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The Fed stands firm, but what comes next? · The Financial Exchange Show

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Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
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Speaker 2: Chuck, Mike, and Tucker with you here on a Thursday,
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Speaker 2: A lot to recap from yesterday's market events. We had
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Speaker 2: a FED meeting, we had a slew of major earnings
1:21
Speaker 2: reports after the close yesterday. And despite that, it's not
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Speaker 2: actually what we're gonna be leading off with. Rather, we're
1:29
Speaker 2: gonna be touching on the story out of Washington, d C.
1:33
Speaker 2: Where American Airlines Flight fifty three forty two was struck
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Speaker 2: by a or rather collided with We still don't know
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Speaker 2: exactly what happened, collided with an Army Blackhawk helicopter, and unfortunately,
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Speaker 2: it appears, based on the reports from local first responders
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Speaker 2: and federal responders as well, that everyone on board both
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Speaker 2: aircraft unfortunately is dead. At this point, we do not
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Speaker 2: know anything with regards to why this happened, the cause
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Speaker 2: of it exactly, you know, who is at faultier. I
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Speaker 2: caution anyone to basically, you know, not say anything with
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Speaker 2: regards to blame on this for quite some time, just
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Speaker 2: because NTSB investigations typically take a little bit of time
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Speaker 2: to unfold, and generally the standard protocol in this case
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Speaker 2: is that no one but NTSB personnel end up speaking
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Speaker 2: on this because no one else really knows what's going on,
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Speaker 2: so all of the speculation that unfortunately is out there
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Speaker 2: throughout social media really sucks and kind of sucks completely.
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Speaker 3: So well, we know, so far as it wasn't American
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Speaker 3: are Lines jet, it was carrying sixty passengers and four crew.
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Speaker 3: The Army black Hawk helicopter appears to be was carrying
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Speaker 3: three military members. And to your point, Chuck, earlier, it
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Speaker 3: is presumed now that this is no longer a rescue
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Speaker 3: operation but rather a recovery operation, and so devastating news
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Speaker 3: out of DC, and I think we should just probably
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Speaker 3: leave it there.
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Speaker 2: Yeah, this is not something that occurs very often.
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Speaker 3: Is the worst commercial crash since what like nineteen eighty, Yeah,
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Speaker 3: it was.
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Speaker 2: And when we talk about like mid air collisions of airplanes,
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Speaker 2: I cannot find anything on record involving a commercial airliner
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Speaker 2: and a mid air collision in the last seventy years.
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Speaker 3: It does, just now that you say that, Chuck, remind
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Speaker 3: me of the stories recovered of the near missus at
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Speaker 3: airports across the country last year. There were a few
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Speaker 3: of those reported, one involving a Southwest Airline flight. But
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Speaker 3: like you said, I don't think any of this is
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Speaker 3: due conjecture.
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Speaker 2: No, we no one knows anything.
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Speaker 3: No one knows anything at this stage, and we will
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Speaker 3: hear more to come. But obviously, just absolutely devastating news
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Speaker 3: this morning for nearly seventy people aboard these two aircraft.
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Speaker 2: So I'm sure we'll have more on this as we
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Speaker 2: learn more, but and TSB investigations take months, if not years.
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Speaker 2: I know everyone wants to know the answer now as
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Speaker 2: to why this happened. None of us have any clue. Yeah,
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Speaker 2: so let's actually respect the process and respect the people
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Speaker 2: that are grieving because of this, because otherwise, it's honestly
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Speaker 2: kind of sick to see people trying to speculate how
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Speaker 2: this might fit into their own story for what they
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Speaker 2: think happened. So let's do better than that. Let's talk
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Speaker 2: a little bit about the Federal Reserve and what they
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Speaker 2: did yesterday. They Mike, we speculated going into this that
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Speaker 2: this was going to be the most boring FED meeting
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Speaker 2: that we've seen in a while, and one that quite honestly,
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Speaker 2: I said it multiple times, like I'm not looking forward
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Speaker 2: to talking about this because nothing's gonna happen, and yet
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Speaker 2: I have to watch it because if you're in this
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Speaker 2: business and you're not watching it, what are you really
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Speaker 2: doing here? And sure enough, it was a complete waste
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Speaker 2: of my afternoon yesterday where the Fed, as expected, didn't
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Speaker 2: change interest rates at all, and then Jay Powell is
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Speaker 2: expected repeatedly. You could tell Jay was getting a little
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Speaker 2: bit edgy by the end of his press conference because
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Speaker 2: he kept getting questions about, well, if the Trump administration
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Speaker 2: does this, and on multiple occasions he was like, you
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Speaker 2: know that, I can't answer that question, right before giving
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Speaker 2: his standard like I can't answer that. So we really
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Speaker 2: got nothing new from yesterday. I didn't find anything particularly,
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Speaker 2: you know, insightful as to what Jay said. I took
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Speaker 2: a couple small quotes away, but like, nothing that's really
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Speaker 2: meaningful things that you know he noted. Look, he said, look,
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Speaker 2: we've got a new administration that's come in. There's some
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Speaker 2: elevated policy certainty as of today, but we expect that
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Speaker 2: to pass as we understand what they're going to be
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Speaker 2: doing more. So okay, like that's that's fine. He did say,
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Speaker 2: in very plain language, the same thing we've been saying
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Speaker 2: about the labor market. He said, we look at a
6:22
Speaker 2: large range of market data and labor indicators. It's a
6:25
Speaker 2: low hiring environment right now, where if you have a job,
6:28
Speaker 2: it's all good. That's actually his his exact words. But
6:32
Speaker 2: hiring rates have come down, and so if you don't
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Speaker 2: have a job, it's tough sledding, right, which is kind
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Speaker 2: of what we've been saying we're seeing in here, you know.
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Speaker 2: He he did also, and this is one that does
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Speaker 2: bother me about how Powell and his group have approached this.
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Speaker 2: He did mention you know, hey, he was asked a
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Speaker 2: question about how tighter financial conditions and he said, well, look,
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Speaker 2: the rates have moved up on the long end of
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Speaker 2: the curve. That could represent a tightening of finance conditions.
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Speaker 2: And yet when last year asked about if the long
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Speaker 2: end coming down represented loosening, he said no, So you
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Speaker 2: can't have it both ways. It can't be. Hey, it's
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Speaker 2: tightening when they go up, but it's not loosening when
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Speaker 2: they go down. And that still is something that bothers
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Speaker 2: me about how he approaches these press conferences.
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Speaker 3: Yeah, there's just been that what we've described as a
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Speaker 3: lack of consistency of thought, and that's agreed problematic. But
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Speaker 3: to your point, the crux of this conference, and the
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Speaker 3: very first question was all about Donald Trump. Unsurprisingly, I'll
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Speaker 3: quote from the very first question from Steve Liiseman from
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Speaker 3: CNBC three part question, has the president done this to you?
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Speaker 3: Has he made that demand? What is your response to that?
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Speaker 3: And third what effect does a president making these kind
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Speaker 3: of remarks have on policy? The remarks that he was
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Speaker 3: referring to was that the president said he'll demand that
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Speaker 3: interest rates drop immediately. And those were all the questions
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Speaker 3: that Jay Powell received throughout the entire day. He handled
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Speaker 3: them a apropriately. He did not lose his cool at
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Speaker 3: any point in time. But his answer was exactly the
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Speaker 3: right answer that you need to have is we don't
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Speaker 3: do that. This is not appropriate for me to comment on.
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Speaker 3: I don't talk politics. Basically, stop asking me these questions.
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Speaker 3: And so, you know, we debate, we talked about prior
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Speaker 3: to the show. To me, the only real thing that
8:26
Speaker 3: was going to come up was these reactions to Donald
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Speaker 3: Trump commentary. And uh, I don't think he messedep missteped
8:33
Speaker 3: on any of it.
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Speaker 2: No, I would tend to agree. And so I think
8:37
Speaker 2: what the one thing that I think you can take
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Speaker 2: from this and how they and how Powell approached. This is,
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Speaker 2: barring some kind of unexpected collapse in the economic data,
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Speaker 2: the FED is not going to have a cut at
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Speaker 2: either of their next couple of meetings. March is certainly
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Speaker 2: off the table.
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Speaker 3: They're saying eighty two hood according to the Chicago a
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Speaker 3: Mercantal exchange of no cut in the March meeting as
9:04
Speaker 3: of today, fifty seven chance of no cut at the
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Speaker 3: May meeting.
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Speaker 2: So I think Pow was trying to set the stage
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Speaker 2: here for yeah, the labor market's fine, we don't want
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Speaker 2: to see further deterioration, but also kind of saying, yeah,
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Speaker 2: the labor market is fairly stable from what we can
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Speaker 2: tell right now, and so absent a deterioration in the
9:23
Speaker 2: labor market where unemployment goes up meaningfully, from here, I
9:27
Speaker 2: think I don't know, Mike, you think if you if
9:29
Speaker 2: they see it start like clipping past like four and
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Speaker 2: a half, that's probably where I think they start to,
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Speaker 2: you know, make some moves.
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Speaker 3: I mean, even that would be a pretty big jump
9:37
Speaker 3: where are we now, for to one.
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Speaker 2: It would be, but so we're at four to one.
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Speaker 2: But I think in the context of, you know, some
9:46
Speaker 2: of the stuff that they tend to look at Remember,
9:49
Speaker 2: the Psalm rule is something that's frequently cited, and it
9:52
Speaker 2: was said by everyone back in the fall when when
9:54
Speaker 2: Jeremy Siegel was on TV yelling like, Hey, you got
9:56
Speaker 2: to do like emergency cuts right now. All right, Jeremy,
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Speaker 2: I'm just not going to let that go. But no,
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Speaker 2: it's you can't, right like, if if you're that hysterical
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Speaker 2: like you just you can't.
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Speaker 3: You deserve to be left out.
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Speaker 2: Sorry. So in this case, if we look at the
10:13
Speaker 2: unemployment rate in the United States and kind of where
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Speaker 2: it's been in the last year, the baseline readings that
10:20
Speaker 2: were below four basically fall off after the next couple
10:25
Speaker 2: of reports. The January one is the last one that
10:27
Speaker 2: was at three seven. Then you got a few three nines,
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Speaker 2: and then you're up to four. So the somber effectively,
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Speaker 2: the trigger for it to fire doesn't start to happen
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Speaker 2: until you get to like four and a half percent.
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Speaker 2: And so that's kind of what I'm looking at, is
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Speaker 2: like the evolution of the baseline labor market. We're no
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Speaker 2: longer comparing it to you know, back in eight point
10:47
Speaker 2: we're not comparing it to April of twenty three when
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Speaker 2: it was at three to four. It's we're comparing it
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Speaker 2: to May of twenty four when it was at four
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Speaker 2: point zero. So I think it would take a move
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Speaker 2: into that mid four range. Maybe you could like quip
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Speaker 2: with it a little, be like, Okay, if it gets
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Speaker 2: to like four to four, they start to get edgy
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Speaker 2: and start cutting. But I think that's kind of where
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Speaker 2: the threshold is in my mind now for where the
11:10
Speaker 2: Fed would say, yeah, there's been another deterioration in the
11:13
Speaker 2: labor market and we've got to make some moves. It's
11:16
Speaker 2: another you know, almost between a third and a half
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Speaker 2: of percent, I think is a fair range where they'd
11:21
Speaker 2: start to consider cutting again.
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Speaker 3: Yeah, look, we might be just you know, debating minor
11:27
Speaker 3: issues here. I think what I'm reminded of is that
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Speaker 3: Jerom Powell in particular and the Federal Reserve Board in general,
11:33
Speaker 3: has had a propensity for lower rates. And so I
11:36
Speaker 3: won't be shocked if they at least started talking about
11:38
Speaker 3: lower rates, should we get up to four to three
11:41
Speaker 3: on the unemployment rate instead of four or five. But
11:43
Speaker 3: we're kind of quibbling in minor details there. In either case,
11:46
Speaker 3: you're right, you do need to see a pretty market
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Speaker 3: increase in unemployment for this FED to get back on
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Speaker 3: the cutting chain.
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Speaker 2: Let's take a quick break here. When we come back,
11:56
Speaker 2: piece in market Watch talking about, hey, even with the
11:58
Speaker 2: FED having cut rates, why most Americans are saying they
12:01
Speaker 2: haven't felt any improvement in their borrowing costs. We'll talk
12:06
Speaker 2: about that when we return.
12:09
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12:35
Speaker 2: All right, Mike, So we got a piece from market
12:37
Speaker 2: Watch titled what Fed rate cut? Most Americans say they
12:40
Speaker 2: haven't felt the impact of the Central Bank's policies, especially millennials.
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Speaker 2: And look, the FED has cut their benchmark interest rate,
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Speaker 2: not pretty meaningfully, I mean like enough over the last
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Speaker 2: year and a half or so. And basically you've seen
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Speaker 2: the funds rates come down from where we had the
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Speaker 2: peak five and a quarter Now we're four and a quarter,
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Speaker 2: so about a one percentage point drop.
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Speaker 3: And when did they start again? That was Tim's cut
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Speaker 3: was in September.
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Speaker 2: Yes, okay, and so again it's been one percent in
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Speaker 2: the last three months, and when you look at the
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Speaker 2: survey data on this, it doesn't quite match up. Sixty
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Speaker 2: two percent of responding to a recent Morning Star I'm
13:24
Speaker 2: sorry morning consolet survey said interest rates are too high,
13:28
Speaker 2: which begs the question of, well, what what's the right
13:31
Speaker 2: interest rate? You know, and obviously it's whatever one lets
13:33
Speaker 2: me borrow in order to do what I want to do.
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Speaker 1: Correct.
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Speaker 2: That's down from sixty eight percent in June, but is
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Speaker 2: only a modest drop. Millennials apparently are especially sensitive eighty
13:43
Speaker 2: two percent saying that high rates have affected their household finances,
13:46
Speaker 2: compared with seventy five percent of adults over all.
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Speaker 3: Millennials especially sensitive is just a funny phrase.
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Speaker 2: It is, you know, like obviously, like look we're we're
13:56
Speaker 2: a little bit sensitive. Don't criticize us because you know
13:59
Speaker 2: we'll cry. Obviously me tphy here, I'll send it. It's
14:04
Speaker 2: in the mail. But look here, here's the thing. I
14:08
Speaker 2: think that the millennial piece is very explainable simply because
14:12
Speaker 2: the millennial generation right now, I think the low end
14:15
Speaker 2: is somewhere around like twenty seven or twenty eight, and
14:16
Speaker 2: the high ends like forty two forty three, I think
14:19
Speaker 2: is the where the demo is. Yeah, that's right in
14:23
Speaker 2: like the time when you are buying homes, cars and
14:25
Speaker 2: sending kids to school for the first time.
14:26
Speaker 3: And Chuck, would you like to know the thirty year
14:29
Speaker 3: mortgage rate back on September? I've got September first here
14:35
Speaker 3: according to Mortgage News Daily.
14:38
Speaker 2: Can I guess? Yeah?
14:39
Speaker 4: Uh?
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Speaker 2: Six close? Six to four?
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Speaker 3: And where is it now? Seven oh seven? I believe, yeah,
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Speaker 3: it is so. Look, it's a disconnect. But the Federal
14:53
Speaker 3: Reserve does not set long term interest rates, and mortgage
14:57
Speaker 3: rates are long term interest rates, and so it is confusing,
15:00
Speaker 3: I would imagine to the average person who does not
15:02
Speaker 3: pay attention to the Federal Reserve and what they are doing.
15:05
Speaker 3: But it is factually accurate to say that while the
15:08
Speaker 3: Fed has cut interest rates by a full percentage point,
15:10
Speaker 3: long term rates have moved up in the opposite direction,
15:13
Speaker 3: especially when it comes to probably the most common mortgage
15:16
Speaker 3: rate that people are used to.
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Speaker 2: Which is the thirty year.
15:19
Speaker 3: The rates that you have seen come down are the
15:22
Speaker 3: ones that we most typically affiliate with saving money market
15:26
Speaker 3: rates CD rates. All of those have reduced pretty rapidly,
15:30
Speaker 3: and you haven't seen you know, I'm sure you have
15:33
Speaker 3: seen credit card interest rates maybe come down a little bit,
15:36
Speaker 3: although there was some debate about that since the what
15:40
Speaker 3: was the government authority that was talking about new restrictions
15:43
Speaker 3: on credit cards? Oh the yeah, CFPB was talking about
15:47
Speaker 3: new rules in place, and so they didn't really lower rates.
15:50
Speaker 3: You saw rates come down on your deposits, and rates
15:53
Speaker 3: go up when trying to borrow money from most people,
15:56
Speaker 3: so their experience is correct. The problem is, I think
16:00
Speaker 3: a lot of us assume that when the Fed starts
16:02
Speaker 3: cutting rates, it's actually going to benefit us from a
16:04
Speaker 3: mortgage perspective, and that's not really how it works well.
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Speaker 2: And I think that this is also something where millennials,
16:12
Speaker 2: again just getting back to the millennial thing, just because
16:14
Speaker 2: I do think there's something interesting there. Millennials first exposure
16:17
Speaker 2: to the financial world was basically post nine, and so
16:24
Speaker 2: I think about the concept of anchoring and basically like
16:28
Speaker 2: what people were used to when they, you know, had
16:32
Speaker 2: their first experience with anything, and to someone who was
16:35
Speaker 2: born in you know, nineteen fifty five and you know,
16:40
Speaker 2: the basically anywhere in the fifties, you say, okay, like
16:43
Speaker 2: your first experience buying a house or buying a car.
16:47
Speaker 2: You were saying, Gee, I'm dealing with like ten percent
16:50
Speaker 2: plus interest rates on these items, right, So hey, something
16:54
Speaker 2: at like six percent isn't that bad, But you know
16:58
Speaker 2: it's it's again, it's based on like kind of those
17:00
Speaker 2: formative years and things like that. Whereas millennials said, oh,
17:03
Speaker 2: like my first time, you know that I had a
17:05
Speaker 2: job and was getting a paychecked, you know, savings accounts
17:08
Speaker 2: paid nothing, but mortgage rates were in the threes and fours.
17:11
Speaker 2: What gives? Why are they you know, six and seven
17:13
Speaker 2: percent right now? And I think that it's important in
17:17
Speaker 2: my mind to realize that, hey, probably both of those
17:21
Speaker 2: are skewed baselines to start from. In that Yeah, if
17:26
Speaker 2: your first experience was with mortgage rates in like the teens,
17:30
Speaker 2: that's not really the norm, and that's been proven out
17:32
Speaker 2: since then. Yeah. Likewise, if your first experience was with
17:35
Speaker 2: mortgage rates in the threes and fours, that's not really
17:38
Speaker 2: the norm, even though you know, did persist for ten years.
17:40
Speaker 2: In both cases, remember the effective federal funds rate even
17:44
Speaker 2: at the end of the nineteen eighties, nineteen eighty nine,
17:46
Speaker 2: I'm looking at it right now, we peaked back over
17:49
Speaker 2: ten percent. On the Fed Funds rate in nineteen eighty nine,
17:52
Speaker 2: So we spent a decade with mortgage rates basically ten
17:56
Speaker 2: percent plus because there's always a spread between the Fed
17:58
Speaker 2: Funds rate and mortgage and so I look at this
18:03
Speaker 2: and yeah, I think that a reasonable expectation, based on
18:09
Speaker 2: the long term trends of growth and inflation in the
18:13
Speaker 2: United States, is mortgage rates probably spend most of their
18:17
Speaker 2: time between five and a half and eight and a
18:19
Speaker 2: half percent. Is that reasonable?
18:23
Speaker 3: Yeah? Yeah, Again, you might get slightly below their first
18:27
Speaker 3: short period of time during recession, slightly above there for
18:30
Speaker 3: real high periods of inflation, but that is probably a
18:33
Speaker 3: more normalized expectation going forward.
18:35
Speaker 2: Yeah. I think that's where we need to adjust our
18:38
Speaker 2: our heads and our expectations too. And it's gonna take
18:41
Speaker 2: some time, like this will play out over the next
18:43
Speaker 2: five to ten years, and hey, we spend enough time
18:46
Speaker 2: there and we all get you know, used to that then.
18:48
Speaker 2: But I think this is where we're heading. I could
18:51
Speaker 2: be wrong, just because look that there is a case
18:54
Speaker 2: to be made if you know X, Y and Z happens. Okay,
18:56
Speaker 2: here's how you know, long term rates could go back lower,
19:00
Speaker 2: but it generally revolves around, Hey, the economic growth is
19:04
Speaker 2: going to have to be much worse in order for
19:06
Speaker 2: rates to get back to where they were.
19:09
Speaker 3: Yeah, so that might take some time. And yeah, adjusting
19:13
Speaker 3: to that new normal is what we'll take the most
19:15
Speaker 3: amount of time, I think.
19:16
Speaker 2: So that's what we're seeing on the interest rate front
19:20
Speaker 2: at the moment. We're gonna take a quick break here.
19:23
Speaker 2: When we come back, we got Wall Street Watch, and
19:25
Speaker 2: then we are getting right into earnings, because man, there's
19:28
Speaker 2: some juicy stuff from me yesterday earnings. When we return,
19:40
Speaker 2: like us.
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19:44
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19:54
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19:57
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20:00
Speaker 4: It's a busy day on Wall Street and Marcus today
20:02
Speaker 4: are in mixed territories. Investors digest yesterday's remarks from fitedchairman
20:07
Speaker 4: Jerome Powell, a flurry of big tech earnings and a
20:10
Speaker 4: fourth quarter GDP reading this morning that came in less
20:14
Speaker 4: than expected. At the moment, the Dow in SMP five
20:17
Speaker 4: hundred are both up by about a tenth of a percent,
20:20
Speaker 4: while the Nasdaq is down by about a quarter of
20:23
Speaker 4: a percent, or thirty seven points. Russell two thousand is
20:26
Speaker 4: up over one and a third percent, Tenure Treasure Reeled
20:31
Speaker 4: is down by four basis points at four point five
20:34
Speaker 4: to one percent, and crude oil up by about one percent,
20:38
Speaker 4: trading at seventy three dollars in thirty two cents a barrel.
20:41
Speaker 4: Taking a look at big tech this morning, where Microsoft
20:44
Speaker 4: shares down by six percent after it issued lighter than
20:47
Speaker 4: expected revenue guidance for the current quarter. Meta posted a
20:51
Speaker 4: record quarterly revenue where its sales jumped twenty one percent
20:55
Speaker 4: year over year, sending that stock up by four percent.
20:58
Speaker 4: Tesla's quarterly profit clime less than expected, However, CEO Elon
21:02
Speaker 4: Musk reiterated his vision of Tesla becoming the world's most
21:06
Speaker 4: valuable company through robotics and self driving vehicles. Tesla shares
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Speaker 4: up by one percent and one more from the tech front,
21:13
Speaker 4: where IBM shares jumping by thirteen percent after the company's
21:17
Speaker 4: adjusted earnings beat forecasts while its revenue came in line
21:21
Speaker 4: with expectations. Meanwhile, Ups down by seventeen percent after the
21:26
Speaker 4: Delivery Giant seated plans to have volumes from its largest customer,
21:30
Speaker 4: Amazon by the end of the year and guided for
21:34
Speaker 4: lower revenue elsewhere. Comcasts reported a decline in broadband and
21:38
Speaker 4: cable TV customers. Despite the pullback in subscribers, Comcasts reported
21:44
Speaker 4: a top and bottom line beat in the fourth quarter.
21:47
Speaker 4: Comcast shares down by ten percent. Signa fell well short
21:51
Speaker 4: of expectations as high healthcare costs hurt results in part
21:55
Speaker 4: of its insurance business, sending that stock down by eight percent.
21:58
Speaker 4: And after today's close bell, Apple and Visa will take
22:02
Speaker 4: their turn to post fourth quarter earnings. I'm Tucker Silvan,
22:06
Speaker 4: that's Wallstreet Watch, Mike.
22:08
Speaker 2: We had a bunch of earnings yesterday from some big names,
22:11
Speaker 2: and I want to focus first on Microsoft and Meta
22:15
Speaker 2: just because they're obviously like true tech companies. I know
22:18
Speaker 2: that Tesla gets lumped in, but this was an automaker
22:21
Speaker 2: and it's it's fundamentally different in terms of you know
22:23
Speaker 2: where AI fits in its importance as opposed to these
22:27
Speaker 2: new names. Which one of these do you want to
22:28
Speaker 2: start with? Microsoft or Meta?
22:30
Speaker 3: Let's get the bad news out first. Microsoft. I think
22:33
Speaker 3: it's all bad news.
22:33
Speaker 2: Mike.
22:34
Speaker 3: I agree, but Microsoft's shareholders are reading it as bad
22:37
Speaker 3: news today with the stock off by by six percent,
22:40
Speaker 3: So let's start there. Both of these companies invested tremendous
22:45
Speaker 3: amounts in AI over the last core. Thirty percent of
22:48
Speaker 3: their revenues are being spent on Capex right now, and Microsoft,
22:52
Speaker 3: in particular, investors seem to be a little bit more
22:56
Speaker 3: questioning on where that growth is going to come from.
23:00
Speaker 2: Here's the thing. So Microsoft had their quarter was fine.
23:05
Speaker 2: They were expected to produce three dollars and eleven cents
23:07
Speaker 2: to share. They came into three twenty three. Okay, nice
23:09
Speaker 2: little four percent beat. Revenue they beat by about one
23:14
Speaker 2: and a half percent. Okay, that's fine, Like that's nice.
23:18
Speaker 2: Revenue Guidance though, came in between sixty seven point seven
23:22
Speaker 2: billion and sixty eight point seven Analysts were expecting sixty
23:25
Speaker 2: nine point seven, so they came in a few percentage
23:28
Speaker 2: points light on revenue. Their revenue growth was also twelve
23:32
Speaker 2: point three percent year over year for the quarter. It's
23:34
Speaker 2: the slowest growth they've seen since the middle of twenty
23:37
Speaker 2: twenty three. They're a zerr cloud, which is where they
23:40
Speaker 2: don't exactly break out their AI revenue and things like that,
23:44
Speaker 2: but a lot of it's in their cloud is the
23:47
Speaker 2: assumption their Azure Cloud grew thirty one percent year over
23:51
Speaker 2: year for revenue, down from thirty three percent in the
23:54
Speaker 2: prior quarter. So you've got a slowing growth story on
23:58
Speaker 2: the revenue side of things overall. And so I think
24:02
Speaker 2: the question here is, Look, these are companies that are
24:06
Speaker 2: talking about ramping up capex thirty to fifty percent per year.
24:12
Speaker 2: If your revenue is not going to grow in line
24:16
Speaker 2: with that, your margins are going to be pressured. And eventually,
24:20
Speaker 2: remember this is all happening in the context of an
24:24
Speaker 2: economic expansion. What happens if the economic growth slows? And
24:29
Speaker 2: so I think there's a very clear question that is
24:32
Speaker 2: being asked there. And by the way, with Microsoft, here's
24:35
Speaker 2: one thing that I do find interesting right now is
24:38
Speaker 2: that if you look at Microsoft's forward price to earnings ratio,
24:43
Speaker 2: so basically, how expensive is Microsoft today relative to its
24:48
Speaker 2: projected next twelve months earnings. It's forward pe right now
24:54
Speaker 2: is sitting at twenty nine, which is still pricey. Okay,
24:57
Speaker 2: the S and P five hundred as a whole is
24:59
Speaker 2: at twenty two. The high for it in the last
25:02
Speaker 2: two years is thirty five. So when you talk about
25:07
Speaker 2: kind of like a high end like growth engine, like
25:10
Speaker 2: on the cutting edge of stuff. Microsoft is starting to
25:14
Speaker 2: not be priced in that way. It's it's starting to
25:17
Speaker 2: not be priced that way. It's it's not there yet,
25:20
Speaker 2: but from a relative price perspective, there's already been a
25:25
Speaker 2: meaningful shift in how the company is being priced in
25:28
Speaker 2: that it's trading six multiples lower than it was, uh,
25:32
Speaker 2: you know back in July of last year, and the
25:35
Speaker 2: stock is down about you know, ten twelve percent off
25:38
Speaker 2: that peak as well.
25:40
Speaker 3: Did they adequately, in your mind address the change that
25:45
Speaker 3: we learned about on Monday from Deep Seek Microsoft? Is
25:48
Speaker 3: my question there. You know, they've planned said they planned
25:50
Speaker 3: to spend a good eighty billion dollars on AAI data
25:53
Speaker 3: centers this fiscal year that ends in June. They're describing
25:57
Speaker 3: their you know, data centers, ask Bulow, shifting between training
26:01
Speaker 3: models and running them, and they were asked questions like,
26:04
Speaker 3: you know, what happens with this new innovation out of China.
26:08
Speaker 3: I think Zuckerberg probably spent a little bit more time
26:10
Speaker 3: on it than Nadela did. But how do you think
26:14
Speaker 3: they addressed that elephant in the room, Chuck.
26:17
Speaker 2: I think the point that they're making right now and yeah,
26:23
Speaker 2: we'll talk about this. There's a I guess theorem, or
26:29
Speaker 2: a there's a A I'm trying to think of the
26:33
Speaker 2: right words, there's a whatever, I'll just talk about it.
26:37
Speaker 2: There's something called Javan's paradox, which, if you've been on
26:40
Speaker 2: the Internet in the last three days, like everyone is
26:42
Speaker 2: freaking talking about it, to the point where I've had
26:43
Speaker 2: to mute it on social media because it's just so annoying.
26:46
Speaker 2: And Javan's paradox is the premise that it's generally been
26:50
Speaker 2: true in energy markets, which is, as you make something
26:55
Speaker 2: more efficient and cheaper, demand for it goes up rather
26:59
Speaker 2: than down. And this he came up with this back
27:02
Speaker 2: in England studying coal markets, because as the cost of
27:06
Speaker 2: producing steam engines came down and they became more efficient,
27:10
Speaker 2: you saw the proliferation of steam engines, railroads and things
27:12
Speaker 2: like that, and so it increased consumption of coal, even
27:16
Speaker 2: though it was in theory designed to decreased consumption of coal,
27:19
Speaker 2: because it became so much more efficient and cheaper to
27:22
Speaker 2: do so. And so everyone and their grandmother, including sat
27:25
Speaker 2: In Adela, is referencing this saying, hey, cheaper AI is
27:30
Speaker 2: going to mean that AI gets used more and that's
27:36
Speaker 2: basically what both he and Zuckerberg said yesterday. And I'm
27:41
Speaker 2: just wondering about the premise there in terms of Mike,
27:45
Speaker 2: when you think about and granted we're at the very
27:49
Speaker 2: early stages of AI, but for there's two segments where
27:55
Speaker 2: where we have to look at this. The first is,
27:57
Speaker 2: let's talk about companies, because they're the ones that are
27:59
Speaker 2: mostly you using AI in a paid sense right now,
28:01
Speaker 2: not just let me go to chat GPT and build
28:04
Speaker 2: like a funny picture of a horse riding a dolphin
28:07
Speaker 2: or something like that. Yep, companies, if the AI becomes
28:13
Speaker 2: much much cheaper, but it's still doing the same things,
28:17
Speaker 2: because that's the premise of the new model from deep
28:19
Speaker 2: Seek is not that it's better than the existing models,
28:23
Speaker 2: but it's basically the same production for a much lower cost.
28:27
Speaker 2: Do companies say, yes, that was the thing holding me up.
28:30
Speaker 2: Now we're gonna, you know, increase our AI spend by
28:34
Speaker 2: two x or three.
28:35
Speaker 3: X Microsoft and Meta. No, but small company that couldn't
28:40
Speaker 3: previously afford it?
28:41
Speaker 2: Maybe are there that many companies that couldn't previously afford it?
28:46
Speaker 3: Though again I don't think we know Chuck right like,
28:50
Speaker 3: but it's not that expensive right now.
28:51
Speaker 2: I guess like just as an example, Microsoft's copilot program,
28:55
Speaker 2: it's four hundred bucks a year. Yeah, there is there
28:58
Speaker 2: really like a small company out there that's like, no,
29:01
Speaker 2: I can't afford four hundred dollars a year. Because if
29:03
Speaker 2: there is, like what, no, the company is that, that
29:06
Speaker 2: wouldn't be the point that I would make. The point
29:07
Speaker 2: that I would make would be there are companies that
29:09
Speaker 2: couldn't build their own AI models. Only that was that
29:14
Speaker 2: was reserved to Chat, GPT, Microsoft, Meta, and Google previously.
29:19
Speaker 2: Now hypothetically you have more competition from those who could
29:23
Speaker 2: not previously afford to build their own AI models and
29:25
Speaker 2: run them in house. Gotcha that? Yes, totally agree, which
29:29
Speaker 2: in that sense actually results in more competition potentially for Microsoft.
29:33
Speaker 3: Which doesn't necessarily mean all bad news, right, Like maybe
29:35
Speaker 3: they need to leverage some of Microsoft data centers like
29:38
Speaker 3: we are talking about here.
29:40
Speaker 2: Sure, But.
29:42
Speaker 3: The thing that I keep going back to is, Okay,
29:44
Speaker 3: now you know, Microsoft, you were previously competing with Chat, GPT,
29:50
Speaker 3: partnering with them to Meta and Google. Hypothetically, now you're
29:54
Speaker 3: competing with darn near everybody. You know, You're competing with
30:00
Speaker 3: Mikey and his in his parents' garage, hypothetically in the margins. Look,
30:03
Speaker 3: that's a very different ballgame.
30:05
Speaker 2: I don't know. So that's on the enterprise side, but
30:09
Speaker 2: for individual users, it really struck me that for the
30:15
Speaker 2: vast majority of individuals, like we talked about AI a
30:19
Speaker 2: lot on this the show, do the vast majority of
30:24
Speaker 2: people in the United States use AI on a regular basis?
30:28
Speaker 3: Probably not, and those that do probably don't pay for
30:31
Speaker 3: it currently.
30:32
Speaker 2: So I guess where I'm going with this is, I
30:36
Speaker 2: don't know that there is this huge latent demand for Yes,
30:42
Speaker 2: like we need to use AI and we're willing to
30:44
Speaker 2: pay for it. It's not like coal in that respect, right,
30:50
Speaker 2: you know, Like I'm not sure that AI is coal,
30:54
Speaker 2: something I thought I would never say, but this is
30:57
Speaker 2: where we are in the year twenty twenty five. I'm
31:00
Speaker 2: sure that artificial intelligence is coal. So I think that
31:05
Speaker 2: as I try to figure out where this is going
31:08
Speaker 2: to go, the the big companies are all saying, oh,
31:13
Speaker 2: this is fine, this is just going to increase the
31:15
Speaker 2: demand for AI, and that very well may be true.
31:18
Speaker 2: But I'm skeptical of the premise to begin with, because
31:22
Speaker 2: just because something gets cheaper doesn't mean that more if
31:24
Speaker 2: it gets used all the time. There's plenty of things
31:26
Speaker 2: that have gotten cheaper and still don't get used a lot. Babies, Mike,
31:32
Speaker 2: three D printing gotten a lot cheaper. Anyone sitting out
31:35
Speaker 2: there being like, oh, like three D printed revolutionizing the world? Yeah, agreed.
31:39
Speaker 2: Now there's other things that have gotten way cheaper and
31:42
Speaker 2: they have become used, you know, way more. The Internet
31:44
Speaker 2: is a great example of that, and the amount of
31:47
Speaker 2: data that you can move around the Internet now is
31:49
Speaker 2: exponentially more than what it was in the nineties, and
31:51
Speaker 2: yet the cost is basically the same in a lot
31:53
Speaker 2: of cases, not not even the same on a per
31:55
Speaker 2: bit basis, it's way lower. So yeah, I'm open to
31:59
Speaker 2: the idea of it, but I'm not sure it's proven.
32:01
Speaker 2: And even if it is, what we end up seeing.
32:05
Speaker 2: The thing that keep coming back to you, how do
32:06
Speaker 2: you know what the companies that are currently in the
32:08
Speaker 2: lead are going to be in the lead in the future.
32:10
Speaker 2: That's what this going this week was all. That's what
32:13
Speaker 2: this week is all about. Also. So I don't know,
32:17
Speaker 2: it's too early to know anything for sure, but I
32:21
Speaker 2: think that the answer eventually has to be more than
32:24
Speaker 2: just well, this is gonna, you know, have more demand
32:27
Speaker 2: for AI. Okay, that's that's kind of like saying that
32:31
Speaker 2: you've got an exercise idea and the total market for
32:34
Speaker 2: you know, people buying exercise equipment is x in the world. Okay, well,
32:38
Speaker 2: why are you going to actually get the people to
32:40
Speaker 2: buy your stuff.
32:41
Speaker 3: I didn't see much of an acknowledgment of the change
32:43
Speaker 3: since Monday, and it seemed to be much more let's
32:47
Speaker 3: power ahead with existing plans and that's fine for now,
32:50
Speaker 3: but I think we'll continue to be called into question.
32:53
Speaker 2: The rest of the year. The next three quarters that
32:54
Speaker 2: we're going to get reported, I think are gonna be
32:57
Speaker 2: huge because that's when they're actually gonna see how the
32:59
Speaker 2: demand and is shifting and you know how they're there,
33:04
Speaker 2: Whether we're seeing additional developments like deepseek. I think that's
33:06
Speaker 2: where we're going to get some some information, but right
33:09
Speaker 2: now it's it's just too early to know. Just take
33:11
Speaker 2: a quick break. A little bit more on this, including
33:13
Speaker 2: SoftBank with some more money that they want to throw
33:16
Speaker 2: into AI. We'll talk about that and a little bit
33:19
Speaker 2: more on META when we return.
33:22
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33:42
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34:42
Speaker 2: Mike, I want to talk a little bit just about
34:44
Speaker 2: Metas earnings as well. I know we covered the numbers
34:46
Speaker 2: for Microsoft. So Meta had a nice quarter. Really earnings
34:51
Speaker 2: beat by about twenty percent, so a big beat on earnings.
34:54
Speaker 2: Revenue came in about two percent higher than expected, so
34:58
Speaker 2: you know, some good numbers there. What's interesting to me
35:02
Speaker 2: is for Q one, they guided that revenue was gonna
35:05
Speaker 2: be light by about two and a half to three percent,
35:09
Speaker 2: and they also for the full year guided that they're
35:13
Speaker 2: spending their total expenses were gonna come in like ten
35:16
Speaker 2: to fifteen percent above where they were expecting. And so
35:20
Speaker 2: I guess I'm trying to reconcile this now where Okay,
35:23
Speaker 2: So you're telling me that you're gonna make less in
35:25
Speaker 2: terms of overall sales, your expenses are going to be
35:29
Speaker 2: higher than you expected, and yet your stock is up
35:32
Speaker 2: two percent. How do I reconcile that.
35:35
Speaker 3: Yeah, I don't know how to reconcilidate either, Chuck. And
35:38
Speaker 3: I'm also a little bit worried about We've talked about
35:42
Speaker 3: the term AI washing before, right, and for those unfamiliar,
35:45
Speaker 3: it's the idea that, hey, I have this product that
35:47
Speaker 3: you wouldn't normally describe as artificial intelligence, are benefiting from AI,
35:52
Speaker 3: but we're gonna say it's benefiting from AI because that's
35:54
Speaker 3: the buzzword of the day. And they do keep growing
35:58
Speaker 3: their revenue, but it's really tough unless you are on
36:02
Speaker 3: the ground at Meta, and even then to determine, hey,
36:05
Speaker 3: how much is our advertising revenue growing because of advances
36:08
Speaker 3: that we're making an artificial intelligence versus how much would
36:12
Speaker 3: our revenue be growing on the advertising side anyway? And
36:15
Speaker 3: I get concerned about that a little bit. From Meta's perspective,
36:18
Speaker 3: I do too.
36:19
Speaker 2: I did read so that there's a fascinating case for
36:22
Speaker 2: why Meta may benefit from basically any kind of AI
36:26
Speaker 2: developments that are going on, and the premise of it,
36:29
Speaker 2: just for anyone listening is Meta really ran into trouble
36:32
Speaker 2: a few years ago when Apple basically locked down their
36:37
Speaker 2: ecosystem as far as sharing personal data, which is a
36:39
Speaker 2: great thing from a data security perspective. To be fair,
36:43
Speaker 2: Apple just takes the data and uses itself from zone
36:45
Speaker 2: ad networks, which is not so great. Googled did a
36:48
Speaker 2: similar thing on their platform as well, which is why
36:50
Speaker 2: Meta is trying to make meta happen so badly, because
36:53
Speaker 2: they want their own hardware so they're not locked out
36:55
Speaker 2: of it. But if you are a company trying to
36:58
Speaker 2: buy ads, the reason why the thought of what's called
37:02
Speaker 2: inference in AI basically being able to piece things together
37:05
Speaker 2: and figure out how they fit together, is Hey, if
37:08
Speaker 2: we have a user that's on our platform and we
37:13
Speaker 2: can see the ads that they are clicking on on
37:16
Speaker 2: our platform, then we can use AI to build a
37:19
Speaker 2: better model of Okay, when we get this anonymized data
37:22
Speaker 2: that's coming in, can we figure out ways to match
37:24
Speaker 2: it up so that we can deliver ads better. That's
37:26
Speaker 2: the premise for Meta at least is can we make
37:29
Speaker 2: the ads pay off better so we can attract more
37:31
Speaker 2: of the ad market. I understand it, I'm not sure
37:34
Speaker 2: if it will work. Is I think what you're saying
37:37
Speaker 2: and I agree with that proce.
37:38
Speaker 3: Yes, yeah, that's kind of where I land on it.
37:40
Speaker 2: But so far.
37:40
Speaker 3: I mean, look, it's in spite of stupid things they've
37:44
Speaker 3: done around the metaverse and things like that. It's pretty
37:46
Speaker 3: tough to sit from an outsider's perspective and say that
37:49
Speaker 3: this company isn't executing on all ends right now.
37:53
Speaker 2: Yeah, they've been really good the last few years. This
37:56
Speaker 2: is the first time in a while where I kind
37:58
Speaker 2: of looked at the numbers projected out they gave us
38:00
Speaker 2: and said, yeah, that's that's look at a little little
38:03
Speaker 2: dodgy there. But again, a little dodgy is not like, hey,
38:06
Speaker 2: you're going out of business. It's much more are you
38:09
Speaker 2: wasting a bunch of money again, and it's not going
38:11
Speaker 2: to show up in revenue. We'll see quick break here.
38:14
Speaker 2: We got our two coming up with a whole bunch more,
38:17
Speaker 2: including Tesla earnings on the Financial Exchange