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Why Long Term Bond Yields Keep Climbing · The Financial Exchange Show

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1:03
Speaker 1: Base is the Financial Exchange with Mike Armstrong and Mark Vandetti.
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Speaker 2: Good morning, Happy Tuesday, and welcome back to the Financial Exchange.
1:15
Speaker 2: You got a little bit of a early morning red
1:18
Speaker 2: on the screen here, especially in tech stocks, with the
1:20
Speaker 2: tech heavy NASDAC down three hundred and ten points on
1:23
Speaker 2: a lack of a whole you know, not a whole
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Speaker 2: lot of news for those companies in the first place.
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Speaker 2: But we've got a heavy week for retail earnings with
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Speaker 2: home Depot going this morning, Walmart, Target, TJX, and others
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Speaker 2: reporting this week. Low's of course also going this week.
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Speaker 2: But wanted to start and kick off the show with
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Speaker 2: the bond sell off that we have been seeing, Mark,
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Speaker 2: because every time that there is a bond sell off
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Speaker 2: we saw one last year as well, a whole bunch
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Speaker 2: of journalists come out and say that the vigilante, the
1:54
Speaker 2: vigilantes are back, and we are seeing people finally exercise
2:00
Speaker 2: their concern over deficits and lookout because this could get
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Speaker 2: a lot worse. Let's I don't want to entirely dismiss
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Speaker 2: those concerns either, but when we see a bond sell off,
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Speaker 2: I just have to discuss and walk through the mechanics.
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Speaker 2: Because most people don't invest in individual bonds by and large.
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Speaker 2: You know, when when you know people think about a
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Speaker 2: stock sell off, they can very easily picture that in
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Speaker 2: their head. But that relationship between yields versus bond prices
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Speaker 2: is a little bit more complicated. And then who actually
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Speaker 2: buys bonds like this? Uh? Because the average person I
2:36
Speaker 2: meet doesn't have any interest in buying thirty year government debt.
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Speaker 2: So you know, just how these mechanics work is important.
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Speaker 2: When we start off with the basics here, the yield
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Speaker 2: on a ten year US government bond is right now
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Speaker 2: sitting at four point seventy two percent. And then when
2:56
Speaker 2: we look out at longer term bonds, what was the
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Speaker 2: thirty year treasury that hit? A Yeah, the thirty year
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Speaker 2: US treasury rose to the highest level since two thousand
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Speaker 2: and seven in the United States. And we are seeing
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Speaker 2: this occur across most developed nations, whether it's you know, UK, France, Germany, Japan,
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Speaker 2: and so I guess the question would be mechanically, why mark,
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Speaker 2: Because like I said, every time yields go up, people
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Speaker 2: start blaming on deficits, and that is an easy cultorate
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Speaker 2: to blame. But what's mechanically happening.
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Speaker 3: Just with respect to price movements it's either supply or demand.
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Speaker 3: And we can tell that doesn't answer any questions by
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Speaker 3: the way, It just points out that that it must
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Speaker 3: be the case that either the price somebody is willing
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Speaker 3: to pay or the price somebody needs to part with
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Speaker 3: something has changed. It doesn't say why. Yep, we'll get
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Speaker 3: into the why.
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Speaker 2: That's more interesting, importantly important to discuss that. Right, whether
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Speaker 2: it's bubblegum or government bonds, the price is determined.
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Speaker 3: I've always got a demand demand curve, if you like,
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Speaker 3: think about the world that way, and a supply curve,
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Speaker 3: and they cross. They're both lines. They only cross at
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Speaker 3: one point. That's the price. You talked about mechanics. I
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Speaker 3: guess you meant, why do prices fall when investors demand
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Speaker 3: to hire interest rate? It's because the interest rate is
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Speaker 3: the coupon the payment that you get. And this is
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Speaker 3: true of any asset. It's the payment that you get.
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Speaker 3: If you want to think of a fraction, it's on
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Speaker 3: it's a numerator. It's on top and the principle or
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Speaker 3: what it's worth. And this could be rental property, it
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Speaker 3: could be a stock. What I'm getting at here is yield.
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Speaker 3: There's a numerator there's a denominator, there's a thing on top,
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Speaker 3: there's a thing on the bottom. If the thing on
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Speaker 3: top is five, the thing on the bottom is one hundred,
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Speaker 3: you get point zero five. Yep, that's five percent yield.
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Speaker 3: The thing on the bottom the one hundred in my example,
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Speaker 3: which is known as the par value in bond parlance.
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Speaker 2: So a new bond gets issued at one.
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Speaker 3: Hundred, it's call it one hundred, could be ten, it
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Speaker 3: could be a thousand, but they call it one hundred.
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Speaker 2: Thirty years from now when it matures, it'll mature at.
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Speaker 3: You get one hundred back. Beautiful. But in between, of course,
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Speaker 3: is where the action is. That one hundred is going
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Speaker 3: to move around. So think about the yield again as
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Speaker 3: a fraction. You got something on top. The five always
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Speaker 3: stays the same. In my example, issued a bond hard
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Speaker 3: value of one hundred coupon rate of five yield as
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Speaker 3: five at the time of issue. If the bond price doubled,
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Speaker 3: this is a stupid example because it doesn't happen. But
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Speaker 3: if it doubled, the five stays the same on top.
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Speaker 2: Yep.
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Speaker 3: The yield therefore drops by one half. Similarly, if it
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Speaker 3: decreased in price by from one hundred to fifty, the
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Speaker 3: yield will go up to ten because the five on
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Speaker 3: top stays the same. That's the essence of bond mechanics.
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Speaker 2: Doesn't generally happen in government bonds, but happens in corporate
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Speaker 2: bonds all over the place, and some icimal bonds, and
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Speaker 2: even some sovereign debt here and there. But so mechanically speaking,
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Speaker 2: what we're talking about here is investors, or I guess
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Speaker 2: generally investors unwilling to take a yield as similar as
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Speaker 2: it was at the earlier this year for a long term.
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Speaker 3: Let's go back to my example. It's you and me.
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Speaker 3: You want to give me a bond with the features
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Speaker 3: that I mentioned. There's a five on top, there's one
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Speaker 3: hundred on the bottom. Yep, that's a yield of five
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Speaker 3: right points zero? Five is that quotient? So it's five percent?
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Speaker 3: I suppose I think inflation is going to be eight.
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Speaker 3: I ain't gonna buy that five percent ye'll bond from you?
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Speaker 3: I want eight, So I've got to push the number
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Speaker 3: on the bottom. My bid is now gonna be ninety two,
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Speaker 3: not one hundred. I'm just making that up.
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Speaker 2: Sure it's close to eight.
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Speaker 3: That's why bond prices go down when say, inflation expectations
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Speaker 3: go up, or suppose I think the issuer of that
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Speaker 3: bond's gonna flood the market. It's gonna force the price down.
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Speaker 3: I'm not gonna hold that bond for one hundred. I'm
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Speaker 3: not gonna pay ninety for it. That's why the yield
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Speaker 3: goes up. Just keep that fraction in your head and
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Speaker 3: it explains everything. So about what bond prices do yields.
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Speaker 2: I want to then go over to the potential causes here, because,
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Speaker 2: like you said, could be supply, could be demand, could
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Speaker 2: be a number of different aspects of those two things.
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Speaker 2: Last year, I think it was last fall, we started
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Speaker 2: to see yields climbing pretty maybe it was last summer,
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Speaker 2: let me double check here. So yeah, August July twenty
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Speaker 2: twenty four, sorry, August September of twenty twenty four, you
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Speaker 2: saw ten year yields down in the three and two
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Speaker 2: thirds range, and they slowly climbed up the four point six.
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Speaker 2: And I remember covering on this show all of the
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Speaker 2: different stories about, hey, the vigilantes are the vigilantes are back,
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Speaker 2: and everyone's concerned about deficits. And then subsequently you had
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Speaker 2: the yield go from four to seven to seven down
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Speaker 2: to four percent. Did deficits in the United States suddenly
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Speaker 2: get better between September and October of twenty twenty five?
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Speaker 3: Is that a rhetorical question, No, I don't. I don't
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Speaker 3: think the fiscal sit you look. It's it's long run
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Speaker 3: fiscal status of the of the government's balance sheet that matters.
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Speaker 3: So I don't think unless there's a dramatic change it should.
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Speaker 2: My point, there would be short term moves and interest rates.
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Speaker 2: I don't think can generally be looked at as purely Oh,
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Speaker 2: this is a deficit concern, But increasingly more and more
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Speaker 2: countries are finding themselves in difficult fiscal situations where they
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Speaker 2: are needing to issue a whole lot more debt in
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Speaker 2: order to fund their obligations, and increasingly they're having a
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Speaker 2: tough time controlling inflation. Soar to a number of different factors.
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Speaker 3: I mean to answer your question, go back to the
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Speaker 3: simple example again, where the where the yield is with
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Speaker 3: the coupon is five, so five is on the top
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Speaker 3: of the fraction and the price is one hundred. If
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Speaker 3: I think recession's coming, I might want to sell stocks
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Speaker 3: and buy bonds. I might want something that's going to
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Speaker 3: be money good. So in that scenario, I'm willing to
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Speaker 3: push the one hundred, which is the par price up,
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Speaker 3: in which case the yield goes down, right, Because it's
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Speaker 3: a fraction, the five is on top, and my example
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Speaker 3: it stays the same. So it could be recessionary fears.
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Speaker 3: It could be a change in the demand of insurance
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Speaker 3: companies for bonds because their liabilities change. That on the margin,
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Speaker 3: that's a affected demand. Yeah, So you know, for lots
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Speaker 3: of different reasons. The number on the bottom of the
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Speaker 3: fraction that I keep using in my example could change.
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Speaker 2: So in any case, I think the important context I
9:14
Speaker 2: have here. You've seen it printed everywhere. The yield on
9:17
Speaker 2: the thirty year US government debt is the highest it's
9:20
Speaker 2: been since two thousand and seven. That's a long time.
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Speaker 2: So people are writing about it again, nineteen years since
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Speaker 2: the last time it got this high. And as Mark mentioned,
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Speaker 2: there can be a litany of different reasons that on
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Speaker 2: the margin, there are fewer buyers of debt at these
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Speaker 2: levels and so therefore yields are going up. It could
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Speaker 2: be that there is much more issuance of debt, so
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Speaker 2: the supply has gone up, and therefore the price has
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Speaker 2: gone down, driving up the yield. There can be a
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Speaker 2: number of different factors, but ultimately the sense that you're
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Speaker 2: getting from everyone that's writing is, Hey, a number of
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Speaker 2: countries are struggling with inflation, and the concern could be
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Speaker 2: that governments can't get inflation under control over the next
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Speaker 2: several years, and so with that risk being out there,
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Speaker 2: I'm going to demand a higher interest rate on the
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Speaker 2: bonds that I'm buying.
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Speaker 3: Yeah, the beauty of understanding how bond prices and yields
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Speaker 3: interact is you don't have to really understand the reason
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Speaker 3: or have a culprit in mind. It's interesting to speculate
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Speaker 3: about that, but nobody really knows. So I guess if
10:34
Speaker 3: you have a strong view, like I think inflation is
10:37
Speaker 3: going to be higher than the market currently expects, and
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Speaker 3: maybe we'll get into what the market currently expects later,
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Speaker 3: then you might not want to own a long term bond,
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Speaker 3: even at five percent.
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Speaker 2: Let's take a quick break when we come back talking
10:50
Speaker 2: a little bit about the consumer. Here, we've got earnings
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Speaker 2: from home Depot. We've got some updates on the status
10:55
Speaker 2: of buy now, pay later loans that are getting pitched left, right,
10:59
Speaker 2: and center. Quick. We'll be right back with that next.
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11:37
Speaker 2: In July of twenty twenty six, there were proximbly four
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Speaker 2: point zero six million home sales in the US. That's
11:50
Speaker 2: taking a look here at twenty twenty five data exactly
11:54
Speaker 2: flat compared to last year. You are not seeing any
11:57
Speaker 2: reasonable uptick in terms of home sale volume. You're continuing
12:02
Speaker 2: to see appreciation in some parts of the country, in
12:05
Speaker 2: parts of the Southeast. You're starting to see home prices
12:08
Speaker 2: actually fall in terms of pricing, but buy and large.
12:12
Speaker 2: What is lacking in this economy right now for residences
12:18
Speaker 2: is any sort of activity. And we've talked to We've
12:21
Speaker 2: talked to that. Yeah, that's great, which makes it tough
12:25
Speaker 2: for realtors. It makes it tough for all sorts of
12:28
Speaker 2: businesses that support that area. Makes it especially difficult for
12:32
Speaker 2: the likes of Home Depot and Lows who make I
12:36
Speaker 2: think it's something like forty percent of their revenue from contractors.
12:41
Speaker 2: And obviously when you think through the process of buying
12:44
Speaker 2: a home, you just tend to make a bunch of
12:47
Speaker 2: visits to Home Depot or Lows. You're buying paint, you're
12:49
Speaker 2: buying a new grill, you're buying all sorts of things
12:52
Speaker 2: that they happen to sell right in your community. And
12:54
Speaker 2: so it's been now a couple of years of pretty
12:57
Speaker 2: rough again not terrible environment for these companies. It's not
13:03
Speaker 2: like we are dealing with the oweight recession again where
13:05
Speaker 2: people are losing their homes and these companies really had
13:09
Speaker 2: a tough time making any money, but just a slow
13:14
Speaker 2: environment for them to operate in and quite different from
13:17
Speaker 2: what they were dealing with in the you know, early
13:20
Speaker 2: days of the COVID pandemic, when everybody had stimulus money
13:23
Speaker 2: was buying homes and uh, you know, shortages of goods
13:28
Speaker 2: was making it so that you could charge whatever you wanted.
13:32
Speaker 2: As such, Home Depot stock is down about fourteen percent
13:35
Speaker 2: over the last twelve months. Low stock is down thirteen
13:43
Speaker 2: percent over the last twelve months, and so all investors
13:48
Speaker 2: are asking this same question, which is, you know, effectively,
13:52
Speaker 2: how do you make things work in this type of environment?
13:54
Speaker 2: And the answer seems to be we're just going to
13:58
Speaker 2: kind of chug along here and assume that the activity
14:03
Speaker 2: in the housing market will pick up again someday. Comp sales,
14:08
Speaker 2: if you hear us, use the term comp sales, comparable sales,
14:12
Speaker 2: same store sales. These are all the same metric. They're
14:14
Speaker 2: measuring the same thing. They are measuring to what degree
14:18
Speaker 2: did sales in stores that were open at the same
14:21
Speaker 2: time last year increase or decrease? Because that's the real measurement,
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Speaker 2: right If you open five five new stores and you
14:28
Speaker 2: saw a sales increase, well yeah, no kidding that that
14:32
Speaker 2: would be expected. You better have seen sales increase in
14:34
Speaker 2: that case. COMP sales really takes that out and just says, okay,
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Speaker 2: just these stores that have been opened for a while,
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Speaker 2: what are they doing. And in home depost case, they
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Speaker 2: saw those sales rise one point seven percent during the
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Speaker 2: period that ended August second. But keep in mind, same
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Speaker 2: time period, what's inflation running mark three?
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Speaker 3: When are we starting the calculation?
14:53
Speaker 2: So it was the period that ended the quarter that
14:55
Speaker 2: ended August second, so oh year every year, yeah, year,
14:58
Speaker 2: every year, three and a half so effectively in terms
15:02
Speaker 2: of quantities of stuff that they are selling. Presumably they're
15:05
Speaker 2: seeing sales decline, you know, in the one and a
15:08
Speaker 2: half percent range. They're just you know, delivering on some
15:11
Speaker 2: price increases here and there and making these sales look
15:15
Speaker 2: okay in this case. But yeah, I don't expect to
15:19
Speaker 2: see much different from lows when things come here. And
15:24
Speaker 2: the only real question is when do when do Americans
15:29
Speaker 2: get used to these new mortgage rates and start kind
15:32
Speaker 2: of transacting homes in a regular volume, because right now
15:37
Speaker 2: it's been a very very slow environment for housing. I
15:39
Speaker 2: don't know that there's much else interesting to add when
15:42
Speaker 2: it comes to these home improvement retailers right now.
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Speaker 3: Yeah. I mean, they're not going to pivot to groceries.
15:46
Speaker 3: Your business is home depot and construction. As you and
15:52
Speaker 3: Chuck talk about, a lot has typically been the dynamo.
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Speaker 2: Yeah. Remember they were selling all sorts of weird stuff
15:58
Speaker 2: during COVID.
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Speaker 3: They still sell some weird yeah.
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Speaker 2: I mean, you know, my dog loses it at the
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Speaker 2: at the inflatable ghosts this time of year every time
16:05
Speaker 2: we walk by, because of course it's you know, August first.
16:08
Speaker 3: So take your dog to the big box store.
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Speaker 2: Always, yeah, always take my dog to any.
16:12
Speaker 3: You dogs very friendly, So it's not really that's true.
16:15
Speaker 4: Don't you get tired of people coming up to you
16:17
Speaker 4: and be like a picture dog?
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Speaker 3: Do you like that? Do strangers come up and try
16:21
Speaker 3: to pat the dog?
16:21
Speaker 2: Always? Yeah, especially with kids.
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Speaker 4: Yeah, my kid does it to every dog owner.
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Speaker 3: What is wrong with my kid? A lot of things? No, no, no, no, no,
16:31
Speaker 3: you're both your kids are are perfect. Really, people pettus
16:36
Speaker 3: they walk up to a strange dog, they ask usually
16:38
Speaker 3: but yeah, lows, lets this happen Depot, whoever, whomever. Actually,
16:43
Speaker 3: they're surprised if they're a rider for that.
16:45
Speaker 2: So, like I knew this about home Depot and lows
16:48
Speaker 2: that they generally allowed pets inside the store. I was
16:51
Speaker 2: talking to somebody who just insists on bringing their dog
16:55
Speaker 2: like everywhere they go. And a lot of retailers will
17:00
Speaker 2: let you just walk through their stores, like most shopping
17:02
Speaker 2: malls allow their dogs in there and then rest. Yeah.
17:06
Speaker 2: She was saying that, like, oh yeah, you can. You
17:07
Speaker 2: can walk into most like Macy's and and you know
17:11
Speaker 2: other types of stores with your dog and nobody cares.
17:14
Speaker 3: I've loved my dog, always had dogs, but I wouldn't
17:17
Speaker 3: think of taking them to the store. I'd be distracted.
17:19
Speaker 2: So I only did it because I had a well,
17:22
Speaker 2: not you, I'm not well, I guess I am. I've
17:24
Speaker 2: had dogs that hate other people and are extremely protective,
17:27
Speaker 2: and this was my ways of, you know, ensuring that
17:30
Speaker 2: that didn't happen with my my next animal, and so socializing.
17:33
Speaker 2: He's very friends. Insurance coverage, Yeah, exactly, it's precisely what they.
17:38
Speaker 3: Most have incidents from time to time. Don't their lawyers
17:40
Speaker 3: tell them enough with the animals.
17:42
Speaker 2: I'm sure they do. Yeah, I'm sure they do have
17:45
Speaker 2: incidents of but yeah, I'm sure that happens.
17:52
Speaker 3: Or if I'm not a dog, I happened to like
17:55
Speaker 3: to be a dog, as are you guys. But not
17:57
Speaker 3: everybody likes dogs. Not everybody wants to veer around dog accidents. Yeah,
18:02
Speaker 3: that's their file fourteen. It lows.
18:05
Speaker 2: Also, most outdoor stores, Dick Sporting Goods, I get, what's
18:11
Speaker 2: the other? Uh?
18:12
Speaker 4: Maybe I don't never mind, I don't get that best
18:15
Speaker 4: pro shops.
18:16
Speaker 2: A few of those places will allow dogs as well.
18:18
Speaker 2: So if you are inside this winter and trying to
18:21
Speaker 2: figure out what to do that. This is why this
18:23
Speaker 2: woman knows all this stuff. In addition to her just
18:26
Speaker 2: enjoying shopping quite a bit. Is wintertime, when the weather's
18:29
Speaker 2: terrible here, she'll just take her dogs walks in shopping mall.
18:32
Speaker 3: Last time I bought a car, I don't know if
18:34
Speaker 3: that there's dogs in a dealership. They're jumping on me.
18:36
Speaker 3: I'm trying to negotiate. He's friendly.
18:38
Speaker 2: I don't care if you.
18:38
Speaker 3: I'm friendly usually piss off. I didn't come to the
18:43
Speaker 3: petting zoomah. Yeah, I just I'm sorry again. Longtime dog
18:49
Speaker 3: owner would lay my life down for my dog? Is
18:52
Speaker 3: what a lot?
18:52
Speaker 2: Well historic dog hater Mark vandetdy Oh come on.
18:56
Speaker 3: No, no, no, I'm an MSPCA guy. Come on, come on.
19:00
Speaker 3: I just don't get the especially in places where food
19:02
Speaker 3: is served or available. That sort of drives me. I mean,
19:06
Speaker 3: I'm not partial to cats for ye. Sorry, we're going
19:08
Speaker 3: this is going on way too much.
19:09
Speaker 2: I get best.
19:10
Speaker 3: It's not funny.
19:11
Speaker 2: I mean, I rather enjoy this conversation, and I will. Yeah,
19:18
Speaker 2: I will intentionally seek out occasionally restaurants letting me dine
19:21
Speaker 2: on their patio with my dogs. So maybe they're doing
19:24
Speaker 2: something right. We have to take quick break because we
19:27
Speaker 2: digressed quite a bit there. But Wall Street Watch is
19:30
Speaker 2: coming up next on the Financial Exchange.
19:39
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19:51
Speaker 1: wool Street Watch treking the stocks, theodato and the headlines
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Speaker 1: driving markets so far today right here on the Financial
19:58
Speaker 1: Exchange Radio Network.
20:00
Speaker 4: Home markets are in negative territory, led by a sell
20:03
Speaker 4: off in tech due to pressure from rising treasure yields
20:06
Speaker 4: as the thirty year hit a new nineteen year high.
20:09
Speaker 4: Wall Street's also digesting retailer earnings from home Depot posted
20:13
Speaker 4: earlier this morning. Right now, the Dow is mostly flat,
20:17
Speaker 4: down by sixteen points. SMP five hundred is down over
20:21
Speaker 4: four tenths of one percent, or thirty four points lowered,
20:24
Speaker 4: Nasdaq selling off over one percenter, two hundred and seventy
20:27
Speaker 4: nine points off, RUSS two thousands down two thirds of
20:31
Speaker 4: one percent ten Your treasure reel down one basis point
20:34
Speaker 4: at four point seventy one to two percent, and oil
20:37
Speaker 4: up about four tenths of a percent, trading right around
20:40
Speaker 4: eighty five dollars. Barrel Home Depot shares are edging higher
20:44
Speaker 4: after the home improvement retailer beats second quarter expectations on
20:48
Speaker 4: the top and bottom lines and reaffirmed its full year guidance.
20:52
Speaker 4: The company's CFO told CNBC that it continues to operate
20:56
Speaker 4: in frozen housing market conditions. We'll see more retail earnings
21:00
Speaker 4: tomorrow morning ahead of the opening bell, where Low's, Target
21:04
Speaker 4: and TJX will report their second quarter results. Meanwhile, several
21:08
Speaker 4: memory chip makers are pulling back from yesterday's gains. Micron
21:12
Speaker 4: Technology down by five percent, while sk Henex and SanDisk
21:17
Speaker 4: are down by six percent. And according to the Information,
21:22
Speaker 4: ev maker Tesla is readying for an August launch of
21:25
Speaker 4: its cyber cab or robotaxi without a steering wheel test.
21:31
Speaker 4: The stock is down over half a percent. I'm Tucker Silva,
21:35
Speaker 4: and that is Wall Street Watch.
21:37
Speaker 2: Back in twenty twelve, a company called A Firm launched
21:40
Speaker 2: in the United States. Wasn't hugely innovative so far as
21:45
Speaker 2: I can tell you. It was basically it was the
21:48
Speaker 2: first buy now, pay later company that was out there
21:51
Speaker 2: that did the same thing that a different version of
21:53
Speaker 2: what credit cards, payday loans loan Sharks have done for
21:58
Speaker 2: decades with a slightly different business model. Yeah, I'm gonna
22:03
Speaker 2: put loan sharks in the same in the same category here,
22:06
Speaker 2: because honestly, so much gets written horribly about these companies
22:09
Speaker 2: and what they're doing, and I look at this like, well,
22:12
Speaker 2: I'd rather people go here than a loan shark or
22:15
Speaker 2: a payday loan. So you know, this is where we are.
22:18
Speaker 2: But a firm launched with a pretty different business model
22:22
Speaker 2: that they wanted to make particularly appealing to the consumer
22:24
Speaker 2: that was disgusted with these other sources of borrowing money,
22:28
Speaker 2: where they said, hey, primarily for big purchases, we will
22:32
Speaker 2: effectively lend you the money to make the purchases. There
22:35
Speaker 2: won't be any late fees. If there's any interest, it'll
22:38
Speaker 2: be fully transparent to you. And we're going to really
22:41
Speaker 2: try and make money here by going to the retailer
22:44
Speaker 2: and saying, hey, people will buy your goods more frequently
22:48
Speaker 2: if you offer a service like this, and so you know,
22:50
Speaker 2: give us a portion of the sales proceeds in order
22:53
Speaker 2: to allow people to complete the purchase with a company
22:56
Speaker 2: like a firm. Since then, other competitors have been launched
22:59
Speaker 2: Klarna after pay with similar but different business models. The
23:04
Speaker 2: other two seem to have more short term repayment options.
23:08
Speaker 2: You know, pay in for is kind of the way
23:10
Speaker 2: of this these days, much bigger missed payment penalties and
23:14
Speaker 2: interest rate charges, and so it's morphed a little bit,
23:17
Speaker 2: But overall the model is the same. You get the
23:20
Speaker 2: good today and you pay for it over a certain
23:24
Speaker 2: period of time, compared to layaway, when you would make
23:27
Speaker 2: a payment periodically and then get the good at the
23:30
Speaker 2: end of that period of time. You know, just another
23:33
Speaker 2: version of the what what the thing that we innovate
23:35
Speaker 2: most effectively here in the United States, which is financial innovation.
23:39
Speaker 3: The opposite, yeah, pay now, get it later.
23:43
Speaker 2: Who wants this is getting now pay later? In any case,
23:48
Speaker 2: the problem that many have identified, which is kind of
23:53
Speaker 2: the logical way that this was always going to go, is, Hey,
23:57
Speaker 2: these companies want to continue to grow, So how do
23:59
Speaker 2: we do it? Well, we start offering it for things
24:01
Speaker 2: like groceries and electric utility bills and my doctor's office.
24:07
Speaker 2: And I'm not surprised that we have gotten here. It
24:11
Speaker 2: speaks to the poor health of the average American consumer.
24:17
Speaker 3: Now, maybe it also speaks to the ability to securitize
24:20
Speaker 3: these things, and the demand for these loans. Yeah, the
24:25
Speaker 3: explosion and individual investing in vehicles of institutional quality, that's
24:31
Speaker 3: a mouthful. I mean three or four to one k.
24:33
Speaker 3: You get cheap access to a diversity of asset classes
24:37
Speaker 3: that nobody had access to thirty years ago. The more
24:41
Speaker 3: sophisticated operation of pension and other institutional pools, insurance companies, endowments, pensions,
24:46
Speaker 3: I'll just put them all together in the institutional category
24:49
Speaker 3: for one case, could go there too. Created a tremendous
24:51
Speaker 3: demand for securitized fancy way of saying, they take your
24:55
Speaker 3: loan and they packed it together with a bunch and
24:57
Speaker 3: they sell it to somebody. This tremendous demand for.
25:00
Speaker 2: This to create some tranche, So it does.
25:03
Speaker 3: There Again, it's supply and demand. There's demand on the
25:07
Speaker 3: part of investors who want to give you their money
25:11
Speaker 3: and they trust you as an investment manager to do
25:14
Speaker 3: something responsible with it. So look, I'm not dismissing concerns
25:19
Speaker 3: about the fragility of the consumer. Those are real. We
25:23
Speaker 3: know real wages are falling again after inflation wages for example.
25:26
Speaker 2: Yeah, and I again, I would not dismiss these things
25:29
Speaker 2: as unimportant, right. It is concerning to me that people
25:33
Speaker 2: need to use payday loans.
25:35
Speaker 3: Do they need to use them? Though I used a
25:37
Speaker 3: firm recently, was a big purchase. They offered me zero percent.
25:39
Speaker 3: That's a no brain er. Inflation's running it for agreed.
25:43
Speaker 2: I think if you're using it to buy or pay
25:45
Speaker 2: for your utility bill, doctor's bill, or grocery bill, it
25:49
Speaker 2: might be a different situation than somebody saying, Hey, I'm
25:52
Speaker 2: making a seven thousand dollars purchase and I'm using these techniques.
25:55
Speaker 2: But maybe not. Maybe it's just there because it's zero
25:58
Speaker 2: interest and people like taking advantage of that sort of thing.
26:00
Speaker 2: There's a lot of people.
26:01
Speaker 3: That that's probably a minority use.
26:04
Speaker 2: I think so. But as much as I've been moan that,
26:07
Speaker 2: and I'm concerned about the state of the consumer, would
26:09
Speaker 2: I prefer instead they go to a payday lender? No, right,
26:14
Speaker 2: like baby, this is supplanting and replacing some of that
26:17
Speaker 2: business that in many parts of the country was actually
26:19
Speaker 2: banned from existing.
26:20
Speaker 3: Did you ever use the firm? They make it so easy,
26:23
Speaker 3: you just selected it check out, they do a quick,
26:25
Speaker 3: very superficial experience or whatever credit rating agency. Okay, so yeah,
26:30
Speaker 3: I mean, it's almost as easy as paying with your
26:32
Speaker 3: credit card. And again, if you're buying something for a
26:34
Speaker 3: grand which I happened to do recently, I had to
26:36
Speaker 3: and they offered me a firm I thought, well, I
26:38
Speaker 3: don't you know, I'm a good situation. I don't have
26:39
Speaker 3: much debt, I'm older, and all that zero percent for
26:42
Speaker 3: a year it's not gonna save me much but after that,
26:46
Speaker 3: but in real terms, my debt is declining over time. Again,
26:49
Speaker 3: I grant you, most people don't think that way.
26:52
Speaker 2: But okay, mathematician, isn't.
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27:57
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28:06
Speaker 2: Mark, I've been a long time, but during the eight recession,
28:09
Speaker 2: it was point after the eight recession, really it was
28:12
Speaker 2: pointed out that the greater Boston area economy seemingly fared
28:17
Speaker 2: quite a bit better than the rest of the United States.
28:21
Speaker 2: Unemployment rate creeped up less than the overall unemployment rate,
28:27
Speaker 2: home prices dropped less than the overall drop, and a
28:30
Speaker 2: few things were pointed out about the Massachusetts economy the
28:33
Speaker 2: greater Boston economy, and one of those was the amount
28:37
Speaker 2: of employment that comes from more insulated areas of the
28:41
Speaker 2: labor force, such as higher education and healthcare. Story in
28:47
Speaker 2: the Globe today is about how that exact benefit seems
28:51
Speaker 2: to be reversing itself in twenty twenty six, as more
28:54
Speaker 2: and more universities come under financial pressure to make changes,
28:58
Speaker 2: adapt and in some cases layoff employees. And it is
29:04
Speaker 2: a pretty marked shift from where we were, well, where
29:09
Speaker 2: universities were a couple of decades ago. And I actually
29:13
Speaker 2: think it's a good news story wrapped in bad news
29:17
Speaker 2: for the people that work there. But yeah, it calls
29:21
Speaker 2: into question will Massachusetts have the same insulation if we
29:24
Speaker 2: go into a receession next time.
29:26
Speaker 3: Well, services are less services, meaning things that aren't concrete,
29:34
Speaker 3: you know, a haircut, like you said, education, going to
29:37
Speaker 3: a movie. Those are services. There was and remains a
29:41
Speaker 3: long term trend away from manufacturing into it. If you
29:43
Speaker 3: want to think about the economy of manufacturing and services, Yeah,
29:46
Speaker 3: goods and services. Maybe that's a useful framework, and Massachusetts
29:50
Speaker 3: benefited from that. We pivoted to services with the help
29:53
Speaker 3: of the industry, the educational institutions we have here and there.
30:00
Speaker 3: They're the environment, I'll just say the environment they created.
30:03
Speaker 3: It was conducive to incubation of all the tech firms
30:06
Speaker 3: that we have here in Massachusetts, including biotechnology and other
30:11
Speaker 3: great services firms. Compare that to say Ohio, which didn't
30:15
Speaker 3: pivot to services. Massachusetts and Ohio were equally rich on
30:19
Speaker 3: a per capita basis fifty years ago. Now Massachusetts is
30:23
Speaker 3: more than fifty percent richer than Ohio on a per
30:26
Speaker 3: capita basis. Might we see a reversal of fortune there?
30:31
Speaker 3: I don't. I find it hard to believe the economy
30:33
Speaker 3: is going to become more manufacturing intensive despite policymaker's best
30:38
Speaker 3: efforts to reorient.
30:40
Speaker 2: Yeah, I tend to agree. I don't think that being
30:43
Speaker 2: so services focus is going to work against Massachusetts if
30:47
Speaker 2: there is another recession. I do think that the job
30:50
Speaker 2: security that a university could offer you twenty years ago
30:53
Speaker 2: might not be quite as prevalent in twenty twenty six
30:56
Speaker 2: as it was back in the two thousands. Let's take
30:59
Speaker 2: a quick break. When we return, I want to talk
31:01
Speaker 2: a little bit about Kevin worsh and the Federal Reserve,
31:05
Speaker 2: a bunch of changes that they are attempting to implement,
31:08
Speaker 2: and a fair bit being written about those changes as well.
31:11
Speaker 2: That's next on the Financial Exchange.
31:13
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31:46
Speaker 2: Mark. I want to talk a little bit about the
31:48
Speaker 2: US Central Bank, Federal Reserve and the guy who leads it,
31:53
Speaker 2: who is now Kevin worsh who replaced J. Powell a
31:56
Speaker 2: couple of months ago. The next meeting for the FED
31:59
Speaker 2: isn't until about a month out, sixteenth of September, where
32:03
Speaker 2: they are at least futures markets are pricing in about
32:07
Speaker 2: a two thirds chance that they hold steady on rates.
32:10
Speaker 2: Here and everyone in financial circles, you know, specifically Bloomberg,
32:15
Speaker 2: Financial Time, CNBC, Wall Street Journal is writing a lot
32:18
Speaker 2: about the FED. Op Ed pieces are getting written about
32:22
Speaker 2: the FED because everyone's got an opinion, and he is,
32:25
Speaker 2: to be fair to those who are writing, he is
32:29
Speaker 2: diverging from what was the FED standard practice for the
32:33
Speaker 2: last yeah decade or so.
32:36
Speaker 3: Funny is there's nothing to write about.
32:38
Speaker 2: There's not much.
32:40
Speaker 3: He's not changed, he's not showing his hand. They're just whining.
32:44
Speaker 2: So I want to hone in on you know, what
32:48
Speaker 2: he has actually said. They are going to do and
32:51
Speaker 2: what people are just writing about. Because we've got a
32:53
Speaker 2: couple of pieces, one from the Journal Worsh is wise
32:56
Speaker 2: to ditch the dots, which he is doing. Another one
32:59
Speaker 2: from Bloomberg ditch inflation targets, better to overhaul them instead. So,
33:04
Speaker 2: to your knowledge, Mark, has Kevin Worsh mentioned removing inflation
33:08
Speaker 2: targets from the Federal Reserves mandates?
33:11
Speaker 3: No, he's not said it publicly. My guess is based
33:14
Speaker 3: on what I know about his Philosophy's ideology is he
33:17
Speaker 3: would love to ditch the inflation target. Yeah, because it
33:20
Speaker 3: binds the Fed's hands.
33:21
Speaker 2: And he has opened committees to research and.
33:24
Speaker 3: He's outstanding economists on them.
33:27
Speaker 2: What is the right way to measure inflation?
33:30
Speaker 3: What is the right approach? That I think exactly.
33:35
Speaker 2: He may have some predisposed thinking to how it should
33:38
Speaker 2: be done, but ultimately he hasn't expressed any of that
33:42
Speaker 2: to the public so far as I am aware. He's
33:46
Speaker 2: just he wouldn't have opened people to research it and
33:48
Speaker 2: come back to him with ideas. And so I got
33:51
Speaker 2: to keep going back to this. I personally have a
33:55
Speaker 2: pretty big problem with the Federal Reserve changing or doing
33:59
Speaker 2: away with an inflation target when you still haven't reached
34:02
Speaker 2: the inflation target of the previous FED, And like, I
34:06
Speaker 2: see that as a little bit problematic if your goal
34:08
Speaker 2: is to convince the general public that you've got inflation
34:11
Speaker 2: under control. We said that under Powell, right, You know,
34:14
Speaker 2: a lot was being written back during twenty three, after
34:17
Speaker 2: we were recovering from the worst inflation a few decades, like, hey,
34:20
Speaker 2: why do we have this two percent target? Is it meaningful?
34:22
Speaker 2: Should it be looked at? And I think both of
34:24
Speaker 2: us agreed at the time, Yeah, maybe, But the time
34:27
Speaker 2: to look at it is once you've defeated inflation, not
34:30
Speaker 2: while you're still battling.
34:31
Speaker 3: So we've had one since twenty twelve, we've had one
34:33
Speaker 3: informally for decades. Sure green Span who was chair before
34:38
Speaker 3: Bernanki so eighty seven to six. He adamantly opposed articulating
34:48
Speaker 3: a publicly an inflation target because he knew it would
34:50
Speaker 3: bind their hands. But he also repeatedly said inflation should
34:54
Speaker 3: be low, stable, which he defined as nobody should be
34:57
Speaker 3: thinking about it, which I think is as good as
34:59
Speaker 3: working defin as any the argument for an inflation target
35:03
Speaker 3: comes from theory, so it's not surprising that an academic
35:05
Speaker 3: like BERNANKI would have been the first one to enshrine
35:07
Speaker 3: it and to express it. The theory says, if you
35:11
Speaker 3: tell people you're going to hit two percent and they
35:14
Speaker 3: find you credit, they find that statement credible, i e.
35:18
Speaker 3: You're going to inflict pain on the economy to reduce
35:20
Speaker 3: inflation if need be. That's what I mean by credibility,
35:22
Speaker 3: and what a monetary policy economist would I think define
35:26
Speaker 3: credibility as more or less. Then it's going to be
35:30
Speaker 3: easier to achieve that goal because people will stop bidding
35:33
Speaker 3: up prices, stop demanding high wage increases, stuff like that,
35:36
Speaker 3: if they believe the Fed's going to get inflation down
35:39
Speaker 3: to a low and stable rate. So there is a
35:41
Speaker 3: theoretical and maybe even a practical argument for a target.
35:44
Speaker 3: As you point out, it would be terrible to move
35:46
Speaker 3: the goal post now.
35:47
Speaker 2: Though this is also a divergence from something some lawmakers
35:51
Speaker 2: have been asking about, which is a formulaic approach to
35:54
Speaker 2: FED policy. Right. I don't remember who has really pushed
35:58
Speaker 2: this on Capitol Hill the most, but the idea being, hey,
36:02
Speaker 2: you put in place a formula and hold to it
36:04
Speaker 2: that if inflation runs x, you know you're going to
36:07
Speaker 2: move the rates in this direction. Why why does that
36:11
Speaker 2: not work? Because why is worth trying to get even
36:14
Speaker 2: further away from something?
36:15
Speaker 3: Some people invoke the so called well look, don't I'm
36:18
Speaker 3: not going to dis formulas entirely. Milton Friedman, who a
36:21
Speaker 3: lot of people know, advocated a k percent rule, meaning
36:24
Speaker 3: money supply. It's not an inflation rules, it's a money
36:27
Speaker 3: supply rule. He said, let money supply grow at three
36:29
Speaker 3: percent a year. Make it such that, you know, a
36:33
Speaker 3: chimpanzee could run your central bank. Make it mechanical. So
36:38
Speaker 3: he advocated a rule for growth in the money supply.
36:40
Speaker 3: Most economists would not agree that that's an effective way
36:43
Speaker 3: to to contain inflation. You might either get to inflation
36:50
Speaker 3: that's too low or too high. So we don't have
36:53
Speaker 3: enough time to talk about rules. Frankly right now. Maybe
36:56
Speaker 3: we pick up later if that's that interest you, because
36:58
Speaker 3: it's like it's like a big topic. I can't encapsulated
37:00
Speaker 3: eefteen seconds.
37:01
Speaker 2: I get it ultimately, though, what we have here is
37:05
Speaker 2: a new FED that is attempting to gain credibility but
37:10
Speaker 2: also trying to reform a lot of the different features
37:14
Speaker 2: of how the Federal Reserve works. Again, I don't want
37:17
Speaker 2: to overstate what Worsh is doing, but he is disrupting
37:21
Speaker 2: the apple cart a little bit here and attempting to
37:24
Speaker 2: reshape how FED policy is done.
37:27
Speaker 3: He recognizes they haven't met there two percent. What is
37:29
Speaker 3: the point of a goal if you haven't met it
37:31
Speaker 3: in five years? It's it's it's you're the emperor with
37:34
Speaker 3: no clothes. Everybody knows you haven't hit it. We ain't
37:37
Speaker 3: gonna hit it this year. We're already it roughly two percent.
37:40
Speaker 3: So better to revisit the whole.
37:42
Speaker 2: Well, is it better to revisit the policy or revisit
37:46
Speaker 2: the goal both?
37:47
Speaker 3: By by revisiting the former, you're necessarily reevaluating the merits
37:51
Speaker 3: of the latter. And he recognizes that the FED will
37:55
Speaker 3: lose credibility if it has not already. If nobody believes
37:59
Speaker 3: except the FOMC Federal Open Market Committee, that they can
38:02
Speaker 3: eventually achieve two percent inflation, I don't believe it. I
38:05
Speaker 3: don't believe we're gonna have anything like it in the
38:06
Speaker 3: next ten years. Do you either one of you guys
38:08
Speaker 3: believe that? Crickets? Thank you.
38:12
Speaker 2: Let's take a quick break. A lot more to cover
38:14
Speaker 2: in the second hour of the Financial Exchange. We'll be
38:16
Speaker 2: right back