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Is Trump getting a better economy than the last time he was elected? · The Financial Exchange Show

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Speaker 1: Armstrong and Mark Vandetti.
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Speaker 2: Good morning and welcome back to the Financial Exchange. If
1:14
Speaker 2: you were hoping to close out the year with just
1:18
Speaker 2: a little bit of holiday calm in between the Christmas
1:21
Speaker 2: and New Year's holidays, then I've got bad news for you.
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Speaker 2: You might have gotten that yesterday out of markets, but
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Speaker 2: today you've got a strong downward move with the NASDAC
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Speaker 2: off nearly two percent. Will be covering a number of
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Speaker 2: different stories today about markets and their volatility in the
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Speaker 2: closing days of twenty twenty four, but it is Mike Armstrong,
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Speaker 2: Mark Fandetti and Ben Kitchen with you on a Friday
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Speaker 2: ahead of the New Year's holiday, one of the last
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Speaker 2: few shows of twenty twenty four. Good Morning, Market Morning.
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Speaker 3: Ben Morner, Michael So kicking things off.
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Speaker 2: Unless there's anything that's catching your eyes about markets, I
1:57
Speaker 2: don't see anything specifically that tells me why the NASDAC
2:02
Speaker 2: might be struggling. You've got some AI news from Open AI,
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Speaker 2: You've got some you know, obviously, interest rate moves that
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Speaker 2: you're seeing out of the bond market. But when you
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Speaker 2: have as little volume as you're talking about on a
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Speaker 2: day of trading like this, I tend to not read. One,
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Speaker 2: you should never read too much into what's a single
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Speaker 2: day with markets and what that might mean. But two,
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Speaker 2: when it's happening on a holiday like this, it's tough
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Speaker 2: to read too much at all into it because there's
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Speaker 2: probably not a whole lot of volume that's driving this
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Speaker 2: thing one way or another. But we'll be diving in
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Speaker 2: throughout the next couple of hours into markets and what
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Speaker 2: we're seeing out there, so stay tuned. I do want
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Speaker 2: to start on this Bloomberg piece regarding the Trump tariff threats,
2:45
Speaker 2: and this has been really most of what people have
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Speaker 2: been talking about since Donald Trump was elected. Certainly there's
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Speaker 2: policy on tax changes, policy on immigration, but from an
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Speaker 2: economic standpoint, the one that seems easiest to implement and
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Speaker 2: most likely, at least in my view, is all about tariffs.
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Speaker 2: And uh, I'm interested to ask both of you. I
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Speaker 2: have heard very little from individual consumers about fear of
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Speaker 2: tariffs and their implementation of what could mean from them,
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Speaker 2: But maybe that's just my you know, my group of
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Speaker 2: people that I talked to. Have either of you heard
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Speaker 2: anything from family members, friends like oh, yeah, I'm thinking
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Speaker 2: about buying a car or a TV, and I'm going
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Speaker 2: to move that purchase forward because I'm worried about what
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Speaker 2: tariffs could look like in twenty twenty five, because I
3:31
Speaker 2: have generally not heard that.
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Speaker 4: I haven't heard it from anyone in particular, but I
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Speaker 4: just keep seeing it in the echo chamber that is
3:38
Speaker 4: X dot com or formerly Twitter.
3:40
Speaker 2: Sure, yeah, mark anything on your end.
3:43
Speaker 3: No, And I don't care what they think, So it's yeah,
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Speaker 3: I discount heavily anything the family.
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Speaker 2: I wasn't listening anyway, so yeah, yeah.
3:51
Speaker 3: They may mumbled something about hardship blah blah blah, can
3:54
Speaker 3: you help us out? Blah blah blah, and I just
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Speaker 3: moved on.
3:58
Speaker 1: Yeah.
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Speaker 3: Yeah, But I'm honestly consumers are your your typical consumer,
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Speaker 3: not your purchasing manager at a big company, not your treasurer,
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Speaker 3: not your economists, not your.
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Speaker 2: Financial journalist financial exchange.
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Speaker 3: Not your financial commentator like we do here, or certainly
4:16
Speaker 3: not your trained economist. They're not plugged in. They might
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Speaker 3: have heard the word tariff's here there because Trump says
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Speaker 3: it every third word, tarris, tariffs, tariffs, What do you need
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Speaker 3: about trail here tariffs? What do you know about fentyl trade?
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Speaker 2: Tariffs?
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Speaker 3: So they're vaguely familiar. That he likes them, but I
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Speaker 3: don't think they have the foggiest of what they are,
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Speaker 3: and they could be they could they could be excused
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Speaker 3: for not knowing, because it does get complicated, and journalists
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Speaker 3: do a horrible job of explaining what they are and
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Speaker 3: what their impact could be. And moreover, we've never had
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Speaker 3: the experience of imposing them broadly in blanket fashion the
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Speaker 3: way that Trump is proposing, if he's even serious, So
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Speaker 3: your head could be spinning in any number of directions
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Speaker 3: for any number of reasons.
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Speaker 2: This, I would agree, and generally thinking, generally speaking, I
5:03
Speaker 2: don't see much reason for consumers to make decisions about
5:07
Speaker 2: this today because it is largely unknowable. But what you
5:10
Speaker 2: are seeing you know fairly clearly. And I've been trying
5:13
Speaker 2: to gauge how significant this is, but there's a few
5:15
Speaker 2: measures here that make it seem that, Hey, companies globally
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Speaker 2: are reacting to this in some way, shape or form.
5:25
Speaker 2: Would be global companies who import or who export products
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Speaker 2: to the United States are saying, Hey, I'm going to
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Speaker 2: do anything that I possibly can to get my goods
5:34
Speaker 2: into the US before tariffs are implemented. And I think
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Speaker 2: that's logical that makes sense. You have certainty about what
5:39
Speaker 2: the tariff rate is, if any today and there's uncertainty
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Speaker 2: about that future. But the Bloomberg has a piece today
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Speaker 2: where they interviewed, you know, the owner of a wine
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Speaker 2: exporter in Germany. They interviewed a furniture manufacturer in China.
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Speaker 2: And you know, in many cases you have companies saying, hey,
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Speaker 2: you know, regardless of how much it's it cost me
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Speaker 2: to rush this into the United States, if I need
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Speaker 2: to fly it rather than putting it on a ship,
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Speaker 2: I want to get this product into the US ahead
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Speaker 2: of implementation of tariffs and at least lock in that
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Speaker 2: certainty before things go into place with a new incoming
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Speaker 2: Trump administration.
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Speaker 3: Oh yeah, totally different calculus. If you are I'll just
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Speaker 3: call it the purchasing manager whatever the right job title
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Speaker 3: is for a big company that relies on imported intermediate
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Speaker 3: goods like most big manufacturers do, if you have a
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Speaker 3: choice of place in an order now versus two months
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Speaker 3: from now. Much like people hedge financial instruments using options,
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Speaker 3: this is just a hedge. If there were an option
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Speaker 3: that allowed you to hedge a price increase on a
6:43
Speaker 3: particular good and ind you can do that in the
6:45
Speaker 3: case of commodities, but you probably can't do that in
6:48
Speaker 3: the case of I don't know, air bag components. If
6:51
Speaker 3: you're putting cars together here in the US, there's no
6:55
Speaker 3: option contract on that particular intermediate good, so your only
6:59
Speaker 3: alternative is just buy a ton of it in advance.
7:03
Speaker 3: It's not optimal, But what else? What are you going
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Speaker 3: to do?
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Speaker 2: What do you think? Do you suppose this shows up?
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Speaker 2: I mean, it certainly will show up in Q one
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Speaker 2: earnings in some way, shape or form, but you know,
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Speaker 2: it doesn't seem like it would be a massive hit
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Speaker 2: two earnings. If companies are saying, yeah, we're stocking up
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Speaker 2: on inventory, they likely have the space to do it,
7:22
Speaker 2: and you know, hey we're warehousing a little bit more
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Speaker 2: inventory than usual. Yeah, that might be a quarter or
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Speaker 2: two hit to things. But assuming that plays out over
7:30
Speaker 2: the course of the year, I don't suspect that investors
7:32
Speaker 2: would react negatively to that.
7:34
Speaker 3: It should pull some demand forward. Consumers may be reacting,
7:38
Speaker 3: though I suspect they're not as much in the loop
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Speaker 3: because it's on the margin, not as big a component
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Speaker 3: of our budgets. But it could pull some demand forward. Mike,
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Speaker 3: and we'll see it show up in inflation for goods.
7:50
Speaker 3: Maybe not headline inflation, but when you break it down,
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Speaker 3: there's goods inflation, and there are measures of supply chain stress.
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Speaker 3: This stuff's all going to get here. It's got to
7:58
Speaker 3: come in through ports and on rails and so forth.
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Speaker 3: So we may see those measures tick up. If people
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Speaker 3: are acting in anticipation of blanket tariffs.
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Speaker 2: Yeah, they Again, it all just feeds into that big
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Speaker 2: giant equation of the US economy. Right, you're hoping that
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Speaker 2: interest rates go down. Well this you know, even the
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Speaker 2: threat of tariffs. Sure, we all know that tariffs ultimately,
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Speaker 2: you know, all else equal, tariffs are inflationary. They raise
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Speaker 2: prices for consumers. But even the threat of those tariffs
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Speaker 2: could have the impact. Like we do about inflation expectations, right,
8:30
Speaker 2: when you have expectations that prices are going to go up,
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Speaker 2: you move purchases forward and therefore sometimes cause inflation. If
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Speaker 2: you expect that prices are going to go up because
8:39
Speaker 2: of tariffs, logically you might pull that purchase forward and
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Speaker 2: buy something that you weren't otherwise planning on purchasing, thereby
8:46
Speaker 2: driving up that inflation rate higher. Thereby, you know, making
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Speaker 2: the incoming Trump administration struggle a little bit more with
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Speaker 2: the implementation of well, the hope for lower interest rates
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Speaker 2: that might not come to pass.
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Speaker 3: What bothers me is that he and his advisors, maybe
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Speaker 3: it's mostly his advisors, are deliberately creating uncertainty around what
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Speaker 3: he believes in what he's going to do. This is
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Speaker 3: so bad no matter what you think of it. You
9:08
Speaker 3: may think he's great. Tariffs are a good idea. Let's
9:10
Speaker 3: stick it to all those foreigners. Let's make everything here.
9:13
Speaker 3: That's a legit argument. Honest people can disagree. But the
9:16
Speaker 3: uncertainty and the drama surrounding all this. One day he's
9:21
Speaker 3: taunting Canada, the next day he's provoking Panama, and the
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Speaker 3: third day, or maybe the afternoon of the second day,
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Speaker 3: he's threatening Denmark over the over Greenland. All of this
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Speaker 3: creates economic and geopolitical uncertainty, which in turn feeds into
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Speaker 3: capital markets. It creates volatility. None of this is good
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Speaker 3: for economic growth. You could say you agree with all
9:43
Speaker 3: of his ends, and I'm talking Trump now, which we're
9:45
Speaker 3: going to be doing over the next four years. Presumably
9:48
Speaker 3: all this uncertainty Mike will increase volatility and probably slightly
9:53
Speaker 3: lower returns. If we want to bring this back to
9:57
Speaker 3: capital markets, it's forgive me, but it's totally unn The
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Speaker 3: world is uncertain enough.
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Speaker 2: Let's take a quick break. When we come back, I
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Speaker 2: want to dive a little bit more into the state
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Speaker 2: of the economy that Donald Trump is going to be inheriting.
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Speaker 2: We've talked at length about this, but it is way
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Speaker 2: way different than the economy he inherited in twenty seventeen
10:17
Speaker 2: when he last took office. Let's say quick break. We'll
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Speaker 2: talk about that next. Here on the Financial Exchange.
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11:20
Speaker 2: Mark. We've got a piece here about the incoming Trump
11:24
Speaker 2: administration and the state of the economy, and quote Biden's
11:27
Speaker 2: gift to Trump. It's a it's an op ed from
11:29
Speaker 2: the market Watch here. And before we get in there,
11:32
Speaker 2: I want to just talk about the state of the economy,
11:36
Speaker 2: you know, twenty sixteen, twenty seventeen compared to twenty twenty four,
11:39
Speaker 2: twenty twenty five. And I won't ask you to quote
11:41
Speaker 2: specific statistics because I didn't ask you to prepare for that.
11:44
Speaker 2: But how would you generally describe one versus the other?
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Speaker 2: If you if you would here in the state of
11:50
Speaker 2: the economy, that's what.
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Speaker 3: You gotta You gotta agree on how we're going to
11:53
Speaker 3: keep score. Does everybody agree that unemployment, inflation and GDP
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Speaker 3: are the most important thing for the most part, the
12:01
Speaker 3: trinity of macro economics if you like, and if you
12:06
Speaker 3: do agree on that, then we can look at each
12:09
Speaker 3: relative to history, relative to when Trump's first term ended,
12:13
Speaker 3: or relative to the future. We could sayah, we're gonna
12:15
Speaker 3: start now, this how we're gonna keep score. And then
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Speaker 3: the the numbers are simple two, three, and four. Remember those.
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Speaker 3: See the Fed's choice inflation measure year over year is
12:25
Speaker 3: in the twos. It's not quite a two, but it's
12:28
Speaker 3: it's close.
12:28
Speaker 1: Right.
12:28
Speaker 2: Mike like to describe it as closer to three than two,
12:32
Speaker 2: but nothing, right.
12:33
Speaker 3: Yeah, two to two to three, that's that's fair. Two
12:35
Speaker 3: to three because I don't think the Fed's done a
12:37
Speaker 3: great job here either, so I'm willing to err on
12:39
Speaker 3: the side of penalizing them. So we're in the two
12:41
Speaker 3: to three range on inflation, unemployment fours, very low fours.
12:47
Speaker 3: So I'm going out order here. I said, go two, three, four,
12:49
Speaker 3: and I went two to four. Back to the three,
12:52
Speaker 3: which is GDP real that is, after inflation over the
12:55
Speaker 3: last year, that's about what the economy in total has
13:00
Speaker 3: grown at. So that, to me, relative to four years ago,
13:04
Speaker 3: is really good. Biden inherited. And I don't necessarily credit
13:08
Speaker 3: him for this, by the way, there are just natural
13:10
Speaker 3: forces at work here, right, But Biden inherits that.
13:13
Speaker 2: And there's trillions of dollars in government barlway.
13:15
Speaker 3: Yeah, which Trump did too, and Bush did and Obama
13:19
Speaker 3: did before him, and you know, so they're all equally
13:23
Speaker 3: culpable when it comes to our debt problem. I think,
13:26
Speaker 3: so if you're keeping score, let's forget about the past
13:29
Speaker 3: and let's look ahead two in four years. When the
13:31
Speaker 3: politicians ask are you better off now than you were
13:34
Speaker 3: two or four years ago, which inevitably they will, you
13:38
Speaker 3: gotta agree on how we're going to scorekeep that and
13:40
Speaker 3: I would prefer to use those three measures, even though
13:43
Speaker 3: they're imperfect. So, yeah, Trump's getting a solid handoff, if
13:47
Speaker 3: you like Mike. I don't think's any denying that.
13:51
Speaker 2: There's no denying that. I think what will be a
13:54
Speaker 2: challenge is he's getting a decent handoff with an economy
13:57
Speaker 2: that's clearly not in a recession, inflation that has has
14:00
Speaker 2: come way more under control than it was two years ago.
14:04
Speaker 2: And yet I would describe this economy as one without
14:07
Speaker 2: a lot of slack. Maybe, yeah, things are tight, it's
14:13
Speaker 2: it's markedly better, I guess, and tighter than it was
14:17
Speaker 2: in twenty sixteen when he last entered off.
14:19
Speaker 3: And why do we say that, by the way, because
14:21
Speaker 3: inflation is elevated on employments, low inflation is elevated. Therefore
14:26
Speaker 3: things are probably tight. Sorry, I just wanted to.
14:27
Speaker 2: Expand economies already want to expand.
14:29
Speaker 3: On Why why you and I feel that way?
14:31
Speaker 1: Good?
14:31
Speaker 3: Sorry?
14:31
Speaker 2: Right, the economy is already growing at a three percent yeah, right,
14:35
Speaker 2: way above thirty sixteen twenty seventeen, and so I think
14:38
Speaker 2: we can agree. Yeah, the Trump administration is walking into
14:41
Speaker 2: an economy that is certainly not in any sort of freefall,
14:45
Speaker 2: and yet he's also inheriting one that arguably, you know
14:51
Speaker 2: who knows, could be peaking. It is at a pace
14:53
Speaker 2: at which it's going to be difficult to stimulate further
14:57
Speaker 2: when you've already got you know, deficit levels to GDP
15:02
Speaker 2: running at six seven percent to spark further growth, what
15:06
Speaker 2: do you need to do expand that to ten percent?
15:09
Speaker 2: It's a question mark that I think I have here
15:11
Speaker 2: of Yes, the Trump administration is walking into an economy
15:14
Speaker 2: that I think would be relatively attractive, and yet it's
15:19
Speaker 2: going to be tremendously challenging to keep it going, especially
15:23
Speaker 2: if part of your goal is to control government spending
15:25
Speaker 2: and get you know, foreign countries to negotiating table on trade.
15:29
Speaker 2: They're the number of challenges that they are going to
15:31
Speaker 2: face here, and so that's where I know somewhat take
15:34
Speaker 2: issue with this piece from Marketwatches. Oh, you know you're
15:38
Speaker 2: getting handed this golden opportunity. Well kind of if he
15:42
Speaker 2: wants to, you know, run the exact same economy that
15:45
Speaker 2: Biden did and grow deficits at an unrealistic pace and
15:48
Speaker 2: keep all of the you know, massive government handouts to
15:53
Speaker 2: green energy and stuff like that on the table, then yeah,
15:55
Speaker 2: I guess you can continue to keep pace with manufacturing.
15:58
Speaker 2: But assuming that's not what your voter brought you in for,
16:01
Speaker 2: it's going to be challenging to stimulate growth in the
16:03
Speaker 2: same way, especially with the policy priorities that you want
16:07
Speaker 2: to put in, such as immigration reform and tariff reform.
16:11
Speaker 3: So, yeah, you don't really need to stimulate growth here,
16:13
Speaker 3: to be clear. We just want to keep it growing
16:15
Speaker 3: above trend if possible without stoking inflation, and historically those
16:21
Speaker 3: have been nearly impossible goals because they're in perfect tension.
16:25
Speaker 3: Don't screw it up, Mike would be the should be
16:28
Speaker 3: their motto, and so far they're they're doing kind of
16:32
Speaker 3: just the opposite. And I'm not being critical of the
16:35
Speaker 3: ends here. I don't disagree. We need to put a
16:38
Speaker 3: stop to unfair practices by China, so we can go
16:42
Speaker 3: down the list. I don't want to get taken off
16:44
Speaker 3: track there, but it's the uncertainty that's being injected into
16:48
Speaker 3: people's decision making right now that gives me real pause.
16:52
Speaker 2: Well, what I would like to hear a little bit
16:54
Speaker 2: more of is the honest assessment of it. Of things
16:58
Speaker 2: like what Elon Musk posted to Twitter back in I
17:01
Speaker 2: think September or October was basically an ask of the
17:04
Speaker 2: American public saying, look, we're trying to completely upend how
17:08
Speaker 2: we do trade. We're trying to completely upend how we
17:11
Speaker 2: do a number of different things. Government spending sends to
17:14
Speaker 2: be the one that Elon Musk is focusing on, and
17:17
Speaker 2: he laid it out pretty clearly. It's going to be challenging, messy,
17:21
Speaker 2: and might be painful for a period of time. And
17:24
Speaker 2: I think that that's the prob that's the part that
17:26
Speaker 2: I think the Trump administration is having a tough time
17:29
Speaker 2: admitting to is, Hey, we can pull off all of
17:32
Speaker 2: this massive change without asking for any sacrifice from equity
17:36
Speaker 2: markets or the overall economy. And the reality is, if
17:39
Speaker 2: you want to deport a few million people, completely change
17:42
Speaker 2: how we do immigration in this country, upend how we
17:45
Speaker 2: do trade, get Chinese to the negotiating table, control inflation,
17:49
Speaker 2: and cut taxes, which you know those have all been
17:53
Speaker 2: I think, big things that the Trump administration has promised.
17:56
Speaker 2: You're not going to be able to do that without
17:58
Speaker 2: some sacrifice.
17:59
Speaker 3: No, no, you can't have all those things right. You
18:01
Speaker 3: can't have high growth, a week dollar, low interest rates.
18:06
Speaker 3: And maybe I'm leaving out a few things because again,
18:09
Speaker 3: these outcomes are not compatible. These goals are in nearly
18:14
Speaker 3: perfect tension. Some of the explanations as to why get
18:17
Speaker 3: a little too abstract. We don't need to get into them.
18:20
Speaker 3: Just to take our word for it. These outcomes are
18:23
Speaker 3: intention You can't have your cake, eat it too, put
18:26
Speaker 3: some of the fridge, pull it out, and need it
18:28
Speaker 3: again tomorrow. Which is what and that's Trump things And.
18:30
Speaker 2: That's where I struggle, That's where I struggle with it
18:32
Speaker 2: is which of these are fundamentally serious, Which of these
18:35
Speaker 2: are actually going to be looked at, Which of them
18:38
Speaker 2: are negotiating tactics, which are you know, that's fine, and
18:42
Speaker 2: which of them are fundamentally unserious. I think I've come
18:45
Speaker 2: down on the Department of Government Efficiency as one of
18:49
Speaker 2: those that I would put into the fundamentally unseerious categories
18:53
Speaker 2: of you know, these guys are talking a big game
18:57
Speaker 2: but have no real intention to cut government spending by
18:59
Speaker 2: two trillion dollar because they are smart enough to know
19:01
Speaker 2: what that would mean. But there are others that I
19:04
Speaker 2: think It's an open question and we will have to
19:06
Speaker 2: wait and see just how serious and incoming Trump administration
19:10
Speaker 2: is about things such as tariffs on Canada and Europe
19:14
Speaker 2: and deporting a number of undocumented immigrants. They things along
19:20
Speaker 2: those lines that I think could be possible, but I'm
19:23
Speaker 2: not sure how serious they're about. Let's take a quick break.
19:26
Speaker 2: When we come back, I mentioned markets opened up in
19:28
Speaker 2: negative territory. We'll have a full review of markets coming
19:32
Speaker 2: up next here on the Financial Exchange.
19:42
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19:48
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19:57
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20:00
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20:02
Speaker 4: Well, there's a lot of red on the board right now.
20:04
Speaker 4: The Dow Jones is down over four hundred and fifteen points,
20:07
Speaker 4: just under one percent. The S and P five hundred
20:10
Speaker 4: down eighty four points one point four percent. The Nasdaq
20:13
Speaker 4: is down a four hundred and twenty six points or
20:16
Speaker 4: two point one three percent. Russell two thousand down thirty
20:19
Speaker 4: four points or a percent and a half. The Vics
20:23
Speaker 4: up twenty three point thirty five percent. Honda's US listed
20:27
Speaker 4: shares continued to advance after Honda officially began merger talks
20:30
Speaker 4: with fellow Japanese automaker Nissan. The stock is currently up
20:33
Speaker 4: one point five percent and was last on pace for
20:36
Speaker 4: a twenty percent weekly game. Toyota Motor shares are up
20:39
Speaker 4: half a percent, extending the nearly nine percent gain seen
20:42
Speaker 4: in the previous session. Earlier this week, Nike, citing an
20:45
Speaker 4: executive who asked not to be named, reported that the
20:48
Speaker 4: Japanese automaker is aiming to double its return on equity
20:52
Speaker 4: to twenty percent. Micro micro Strategy shares are down three
20:56
Speaker 4: percent and that comes after the price of cryptocurrency had
20:59
Speaker 4: earlier advance ninety six thousand dollars, but it has since
21:03
Speaker 4: fallen to ninety two thousand dollars. This comes a day
21:06
Speaker 4: after crypto markets were under pressure. During that trading session,
21:10
Speaker 4: micro Strategy fell four point eight percent. Game stock Game
21:14
Speaker 4: Stop stock is down five point eight five percent, reversing
21:17
Speaker 4: the gain scene in the previous sessions. Shares of the
21:20
Speaker 4: video game retailer had been on a five day winning
21:22
Speaker 4: streak and have served more than eighty eight percent this year.
21:25
Speaker 4: Red Cat Holding shares are down eight percent, which is
21:29
Speaker 4: stopping its massive run from earlier this year. In twenty
21:32
Speaker 4: twenty four, the drone stock has gained nearly one four
21:35
Speaker 4: and twenty four percent. The stock had also risen about
21:38
Speaker 4: fourteen percent month to day. AMD a broader rally in
21:41
Speaker 4: the category as drone sightings across the Northeast spurred retail
21:45
Speaker 4: interest in the sector. I am ben Kitchen and that.
21:52
Speaker 2: Mark. There's a one more piece here from Mohammadel Ariaan
21:56
Speaker 2: before year end, criticizing the Federal Reserve. I can't think
21:59
Speaker 2: of any author who's been published quite as much as
22:02
Speaker 2: l Arean over the last two years to three years
22:06
Speaker 2: and has been consistently critical of the FED that the
22:09
Speaker 2: job that the Federal Reserve is doing. In terms of
22:12
Speaker 2: the Fed's next year meetings, right now, the benchmark interest
22:16
Speaker 2: rate is sitting at four and a quarter to four
22:18
Speaker 2: and a half percent. When we take a look out
22:21
Speaker 2: at their first meeting of the year, which will the
22:23
Speaker 2: end of January. According to the Chicago Market Title Exchange,
22:26
Speaker 2: there's about an eighty nine percent chance that they hit
22:28
Speaker 2: keep those rates exactly where they are. If I fast
22:32
Speaker 2: forward now and go look at the end of twenty
22:35
Speaker 2: twenty five, just to give you a semblance of where
22:37
Speaker 2: investors are betting on rates, they put the Fed's benchmark
22:42
Speaker 2: rate most likely outcome sitting only a quarter of a
22:46
Speaker 2: percent below where we are today. There's about a one
22:48
Speaker 2: in three chance that that's where it stands. There's an
22:51
Speaker 2: eighty four percent chance that we are lower than where
22:55
Speaker 2: we are today, and that means there's about a sixteen
22:57
Speaker 2: percent chance that rates don't actually move at all through
23:01
Speaker 2: the course of the year. Interestingly, no probability of a
23:04
Speaker 2: rate increase come twenty twenty five, and to me that
23:06
Speaker 2: is that is a possibility, albeit a small one, but
23:10
Speaker 2: nonetheless that's that's kind of how things are shaping up here.
23:13
Speaker 2: In terms of the ten year treasury, we've been talking
23:17
Speaker 2: about this spiking. It's not moving around today but sitting
23:20
Speaker 2: around four point five eight percent, and we've talked about
23:24
Speaker 2: what that's done to mortgage rates, which are now sitting
23:26
Speaker 2: above thirty above seven percent on the thirty year fixed,
23:30
Speaker 2: a little bit higher on those jumbo rates. It does
23:34
Speaker 2: start to a big questions of what the Fed's policy
23:40
Speaker 2: is going to look like next year. And maybe you
23:42
Speaker 2: can summarize for me what you think el aarians. I
23:47
Speaker 2: guess problem with Jerome Powell and their way of doing
23:49
Speaker 2: things over the course of the last few years has
23:51
Speaker 2: been it's say yeah, go ahead.
23:54
Speaker 3: Yeah, he's pissed. He's pissed because of their inconsistent it's
23:57
Speaker 3: frustrating to him. And Jason Furman, who's at a trial
24:00
Speaker 3: in the Wes who's commentary on the Wall Street Journal
24:02
Speaker 3: we talked about yesterday. They want coherent thinking, they want
24:06
Speaker 3: a framework. This is what happens when your own Powell
24:11
Speaker 3: is a smart guy, but he's not a trained economist.
24:14
Speaker 3: And I'm sorry, but when you're running the world's most
24:17
Speaker 3: important economic institution, you need a little bit of training,
24:20
Speaker 3: you at least need. Doesn't mean you have to go
24:22
Speaker 3: get your master's, a PhD or whatever, but you need
24:25
Speaker 3: a framework. That framework will help you organize your own thinking.
24:29
Speaker 3: It would be like if you're a carpenter, you don't
24:32
Speaker 3: just jump into a job. You get the lay of
24:34
Speaker 3: the land. You do a draft, maybe only in your
24:37
Speaker 3: head if it's simple, maybe on paper. If it's complex,
24:40
Speaker 3: you follow a process. Powell has personally, I mean no process.
24:47
Speaker 3: The economists working for him do they have a framework.
24:49
Speaker 3: They know about inflation, unemployment, trade offs, they have ways
24:52
Speaker 3: to model those, They know what the errors and the
24:55
Speaker 3: predictions of their models are. It's clear, Mike, particularly from
24:59
Speaker 3: his last press comfort reference, which I think could be
25:01
Speaker 3: fairly described as pathetic, it's clear he doesn't have a framework.
25:05
Speaker 3: At times he's saying policy is restrictive. At times he's
25:08
Speaker 3: saying they can afford to they may have to wait
25:11
Speaker 3: and see. Those two statements are contradictory, yet he utters
25:15
Speaker 3: them within minutes of each other in some cases. And
25:19
Speaker 3: Furman made the point yesterday, and Larian makes the point
25:21
Speaker 3: today that relative to where we thought we'd be a
25:24
Speaker 3: year ago, where the FED thought we'd be growth is higher,
25:26
Speaker 3: inflation's higher on employments lower. So why in God's name
25:31
Speaker 3: are you easing? Nobody understands why we need a framework,
25:35
Speaker 3: which is.
25:35
Speaker 2: What I think it could be justifiled to ease, but
25:37
Speaker 2: to ease more than you were anticipating doing at the
25:40
Speaker 2: beginning of the year under tighter conditions.
25:43
Speaker 3: Why why is he easing at all? Justifiable? Forget about
25:46
Speaker 3: what they thought a year ago. I'll forgive them for
25:49
Speaker 3: not getting that right. But why given where unemployment is today,
25:52
Speaker 3: inflation is today, the direction of inflation lately, why is
25:56
Speaker 3: more easing called for? There may be a good reason, Mike,
25:59
Speaker 3: if he hasn't been thinking with us, if he shared
26:02
Speaker 3: his little mental mode. I don't mean little is in
26:03
Speaker 3: he's got a little mental model. I just mean a
26:05
Speaker 3: simple mental model. If he had one in mind when
26:08
Speaker 3: he was communicating, it would allow him to be clearer
26:11
Speaker 3: and people like us, and more importantly, luminaries like Furman
26:16
Speaker 3: and Muhammad Alarian, to be less frustrated with the process.
26:20
Speaker 3: This is why Furman called for what he did yesterday
26:23
Speaker 3: in the Wall Street Journal. And I'll say again, coming
26:25
Speaker 3: from a slightly left of center guy, I think that's
26:27
Speaker 3: a really big deal.
26:29
Speaker 2: Now, let me play Devil's advocate for a moment here
26:32
Speaker 2: and evaluate el Arian's background. And you know, money manager
26:36
Speaker 2: for Pimco money manager today, or at least you know
26:39
Speaker 2: economic advisor to Alion's. How much of this just comes
26:42
Speaker 2: from a place of, Hey, my job requires me to
26:46
Speaker 2: better understand what you're doing, and I'm getting frustrated because
26:50
Speaker 2: you're you're not giving me enough clarity. And how really
26:53
Speaker 2: important is that? I mean, we talk about how the
26:56
Speaker 2: economy is constantly evolving. The last thing that I would
27:00
Speaker 2: want out of a federal reserve is one that are
27:02
Speaker 2: so tied to their own beliefs about a forecast that
27:06
Speaker 2: they're unwilling to bend and change with incoming economic data.
27:10
Speaker 2: Don't you run the risk of doing that? If you
27:12
Speaker 2: are being hold into some form of vision of the future.
27:15
Speaker 3: Sure, so you make sure that you're not rigidly beholden
27:19
Speaker 3: to it. When Firman yesterday writes about using a tailor
27:22
Speaker 3: type role, he didn't say, and here's the one you
27:24
Speaker 3: should use. There are a variety of specifications out there.
27:28
Speaker 3: You kind of take an average, much like you and
27:30
Speaker 3: Chuck Zada do when you're talking about inflation. You talk
27:33
Speaker 3: about headline, you talk about core, you talk about meeting,
27:35
Speaker 3: and you talk about trim bean, you talk about sticky
27:37
Speaker 3: price inflation, and right on down the line, and then
27:40
Speaker 3: you take sort of a mosaic. You step back and
27:43
Speaker 3: what are all these things telling us? It's not a
27:45
Speaker 3: rigid approach, Mike, but it does. It does keep you
27:48
Speaker 3: somewhat disciplined so that you're not vacillating wildly oscillating, I
27:52
Speaker 3: should say, wildly from one end of the range to
27:56
Speaker 3: the other. It's a tool. It's a tool meant to
28:00
Speaker 3: discipline you, not to dictate outcomes rigidly.
28:04
Speaker 2: Let's take it a step further, then, Is this federal
28:07
Speaker 2: reserves failing in that category genuinely a risk to us
28:12
Speaker 2: exceptionalism like all else equals long term?
28:15
Speaker 3: Yeah?
28:15
Speaker 2: It is so, because we had, you know, a wild
28:19
Speaker 2: Wednesday trading last week, which I will largely blame on
28:22
Speaker 2: Jerome Cowell because arkets were completely flat when they released
28:26
Speaker 2: their policy. It was only once he started speaking that
28:28
Speaker 2: they they became pretty wild. Where does that threat to
28:33
Speaker 2: us exceptionalism?
28:34
Speaker 3: Long term growth depends on credibility of institutions and the
28:40
Speaker 3: stability that's good institutions engender. So, erratic tariff policy is
28:45
Speaker 3: a threat to short and long term growth. Erratic monetary
28:48
Speaker 3: policy is a threat to long and short term growth.
28:50
Speaker 3: Presidential meddling in the operations of the Federal Reserve is
28:54
Speaker 3: a threat to long and short term growth. Maybe that's
28:57
Speaker 3: why volatility is ticking up over the past couple weeks.
29:00
Speaker 3: Markets are realizing, oh crap, this is all about to
29:03
Speaker 3: get very real. And by that I mean a new regime,
29:05
Speaker 3: who's processes, whose thoughts or shall we say, still information. So, yeah, Mike,
29:11
Speaker 3: it is a threat to our institutional stability and the
29:15
Speaker 3: standards of living that we've been able to achieve as
29:17
Speaker 3: a result of that. I think that's what it means.
29:21
Speaker 2: Yeah, I think that's well put. Let's take a quick
29:25
Speaker 2: break when we come back. Want to talk a bit
29:28
Speaker 2: about a new I guess a new area of lending
29:32
Speaker 2: in the market. Private credit has taking a massive role
29:36
Speaker 2: where banks used to fill a lending void there. It's
29:40
Speaker 2: grown substantially and being talked about a little bit more
29:44
Speaker 2: in terms of a risk factor. I want to discuss
29:46
Speaker 2: with you, Mark, just where those risks lie and is
29:48
Speaker 2: it something that investors every day investors need to actually
29:51
Speaker 2: worry about quick break. We're talking private credit next when
29:54
Speaker 2: we return.
29:56
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30:18
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30:31
Speaker 2: Mark piece in the New York Times This Morning Wall
30:33
Speaker 2: Street minting easy money from risky loans? What could go wrong?
30:37
Speaker 2: If you're not following this closely, you probably need a
30:40
Speaker 2: little bit of a backstory on all this. So Great
30:44
Speaker 2: Recession banks underwent a whole bunch of new regulation that
30:49
Speaker 2: didn't necessarily force them to jettison these businesses, but big
30:54
Speaker 2: banks took a large step away from issuing loans to
30:58
Speaker 2: smaller businesses risky types of loans to struggling companies. They
31:04
Speaker 2: had done some of that leading up to the Great Recession,
31:06
Speaker 2: but largely stepped out of it, and since then a
31:10
Speaker 2: kind of newer industry has popped up in the way
31:12
Speaker 2: of private credit and maybe you can maybe can mark,
31:15
Speaker 2: but you kind of summarize what they're doing and how
31:20
Speaker 2: they are filling a void, because, as we talk about frequently,
31:23
Speaker 2: risk never leaves a system. It just moves around in
31:26
Speaker 2: some way, shape or form. And this time it's migrated
31:28
Speaker 2: from a lot of large multinational banks to private credit
31:33
Speaker 2: companies that issue loans in a different type of fashion.
31:36
Speaker 3: Yeah, that's exactly what it is, and it's actually it's benerent.
31:39
Speaker 3: It came into its own after the finance a little
31:43
Speaker 3: bit before and then after in forced the global financial
31:46
Speaker 3: crisis of two thousand and eight two thousand and nine,
31:48
Speaker 3: when banks tightened up their lending, private lenders stepped in,
31:52
Speaker 3: and a private loan is exactly what it sounds like.
31:55
Speaker 3: It's negotiated between two parties, and it doesn't end up
31:57
Speaker 3: traded on an exchange like a bond that might be
32:01
Speaker 3: in your bond fund and your four to one kay.
32:03
Speaker 3: When AT and T needs money, they go to their
32:06
Speaker 3: maybe Goldman Sachs, and Goldman Sachs writes up the terms
32:11
Speaker 3: and then presides over the issuance of that bond and
32:15
Speaker 3: places it with Franklin Templeton and tro Price and Fidelity.
32:19
Speaker 3: Very straightforward, then you and I buy it through our
32:20
Speaker 3: four oh one K. For example, private credit is very
32:23
Speaker 3: different and also now potentially bigger than public credit. Who
32:29
Speaker 3: buys these things Pension funds, endowments, sophisticated institutional investors who
32:34
Speaker 3: have the resources to do the due diligence. It's a
32:36
Speaker 3: big asset class, Mike. Sometimes this is called the shadow
32:40
Speaker 3: banking system, and it actually contributed to the collapse in
32:43
Speaker 3: two thousand and eight two thousand and nine because it's
32:46
Speaker 3: pretty lightly regulated, so it both fills a void and
32:51
Speaker 3: adds to a volatility during tough times. Potentially.
32:57
Speaker 2: Now, like we said, these companies we're going to find
33:00
Speaker 2: access to credit in some way, shape or form. It
33:03
Speaker 2: just happens to not be at the banks. And frankly,
33:06
Speaker 2: that was part of the goal of Dodd Frank regulations. Hey,
33:10
Speaker 2: we know this risk needs to exist somewhere, we just
33:12
Speaker 2: don't want it at these systemically important large banks, which
33:16
Speaker 2: when they fail, the entire financial system comes crashing down
33:19
Speaker 2: around them. So to some of this, I say, this
33:23
Speaker 2: is a success story. Though, as a New York Times asked,
33:28
Speaker 2: like what could go wrong? Well, I do wonder about
33:30
Speaker 2: the eventual ramifications of when we have the next recession
33:35
Speaker 2: and this credit drives up. What sort of problems you
33:38
Speaker 2: have because it's not a heavily regulated sector and it's
33:42
Speaker 2: not getting a whole lot of look from regulators. But again,
33:45
Speaker 2: I wonder if this is actually a success story. If hey,
33:48
Speaker 2: we've cordened this risk off and it still exists, but
33:50
Speaker 2: it's not at least being held by the general public
33:53
Speaker 2: that's going to require a bailout during the next recession
33:56
Speaker 2: or is it, you know, or are we just going
33:58
Speaker 2: to bail out all these insurance companies and pens funds
34:00
Speaker 2: that are now taking all the risk with the private
34:02
Speaker 2: credit companies instead of the banks. Yeah.
34:04
Speaker 3: I haven't thought about that enough to say, to tell
34:06
Speaker 3: you the truth, but right now much of it is
34:08
Speaker 3: beyond the reach of regulators, thus the name shadow banking. Yeah,
34:13
Speaker 3: and from my point of view, it's a useful tool.
34:15
Speaker 3: But good Sorry, Mike, No.
34:17
Speaker 2: I think I always try and bring it back to
34:19
Speaker 2: the individual investor out there who's looking at all of this,
34:23
Speaker 2: And you know, the downside here is you haven't been
34:25
Speaker 2: able to get this type of exposure as an individual investor.
34:29
Speaker 2: By and large, some accredited investors, larger investors are able
34:33
Speaker 2: to go place money in private equity funds, but largely
34:35
Speaker 2: they have big minimums and long hold periods and all
34:38
Speaker 2: sorts of stuff. But again that's kind of by design,
34:41
Speaker 2: and one would just hope that if it does all
34:44
Speaker 2: blow up in our faces down the road, that yeah,
34:47
Speaker 2: pension funds and insurance companies end up taking a hit
34:50
Speaker 2: and we don't need to go bail them out, because
34:51
Speaker 2: that was the point of Dodd Frank regulation.
34:55
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35:48
Speaker 2: Mark and Ben, I have a funny story for you. So,
35:51
Speaker 2: the state of New York, and specifically the city astronding
35:55
Speaker 2: in Manhattan. New York City spent some half a billion
35:59
Speaker 2: dollars over the life last year buying up and installing
36:02
Speaker 2: a bunch of equipment in order to start tooling people
36:05
Speaker 2: for congestion pricing entering Manhattan. And it's been like six
36:11
Speaker 2: months since they planned on starting this, and they still
36:14
Speaker 2: haven't collected any tolls because it keeps getting headed off
36:16
Speaker 2: in court, which I just find to be a hilarious
36:19
Speaker 2: waste of money so far. But here's what New York
36:22
Speaker 2: City is attempting to do is they have already, by
36:26
Speaker 2: the way, installed cameras on pretty much every way that
36:29
Speaker 2: you can get into Manhattan, and they're intending on tolling
36:34
Speaker 2: passenger cars nine dollars to enter Manhattan during peak hours,
36:37
Speaker 2: twelve dollars by twenty twenty eight, and up to fifteen
36:39
Speaker 2: dollars come twenty thirty one. The rate will be higher
36:43
Speaker 2: for cargo trucks, you know, anybody moving products in and
36:47
Speaker 2: out of Manhattan. That will be more expensive to do
36:50
Speaker 2: for the trucks. And the idea here is hey fund
36:53
Speaker 2: the MTA further punish people for coming into the City
36:58
Speaker 2: of New York via vehicle and make get more reliable
37:01
Speaker 2: and affordable to do so via train. And it's been
37:05
Speaker 2: held up for several months with court battles and then
37:08
Speaker 2: the governor saying that she didn't want to do it,
37:10
Speaker 2: and then one reelection and now says she does want
37:12
Speaker 2: to do it. So it's it looks like it's heading
37:15
Speaker 2: to be heading to that area. And from a I
37:21
Speaker 2: don't know, from an economic standpoint, I think this makes
37:23
Speaker 2: all the sense in the world. I don't think it
37:25
Speaker 2: really would work in the Boston area where where you
37:28
Speaker 2: and I live, Mark and Ben live. But from a
37:31
Speaker 2: general standpoint, you want fewer cars in the island of Manhattan.
37:36
Speaker 2: The question is how much waste comes It comes to
37:38
Speaker 2: play here, but it'll be an interesting just kind of
37:41
Speaker 2: economic look in terms of how well does this work?
37:45
Speaker 2: Do people actually drive less into the into the city
37:47
Speaker 2: of New York. I don't know, Mark, if you've if
37:49
Speaker 2: you've thought about this or looked at other cities and
37:52
Speaker 2: states that have implemented peak congestion pricing for things like this.
37:56
Speaker 3: No, sorry, didn't. Nothing to know like you and how
38:00
Speaker 3: it's going to turn out to be a neat experiment.
38:03
Speaker 2: Markets remain in negative territory NASDAC leading the way down,
38:07
Speaker 2: off three hundred and sixty points one point eight percent.
38:10
Speaker 2: We'll have a full market recap for you and more.
38:12
Speaker 2: Stay tuned for the second hour the Financial Exchange up
38:14
Speaker 2: next