker 2: lot in common, obviously, but when you take a look
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  Speaker 2: at their revenue and their profits, which by the way,
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  Speaker 2: SpaceX doesn't have profits, so pretty easy to look at
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  Speaker 2: those ones, they don't resemble each other. Microsoft is this
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  Speaker 2: behemoth of a profitable entity with a deep moat. SpaceX
• 12:43
  Speaker 2: you can say, has a deep moat too, but you know,
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  Speaker 2: losing money like crazy. Nonetheless, briefly the hype over SpaceX
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  Speaker 2: got them valued over that.
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  Speaker 3: Since then, they've been falling.
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  Speaker 2: Stocks down close to twenty five percent off of those
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  Speaker 2: recent highs at about two hundred two dollars a share,
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  Speaker 2: were now sitting at one hundred and fifty five dollars
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  Speaker 2: per share. It was down big yesterday, about flat today,
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  Speaker 2: and you know, continued questions not only about how this
• 13:13
  Speaker 2: core business progresses because that in and of itself is complicated.
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  Speaker 4: What is the core business?
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  Speaker 3: I see a few rockets.
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  Speaker 2: And space rockets and space defense contracts as well as satellite.
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  Speaker 4: I said, spacelink, Starlink excuse yes.
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  Speaker 2: Starlink would be one of the core businesses, the only
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  Speaker 2: one that's really actually making any money. And then the
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  Speaker 2: other one I see as a massive defense contractor and
• 13:36
  Speaker 2: isn't X is in there too, right, formerly twitter X
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  Speaker 2: formally Twitter, as well as the AI business, which they're
• 13:44
  Speaker 2: you know, not doing anything terribly interesting in there other
• 13:47
  Speaker 2: than selling massive amounts of compute power to other entities
• 13:50
  Speaker 2: because it turned out that their AI platform, GROC is
• 13:55
  Speaker 2: not terribly good at anything. So hey, we've got all
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  Speaker 2: this excess capacity because nobody's using rock and out. On
• 14:01
  Speaker 2: top of that, rumors that they might want to fold
• 14:03
  Speaker 2: Tesla into the corporation. In addition to what was the
• 14:07
  Speaker 2: acquisition they made of the AI coding agent. I think
• 14:10
  Speaker 2: it was like a sixty billion dollar acquisition that they
• 14:14
  Speaker 2: wanted to make. I'm forgetting the name of the company now.
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  Speaker 4: Cursor is that it?
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  Speaker 3: Yeah? Suffice, Yeah, Cursor exactly.
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  Speaker 2: Suffice to say, there's a lot of complexity going on
• 14:25
  Speaker 2: with this brand newly started trading company. In addition to
• 14:28
  Speaker 2: all of that, you have the vast majority of shares.
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  Speaker 2: Ninety five percent of shares are locked up and unable
• 14:35
  Speaker 2: to be traded. So remember newly public company, A lot
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  Speaker 2: of people got in beforehand. Elon Musk himself is a
• 14:42
  Speaker 2: massive holder of the stock, and Elon's shares are locked up,
• 14:46
  Speaker 2: he can't trade them for a full year. Others will
• 14:49
  Speaker 2: have different notches at which point their chairs become available.
• 14:52
  Speaker 2: And so I don't think we covered this on the program.
• 14:56
  Speaker 2: You shouldn't be surprised by the volatility of a company
• 15:00
  Speaker 2: this fresh and new to markets when you add on
• 15:03
  Speaker 2: to it the complexities of how big it is, combined
• 15:06
  Speaker 2: with how little revenue and profit they have, finally with
• 15:09
  Speaker 2: how few shares are available for trading compared to their
• 15:13
  Speaker 2: total shares of the company. I'm not shocked to see
• 15:16
  Speaker 2: this type of volatility in there, and I don't know
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  Speaker 2: that it signifies much of anything. What I do find
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  Speaker 2: interesting and so far as I know, Mark, you're not
• 15:26
  Speaker 2: a bond rating expert corporate bond rating expert to my knowledge,
• 15:31
  Speaker 2: never part of your career experience either. But there's a
• 15:34
  Speaker 2: piece in Bloomberg this morning that I wasn't aware of.
• 15:36
  Speaker 2: Moodies just gave SpaceX a BAA one investment grade rating
• 15:42
  Speaker 2: on their newly issued debt. And I was thinking about
• 15:46
  Speaker 2: this one because none of these bond rating agencies have
• 15:49
  Speaker 2: an extraordinarily good track record of accurately identifying risk. Go
• 15:54
  Speaker 2: see their ratings on all sorts of bank and you
• 15:58
  Speaker 2: know debt instruments ahead of the Great Financial Crisis and
• 16:01
  Speaker 2: other points in time.
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  Speaker 4: Well, they have some big misses, but generally they have
• 16:04
  Speaker 4: a pretty good track record of investment grade versus non
• 16:08
  Speaker 4: investment grade distinctions. Are investors do find them useful? You're right,
• 16:12
  Speaker 4: they've had some big misses.
• 16:13
  Speaker 2: Though they've had some big misses, it is easy to
• 16:16
  Speaker 2: dump on them because of those big misses. You can
• 16:20
  Speaker 2: generally point to though a higher six a higher failure
• 16:24
  Speaker 2: rate among their junk rated debt, and a lower failure
• 16:28
  Speaker 2: rate among their investment graded debt. But when you look
• 16:32
  Speaker 2: at SpaceX as financials, you have to sit there and say, hmm,
• 16:36
  Speaker 2: they're getting the same rating as a company like Nvidia
• 16:38
  Speaker 2: did almost a decade ago, in spite of massive losses,
• 16:42
  Speaker 2: very little publicly traded experience, and a whole bunch of
• 16:46
  Speaker 2: other factors, which initially made me scratch my head, but
• 16:48
  Speaker 2: then ultimately I got to another point and said, their
• 16:53
  Speaker 2: job is to assess whether or not a company is
• 16:55
  Speaker 2: going to be able to pay their debts, right, whether
• 16:57
  Speaker 2: a company is going to fail?
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  Speaker 4: Yeah, how much? How much credit risk is attended with the.
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  Speaker 3: Is SpaceX a failure risk?
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  Speaker 2: So like, forget about all the financials for a moment here.
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  Speaker 3: I recognize they.
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  Speaker 2: Are not a financially what I would describe as healthy
• 17:14
  Speaker 2: company by any stretch. I know that their valuations are stretched,
• 17:17
  Speaker 2: but let's just think through that subject. The only company
• 17:22
  Speaker 2: in the world that is currently partnering with NASA to
• 17:26
  Speaker 2: launch products into space and launch satellites on a commercial basis,
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  Speaker 2: is that a company that anyone can envision failing.
• 17:35
  Speaker 4: I can't failure. I don't know over the life of
• 17:39
  Speaker 4: the bond.
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  Speaker 3: Yeah, granted that's a long period of time. I'm with you.
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  Speaker 4: I just what's the term on these the on the debt.
• 17:46
  Speaker 4: I don't, you know, a typical corporate bond, so i'd
• 17:49
  Speaker 4: call it ten years ago. I don't know.
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  Speaker 2: It just it struck me that, you know, when I
• 17:54
  Speaker 2: think about major companies that are out there that you know,
• 17:58
  Speaker 2: would be considered two strategically important to fail.
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  Speaker 3: Believe it or not, SpaceX is kind of at the
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  Speaker 3: top of that list right now.
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  Speaker 2: That could change, you know, the Amazon's Blue Origin, Jeff
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  Speaker 2: Bez's Blue Origin, or some of these other companies could
• 18:12
  Speaker 2: make up ground. But it would seem to me that
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  Speaker 2: at this point in time, in spite of the fiasco
• 18:17
  Speaker 2: of the new company, in spite of all the criticism
• 18:19
  Speaker 2: that I've put together of it, I don't know that
• 18:22
  Speaker 2: their financials could deteriorate to a point where the US
• 18:25
  Speaker 2: government wouldn't say, hey, that company can't fail because of
• 18:28
  Speaker 2: how strategically important it is to our national defense.
• 18:30
  Speaker 4: Now shareholders could get wiped out, deb whole bondholders. It
• 18:35
  Speaker 4: does feel unlikely based on the way you described it.
• 18:38
  Speaker 4: I don't disagree with that.
• 18:40
  Speaker 3: I don't know it.
• 18:41
  Speaker 2: It's probably overly optimistic, but it just struck me that
• 18:45
  Speaker 2: this is not your typical company. This is something kind
• 18:48
  Speaker 2: of unique and special based on their business model.
• 18:51
  Speaker 3: We've got to take a quick break here in the
• 18:54
  Speaker 3: next minute. Here.
• 18:54
  Speaker 2: Markets have been bouncing around. The Dow has actually now
• 18:58
  Speaker 2: turned positive for the day. SpaceX stock, by the way,
• 19:02
  Speaker 2: which was down big yesterday, also positive for the morning.
• 19:06
  Speaker 2: In spite of that, the overall market, the S and
• 19:08
  Speaker 2: P five hundred being dragged negative and the Nasdaq being
• 19:12
  Speaker 2: dragged down considerably, off over one percent in early trading.
• 19:17
  Speaker 2: We will take a quick break and when we come
• 19:20
  Speaker 2: back full market update with Wall Street Watch.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:42
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:46
  Speaker 1: on the Financial Exchange Radio Network. Till now Full Wall
• 19:51
  Speaker 1: Street Watch tracking the stocks, theodato and the headlines driving
• 19:55
  Speaker 1: markets so far today right here on the Financial Exchange
• 19:59
  Speaker 1: Radio Network.
• 20:00
  Speaker 5: Major text sell off this morning impact in global markets
• 20:03
  Speaker 5: after South Korea's index plummeted nearly ten percent, with significant
• 20:07
  Speaker 5: losses by chip makers like Samsung and sk Highnex over
• 20:10
  Speaker 5: worries about heavy AI spending. However, there is some dip
• 20:14
  Speaker 5: buying occurring right now. The Dow is up modestly, only
• 20:17
  Speaker 5: twenty points high, SMP five hundred is down over eight
• 20:20
  Speaker 5: tens of a percent, Nasdack down one and a quarter percent,
• 20:24
  Speaker 5: Russell two thousand is off about half a percent ten
• 20:27
  Speaker 5: Your Treasure reeled down two basis points at four point
• 20:30
  Speaker 5: four to eight percent, and Oil down over one and
• 20:33
  Speaker 5: a half percent, trading at seventy two dollars a barrel.
• 20:36
  Speaker 5: Several semiconductor names seeing losses on the day, Micron down
• 20:41
  Speaker 5: by nearly nine percent, Intel off by three percent, in
• 20:44
  Speaker 5: Nvidia down almost three percent. Meanwhile, after notching his third
• 20:48
  Speaker 5: straight day of losses and sinking sixteen percent yesterday, space
• 20:53
  Speaker 5: X shares are up modestly today. The stock did briefly
• 20:57
  Speaker 5: fall below its debut bright price of one one hundred
• 21:00
  Speaker 5: and fifty dollars. Elsewhere, Oracle disclosed that it had cut
• 21:04
  Speaker 5: twenty one thousand jobs, or about thirteen percent of its
• 21:07
  Speaker 5: workforce over their last fiscal year as part of a
• 21:10
  Speaker 5: AI focus reorganization. That stock is down by one percent.
• 21:15
  Speaker 5: IBM is one of the loan gainers in the tech
• 21:17
  Speaker 5: sector after JP Morgan upgraded the company to overweight, where
• 21:21
  Speaker 5: the analyst said software continues to drive better recurring revenue
• 21:26
  Speaker 5: and after today's close, we'll see earnings from FedEx. I'm
• 21:31
  Speaker 5: Tucker Sullivan. That is Wall Street watch mark.
• 21:35
  Speaker 2: On Thursday of this week, we will be getting the
• 21:37
  Speaker 2: FEDS preferred measure inflation for the month of May, the
• 21:41
  Speaker 2: PC Price Index, along with some other economic data. We'll
• 21:45
  Speaker 2: be coming out at that point and wanted to get
• 21:48
  Speaker 2: your take on our new FED chair. He had his
• 21:51
  Speaker 2: first press conference on Wednesday of last week, and for
• 21:54
  Speaker 2: those not following, you know FED circles and news.
• 22:00
  Speaker 3: Comes in there.
• 22:02
  Speaker 2: I don't know if I'm gonna call it controversy, but
• 22:04
  Speaker 2: he comes into the role with some questions about his credibility.
• 22:09
  Speaker 2: Those questions exist because of his seeming willingness to flip
• 22:13
  Speaker 2: flop on his core principles compared to where they were
• 22:17
  Speaker 2: in the early twenty tens, in late two thousands, compared
• 22:20
  Speaker 2: to the things that he said publicly in the last
• 22:25
  Speaker 2: year and a half while trying to get the nomination
• 22:27
  Speaker 2: for a FED share. He took the stage Wednesday, gave
• 22:30
  Speaker 2: his very short press conference, had some changes to the
• 22:33
  Speaker 2: way things are done. There answered questions though, how would you,
• 22:37
  Speaker 2: I guess, how would your greatest performance? And how should
• 22:40
  Speaker 2: we assess things? So far from the new leader of
• 22:43
  Speaker 2: the FED.
• 22:44
  Speaker 4: I think the big question hanging over the FED, and
• 22:46
  Speaker 4: this is not like a deep insight everybody's talking about
• 22:49
  Speaker 4: it is will it remain independent? The President has put
• 22:52
  Speaker 4: a lot of this, so this all starts with the president.
• 22:54
  Speaker 4: You could say you think it's great. You could say
• 22:55
  Speaker 4: you don't like it, but you can't deny that he
• 22:57
  Speaker 4: wanted to take over monetary pots. He tried to imprison
• 23:00
  Speaker 4: the former FED chair and one FED governor. That's pretty serious.
• 23:04
  Speaker 4: So he wanted to take it over. Has he taken
• 23:06
  Speaker 4: it over? That's the question. It's probably not good. You've
• 23:10
  Speaker 4: talked about this, Mike a lot for any politician to
• 23:13
  Speaker 4: control monetary policy, because we know what they'll do. They'll
• 23:15
  Speaker 4: print money to keep interest rates low, overstimulate the economy.
• 23:19
  Speaker 4: That will result in entrenched inflation. It's happened here, it's
• 23:22
  Speaker 4: happened elsewhere.
• 23:23
  Speaker 2: No need to Yeah, so if you're in the nineteen seventies,
• 23:26
  Speaker 2: we've seen it in Turkey, We've seen it in Argentina.
• 23:28
  Speaker 3: We've seen it in Brazil.
• 23:29
  Speaker 2: We've seen it in plenty of plants with a less
• 23:31
  Speaker 2: independent FED that has caused problematic economy.
• 23:35
  Speaker 3: Yes, so usually high inflation.
• 23:36
  Speaker 4: Most researchers agree that independence is important for this reason,
• 23:40
  Speaker 4: though it's there are plenty of countries without independent central
• 23:43
  Speaker 4: banks that have managed to tame inflation too. But you
• 23:46
  Speaker 4: don't want to risk it. So the question is will
• 23:49
  Speaker 4: he be independent? Based on what I saw and his
• 23:53
  Speaker 4: emphasis on what he called price stability, which you can
• 23:56
  Speaker 4: interpret as inflation that is so low you don't need
• 23:59
  Speaker 4: to work worry about it. They have a formal goal,
• 24:02
  Speaker 4: as we know, of two percent, but price stability could
• 24:04
  Speaker 4: mean something more general than that. He reassured me that
• 24:10
  Speaker 4: he will put price stability, because he said it so
• 24:12
  Speaker 4: many times, He'll make that paramountain. He in my eyes,
• 24:17
  Speaker 4: exhibited independence, unlike say Governor Miron or Miron however it's
• 24:22
  Speaker 4: pronounced who was who did not behave as if he
• 24:30
  Speaker 4: had the independent mandate of the independent remit of the
• 24:34
  Speaker 4: Federal Reserve in mind. So by that I mean he
• 24:36
  Speaker 4: was Trump's tody period. This guy does not appear to
• 24:39
  Speaker 4: be and that was reassuring to me.
• 24:41
  Speaker 2: So I walked away from that press conference neither convinced
• 24:46
  Speaker 2: of his independence or dependence. You know, he did not
• 24:49
  Speaker 2: say anything that would indicate to me that he is,
• 24:53
  Speaker 2: you know, not taken seriously inflation, that he is pushing
• 24:56
  Speaker 2: for lower interest rates. None of that came across in
• 24:58
  Speaker 2: the meeting. So with you there, it seemed to me
• 25:01
  Speaker 2: that he came across as independent, serious about the mandate,
• 25:04
  Speaker 2: and serious about the job. I was struck by how
• 25:08
  Speaker 2: much change he talked about. And perhaps it's just because
• 25:13
  Speaker 2: we haven't had much change in terms of what the
• 25:16
  Speaker 2: Fed's been doing in terms of communication really since the
• 25:21
  Speaker 2: Bernanki days. That was the last time I can think
• 25:24
  Speaker 2: of where there's been substantial change in communication and policies
• 25:29
  Speaker 2: from the Federal Reserve. So it's been a long time.
• 25:31
  Speaker 2: And you know, it's not as though Warsh came out
• 25:34
  Speaker 2: and changed a bunch of things on day one, but
• 25:37
  Speaker 2: he did change some things on his first day. He
• 25:40
  Speaker 2: did not give his own forecast of where interest rates
• 25:43
  Speaker 2: would be, He did not participate in the dot plot.
• 25:47
  Speaker 2: He dramatically reduced the number of words he spoke at
• 25:50
  Speaker 2: his press conference and did not guarantee that he would
• 25:52
  Speaker 2: continue to give press conferences.
• 25:54
  Speaker 3: He set up committees to evaluate any number.
• 25:57
  Speaker 2: Of different parts of the Federal Reserves actions, including press
• 26:01
  Speaker 2: conferences that they give forward guidance, as.
• 26:05
  Speaker 3: Well as.
• 26:07
  Speaker 2: Evaluating I guess the price stability. It's not the mechanism,
• 26:13
  Speaker 2: but the actual target. He's setting up a committee to define,
• 26:17
  Speaker 2: you know, should we be going towards that two percent
• 26:21
  Speaker 2: target or should we be more generally defining something as
• 26:24
  Speaker 2: price stability more like they did during the Vulgar and
• 26:26
  Speaker 2: Greenspan days. And I guess my question is is now
• 26:33
  Speaker 2: the right time to be looking at a whole bunch
• 26:37
  Speaker 2: of changes when we are in the midst of the
• 26:39
  Speaker 2: greatest inflation that we've seen in five decades.
• 26:42
  Speaker 4: Absolutely it is, I think, And I also think he's
• 26:45
  Speaker 4: right to emphasize talking less. It's not so this whole
• 26:52
  Speaker 4: forward guidance. Forward guidance just means changing the way we
• 26:55
  Speaker 4: think about what the Fed will do in the future.
• 26:57
  Speaker 4: So the Fed, we know, can control short interest rates
• 27:01
  Speaker 4: through its management of the money supply. The Fed cannot.
• 27:04
  Speaker 4: It has sometimes tried, but does not currently try to
• 27:07
  Speaker 4: manage longer term interest rates using the money supply. It
• 27:11
  Speaker 4: could buy ten year treasuries. It's done that even recently,
• 27:14
  Speaker 4: but it's not doing that right now. Instead, the Fed
• 27:17
  Speaker 4: tries to shape expectations about what it'll do in the
• 27:19
  Speaker 4: future through its communications. Worsh is not a proponent clearly
• 27:23
  Speaker 4: of so called forward guidance, and it's not ford guidance
• 27:28
  Speaker 4: can have a short term effect. I don't think any
• 27:30
  Speaker 4: researcher would deny that. But the best thing the Fed
• 27:34
  Speaker 4: can do, and Warsh does get this, is make clear
• 27:39
  Speaker 4: its commitment to squash inflation whenever it emerges. Now will
• 27:44
  Speaker 4: he take the action necessary to do that? Now? I mean,
• 27:48
  Speaker 4: we're living through another test case. I don't know he
• 27:51
  Speaker 4: was convincing, at least to me. So Ford guidance is out,
• 27:55
  Speaker 4: or at least on ice. We know that, and I
• 27:58
  Speaker 4: don't think it's any I personally don't think it's any
• 28:00
  Speaker 4: great loss. I'd like I think bond traders like it
• 28:03
  Speaker 4: because it allows them to make money. But for most people,
• 28:07
  Speaker 4: Forward guidance doesn't help you set inflation expectations. It's what
• 28:10
  Speaker 4: the Fed's doing. You look at what you're paying today,
• 28:13
  Speaker 4: you assume that that rate of change, whatever change good
• 28:16
  Speaker 4: to the layman.
• 28:17
  Speaker 3: Can you describe forward guidance?
• 28:18
  Speaker 4: Yeah, it's trying to convince you that they will or
• 28:21
  Speaker 4: will not do something in the future.
• 28:23
  Speaker 2: It's press conferences, it's uh speech, eaches, it's.
• 28:26
  Speaker 3: All of this stuff, all them.
• 28:28
  Speaker 4: Yeah, and there's too much.
• 28:29
  Speaker 2: Frankly, even we on the Financial Exchange, a program that
• 28:33
  Speaker 2: covers financial related matters in the Federal Reserve specifically, don't
• 28:38
  Speaker 2: generally listen to.
• 28:41
  Speaker 4: Uh. Yeah, So I'm not sure it's very effective. It
• 28:44
  Speaker 4: does create confusion because their views governors and other FOMC
• 28:48
  Speaker 4: members views can differ, so Warsh I think rightly recognizes
• 28:53
  Speaker 4: that it can sometimes be counterproductive. There's just too much
• 28:56
  Speaker 4: talking and it's not clear that it's helping. Again, the
• 29:00
  Speaker 4: best thing Worsh recognizes this, and I think it's borne
• 29:03
  Speaker 4: out by the historical record. Best thing the FED can
• 29:05
  Speaker 4: do is kill inflation when it starts to emerge. That's
• 29:09
  Speaker 4: how you get credibility. Volker didn't jam it didn't yammer
• 29:12
  Speaker 4: on and on, but he was perceived as the toughest
• 29:15
  Speaker 4: nails inflation flighter. Green Span. This is Volker green Span.
• 29:21
  Speaker 4: The pre Bernanke Cheers was famously cryptic and mysterious.
• 29:28
  Speaker 2: I was communicating by this yesterday, but there was stories
• 29:31
  Speaker 2: that I was so green Span passed away yesterday and
• 29:34
  Speaker 2: we'll be talking about that later. But I was reading
• 29:36
  Speaker 2: stories about people would try and read into his plan.
• 29:39
  Speaker 4: It was a cottage. It was a cottage industry. Yeah,
• 29:43
  Speaker 4: trying to decipher what he meant and very simple like
• 29:46
  Speaker 4: very simple utterances was again a cottage industry. Worsh seems
• 29:53
  Speaker 4: to be more of that school, and I green Span
• 29:56
  Speaker 4: could afford to do that because people believed there were
• 30:00
  Speaker 4: a couple of exceptions. His tenure was not I'm not
• 30:03
  Speaker 4: even talking about the financial crisis that a cred after
• 30:05
  Speaker 4: e after he left the board. His tenure was not spotless.
• 30:10
  Speaker 4: He struggled with inflation in the late eighties, and he
• 30:13
  Speaker 4: probably didn't lift the Fed's boot off the economy fast
• 30:17
  Speaker 4: enough in ninety one ninety two. But otherwise he had credibility.
• 30:21
  Speaker 4: Wars still has to earn that, but in my view,
• 30:25
  Speaker 4: for what it is worth, despite his lack of, say,
• 30:28
  Speaker 4: technical expertise, which I've criticized, I don't understand why we
• 30:31
  Speaker 4: can't hire a PhD economist for the job of FED chair.
• 30:34
  Speaker 4: Is it we've had two lawyers in a row? Are
• 30:37
  Speaker 4: we wouldn't put an economist on the Supreme Court? Why
• 30:39
  Speaker 4: the heck are we putting a lawyer at the head
• 30:41
  Speaker 4: of the Federal Reserve? There are plenty anyway. That ship
• 30:44
  Speaker 4: has sailed off in my view, considering the disadvantages he
• 30:49
  Speaker 4: operates under being a non economist having to take the
• 30:52
  Speaker 4: word of economists on staff. Despite those disadvantages, probably off
• 30:56
  Speaker 4: to a decent start.
• 30:57
  Speaker 2: Mic Let's take a quick break when we come back.
• 31:00
  Speaker 2: One of the key markets that FED policy impacts, of course,
• 31:05
  Speaker 2: would be the market for getting homes through mortgages. We're
• 31:08
  Speaker 2: gonna talk a little bit about the six percent mortgage
• 31:11
  Speaker 2: rate and where we stand right now when we come back.
• 31:15
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• 31:18
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• 31:22
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• 31:31
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• 31:36
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• 32:25
  Speaker 2: According to Mortgage News Daily, the current average thirty or
• 32:29
  Speaker 2: fixed rate mortgage is going for six point six six percent.
• 32:33
  Speaker 3: That's as of yesterday.
• 32:34
  Speaker 2: And peace from Bloomberg today is all about how to
• 32:37
  Speaker 2: find that sub six percent mortgage in twenty twenty six,
• 32:41
  Speaker 2: which the best way to do that would have been
• 32:44
  Speaker 2: to apply for a mortgage on February twenty seventh when
• 32:46
  Speaker 2: they were below six percent prior to the war in Iran.
• 32:49
  Speaker 2: But outside of that, a few other options that Bloomberg
• 32:55
  Speaker 2: runs out here that I think kind of missed the
• 32:58
  Speaker 2: point of buying a home, but they doubt you know,
• 33:00
  Speaker 2: if you live in an area with a lot of
• 33:02
  Speaker 2: new builds, there are some areas where you know home
• 33:05
  Speaker 2: builders are offering mortgage discounts or mortgage buydowns. You could
• 33:09
  Speaker 2: look at an adjustable rate mortgage where the rate is
• 33:12
  Speaker 2: fixed but only for a period of five to ten years,
• 33:15
  Speaker 2: and then we'll fluctuate with prevailing rates. So better hope
• 33:19
  Speaker 2: that you can refinance that thing down and after the
• 33:21
  Speaker 2: five years we can.
• 33:23
  Speaker 4: I ask what you tell people who say, should I
• 33:25
  Speaker 4: take an adjustable mortgage? Should I apply for an adjustable mortgage.
• 33:29
  Speaker 2: Yeah, what I say is that it can be a
• 33:33
  Speaker 2: good tool. Make darn sure that you can afford the
• 33:36
  Speaker 2: payment should the rate adjust upwards?
• 33:39
  Speaker 4: How much?
• 33:40
  Speaker 3: Like what is work?
• 33:42
  Speaker 4: Go ahead story? No?
• 33:43
  Speaker 3: Please?
• 33:44
  Speaker 4: How much should I prepare? Should I be prepared for
• 33:46
  Speaker 4: rates to well go?
• 33:47
  Speaker 2: All of these have contracts in them as to how
• 33:49
  Speaker 2: much the rates can actually fluctuate. Okay, So like an
• 33:52
  Speaker 2: adjustable rate mortgage will tell you right up front, this
• 33:54
  Speaker 2: is the prevailing rate, and this is how much it
• 33:56
  Speaker 2: can adjust on a go forward basis, on an annual basis.
• 33:59
  Speaker 2: So I don't think there's a point in factoring in, like, Okay,
• 34:03
  Speaker 2: what might happen if my mortgage rate doubles.
• 34:06
  Speaker 3: You know, after the prevailing period goes off?
• 34:09
  Speaker 2: Because you can't you probably can't afford it, is the answer,
• 34:12
  Speaker 2: But I think the prevailing answer should be, Hey, if
• 34:15
  Speaker 2: at the end of five years this thing adjusts upwards
• 34:18
  Speaker 2: by a couple percentage points, can I still in fact
• 34:20
  Speaker 2: afford that mortgage? There's nothing wrong with adjustable rate mortgages,
• 34:24
  Speaker 2: but you do have to be prepared for how the
• 34:26
  Speaker 2: math could work out. And you know, presumably too, if
• 34:30
  Speaker 2: mortgage rates are going up like that five years from now,
• 34:34
  Speaker 2: then it had darned well better be because we're in
• 34:36
  Speaker 2: the midst of a pretty strong labor market, wage inflation
• 34:38
  Speaker 2: and other things that should.
• 34:39
  Speaker 3: Help you be able to pay for it. Okay, all else, EQL.
• 34:44
  Speaker 2: You could pledge assets to the bank in order to
• 34:46
  Speaker 2: get a lower rate. I did that when I bought
• 34:49
  Speaker 2: my home. You could buy points to get that rate down.
• 34:52
  Speaker 2: You could find a.
• 34:52
  Speaker 3: Home with an assumable mortgage. Good luck.
• 34:55
  Speaker 2: I feel as though, however, this whole article kind of
• 34:58
  Speaker 2: misses the point right, Like getting a sub six percent
• 35:03
  Speaker 2: mortgage isn't the goal. The goal is to buy a
• 35:07
  Speaker 2: home that you want to live in and think that
• 35:10
  Speaker 2: you might be able to afford over the long term
• 35:13
  Speaker 2: and ideally grow into as a home buyer.
• 35:16
  Speaker 4: Is pledging assets something most people can do, And what
• 35:19
  Speaker 4: type of assets they require? Property? I assume they're not
• 35:21
  Speaker 4: going to take by VW.
• 35:23
  Speaker 2: No, they want cash. The bank that I bought through
• 35:26
  Speaker 2: wanted cash. That was perfect because I had a bunch
• 35:29
  Speaker 2: of repairs that I was planning to do to the
• 35:31
  Speaker 2: home and so needed cash on hand that I could
• 35:33
  Speaker 2: deposit at the bank and.
• 35:34
  Speaker 3: Use to they facilitate want it there.
• 35:37
  Speaker 2: They want it there at the bank in order to
• 35:39
  Speaker 2: facilitate a lower rate mortgage. My point though, would be
• 35:43
  Speaker 2: if you're only shopping around for homes if you can
• 35:49
  Speaker 2: get a sub six percent mortgage, then you're going to
• 35:52
  Speaker 2: fall into a trap. You're doing the whole thing in reverse.
• 35:55
  Speaker 3: Right.
• 35:55
  Speaker 2: You want to find the best home for you and
• 35:57
  Speaker 2: your family and then go look around it. Hey, where
• 36:01
  Speaker 2: is the place that I can get the best mortgage rate?
• 36:03
  Speaker 2: How do I fix that over you know, fit that
• 36:05
  Speaker 2: into my overall plan, because the worst possible thing you
• 36:07
  Speaker 2: could do would be say, hey, I'm only going to
• 36:10
  Speaker 2: look at brand new construction because I think I can
• 36:12
  Speaker 2: get a lower mortgage rate.
• 36:14
  Speaker 3: Well, if everybody's doing that, then guess what.
• 36:15
  Speaker 2: You're going to pay a higher price for the home,
• 36:17
  Speaker 2: And the rate on the mortgage is probably not the
• 36:19
  Speaker 2: most relevant feature. So the interesting story, and if you're
• 36:22
  Speaker 2: unaware of different programs to get lower interest rates, then
• 36:25
  Speaker 2: I think that's useful. But otherwise, focus on the key fact,
• 36:31
  Speaker 2: which is can I afford the home that I am in,
• 36:34
  Speaker 2: rather than is that.
• 36:35
  Speaker 3: Home going to be a good investment?
• 36:37
  Speaker 2: Because I can promise you that fifteen years from now,
• 36:42
  Speaker 2: you're probably not going to give a darn as to
• 36:45
  Speaker 2: whether or not it was the best investment you've ever made.
• 36:48
  Speaker 2: A lot of other things that go into buying a home.
• 36:50
  Speaker 2: A bit of breaking news today there was a ballot
• 36:54
  Speaker 2: initiative in the state of Massachusetts that had made its
• 36:57
  Speaker 2: way onto the November ballot based on how many signatures
• 37:00
  Speaker 2: they got.
• 37:01
  Speaker 3: It was all about rent control.
• 37:02
  Speaker 2: The state's Judicial Court in Massachusetts has tossed out that
• 37:07
  Speaker 2: ballot on what seems like a relatively minor a caveat
• 37:16
  Speaker 2: not a caveat or a relatively minor item here, but
• 37:19
  Speaker 2: ballot initiatives are not allowed to vote on religious topics,
• 37:26
  Speaker 2: and the ballot initiatives specifically would have enacted rent control
• 37:32
  Speaker 2: other than for units that are operated by religious facilities,
• 37:37
  Speaker 2: and because of that religious facilities exemption, the judicial court
• 37:40
  Speaker 2: tossed out the ballot and it will not appear on
• 37:43
  Speaker 2: the November ballot, which they'll be back. I guess my
• 37:47
  Speaker 2: point would be, I'm glad that rent control isn't going
• 37:52
  Speaker 2: to be going into place, but I think it would
• 37:55
  Speaker 2: have been healthier for us to have a real debate.
• 37:57
  Speaker 4: We need to vote on do not have it? Technicality?
• 38:01
  Speaker 2: Yeah, and that's what's happening here. It's tossed on a technicality,
• 38:04
  Speaker 2: and my guess is it'll be back on a ballot
• 38:05
  Speaker 2: absolutely years, and we should really just have an honest
• 38:08
  Speaker 2: conversation about why rent control sucks rather than just tossing
• 38:12
  Speaker 2: it out on technicality. A little bit of my bias
• 38:14
  Speaker 2: seeping in there.
• 38:15
  Speaker 3: Markets have moved lower as we head towards the top
• 38:18
  Speaker 3: of the hour. We're going to take quick break.
• 38:19
  Speaker 2: We'll be right back with a recap and more next