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Iran Deal Progress Eases Oil Fears as AI Risks Build · The Financial Exchange Show

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  Speaker 2: Good more than welcome back to the Financial Exchange. Hope
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  Speaker 2: everybody that had the day off on Friday and a
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  Speaker 2: nice long weekend, good Father's Day weekend and continued entertainment
• 1:21
  Speaker 2: of the World Cup action that I personally have been
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  Speaker 2: overwhelmed by how fun it has been to participate, watch
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  Speaker 2: and get entertained by all the visitors to the US
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  Speaker 2: enjoying the World Cup. I did forget that the last
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  Speaker 2: World Cup was in was a guitar guitar where consumption
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  Speaker 2: of alcohol is illegal, so I do now understand why
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  Speaker 2: fans are drinking Boston dry, but nonetheless been fun to
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  Speaker 2: tag along and watch. We have updates coming out of
• 1:48
  Speaker 2: Irun from over the weekend. The passing of an economic
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  Speaker 2: legend who lived for a century, Alan Greenspan, came out
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  Speaker 2: this morning, so a lot to jump into on the show.
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  Speaker 2: But obviously the piece that continues to dominate is the
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  Speaker 2: war in Iran, the progress towards negotiations and what's actually
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  Speaker 2: been happening, you know, literally on the ground here over
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  Speaker 2: the last few days. Is the all important factor when
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  Speaker 2: it comes to traffic through the Strait of Horne Moos.
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  Speaker 2: So we're going to start right there. Markets today opening
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  Speaker 2: slightly positive and they've been bouncing around as news about
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  Speaker 2: Iran continues to unfold. Oil prices down another two and
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  Speaker 2: a half percent this morning, Equities up slightly. But let's
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  Speaker 2: just start with you know what we've seen over the
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  Speaker 2: last few days, and you know what I've been and
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  Speaker 2: what everybody's been tracking, is traffic through the Strait. That's
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  Speaker 2: what has mattered, you know, this time of year. Last year,
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  Speaker 2: according to the IMF, who has this portwatch tool that
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  Speaker 2: I've been tracking and is unfortunately not giving us data
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  Speaker 2: through yesterday. But you know, this time of year, you
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  Speaker 2: were seeing a seven day moving average that was hitting
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  Speaker 2: loads of eighty ships per day and highs in the
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  Speaker 2: low hundreds. Right, So the standard for this time of
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  Speaker 2: year was around one hundred ships a day navigating the Strait.
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  Speaker 2: We've been at pretty much zero since the outbreak of
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  Speaker 2: all of this. But over the weekend you were seeing
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  Speaker 2: reports of maybe seventy ships having navigated through the Strait
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  Speaker 2: between Thursday, Friday and Saturday of last week. So again
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  Speaker 2: some uptick in volume there. Sunday everything fell apart and
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  Speaker 2: you saw traffic basically halt as Irun threatened to.
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  Speaker 3: Close the straight again.
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  Speaker 2: That was under debate because the White House said they
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  Speaker 2: haven't done so and don't have the ability.
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  Speaker 3: To do so.
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  Speaker 2: But we are clearly seeing I'm not yet willing to
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  Speaker 2: call it a return to normalcy, but we did see
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  Speaker 2: some traffic getting through the strait of horn moves. And
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  Speaker 2: I think most market analysts are looking at this and saying, hey,
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  Speaker 2: you don't need one hundred ships a day to get
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  Speaker 2: back to pure normalcy, or to at least to fend
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  Speaker 2: off the worst case scenarios.
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  Speaker 3: You do need some traffic to navigate.
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  Speaker 2: And that's seemingly where we are for the last few days,
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  Speaker 2: is some traffic navigating through the strait of horror moves.
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  Speaker 4: Yeah, it's interesting there. There's still is this sense, at
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  Speaker 4: least maybe in my mind, and maybe I'm overreacting, of
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  Speaker 4: fragility in the agreements in place. I mean, obviously you
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  Speaker 4: had the fourteen point memorandum of understanding executed last Friday,
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  Speaker 4: and there does seem to be optimism today that in
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  Speaker 4: the next sixty days a deal will be met or
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  Speaker 4: will be created between the US and Iran. But you
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  Speaker 4: do get these small blips over the weekend between Iran's
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  Speaker 4: concern about Israel's continued attacks on Lebanon that presents a
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  Speaker 4: potential challenge, as well as President mentioning that he might
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  Speaker 4: force some additional strikes. But it seems like from a
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  Speaker 4: broader perspective, though those headlines continue to loom over in
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  Speaker 4: the negotiations that the encouraging thing, as you mentioned, Mike,
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  Speaker 4: is we are seeing some traffic resume through there. I
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  Speaker 4: think from an economic perspective, if i'm i Ran, certainly
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  Speaker 4: they are very able to withstand a significant amount of
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  Speaker 4: economic turmoil, but it is in their best interest.
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  Speaker 3: To Yeah, their economy is a mess.
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  Speaker 4: Yes, Oh my goodness, it is just unbelievable. I was
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  Speaker 4: reading some of the data this morning. Year over year
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  Speaker 4: inflation of seventy seven percent, you have, you know, economic
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  Speaker 4: damage to the region that is almost equal to their
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  Speaker 4: annual GDP. So it just seems like from their perspective,
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  Speaker 4: it would be really a necessity at this point to
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  Speaker 4: get baryls traveling through the Strait. So it does seem
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  Speaker 4: like we've made some progress on that front, and hopefully
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  Speaker 4: that momentum continues throughout the week here.
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  Speaker 2: Yeah, look, I mean my read of all of this
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  Speaker 2: is we were heading towards catastrophically high gas prices here
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  Speaker 2: in the United States in the coming weeks had action
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  Speaker 2: not taken place. The President's been pretty as he always is,
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  Speaker 2: kind of honest about his views on the economy and
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  Speaker 2: where things are going. He was quoted over the last
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  Speaker 2: few days talking about Herbert Hoover quote, so rather than
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  Speaker 2: possibly going into a depression, rather than having your favorite
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  Speaker 2: president to be Herbert Hoover, he was always the one I.
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  Speaker 3: Didn't want to be.
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  Speaker 2: He's talking about how his own policies could lead to
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  Speaker 2: economic catastrophe if this continues, and so I think he's
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  Speaker 2: looking at all this as with that mindset in mind.
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  Speaker 2: Now you might talk about that as not being a
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  Speaker 2: terribly strong negotiating position, if he's unwilling to close the
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  Speaker 2: straight again or see it closed by the Iranians, But nonetheless,
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  Speaker 2: I think this economic construct is how he is framing
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  Speaker 2: all this, And to that end, I don't find it
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  Speaker 2: terribly surprising that we had really bad news over Sunday
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  Speaker 2: that was kind of magically resolved by Monday morning by
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  Speaker 2: trading time, right like traffic came to a grinding halt
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  Speaker 2: on Sunday.
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  Speaker 3: And what story is leading our stack today.
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  Speaker 2: Well, it's a piece from Bloomberg saying Iran sites major
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  Speaker 2: progress after all night talks with the United States. There
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  Speaker 2: is clearly, at least in my mind, some incentive here
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  Speaker 2: on the part of the White House to.
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  Speaker 3: See things moving.
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  Speaker 2: Towards progress, especially when equity trading markets are open, and
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  Speaker 2: we've seen that pretty consistently since the war broke out.
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  Speaker 2: Right when did we start striking Iran. It was on
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  Speaker 2: a Friday evening leading into the weekend, and several of
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  Speaker 2: these actions have taken place coinciding with important market moments,
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  Speaker 2: So I think that continues to be the construct.
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  Speaker 3: I was asked this morning.
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  Speaker 2: You know, my own view was on oil markets, which
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  Speaker 2: I've been brutally honest with everyone, which is I can't
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  Speaker 2: explain oil prices today, so I have no forecast of
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  Speaker 2: where they're going to be tomorrow. Nonetheless, I think as
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  Speaker 2: we head towards reopening, we are clearly seeing downward pressure
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  Speaker 2: on oil markets, which would help at the gas pump
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  Speaker 2: and already has go ahead.
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  Speaker 4: Oh yeah, we're already down at seventy five dollars a
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  Speaker 4: barrel in West Texas Interdia today at two point six percent, which.
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  Speaker 3: Wild because we're at one hundred and ten. That's three weeks.
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  Speaker 2: Yeah, absolute wild price wings going on out there.
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  Speaker 3: But one thing remains true. Actually a few things remain true.
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  Speaker 2: One, I do believe that the Straight of Hormos is
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  Speaker 2: not going to be as significant to a waterway as
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  Speaker 2: it was prior to the war, no question right. There
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  Speaker 2: are plenty of surrounding nations who didn't trust around going
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  Speaker 2: into this have now seen the Iranians willingness and ability
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  Speaker 2: to close the straight effectively, and even if it's reopened,
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  Speaker 2: could have higher toll costs associated with it at some point.
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  Speaker 2: If not physical actual tolls, then higher insurance costs associate
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  Speaker 2: with higher prices. So I do believe that all of
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  Speaker 2: those countries are going to work on infrastructure to be
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  Speaker 2: able to reroute oil through other areas, because that's strategically important.
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  Speaker 2: I also believe that plenty of foreign nations are going
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  Speaker 2: to look at their own energy security, especially Europe, those
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  Speaker 2: with big reserves and cash to be able to do this,
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  Speaker 2: and want to build those up like Chinese did, like
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  Speaker 2: the United States did. I would think that the logical
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  Speaker 2: next move would be to say, okay, if this happens again,
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  Speaker 2: which who knows. It's not as though we are screaming before.
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  Speaker 2: It's a piece steal, Yeah, you know, we need to
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  Speaker 2: be better prepared for it. And then the third piece
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  Speaker 2: would be that I think many of those same countries say, hey,
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  Speaker 2: we don't necessarily want to burn oil to fuel our
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  Speaker 2: electricity grids, so what can we do to diversify away
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  Speaker 2: from that? How does that all work out to oil
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  Speaker 2: prices over the course of the next twelve, twenty four
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  Speaker 2: and thirty six months. I just got to be honest,
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  Speaker 2: I got no idea, like I believe that if the
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  Speaker 2: Strait remains open, oil prices should be lower than they
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  Speaker 2: otherwise would be beyond that, really tough to get a
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  Speaker 2: grasp on where oil prices go next, not to mention
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  Speaker 2: the biggest driver of all of it, which is consumer consumption,
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  Speaker 2: which will be driven by the economic cycle.
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  Speaker 4: Right, And I just have had the hardest time over
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  Speaker 4: the course of the last few week understanding this oil
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  Speaker 4: price movement. Like you were mentioning before, It just seems like,
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  Speaker 4: though there has been tremendous progress between the US and Iran,
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  Speaker 4: that there are areas out there in the market, whether
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  Speaker 4: it be re bolstering the strategic reserves of different countries
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  Speaker 4: that would create more demand than there is supply. But
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  Speaker 4: yet here we sit at seventy five dollars a barrel,
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  Speaker 4: and it doesn't seem to be that that's any way
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  Speaker 4: phasing the energy markets. And the fact that even though
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  Speaker 4: the Strait is opening, we're talking about still what a
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  Speaker 4: fifth of normal traffic. So there's all the factors that, yeah,
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  Speaker 4: that have just confounded me. And so what I've learned
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  Speaker 4: over my career in the investing world is that energy
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  Speaker 4: markets and predicting them is always just an impossibility. So
• 10:32
  Speaker 4: you just buckle up and enjoy, or just follow the ride,
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  Speaker 4: not even enjoy, just just keep an eye on it.
• 10:38
  Speaker 2: Let's take a quick break when we return, remembering the
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  Speaker 2: Maestro Alan green Span passing away at one hundred years old.
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  Speaker 3: He's up next on the Financial Exchange.
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  Speaker 2: Well, we learned this morning of the passing of one
• 11:55
  Speaker 2: of the most influential people in US economic history, Alan Greenspan.
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  Speaker 3: Who oversaw Yeah.
• 12:02
  Speaker 2: I'll say, arguably one of the best economies are the
• 12:05
  Speaker 2: United States has ever seen, maybe the best. Like we
• 12:08
  Speaker 2: constantly point to the late nineteen nineties as the single
• 12:12
  Speaker 2: best economy we've seen in modern US history, and it's
• 12:15
  Speaker 2: tough for me to point to any others that would
• 12:18
  Speaker 2: beat it. Greenspan took over from Vulgar in nineteen eighty seven.
• 12:22
  Speaker 2: He was the second longest serving FED share at nearly
• 12:25
  Speaker 2: nineteen years eighty seven to six, Right, Like, that is
• 12:31
  Speaker 2: a long period of time with a lot of presidents
• 12:34
  Speaker 2: to seek come and go. You know, we constantly point
• 12:38
  Speaker 2: to Vulkar or have over the last few years. Right,
• 12:40
  Speaker 2: Vulker was the one who was brought in to finally break.
• 12:44
  Speaker 3: The back of inflation.
• 12:46
  Speaker 2: Yeah, like he had watched it dominate to the US
• 12:50
  Speaker 2: economy during the nineteen seventies, brought in and did defeat
• 12:55
  Speaker 2: inflation before. I don't have as much of the context
• 13:00
  Speaker 2: textual history of the you know, brinkmanship between Reagan and
• 13:03
  Speaker 2: Vulgar at the time, but you know was exited from
• 13:06
  Speaker 2: the FED in part because of Reagan's wishes for a
• 13:12
  Speaker 2: deregulatory environment. And Greenspan was the person who was put
• 13:16
  Speaker 2: in there, and quite honestly, like you know, whether through
• 13:21
  Speaker 2: luck or through good practice, which was probably some combination
• 13:25
  Speaker 2: of the two, as is usually the case, oversaw again
• 13:30
  Speaker 2: probably the best economy with the most growth least inflation
• 13:34
  Speaker 2: that we have seen for such an extended period of time.
• 13:37
  Speaker 3: It wasn't that was without you know, periods of strife.
• 13:40
  Speaker 2: He brought in, was brought in and pretty much immediately
• 13:43
  Speaker 2: saw Black Monday, one of the worst stock market days
• 13:46
  Speaker 2: in history, oversaw times during the dot com bubble popping.
• 13:51
  Speaker 3: But yeah, I mean they referred to him as the
• 13:54
  Speaker 3: Maestro for a reason.
• 13:55
  Speaker 4: He had his fingerprints over so many different economic events
• 13:59
  Speaker 4: in the US history, and it dates back to even
• 14:01
  Speaker 4: prior to his chime as chairman from eighty seven to six.
• 14:05
  Speaker 4: He was involved on the White House Council of Economic
• 14:08
  Speaker 4: Advisors in seventy four when the inflationary ballots picked up.
• 14:13
  Speaker 4: He goes back to nineteen fifty nine and having impact
• 14:16
  Speaker 4: on just FED policy on that front too. So just
• 14:20
  Speaker 4: a long, storied career, Like I said, fingerprints all over
• 14:24
  Speaker 4: some significant events in US economic history. He also was
• 14:28
  Speaker 4: able in nineteen eighty seven to sort of take that
• 14:31
  Speaker 4: role that the FEDI feels like has taken more recently
• 14:34
  Speaker 4: to a significant degree of trying to cushion markets against
• 14:38
  Speaker 4: these big blows like the crash in eighty seven and
• 14:41
  Speaker 4: like the blowing up of the dot com bubble in
• 14:43
  Speaker 4: the late nineties. He's famous for the phrasing irrational exuberance
• 14:48
  Speaker 4: describing the markets back in ninety six, even though it
• 14:51
  Speaker 4: took five years for it to fall down and come
• 14:54
  Speaker 4: crashing apart. At that point, in time and then also
• 14:56
  Speaker 4: fed speak was something that is attributed largely to Greensman,
• 15:00
  Speaker 4: this idea of being sort of vague and mumbling through
• 15:05
  Speaker 4: his testimonies his speeches to really not indicate one way
• 15:09
  Speaker 4: or another the direction that the Federal Reserve was.
• 15:11
  Speaker 2: I heard the story of you know, analysts looking at
• 15:14
  Speaker 2: the size of his briefcase to indicate whether rates were
• 15:18
  Speaker 2: going up or down. He would like, kind of sneakily,
• 15:20
  Speaker 2: you know, bring in a larger or smaller briefcase, depending
• 15:23
  Speaker 2: on that, and analysts would look at and say, okay,
• 15:25
  Speaker 2: that one that looks like he might be hiking rates
• 15:28
  Speaker 2: soon based on the size of his briefcase that he
• 15:30
  Speaker 2: brings in. So, yeah, it is an interesting reflection. I
• 15:35
  Speaker 2: do wonder about his legacy. Right like he oversaw again
• 15:40
  Speaker 2: a few of the best economies we've ever seen, he
• 15:43
  Speaker 2: also oversaw in spite of him naming the irrational exuberance
• 15:48
  Speaker 2: and identifying it.
• 15:50
  Speaker 3: Did little to what's the right way to describe this,
• 15:55
  Speaker 3: He did little to prohibit.
• 15:58
  Speaker 2: The actions that led to the craze, right, you know,
• 16:01
  Speaker 2: he could have viewed those actions and said, hey, we're
• 16:04
  Speaker 2: going to dramatically raise interest rates over the course of
• 16:07
  Speaker 2: five years here really didn't It didn't do much there.
• 16:12
  Speaker 2: And the most biggest piece that he's probably blamed for
• 16:15
  Speaker 2: and carries the biggest blemish on his record is that
• 16:19
  Speaker 2: he famously deregulated and refused to put in place new
• 16:24
  Speaker 2: regulations when it came to the financial sector, and he
• 16:27
  Speaker 2: himself admitted in later interviews that, hey, we just didn't
• 16:32
  Speaker 2: really see the risk in the banking sector. We really
• 16:35
  Speaker 2: felt that they were self regulating and we would never.
• 16:37
  Speaker 3: See a blow up there.
• 16:39
  Speaker 2: Famously pointed at the housing market when people in you know,
• 16:43
  Speaker 2: the mid two thousands were calling it a bubble, denied
• 16:46
  Speaker 2: it and famously you know, pointed to it and said, now,
• 16:49
  Speaker 2: not a bubble. We're not seeing a subprime issue here,
• 16:54
  Speaker 2: and was pretty blind to that period of time. You know,
• 17:00
  Speaker 2: I think he was more blind to the financial crisis
• 17:03
  Speaker 2: bubble than he was the dot com bubble. But honestly,
• 17:07
  Speaker 2: you know, it's not as though his actions in any
• 17:12
  Speaker 2: way prohibited the stuff that led to the dot com bubble. Yes,
• 17:16
  Speaker 2: he named it as irrational exuberance, but I would argue
• 17:20
  Speaker 2: that his green span put as people described it, right,
• 17:23
  Speaker 2: the idea that hey, the FED is going to come
• 17:25
  Speaker 2: rescue markets as soon as they fall apart. It was
• 17:28
  Speaker 2: a contributing factor to the dot com era and the
• 17:31
  Speaker 2: build up that led to it. And you know, now
• 17:34
  Speaker 2: we don't call it the green span put, but we
• 17:36
  Speaker 2: do call it the FED put right, there is a
• 17:38
  Speaker 2: term the FED put out there that Hey, anytime that
• 17:41
  Speaker 2: financial markets or banks or anybody falls apart, who's going
• 17:44
  Speaker 2: to step in?
• 17:46
  Speaker 3: J Powell?
• 17:46
  Speaker 2: Now, Kevin worship the FED to rescue the day and
• 17:49
  Speaker 2: prohibit things from getting too much work.
• 17:51
  Speaker 4: And we saw that in twenty twenty two with some
• 17:53
  Speaker 4: of the regional banks blowing up where the FED stepped
• 17:56
  Speaker 4: in as the B three twenty two. Maybe the trickle
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  Speaker 4: down effects from the race rose, that's probably. But when
• 18:07
  Speaker 4: you have a career, probably long enough within the financial
• 18:10
  Speaker 4: services market or in economic policy, and maybe I'm just
• 18:14
  Speaker 4: sort of lending an olive branch here to him, you're
• 18:16
  Speaker 4: gonna have mistakes like this and oh wait, was probably
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  Speaker 4: one of them. Does that overshadow some of the great
• 18:22
  Speaker 4: efforts that he took in eighty seven and some of
• 18:24
  Speaker 4: these other periods of time.
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  Speaker 2: I'm comfortable simultaneously saying that two things can his right.
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  Speaker 2: You know, his actions in the eighties and nineties, and
• 18:32
  Speaker 2: his willingness to ignore potential inflationary problems in the nineties
• 18:38
  Speaker 2: and raise rates and reaction to them led to one
• 18:40
  Speaker 2: of the best economies in the eighties and nineties that
• 18:43
  Speaker 2: we've ever seen. Simultaneously, those same actions probably contributed to
• 18:48
  Speaker 2: one of the worst decades of financial and economic activity, which.
• 18:52
  Speaker 3: Was the two thousands, right.
• 18:53
  Speaker 2: I mean, there's not much arguing the two thousand decade
• 18:55
  Speaker 2: from you know, two thousand to twenty ten was one
• 18:59
  Speaker 2: of the worst economic periods that we've seen. I put
• 19:01
  Speaker 2: it right up there with the nineteen seventies and the
• 19:04
  Speaker 2: nineteen thirties, right, Like, it's tough to argue that it was.
• 19:09
  Speaker 2: There are many periods worse than that, and green Span
• 19:12
  Speaker 2: in some degree contributed to all of that, And so
• 19:17
  Speaker 2: both things can be true. And when you're overseeing such
• 19:19
  Speaker 2: a powerful institution, you're going to have a likely mixed record,
• 19:22
  Speaker 2: especially when you serve it for close to two decades.
• 19:25
  Speaker 2: Let's say a quick break when we come back Wall
• 19:27
  Speaker 2: Street watch coming up next.
• 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. Turn now full Wall
• 19:51
  Speaker 1: Street Watch treking the stocks, the data, and the headlines
• 19:54
  Speaker 1: driving markets so far today right here on the Financial
• 19:58
  Speaker 1: Exchange Radio network.
• 19:59
  Speaker 5: Markets are to open the week as Wall Street continues
• 20:02
  Speaker 5: to monitor peace discussions between the US and Iran as
• 20:05
  Speaker 5: both sides try to reach a piece deal within two months.
• 20:09
  Speaker 5: Right now, the Dow is up about a third of
• 20:11
  Speaker 5: a percent, SMP five hundred down two tenths of a percent,
• 20:15
  Speaker 5: NASDAC down actually selling off nearly nine tenths of a percent,
• 20:19
  Speaker 5: or two hundred and twenty six points. RUSS two thousand
• 20:22
  Speaker 5: is up three quarters of a percent. Tenure Treasureeled is
• 20:26
  Speaker 5: up five basis points at four point five zero percent,
• 20:29
  Speaker 5: and OILED down about two and a half percent, trading
• 20:32
  Speaker 5: at seventy four dollars A barrel some acquisition news this
• 20:36
  Speaker 5: morning after ABV confirmed it will acquire biotech firm Apogee
• 20:41
  Speaker 5: Therapeutics and a ten point nine billion dollar deal in
• 20:45
  Speaker 5: an effort to accelerate abvi's presence in the respiratory space.
• 20:49
  Speaker 5: ABVS stock is up nearly five percent, while Apogee shares
• 20:53
  Speaker 5: are surging forty six percent. Meanwhile, SpaceX is on pace
• 20:58
  Speaker 5: to decline for its third straight session, down ten percent
• 21:03
  Speaker 5: Today elsewhere Getty Images seeing its stock rocket ninety five
• 21:07
  Speaker 5: percent after the company announced in agreement with open Ai,
• 21:11
  Speaker 5: where its content will appear on open ai search and
• 21:14
  Speaker 5: chat GPT. Micron Technology up over four percent after the
• 21:19
  Speaker 5: semiconductor company received two price target hikes from Bernstein and Needham,
• 21:24
  Speaker 5: and former Federal Reserve chairman Alan Greenspan has died at
• 21:29
  Speaker 5: the age of one hundred. I'm Tucker Sliva and that
• 21:33
  Speaker 5: is Wall Street.
• 21:34
  Speaker 2: Watch two stories from the Journal today about the risks
• 21:38
  Speaker 2: of the stock market today. The first the biggest risks
• 21:41
  Speaker 2: threatening this high flying stock market. The second all the
• 21:43
  Speaker 2: money flooding into AI is a giant warning sign. The
• 21:49
  Speaker 2: first lays out four different scenarios here that they deem
• 21:53
  Speaker 2: as risks to the stock market. I'll argue that only
• 21:56
  Speaker 2: one of them really matters, although a few of them
• 21:58
  Speaker 2: are a combination of the other. Stretched valuations is one
• 22:02
  Speaker 2: that they point out, and stretched valuations are being caused
• 22:05
  Speaker 2: by AI infatuation as well as well a combination of
• 22:14
  Speaker 2: all the stuff related to AI. Higher interest rates that
• 22:18
  Speaker 2: could get in the way of a continued boom and
• 22:20
  Speaker 2: could be a temporary setback. But I don't see higher
• 22:23
  Speaker 2: interest rates that surprise investors as being the cause of
• 22:26
  Speaker 2: a prolonged market downturn. You know, it could combine with
• 22:31
  Speaker 2: other factors to lead to a bubble that bursts, But
• 22:33
  Speaker 2: I just don't see it as going to be the
• 22:35
  Speaker 2: leading factor. Ai jitters I already explained how that's kind of,
• 22:38
  Speaker 2: you know, mocked into all the other ones. And so
• 22:42
  Speaker 2: what I do feel as a real risk is we
• 22:45
  Speaker 2: are facing a market that is more concentrated than we've
• 22:50
  Speaker 2: just about ever seen. The valuations on the market are
• 22:53
  Speaker 2: as about as stretched as we've ever seen. It's worth
• 22:57
  Speaker 2: talking about that valuation story a little bit because we
• 22:59
  Speaker 2: covered last week how the way that companies report their
• 23:03
  Speaker 2: earnings is very interesting. But the other piece about this
• 23:06
  Speaker 2: market that you know, the journal acknowledges here too, is
• 23:10
  Speaker 2: all the money that's flooding into it via debt. In
• 23:14
  Speaker 2: debt raises, Google offering new shares for sale, the IPOs
• 23:20
  Speaker 2: of SpaceX, and pending IPOs of Anthropic and Open AI.
• 23:25
  Speaker 2: You're talking about these massive fundraising rounds. It does two things.
• 23:29
  Speaker 2: One requires new capital to sustain it, and two removes
• 23:33
  Speaker 2: a bunch of capital that was going to stock buybacks
• 23:37
  Speaker 2: over the course of the last decade. On the profitability
• 23:39
  Speaker 2: valuation side, what I think is important to talk about
• 23:43
  Speaker 2: are the record profits that everyone's pointing to, and it
• 23:48
  Speaker 2: is a crucial difference between now and the dot com bubble,
• 23:51
  Speaker 2: is that these companies that are being priced at massive valuations.
• 23:57
  Speaker 2: SpaceX might be an exception here to the profitability story,
• 24:00
  Speaker 2: but these companies that are being priced at these stretched
• 24:03
  Speaker 2: valuations are outrageously profitable, so that that remains true. But
• 24:09
  Speaker 2: I want to speak to the accounting of all this stuff.
• 24:11
  Speaker 2: So let's talk about the data center build out for
• 24:15
  Speaker 2: a moment here. If you're a company like in Video,
• 24:18
  Speaker 2: you've been booking these major revenues and profits. Those sales
• 24:22
  Speaker 2: of chips are coming from the likes of Le's. Let's
• 24:26
  Speaker 2: use Google all right. Google is spending tremendous amounts of money,
• 24:29
  Speaker 2: or was within Nvidia and still is today a big
• 24:32
  Speaker 2: in Vidia customer. They've been buying semiconductors building out their
• 24:36
  Speaker 2: AI capacity in video. When they make the sale and
• 24:39
  Speaker 2: deliver the semiconductor, books the revenue immediately. If you are Google,
• 24:43
  Speaker 2: you might be spending one hundred billion dollars right, you
• 24:46
  Speaker 2: are not booking that expense immediately on your balance sheet.
• 24:50
  Speaker 2: The way you are doing it is you're acquiring an asset,
• 24:53
  Speaker 2: and that asset is going to depreciate over time. You're
• 24:55
  Speaker 2: not actually required to realize that expense until that asset depreciates.
• 24:59
  Speaker 2: And so what we are seeing right now is everyone
• 25:03
  Speaker 2: looks like a beneficiary of the AI trade. The sellers
• 25:06
  Speaker 2: of the stuff are booking revenue immediately. The buyers of
• 25:09
  Speaker 2: the stuff are not booking the expense immediately. And this
• 25:13
  Speaker 2: is permeating throughout most of the market where you have
• 25:16
  Speaker 2: sellers doing really well because they're selling their stuff at
• 25:19
  Speaker 2: really high profit numbers. Buyers might be spending a bunch
• 25:23
  Speaker 2: of money, but you know what, Hey, we don't really
• 25:26
  Speaker 2: need to book that expense because it's an asset that's
• 25:28
  Speaker 2: going to last and depreciate over let's say seven years.
• 25:31
  Speaker 3: Well, what happens when.
• 25:32
  Speaker 2: That depreciation actually comes, right, what happens when that depreciation
• 25:36
  Speaker 2: comes is you better have a heck of a lot
• 25:37
  Speaker 2: of revenue to back up the investorial capital.
• 25:41
  Speaker 4: Yeah, exactly, No, it's and if the.
• 25:42
  Speaker 2: Depreciation comes faster than you were anticipating because the things
• 25:45
  Speaker 2: don't last as long, then you're really screwed.
• 25:47
  Speaker 4: The depreciation as well as the demand cycle in general,
• 25:51
  Speaker 4: Like right now there's a troneous amount of demand for
• 25:53
  Speaker 4: everything within the data center build out. We've referenced often
• 25:57
  Speaker 4: on the show the six hundred and seventy billion dollars
• 26:00
  Speaker 4: that's committed in terms of CAPEX to build out these
• 26:02
  Speaker 4: data centers. But I do worry a little bit about
• 26:05
  Speaker 4: the fragility behind all the enthusiasm REGARDIA official intelligence. You know,
• 26:10
  Speaker 4: every day brings a different story where you can perhaps
• 26:14
  Speaker 4: view it as a pessimistic view of AI going forward.
• 26:17
  Speaker 4: Overwhelming the stories are mostly positive, but you know, there
• 26:20
  Speaker 4: was a piece recently where open ai is considering drastic
• 26:24
  Speaker 4: price cuts. You've also had just some general pushback from
• 26:28
  Speaker 4: businesses broadly speaking that the expense associated with their AI
• 26:33
  Speaker 4: usage is concerning to them based on the return that
• 26:36
  Speaker 4: they're getting. So there are all these different factors and
• 26:40
  Speaker 4: you do have to at least make the comparison not
• 26:43
  Speaker 4: to say that the same thing is going to happen
• 26:45
  Speaker 4: to twenty twenty one Mike where it feels like the
• 26:48
  Speaker 4: surge that we've seen in M and A activity this year,
• 26:51
  Speaker 4: as well as the issuances like Google doing the secondary
• 26:54
  Speaker 4: offering of shares SpaceX's IPO and if we get anthropic
• 26:58
  Speaker 4: and open AI over the course of this year, it
• 27:00
  Speaker 4: does feel a little bit reminiscent to twenty twenty one,
• 27:02
  Speaker 4: where there was a tremendous amount of a really robust
• 27:06
  Speaker 4: IPO market, you had specs and other areas of market froth.
• 27:11
  Speaker 4: It seemed like sort of bubbling to the surface. That's
• 27:13
  Speaker 4: not to say that it's going to be the same
• 27:15
  Speaker 4: this time, but sometimes that can be the end of
• 27:19
  Speaker 4: a cycle where these companies like a Google or SpaceX
• 27:22
  Speaker 4: sort of recognize, hey, there's a lot of investor appetite
• 27:25
  Speaker 4: right now, the markets are going, well, let's raise while
• 27:28
  Speaker 4: the going is good.
• 27:29
  Speaker 2: So I think the author in the journal actually does
• 27:31
  Speaker 2: a pretty good job of laying out a few scenarios.
• 27:34
  Speaker 2: The bull case scenario that he points out is, you
• 27:36
  Speaker 2: know what, this AI moment, this opportunity literally is so
• 27:40
  Speaker 2: huge that it just can absorb all of the cash
• 27:44
  Speaker 2: that is going into it and the spending that is
• 27:46
  Speaker 2: being done by all these companies. The three quarters of
• 27:49
  Speaker 2: a trillion dollars that will be spent by mega tech
• 27:51
  Speaker 2: companies is justified because the business opportunity and the revenue
• 27:54
  Speaker 2: associated with it a few years out is going to
• 27:56
  Speaker 2: be so massive that, yeah, it was worth the spending.
• 27:59
  Speaker 3: There's your bulk. You really have to buy on a
• 28:01
  Speaker 3: lot of execution actually happening, timing happening.
• 28:05
  Speaker 2: I have a tough time getting there. But there's your boalcase,
• 28:08
  Speaker 2: the barecase. You know what, The technology is real, the
• 28:11
  Speaker 2: opportunity is real, but it's going to be a RaSE
• 28:15
  Speaker 2: to zero in terms of cost, and it's going to
• 28:18
  Speaker 2: you know, destroy a lot of value as these companies
• 28:20
  Speaker 2: compete with each other and are not able to charge
• 28:22
  Speaker 2: the rates that they had hoped they would, and so
• 28:25
  Speaker 2: a number of companies go out of business and the
• 28:27
  Speaker 2: revenue opportunity, the profit opportunity is smaller than we thought.
• 28:31
  Speaker 2: The third case scenario is the probably most concerning one,
• 28:33
  Speaker 2: which most closely resembles twenty twenty one, where hey, there
• 28:37
  Speaker 2: actually isn't much of an opportunity here at all, and
• 28:41
  Speaker 2: these companies are just going with the spend because they're
• 28:43
  Speaker 2: investors and the general public is cheering them on and
• 28:47
  Speaker 2: you know, causing them to do it. See NFTs and
• 28:51
  Speaker 2: NFTs electric vehicles. You know, all of the hype around
• 28:56
  Speaker 2: twenty twenty one market that five years out now looks
• 29:00
  Speaker 2: almost humorous as to how little and small the opportunity
• 29:04
  Speaker 2: really was. The problem here is that this market is
• 29:10
  Speaker 2: many times larger for these products than it was back
• 29:13
  Speaker 2: in twenty twenty one, and that infatuation craze and so
• 29:16
  Speaker 2: the downturn could be significantly work.
• 29:18
  Speaker 4: And also another point on your barecase side of things,
• 29:20
  Speaker 4: all these companies are so intertwined in terms of their success.
• 29:24
  Speaker 4: We've talked about on the show before the circular financing
• 29:28
  Speaker 4: efforts of a lot of these different companies, So that
• 29:30
  Speaker 4: could make the impacts more significant if we get to
• 29:32
  Speaker 4: that point.
• 29:33
  Speaker 3: Let's take a quick break.
• 29:34
  Speaker 2: When we come back, one of the biggest AI giants
• 29:38
  Speaker 2: out there telling the market that we can't let AI
• 29:40
  Speaker 2: giants eat the economy. We'll be talking about him next
• 29:43
  Speaker 2: on the Financial Exchange.
• 29:45
  Speaker 1: Remember, you can watch the show live every day on
• 29:48
  Speaker 1: our YouTube page. We've got market updates and breaking business
• 29:51
  Speaker 1: news all morning long, plus a full archive of all
• 29:54
  Speaker 1: our show's content. It's all there with that click of
• 29:57
  Speaker 1: a button at YouTube dot com. Slash The Financial Exchange Show,
• 30:02
  Speaker 1: breaking business and financial news first throughout the day, only
• 30:06
  Speaker 1: here on the Financial Exchange Radio Network.
• 30:26
  Speaker 2: You know Paul, one of the parts of the World
• 30:28
  Speaker 2: Cup that I've enjoyed the most is cheering on the
• 30:30
  Speaker 2: little guy. I don't know if you caught any of
• 30:33
  Speaker 2: the Germany Ivory Coast game on Saturday.
• 30:36
  Speaker 3: But that was a really close game.
• 30:38
  Speaker 2: Germany only came away with the win two to one,
• 30:40
  Speaker 2: and it reminds me of this next story of cheering
• 30:42
  Speaker 2: on the little guy, because Microsoft CEO Satan Needella is
• 30:47
  Speaker 2: getting fed up with all these AI giants eating the economy.
• 30:51
  Speaker 2: A little bit of tongue in cheek here, Microsoft, you
• 30:53
  Speaker 2: are arguably one of the biggest, if not, I mean,
• 30:56
  Speaker 2: you could make a case that Microsoft is the biggest
• 30:59
  Speaker 2: AI giant out there. I'm sure their co pilot numbers
• 31:01
  Speaker 2: are among the top few.
• 31:03
  Speaker 3: They might not be the biggest lab.
• 31:05
  Speaker 2: Creator, but they've funded all of these companies that are
• 31:08
  Speaker 2: doing what they are doing. So I take anything that
• 31:11
  Speaker 2: Satya Nadella has to say about criticizing the moment in
• 31:15
  Speaker 2: time to be self serving.
• 31:17
  Speaker 3: At best and hypocritical at worst.
• 31:22
  Speaker 2: But he's quoted saying, you can't say, hey, all white
• 31:25
  Speaker 2: collar jobs are gone, and this could even be a weapon,
• 31:29
  Speaker 2: and we will use all the power to build data centers.
• 31:32
  Speaker 2: The publicly predicted wouldn't tolerate just a few models in
• 31:35
  Speaker 2: companies doing all of the learning for the world.
• 31:39
  Speaker 3: Again, I'm not sure what.
• 31:44
  Speaker 2: I'm unclear about what viewpoint Satya Nadella believes the American
• 31:48
  Speaker 2: public has about Microsoft. But as far as I can tell,
• 31:52
  Speaker 2: I think most of us are looking at Microsoft as
• 31:54
  Speaker 2: one of those players that's warning us about how it's
• 31:57
  Speaker 2: going to destroy jobs and create all these issues, and
• 32:00
  Speaker 2: is nevertheless funding it as fast as they possibly can
• 32:05
  Speaker 2: with no end in sight. So I mean, I'm perfectly
• 32:08
  Speaker 2: willing to listen to somebody who wants to say, hey,
• 32:11
  Speaker 2: we can't do this or we need to pause this,
• 32:14
  Speaker 2: but unless you're backing it up with actions, I don't
• 32:17
  Speaker 2: really see the validity of the comment.
• 32:20
  Speaker 4: Money talks is an expression that's often used, and they
• 32:22
  Speaker 4: have put a lot of money into these companies that
• 32:26
  Speaker 4: are at the edge of these frontier models, whether it
• 32:28
  Speaker 4: be one of their oldest partners in open Ai that
• 32:32
  Speaker 4: has one of the biggest models out there, and they've
• 32:35
  Speaker 4: also invested a multi billion dollar agreement with anthrop It
• 32:38
  Speaker 4: two Microsoft has And then when you go back to
• 32:42
  Speaker 4: just the cloud and the way that played out, basically
• 32:45
  Speaker 4: three players took the majority of scale. It's it's Microsoft
• 32:48
  Speaker 4: with Azure, it's Amazon and Google. Those are the three
• 32:51
  Speaker 4: biggest players, and I don't see them crying about the
• 32:55
  Speaker 4: dominance that they have in that market. But yet when
• 32:58
  Speaker 4: they don't have a frontier model Microsoft's case, he's crying
• 33:01
  Speaker 4: that it should be, you know, the lowest cost provider
• 33:04
  Speaker 4: out there, and that everyone should get a chance at this.
• 33:07
  Speaker 4: It just feels very self serving. Oh yes, commentary.
• 33:10
  Speaker 2: More and more, the piece that concerns me is the
• 33:12
  Speaker 2: commentary that I keep hearing from leadership of these companies is, hey,
• 33:16
  Speaker 2: we believe that we are inventing a technology that is
• 33:19
  Speaker 2: going to bring about the.
• 33:20
  Speaker 3: End of the world.
• 33:21
  Speaker 2: But we feel that we would be the best stewards
• 33:24
  Speaker 2: for the end of the world compared to our competitors,
• 33:26
  Speaker 2: so we're going to keep plowing ahead, even though basically
• 33:29
  Speaker 2: it's the argument of, hey, if we don't do it,
• 33:31
  Speaker 2: then somebody else worse than us is going to and
• 33:34
  Speaker 2: that is a really self serving and dangerous.
• 33:37
  Speaker 3: Argument to make.
• 33:38
  Speaker 2: Well, they've heard it from social media companies too, like, hey,
• 33:40
  Speaker 2: we genuinely believe that this product is ruining people's lives,
• 33:44
  Speaker 2: but if we don't do it, then somebody else is
• 33:46
  Speaker 2: going to and.
• 33:46
  Speaker 3: They're going to be worse at ruining people's lives.
• 33:48
  Speaker 4: What they're learning these companies, whether it be anthropic or
• 33:50
  Speaker 4: opening eye, is that there has to be a shift
• 33:53
  Speaker 4: in framing just how AI is viewed by the general populace.
• 33:57
  Speaker 4: And they had made some critical mistake early on, whether
• 34:01
  Speaker 4: it was for self serving nature talking up your own
• 34:04
  Speaker 4: business to say that we're going to wipe out half
• 34:06
  Speaker 4: of entry level jobs. Now lead us what we're going
• 34:08
  Speaker 4: to burn down your data center now, recognizing that that's
• 34:11
  Speaker 4: not going to be welcome with open arms. So the
• 34:13
  Speaker 4: messaging is very key, and I think Satiaadella here is
• 34:16
  Speaker 4: striking a different tone. But all of this comes back
• 34:19
  Speaker 4: to the general idea of messaging to benefit your company
• 34:24
  Speaker 4: the best that you can, rather than his real view.
• 34:27
  Speaker 3: Of the industry.
• 34:28
  Speaker 2: To be clear, I have no plans on burning down
• 34:29
  Speaker 2: data centers, but like you know, people are pointing at
• 34:32
  Speaker 2: the Luddites as the historical context for what we're talking about.
• 34:36
  Speaker 2: And yeah, when you cause mass unemployment do to rapid
• 34:38
  Speaker 2: technological change without any plans to deal with it, the
• 34:42
  Speaker 2: population doesn't generally give you that rope.
• 34:46
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• 35:58
  Speaker 2: Well, Paul, we are the armstrong household needed to go
• 36:02
  Speaker 2: buy a personal laptop recently.
• 36:04
  Speaker 3: We don't have one anymore. My wife's Mac.
• 36:09
  Speaker 2: Leaped the bed a couple of years ago, and so
• 36:11
  Speaker 2: we went out and picked out a new Lenovo for
• 36:14
  Speaker 2: pushing nine hundred dollars. I was just trying to do
• 36:16
  Speaker 2: some research on how much this laptop cost a couple
• 36:18
  Speaker 2: of years ago. It looks like you could pick it
• 36:20
  Speaker 2: up for the six hundred and fifty to seven hundred
• 36:22
  Speaker 2: and fifty dollars range.
• 36:23
  Speaker 3: But across the board we.
• 36:24
  Speaker 2: Are seeing prices begin to move up on consumer hardware devices,
• 36:30
  Speaker 2: and the blame is again here on the AI trade.
• 36:33
  Speaker 2: You are suddenly competing for memory chips and different electronic
• 36:38
  Speaker 2: components with the likes of Google, Microsoft, and Facebook, which
• 36:42
  Speaker 2: is driving up prices and a few companies have had
• 36:45
  Speaker 2: to make that disclosure. So Nintendo bumped up the cost
• 36:48
  Speaker 2: of their Switch gaming device to four hundred and ninety
• 36:53
  Speaker 2: nine dollars. I was a fifty dollars increase in May.
• 36:57
  Speaker 2: Microsoft Microsoft's price seemed kind of crazy to me.
• 37:01
  Speaker 3: So the new.
• 37:02
  Speaker 2: Microsoft Surface Pro laptop starts at sixteen hundred dollars, which
• 37:06
  Speaker 2: is up sixty percent from where.
• 37:08
  Speaker 3: It was in the previous generation. It's one thousand dollars.
• 37:11
  Speaker 2: I don't know if you can blame all of that
• 37:13
  Speaker 2: on the AI move, but nonetheless you are starting to
• 37:16
  Speaker 2: see these things occur and more and more frequently. And
• 37:20
  Speaker 2: the latest iPhone is going to be the real test here,
• 37:23
  Speaker 2: as some are guessing that they would have to raise
• 37:25
  Speaker 2: the price to thirteen hundred dollars just to maintain profit
• 37:28
  Speaker 2: on it.
• 37:28
  Speaker 4: It's incredible the companies that have been the biggest beneficiars
• 37:31
  Speaker 4: that if you look at Micronstock or sk Heinex, Hennix,
• 37:35
  Speaker 4: they have just been going absolutely gangbusters, and you do
• 37:39
  Speaker 4: just kind of scratch your head a little bit on
• 37:42
  Speaker 4: some of the margins that they're commanding. There is such
• 37:45
  Speaker 4: a shortage in memory out there that you've seen these
• 37:47
  Speaker 4: companies just dramatically rise, and investors and analysts are having
• 37:51
  Speaker 4: difficulty trying to figure out what the valuation should be
• 37:54
  Speaker 4: for these memory chip companies going forward, because usually it's
• 37:57
  Speaker 4: been a real cycle of boom and bust for the
• 38:00
  Speaker 4: red chip industry. But perhaps this is a different phenomenon
• 38:03
  Speaker 4: that we're up against here.
• 38:04
  Speaker 3: We've got to take quick break.
• 38:06
  Speaker 2: Markets have largely turned negative for the day, with the
• 38:08
  Speaker 2: Nasdaq and SMP in the red. Here dows holding onto gains,
• 38:13
  Speaker 2: but just barely. We'll be right back with the full
• 38:15
  Speaker 2: market recap and more on the financial exchange.