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AI Profits Raise New Cash Flow Questions · The Financial Exchange Show

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Speaker 1: donation today. Face is the Financial Exchange with Mike Armstrong
1:07
Speaker 1: and Mark Vandetti.
1:12
Speaker 2: Good morning, Happy Tuesday.
1:14
Speaker 3: Hope everyone's ready to make history here on the Financial
1:18
Speaker 3: Exchange is the S and P five hundred barrels through
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Speaker 3: to a new all.
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Speaker 2: Time high as of today.
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Speaker 3: It's Mike, Mark and Chucker with you in a jobs
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Speaker 3: week here. We had a Jolt report this morning at
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Speaker 3: ten am that will be going through still the midst
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Speaker 3: of earning season here with SpaceX and AMD to be
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Speaker 3: the big ones to go this afternoon after the bell,
1:43
Speaker 3: Bud McDonald's, Marriott and others letting us know how they're
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Speaker 3: doing as well. And yeah, we've got stocks beating up
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Speaker 3: on their previous all time high, which was reached back
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Speaker 3: in June of last year at seventy six twenty one
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Speaker 3: on the index, now intraday sitting at seventy six sixty eight.
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Speaker 4: Mark, is that a new thing? Touting the all time high?
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Speaker 4: Because stock's trend up, It's almost like saying I got
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Speaker 4: older last year relative to this year. Stocks trend up,
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Speaker 4: So they've hit all time highs under every president I think,
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Speaker 4: except like Ford. If that's your chronology, If that's.
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Speaker 2: Mark also doesn't celebrate his birthday just so? No? Is it?
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Speaker 4: Is it? If stocks were not hitting all time highs,
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Speaker 4: it mean.
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Speaker 2: That they're going down. Yeah, it would mean being flatlining.
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Speaker 4: But my point is the trend is up, so outside
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Speaker 4: of recessions and the occasional plateaus, hitting a new stocks.
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Speaker 2: Are always hitting all time highs is irrelevant. I think
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Speaker 2: what people do cele inflation.
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Speaker 4: Incidentally, like big.
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Speaker 2: Dow mileless milestones.
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Speaker 3: People have notorious celebrated fifty Dow h I will et cetera.
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Speaker 4: Allow that, but yeah, you're right, it should always be
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Speaker 4: hitting new Hyes, stocks tend to go up a little
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Speaker 4: over half the time. I'm daily basis a little over
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Speaker 4: six percent of the time, excuse me, monthly. We know
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Speaker 4: the statistics, we see the trend line. If they're not
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Speaker 4: going up, it's when it's sort of yeah, notable.
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Speaker 3: I suppose a little bit more unique, would it be
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Speaker 3: the S and P five hundred averaging something like twenty
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Speaker 3: odd percent for the last three years.
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Speaker 2: That's that's a bit more something to talk about and noteworthy.
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Speaker 2: But yeah, Mark actually doesn't celebrate his birthday. Nobody actually
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Speaker 2: knows what it is.
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Speaker 3: It's a little bit like Ron Swanson from Parks and
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Speaker 3: rec if you've ever seen that show.
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Speaker 2: Yeah, nobody knows, and it's just.
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Speaker 4: Yeah, it's like the third week after the first full
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Speaker 4: after the first harvest moon in August or something.
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Speaker 2: Yeah, exactly.
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Speaker 4: It varies.
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Speaker 5: Is today your birthday?
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Speaker 4: I will be on the air on my birthday this year,
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Speaker 4: but no, it's not today.
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Speaker 5: I'll just say happy birthday every day.
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Speaker 3: Yeah, let's just guess every day every time Mark is hosting,
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Speaker 3: we're just gonna say happy birthday. And one of the
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Speaker 3: times we're going to be correct, and we'll see whether
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Speaker 3: or not he acknowledges it.
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Speaker 2: Here, I go up exchange.
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Speaker 3: Other news out there. This week, we'll have a Friday
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Speaker 3: jobs report, getting a reading on the state of hiring
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Speaker 3: and firing in this economy where it's coming from. And then,
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Speaker 3: as I mentioned, Jolts came out about nine minutes ago.
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Speaker 3: We'll try and get some coverage of that in the
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Speaker 3: next segment once all of us actually have time to
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Speaker 3: read the thing, because it is hot off the presses here.
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Speaker 3: But yeah, earnings are rolling in and this economy and
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Speaker 3: market continues to be driven by one thing and one
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Speaker 3: thing only, which is obsession over any company related to
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Speaker 3: artificial intelligence and peace from Axios this morning, the AI
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Speaker 3: driven boom and profits comes with some caveats. Is something
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Speaker 3: that we've talked about a couple of times before. And
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Speaker 3: the article points out that, you know, the S and
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Speaker 3: P five hundred posted forty percent year on your earnings
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Speaker 3: growth in the first and second quarters of twenty ten,
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Speaker 3: and we are seeing those type of returns right now
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Speaker 3: in terms of massive earnings growth across the S and
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Speaker 3: P five hundred, and pointing out that it is pretty impressive.
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Speaker 3: The only reason you reached forty percent a year on
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Speaker 3: your earnings growth back in twenty ten was because you
5:15
Speaker 3: were in an abysmal economy and market in two thousand
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Speaker 3: and nine, and so you were coming off some very
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Speaker 3: low lows.
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Speaker 2: But what is the if there is a caveat to.
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Speaker 3: This earnings growth right now? Mark, And it's one that
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Speaker 3: we've pointed out a few times to me, it's that.
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Speaker 2: Cash flow free cash flow.
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Speaker 3: For those same businesses is not looking so solid and
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Speaker 3: is turning negative in some cases, and a lot of
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Speaker 3: the earnings growth itself, rather than coming from hey, I
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Speaker 3: sold this widget and drew some profits, is instead coming
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Speaker 3: from I own this company or I own a part
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Speaker 3: of this company, and the markets think it's much more
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Speaker 3: valuable than it was twelve months ago.
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Speaker 4: Yeah, I guess that's concern. I tend to just look
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Speaker 4: at the series and take it at face value. The
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Speaker 4: caveat for me is a little different. It's that earnings
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Speaker 4: growth is not predictive. In fact, high earnings growth periods
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Speaker 4: are followed by low earnings growth periods. It reverts to
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Speaker 4: a trend, if you will, because earnings can't grow faster
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Speaker 4: than the economy for perpetuity if.
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Speaker 1: You prefer.
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Speaker 2: The other.
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Speaker 4: And this is a question that we raised in many
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Speaker 4: different forms is how are they going to get cash flow?
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Speaker 4: All I care about is an investor, is free cash flow.
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Speaker 4: What's available to pay out to me as a dividend
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Speaker 4: or in the form of a share repurchase. How are
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Speaker 4: the hyperscalers going to resuscitate free cash flow? Will AI? Well,
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Speaker 4: the benefits of AI accrue to them or to other firms.
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Speaker 4: That's all I care about as an investor. So keeping
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Speaker 4: those two things in mind, it's noteworthy, But it's also
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Speaker 4: a little bit unsettling that earnings of own so fast.
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Speaker 3: Yeah, I think that's the unsettling phrase there, I think
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Speaker 3: is the right one. We'll talk a little bit later
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Speaker 3: about what Archibald's Something's Leopold, Yeah, his hedge fund that
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Speaker 3: blew up, and the warning signs that maybe should have
7:18
Speaker 3: come from four hundred and thirty percent returns in a
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Speaker 3: quarter or a half a And we're experiencing something in
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Speaker 3: the overall market right now which is very outsize earnings
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Speaker 3: growth that is pretty rare, and a lot of questions
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Speaker 3: about how that could possibly continue, and examples that they
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Speaker 3: write about here. You know, Amazon's second quarter earnings grew
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Speaker 3: by two hundred and forty two percent, Alphabet's by almost
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Speaker 3: three hundred percent, and you look at that and you say,
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Speaker 3: that's that's obscene. The insane gains though, however, we're a
7:47
Speaker 3: pretty much almost entirely a result of non operating unrealized gains,
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Speaker 3: so unrealized gains being I made an investment, I didn't
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Speaker 3: sell the investment and take my cash. I just have
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Speaker 3: to mark that investment back to what the market what
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Speaker 3: we think it's worth. And a huge portion of that
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Speaker 3: came from investments in Anthropic and SpaceX that they had
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Speaker 3: to kind of readjust and revalue. And so I think importantly,
8:15
Speaker 3: and we've been talking about this a lot in the show,
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Speaker 3: we're focusing a lot more in this moment. And I
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Speaker 3: think a lot of investors are on that free cash
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Speaker 3: flow metric because, as you mentioned, that is going to
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Speaker 3: be the driver of the next dividend payment, share repurchase
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Speaker 3: and additional capital expenditures.
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Speaker 4: Yeah, and you can't learn anything about that given the
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Speaker 4: data we have.
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Speaker 2: I think we're explaining what you mean.
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Speaker 4: I don't know what I care about future free cash
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Speaker 4: flow as an investor. That's what is left over after
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Speaker 4: making investments to keep the business going more or less
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Speaker 4: to pay me a dividend or via increase in earnings
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Speaker 4: per share through share repurchases. There are different ways companies
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Speaker 4: can distribute cash. So I care about future free cash flow.
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Speaker 4: I really can't forecast. There are ways of forecasting it.
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Speaker 4: I don't do that. Some people do. It's especially hard
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Speaker 4: to do right now because again, the benefits, the extent
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Speaker 4: to which the benefits of AI accrue to existing publicly
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Speaker 4: traded companies like the hyperscalers who are making all these
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Speaker 4: investments is pretty uncertain. I'm sorry, I'm saying the same
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Speaker 4: thing over and over again. I don't know how else
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Speaker 4: to put it. But the lesson important thing, okay, the
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Speaker 4: lessons of history though are pretty unkind are are are
9:28
Speaker 4: are pretty to use the word again, unsettling. We know
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Speaker 4: what follows periods of massive investment in anything, in railroads,
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Speaker 4: in fiber optics, you name it, ruinous competition, bankruptcies, recession,
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Speaker 4: big market declines. Will this time be different? Because AI
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Speaker 4: is different than other general purpose technologies. The thing learns.
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Speaker 4: It not only can help you do what you do
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Speaker 4: today better, it can tell you how to do it differently.
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Speaker 4: That's what's you know, electricity doesn't jump out of the
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Speaker 4: socket and tell you to organize your factory floor differently.
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Speaker 4: You got to figure that out. Be a little disturbing
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Speaker 4: if it. If it did, yeah, yeah, right, that's what
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Speaker 4: makes AI different. I acknowledge that. But will the benefits
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Speaker 4: of that accrue to you know, Meta, Microsoft, Oracle, Amazon, Alphabet.
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Speaker 4: If I left any hyperscalers out, maybe I did we
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Speaker 4: need an acronym for that. I think that's the the.
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Speaker 2: What multi trillion?
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Speaker 4: I was going to say, it's at least a trillion
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Speaker 4: dollar question, because that's what they're going to be plowing
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Speaker 4: into AI. I'll just call it infrastructure.
10:36
Speaker 3: Let's take a quick break. As markets, uh, you know,
10:39
Speaker 3: reach new all time highs. Bloomberg apparently having a slow
10:43
Speaker 3: news data cover as they just announced that New York
10:45
Speaker 3: City rat sightings are down twenty two percent.
10:47
Speaker 2: So we've just got a series of great news this morning.
10:51
Speaker 3: We're going to take quick break. We're not talking about
10:53
Speaker 3: rat sightings. When we come back, we are going to
10:54
Speaker 3: talk tackle jobs next on the Financial Exchange.
10:58
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11:44
Speaker 2: This morning, at ten a m.
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Speaker 3: The Bureau of Labor Statistics released information on their JOLTS survey,
11:52
Speaker 3: which stands for Job Openings and Labor Turnover.
11:55
Speaker 2: They perform this survey once a month.
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Speaker 3: It's measuring the number of job openings at the end
12:00
Speaker 3: of June, so a fair bit outdated, but I can't
12:03
Speaker 3: say that anything specific to the labor market that I
12:05
Speaker 3: can note changed dramatically between now and June, and so
12:09
Speaker 3: I think it's probably a relatively good gauge. The number
12:12
Speaker 3: of job openings did not change much. We're sitting at
12:14
Speaker 3: seven point four million in the month of June. The
12:19
Speaker 3: hires rate also didn't change a whole lot. We sat
12:22
Speaker 3: at five point three million, while total separations was at
12:25
Speaker 3: five point four million. So I think what you can
12:29
Speaker 3: draw from this report, and there's a few other statistics
12:32
Speaker 3: that we can talk about, but it's something that we've
12:35
Speaker 3: talked about several times here. The job market is not
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Speaker 3: nearly as robust as it was in the earlier twenty
12:44
Speaker 3: twenties coming out of the COVID pandemic, when the pace
12:47
Speaker 3: of hiring was very very fast, but it has improved
12:52
Speaker 3: from the concern employers seemed to have last year, and
12:57
Speaker 3: the JOLT survey seems to be indicating that the number
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Speaker 3: of people looking for work compared to the number of
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Speaker 3: employers looking for employees is somewhere around.
13:05
Speaker 2: Equilibrium at the moment.
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Speaker 3: They don't seem like they are desperately clamoring for new employees.
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Speaker 3: Certainly there are some people looking for work or we're
13:15
Speaker 3: having a tough time, and these statistics I don't think
13:18
Speaker 3: completely negate that either, because the pace of hiring hasn't
13:22
Speaker 3: really picked up a whole lot either. I do want
13:27
Speaker 3: to think this well, a few things that I want
13:29
Speaker 3: to think through. We're now well away from the twenty
13:34
Speaker 3: twenty five period of hiring and the massive slowdown that
13:38
Speaker 3: we saw. I don't know the exact statistic mark, maybe
13:41
Speaker 3: you do. The average pace of hiring in twenty twenty five,
13:46
Speaker 3: it was close to zero per month the payrolls job
13:51
Speaker 3: so it was a disaster.
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Speaker 2: It was a.
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Speaker 3: Really ugly employment situation. In twenty twenty five, the unemployment rate.
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Speaker 4: Rot and by the way, to put in perspective, it
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Speaker 4: was over one hundred and ten or twenty the year
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Speaker 4: before that, and it was about two hundred the year
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Speaker 4: but so it had been trending down. But the job market,
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Speaker 4: as measured by the payroll survey, the establishment survey, which
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Speaker 4: asked business is how many people did you hire? It
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Speaker 4: came to a screeching halt in twenty twenty five, probably
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Speaker 4: in part due to tariff uncertainty, Yeah, that's what business
14:19
Speaker 4: has told us.
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Speaker 2: Yeah, business surveyed told us that. I think there was
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Speaker 2: part of it.
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Speaker 3: I think there was another part of that that wasn't
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Speaker 3: entirely this piece. I think there was another part of
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Speaker 3: this that was investors are clamoring for any signs that
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Speaker 3: I'm benefiting from artificial intelligence. This was something that we
14:38
Speaker 3: saw in earnings reports when when big companies came out
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Speaker 3: and said, hey, we're not hiring for this job, or
14:43
Speaker 3: we laid some people off because AI is allowing us
14:47
Speaker 3: to be more efficient. Whether it was true or not,
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Speaker 3: investors tended to reward those companies. And so I think
14:52
Speaker 3: some combination of tariff uncertainty, which was robot start.
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Speaker 4: The reason I'm so I'm speaking so definitively is that
15:01
Speaker 4: it started in March January, February or fine March fell
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Speaker 4: off a.
15:05
Speaker 2: Cliff, YEP. So it seems like it was pretty much
15:08
Speaker 2: related to that.
15:09
Speaker 3: And the reality is that today, while there are new
15:13
Speaker 3: tariffs in place, and yeah, there's a new lawsuit. I
15:15
Speaker 3: think twenty four states attorneys general are suing the federal
15:18
Speaker 3: government over the new.
15:19
Speaker 2: Round of tariffs.
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Speaker 3: It's been sitting here between ten and fifteen percent now
15:25
Speaker 3: for quite some time, and businesses are seemingly better able
15:30
Speaker 3: to make pocisions with.
15:31
Speaker 4: That, and they're a little less whimsical. He can't the
15:35
Speaker 4: President can't wake up on the wrong side of the
15:36
Speaker 4: bed and hit Brazil with a tariff, right because the
15:39
Speaker 4: Supreme Court said you can't do that.
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Speaker 2: Yeah, shocker. So that's the state of things right now.
15:45
Speaker 3: When we take a look at the upcoming jobs report again,
15:48
Speaker 3: we get two different late well, we get a few
15:50
Speaker 3: more than two, but from the BLS we get two
15:53
Speaker 3: major jobs reports this week. The first was the one
15:55
Speaker 3: I just mentioned, the Jolts Report, which basically indicated no
15:59
Speaker 3: real change month over month May to June in the
16:02
Speaker 3: pace of hiring or pace of firing. This Friday, we
16:06
Speaker 3: will be getting the full jobs report for the month
16:08
Speaker 3: of July, which gives us the unemployment rate, the average
16:12
Speaker 3: hourly earnings, and the total.
16:13
Speaker 2: Number of payrolls added or subtracted.
16:16
Speaker 3: From the US economy forecast that I'm seeing right now
16:19
Speaker 3: is around eighty three thousand. The previous month was down
16:22
Speaker 3: to fifty seven thousand, so we'll see right that pace
16:25
Speaker 3: of hiring has picked up dramatically in twenty twenty six.
16:28
Speaker 3: Compared to twenty twenty five. Can we keep along that
16:31
Speaker 3: pace and do we start to see wages moving in
16:33
Speaker 3: one direction or another. You know, one trend that I
16:36
Speaker 3: think has kind of reversed is that idea of mass
16:39
Speaker 3: layoffs from AI. While the fear is still there, we
16:42
Speaker 3: are definitely not seeing it from major employers that they're saying, hey,
16:46
Speaker 3: I'm laying off these people. In fact, the more and
16:49
Speaker 3: more I'm hearing is, you know, we laid some people
16:51
Speaker 3: off and turned out we didn't really know what we
16:54
Speaker 3: were doing on that front and need to go hire
16:56
Speaker 3: back some folks that we didn't think we previously needed.
16:59
Speaker 2: Because of AI.
17:00
Speaker 3: So we will see where that trend goes. Anything else
17:03
Speaker 3: to add, No, No, I guess it's the one thing.
17:06
Speaker 2: That I want to add. I'm sorry to cut you off.
17:08
Speaker 3: It's your show and ask you about But what it
17:12
Speaker 3: all means for the FED is kind of all important.
17:14
Speaker 4: I was I was gonna put we We're gonna get
17:15
Speaker 4: into the FED. Sure, that's the only reason I'm employed here.
17:19
Speaker 2: But oh the Fed.
17:25
Speaker 3: He as he drums his finger, mount burns waiting two
17:29
Speaker 3: more minutes.
17:32
Speaker 5: What time is FED talk?
17:33
Speaker 4: It?
17:33
Speaker 5: Was it?
17:34
Speaker 4: Get gem and Walash fummies mill. This a low higher,
17:39
Speaker 4: low fire labor market. That's what it's been called. And
17:42
Speaker 4: that's as good a descriptions. I think it's it's perfect,
17:46
Speaker 4: And these are very long term trends. Low higher refers
17:49
Speaker 4: to the higher statistic and the JEWELTR Report. Low fire
17:52
Speaker 4: refers to terminations. Obviously there are voluntary separations reported as well.
17:58
Speaker 4: The series is the clearn Fed points out in a
18:01
Speaker 4: great commentary this morning, have been trending down for a
18:05
Speaker 4: long time, for maybe demographic reasons, workforces getting older. People
18:10
Speaker 4: tend to turn over in their jobs less as they
18:12
Speaker 4: get older, and most of the job turnover occurs in
18:14
Speaker 4: your twenties, not in your forties and fifties, thank god.
18:18
Speaker 4: So for various reasons, namely the structure of the well,
18:23
Speaker 4: this isn't very insightful. It's either the structure of labor
18:25
Speaker 4: market or the structure of the economy. Well, yeah, they've
18:27
Speaker 4: been trending down for a long time these series. So
18:30
Speaker 4: in a sense, this survey gets less and less useful
18:35
Speaker 4: maybe in terms of in terms of signaling turning points.
18:38
Speaker 4: Some people find the job openings and you alluded to
18:43
Speaker 4: the openings to unemployed people that metric. Some people find
18:49
Speaker 4: measures like that useful in as proxies for slack in
18:54
Speaker 4: the economy and their inflation forecasting models. But we'll talk
18:57
Speaker 4: about inflation later.
19:00
Speaker 3: Taking a look around at markets, the games are accelerating
19:03
Speaker 3: a bit. We've got the Dow up six hundred points,
19:06
Speaker 3: SMP five hundred, up seventy two points, the Nasdaq up
19:10
Speaker 3: four hundred and sixteen, and oil, which had been up earlier,
19:14
Speaker 3: taking a big drop this morning as well.
19:16
Speaker 2: We're going to take a quick break here.
19:18
Speaker 3: When we come back, Tucker's going to have a full
19:20
Speaker 3: recap with Wall Street Watch.
19:38
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19:41
Speaker 1: TFFE show. Breaking business news is always first right here
19:46
Speaker 1: on the Financial Exchange Radio Network. Till now full Wall
19:50
Speaker 1: Street Watch tracking the stocks, the data, and the headlines
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Speaker 1: driving markets So far today, right here on the Financial
19:57
Speaker 1: Exchange Radio Network.
20:00
Speaker 5: The markets are building on their rallies investors sit through
20:03
Speaker 5: a new batch of earnings. Also, Treasury Secretary Scott bess
20:06
Speaker 5: And told CNBC that the US and Iran could reach
20:08
Speaker 5: a deal to open the Straight of Four Moves as
20:10
Speaker 5: soon as today or Wednesday, sending oil lower. Right now,
20:14
Speaker 5: the Dow is up one point one percent, or six
20:17
Speaker 5: hundred and seventeen points higher, SMP five hundred up about
20:20
Speaker 5: one percent, seventy three points higher, Nasdaq up one point
20:23
Speaker 5: six percent, or four hundred and fourteen points. RUSS two
20:26
Speaker 5: thousand is up nearly nine tenths of one percent, Tenure
20:30
Speaker 5: treas Reel down four basis points at four point sixty
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Speaker 5: four percent, and Oil down five percent, trading its seventy
20:37
Speaker 5: six dollars a barrel. Pallenteer surging twenty five percent after
20:41
Speaker 5: the enterprise software company posted second quarter earnings that CEO
20:45
Speaker 5: Alice carp dened as of the worldly, driven by customer
20:48
Speaker 5: demand for AI sovereign tools. Meanwhile, McDonald said sales at
20:53
Speaker 5: US restaurants climbed only zero point eight percent in the
20:55
Speaker 5: previous quarter, its slowest growth since the start of twenty
20:58
Speaker 5: twenty five. The fast food giant also named Sky Anderson
21:02
Speaker 5: as its new US president to bring focus in urgency
21:06
Speaker 5: to its home market, replacing Joe Ehringer. Shares are up
21:10
Speaker 5: by one percent. Elsewhere, a Caterpillar handily beat earnings expectations
21:14
Speaker 5: and lifted its profit outlook, driven by continued demand for
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Speaker 5: construction equipment that stock up by four percent. Wayfair, rallying
21:22
Speaker 5: twenty eight percent, after the online furniture retailer saw its
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Speaker 5: strongest US growth since twenty twenty, and after today's close,
21:30
Speaker 5: we'll see earnings from AMD and SpaceX. I'm Tucker Silvan.
21:36
Speaker 1: That is Wall Street watch Mark.
21:37
Speaker 3: I want to jump to Japan here and talk about
21:41
Speaker 3: something that happened over the last few days that is
21:45
Speaker 3: a bit technical. So I find it always helpful when
21:47
Speaker 3: we're getting into these somewhat technical subjects that people don't
21:50
Speaker 3: frequently think like people think about stocks a lot, they
21:53
Speaker 3: think about jobs a lot. They don't think about the
21:56
Speaker 3: price of a dollar in Japanese yen very frequently, and
21:59
Speaker 3: so I I like to take a step back and
22:01
Speaker 3: talk about why this stuff sometimes matters. So first things first,
22:05
Speaker 3: global currencies trade just like any other type of security.
22:10
Speaker 3: I suppose you can trade currencies, and it's actually a
22:13
Speaker 3: pretty active market. The Japanese are the single largest owner
22:18
Speaker 3: of US government debt outside the US, so you know,
22:23
Speaker 3: in terms of country stacking, Japan is the single largest
22:27
Speaker 3: owner of US government debt, which comes into play with
22:30
Speaker 3: all of this. They and everybody else need and use
22:34
Speaker 3: dollars in order to fund all sorts of things in
22:37
Speaker 3: this moment, importantly buying oil on global markets, and their currency,
22:44
Speaker 3: by some arguments, had cheapened. Is that the right word
22:50
Speaker 3: to use in this circumstance considerably over the course of
22:54
Speaker 3: the last several months, and so.
22:56
Speaker 4: Just say depreciated? Yeah, but you have to it's always
22:58
Speaker 4: relative to something.
22:59
Speaker 2: Yeah, it's got to be relative.
23:01
Speaker 4: Dollars, euros, right, some other reference point.
23:04
Speaker 2: Yeah.
23:05
Speaker 3: And the answer is it appreciated substantially against the dollar
23:08
Speaker 3: over the course of the last year or so. The
23:12
Speaker 3: US government now has stepped in in order to support
23:16
Speaker 3: that currency, and for the last couple of days at least,
23:19
Speaker 3: seems to have been successful in doing so. So, taking
23:22
Speaker 3: that step back, I think we have the context. Japan
23:26
Speaker 3: owns a lot of government debt, They need dollars to.
23:28
Speaker 2: Buy oil and other goods.
23:30
Speaker 3: Why is it in the US interest to support the
23:33
Speaker 3: Japanese or why.
23:34
Speaker 4: Might appear really well, the pretext, the stated argument in
23:40
Speaker 4: favor of intervention is that they're gonna intervene the Japanese.
23:44
Speaker 4: Our intervention is the term used when a government, a
23:48
Speaker 4: central bank like the FED not the FED right now,
23:51
Speaker 4: but the Bank of Japan in this case, steps into
23:54
Speaker 4: a market and buys or sells something to influence its value,
23:58
Speaker 4: namely its currency in this case, So the pretext for
24:02
Speaker 4: helping Japan and its intervention to push up the value
24:05
Speaker 4: of the n is, well, they're going to do it
24:07
Speaker 4: either way. We don't want them selling their US treasuries
24:10
Speaker 4: to raise the dollars, which would in turn be exchanged
24:14
Speaker 4: for en by Japan to push up the value of
24:16
Speaker 4: the end. As you pointed out, currencies trade like any asset.
24:20
Speaker 3: And as it pointed out, Japan holds a whole utrillon
24:25
Speaker 3: crapload of US government securities.
24:27
Speaker 4: That's accurate.
24:28
Speaker 3: So if they do it there themselves, then one way
24:30
Speaker 3: of doing it would be say, hey, we're going to
24:32
Speaker 3: dump all We're going to sell something bonds that we have.
24:34
Speaker 3: We need to raise this cash somewhere, and we're going
24:37
Speaker 3: to use it to buy our own currency, which should
24:40
Speaker 3: make it more valuable.
24:41
Speaker 2: Is that that's effectively.
24:42
Speaker 4: We didn't We wanted to avoid that eventuality because rates
24:46
Speaker 4: are already at multi decade highs here in the United States, yep.
24:49
Speaker 3: And if you have a giant seller of US government debt,
24:53
Speaker 3: then it could force the rest or it could force
24:56
Speaker 3: markets to uh drive that rate even higher because as
25:00
Speaker 3: you have Well.
25:00
Speaker 4: That's the stated reason. Another possibly likely reason is that
25:06
Speaker 4: it has resulted in a lower, a stronger end relative
25:10
Speaker 4: to the dollar. It takes fewer yen to buy a
25:12
Speaker 4: dollar than it did before this intervention. Several it's it's
25:16
Speaker 4: not that pronounced at this point, but it's uh, it's
25:21
Speaker 4: it's it's it's meaningful. Nevertheless, that should help US exports,
25:24
Speaker 4: all else equal.
25:26
Speaker 3: And I think this this administration, with you like this
25:29
Speaker 3: policy or not, is pretty focused on US exports and
25:32
Speaker 3: trade imbalances and all those things. Yes, if the end
25:36
Speaker 3: you're very obsessed with the value, then it's going to
25:39
Speaker 3: be tough for those exports to work.
25:40
Speaker 4: Yeah, yeah, so and and and Trump seems to like
25:44
Speaker 4: to do like when when asked to commenty well, I
25:46
Speaker 4: like Japan, I like the way the Prime Minister dresses
25:48
Speaker 4: or something. He didn't say that, but it was just
25:50
Speaker 4: about as substantive as that.
25:51
Speaker 2: This is the second you got.
25:52
Speaker 4: Nothing out of Trump. Bessett, on the other hand, is
25:54
Speaker 4: a is a four X genius. I'm not saying his
25:58
Speaker 4: I his motive are necessarily in line with what most
26:02
Speaker 4: people would think is America's best interest. In this case,
26:04
Speaker 4: but he knows what he's doing.
26:05
Speaker 3: Okay, So what did we actually do right? Because US
26:08
Speaker 3: intervened with Japan?
26:09
Speaker 4: Evidently we sold according to Treasury, and I don't know
26:12
Speaker 4: if we could substantiate it yet. By that, I mean
26:15
Speaker 4: I don't know that we have the data yet. But
26:16
Speaker 4: we sold euro denominated assets or just euros, which is
26:19
Speaker 4: the currency of the European Union, to buy in. You
26:23
Speaker 4: could think about it in very straightforward terms like that.
26:27
Speaker 3: So one of the theories could be, Hey, we didn't
26:29
Speaker 3: want US bond yields going even higher than they already have.
26:33
Speaker 3: We didn't want a bunch of sellers of US government debts,
26:36
Speaker 3: so we're going to team up with Japan here and
26:38
Speaker 3: instead we're going to I don't know if it's punishing euros,
26:41
Speaker 3: but we're going to sell the euros to support.
26:43
Speaker 4: You we didn't have to do. Yeah. I think there's
26:46
Speaker 4: probably a vindictive angle to it, know in this crowd, sure,
26:49
Speaker 4: And by that I just mean they like to punish
26:51
Speaker 4: their enemies and reward their friends, and they view Europe
26:54
Speaker 4: as an enemy for some reason, or maybe just a competitor.
26:58
Speaker 3: Go ahead, So just in terms of how unusual this
27:04
Speaker 3: is for some context, here. The US hasn't been involved
27:08
Speaker 3: in supporting the yen since twenty eleven, which was after
27:11
Speaker 3: Japan's earthquake and tsunami, And the first time this ever
27:16
Speaker 3: happened was ninety eight. So first things first, this isn't
27:18
Speaker 3: something that happens every year or two. It is a
27:21
Speaker 3: pretty rare event for the US government to decide to
27:24
Speaker 3: join up with another central bank and intervene. We did
27:27
Speaker 3: do it with Argentina, I'm reminded of just last year.
27:30
Speaker 3: I believe it was to support the peso, but it's
27:34
Speaker 3: a pretty rare instance that this type of thing happens.
27:38
Speaker 2: I want to.
27:39
Speaker 3: Now turn to the FED, and there's this piece from
27:45
Speaker 3: CNBC about how the Federal Reserve may be pulled into
27:50
Speaker 3: best and s effort to support the Japanese yen. And
27:53
Speaker 3: my main question there is this FED share has extolled
27:59
Speaker 3: not an next to He has criticized pretty much all
28:01
Speaker 3: of the previous FED shares for expanding their scope beyond
28:05
Speaker 3: the dual mandate. And my question is what does supporting
28:09
Speaker 3: the end have to do with inflation and jobs in
28:12
Speaker 3: the United State.
28:13
Speaker 4: He's briefly, I want to correct something I said. We
28:15
Speaker 4: do know that they Treasury told the Federal Reserve Bank
28:18
Speaker 4: of New York, their agent in the foreign exchange market,
28:21
Speaker 4: to sell euros.
28:22
Speaker 2: To buy yen.
28:22
Speaker 4: So we do know that. Okay, so sorry, I just
28:24
Speaker 4: wanted to correct that I misspoke.
28:26
Speaker 3: We went all along. Let's take a quick break. When
28:29
Speaker 3: we come back. I want to expand on this because
28:32
Speaker 3: again context here is important, and while the average American
28:36
Speaker 3: does not buy and sell Japanese yen, this story is
28:40
Speaker 3: a fairly big one in financial circle. So I want
28:42
Speaker 3: to turn back to it, besn't fed Kevin Warsh next
28:46
Speaker 3: on The Financial Exchange.
28:47
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29:19
Speaker 3: Mark as we discussed, said, the Treasury took a rare
29:25
Speaker 3: step to intervene in currency markets, supporting the Japanese yen,
29:30
Speaker 3: which had weakened significantly against the dollar over the course
29:33
Speaker 3: of the last year. And specifically over the last few months.
29:35
Speaker 3: There could be any number of reasons to do this,
29:39
Speaker 3: including just liking the Japanese and aligning with them, because
29:44
Speaker 3: a weak currency for a nation that has to import
29:48
Speaker 3: pretty much all of its energy becomes pretty problematic quickly,
29:52
Speaker 3: and so that could be part of the reason here.
29:55
Speaker 2: It could be that.
29:56
Speaker 3: We were worried they would dump US government securities.
30:01
Speaker 4: Explained much like it wasn't in Argentina. It seems like
30:04
Speaker 4: they're doing friends for people. They're doing favors, excuse me,
30:07
Speaker 4: for people that they like. Japan is an important ally.
30:09
Speaker 4: We have a lot of important ally. I mean, we
30:11
Speaker 4: don't routinely go ahead, sorry, no, you're yeah, a point
30:14
Speaker 4: you already made. This is not routine, it's not It
30:17
Speaker 4: is unusual and merit. It's unusual. It involves a lot
30:19
Speaker 4: of money. It does not, by the way, address Japan's
30:22
Speaker 4: long term structural problems. They are trapped, they're caught. As
30:26
Speaker 4: one author put it all pretty much quote here between
30:28
Speaker 4: the need to keep long term government bond yields low
30:30
Speaker 4: to avoid a debt crisis and a growing urgency to
30:33
Speaker 4: stabilize the end for reasons you pointed out, so US
30:37
Speaker 4: intervention here boj intervention for that matter, probably has a
30:40
Speaker 4: short half life. Japan's structural problems are enormous and not
30:45
Speaker 4: at all addressed by this band aid.
30:49
Speaker 3: In the meantime, there's you know, rumors or papers being
30:54
Speaker 3: written about the Federal Reserve maybe being pulled into all
30:56
Speaker 3: of this, And I don't really understand the structure of that,
30:59
Speaker 3: but but I guess I would will I think we
31:02
Speaker 3: should get more of an explanation as to why we're
31:04
Speaker 3: intervening in Japan from the Treasury. I would deem that
31:09
Speaker 3: even more important for the Federal Reserve, who has spent
31:12
Speaker 3: the last decade and a half criticizing any Federal Reserve
31:14
Speaker 3: member who does anything other than focus on the dual.
31:17
Speaker 4: Okay, if they give access to SWAP, if they take
31:20
Speaker 4: I'm gonna get it. I'm gonna get way in over
31:22
Speaker 4: my head here.
31:22
Speaker 2: I'm sure you need to Okay, go ahead.
31:25
Speaker 4: No, if the Fed got involved and indirectly put taxpayers
31:29
Speaker 4: on the hook, then we need to talk. We already
31:32
Speaker 4: don't know what the rationale for this intervention is. It
31:34
Speaker 4: seems to have been successful so far, but it's likely
31:36
Speaker 4: for structural reasons. As we pointed out, to have a
31:39
Speaker 4: short half life. Did we just do this because Trump
31:42
Speaker 4: likes the Prime Minister and is trying to help her out.
31:45
Speaker 4: I don't really know, Butcent is just doing victory laps.
31:47
Speaker 4: These guys like taking victory laps but not explaining things.
31:50
Speaker 4: I would find an explanation. Maybe it's coherent and compelling.
31:55
Speaker 4: I think taxpayers who are ultimately on the hook for
31:58
Speaker 4: this stuff deserve that.
32:00
Speaker 2: And to be clear, the FED has two jobs.
32:02
Speaker 3: And again we've criticized the FED in previous years when
32:06
Speaker 3: they've started to, you know, diverge from those, when lawmakers
32:11
Speaker 3: have pushed them to focus on climate policy or you know,
32:17
Speaker 3: monopolism or all these other things that chairs have been
32:20
Speaker 3: questioned about in front of Congress. We've we've criticized anybody
32:25
Speaker 3: that's diverged from that dual mandate.
32:26
Speaker 2: I hate. The job is to keep Yeah.
32:31
Speaker 4: Just stability angle here if a further depreciation of the yen.
32:35
Speaker 4: And this raises the question, by the way, or this
32:37
Speaker 4: actually begs a question because you're assuming something right. If
32:41
Speaker 4: Chuck were here, he would correct me. I think, but
32:43
Speaker 4: I think this begs a question. I think I'm using
32:45
Speaker 4: that phrase correctly. Chuck will tell us tomorrow. Sorry, but
32:48
Speaker 4: I always think, oh my god, did I say something
32:50
Speaker 4: that Chuck would find offensive. Grammatically, this begs the question,
32:55
Speaker 4: what does it mean for a currency to be undervalued?
32:57
Speaker 4: What's your measure? The cent should explain that is it
33:00
Speaker 4: just anything? Speculators have pounced on it, much like he
33:03
Speaker 4: did when he's the guy who drove the pound out
33:07
Speaker 4: of the euro's exchange rate, out of the European Economic
33:11
Speaker 4: Communities exchange rate mechanism at the time and made a
33:14
Speaker 4: lot of money for George Sorows and himself.
33:16
Speaker 3: And if the Federal Reserve does need to intervene in
33:19
Speaker 3: the Japanese currency in order to maintain financials to build.
33:22
Speaker 4: Well, they're just going to load me Japanese. They're going
33:24
Speaker 4: to allow the Japanese I believe, to pledge treasuries as call.
33:28
Speaker 4: It gets complicated, and I would get it wrong if
33:30
Speaker 4: I tried to explain it. They're not going to actually
33:31
Speaker 4: print money to give them.
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34:44
Speaker 3: Mark speaking of Kevin Warsh, he's been I think the
34:49
Speaker 3: going consensus in financial media is that he did a
34:53
Speaker 3: pretty abysmal job at the press conference last week and
34:56
Speaker 3: left a lot of people wondering.
34:58
Speaker 2: And I haven't been able to talk to you about it,
35:00
Speaker 2: so disagree.
35:01
Speaker 3: The reaction from markets was that longer term yields went higher,
35:05
Speaker 3: and the reaction from the media was that he was
35:07
Speaker 3: unclear about the policy and the messaging. But I did
35:13
Speaker 3: get the sense that you disagree. So walk me through
35:15
Speaker 3: your argument.
35:15
Speaker 4: And you know, I'm a fan.
35:16
Speaker 2: Of warsh, I do.
35:17
Speaker 4: Yeah, So I'm buying.
35:19
Speaker 2: A poster on his wall right next to the buppets.
35:22
Speaker 4: Do they do they make up poster?
35:24
Speaker 2: Yeah? Oh yeah.
35:26
Speaker 4: So I'm a little bit biased here because I like
35:29
Speaker 4: his his philosophy. I like his almost fanatical focus on
35:33
Speaker 4: price stability. I wish they would have raised rates a
35:36
Speaker 4: little bit, just to add some substance sure to that
35:39
Speaker 4: stated conviction. But you know, the price of oil has
35:43
Speaker 4: come down over the past couple of weeks, so there
35:47
Speaker 4: may be some disinflation baked into the cake here, So
35:50
Speaker 4: that may look pressient that that standing pad in retrospect.
35:55
Speaker 4: Bond traders are mad because they've had to They've only
35:58
Speaker 4: had to work once every six weeks for the last
36:03
Speaker 4: call it twenty years. No offense if you're a bond trader,
36:05
Speaker 4: but you know what I mean, You sit around and
36:08
Speaker 4: you wait for the Fed to tell you what's going
36:09
Speaker 4: to happen on the long end, then you trade accordingly,
36:12
Speaker 4: and all of a sudden, Warsh is telling them, no, no,
36:15
Speaker 4: we're talking, as Greenspan put it a long time ago
36:17
Speaker 4: in a mirror. When we do that, if we also
36:19
Speaker 4: look to the bond market for signals, Warsh is saying,
36:22
Speaker 4: let price discovery work. I'm not gonna how did he
36:26
Speaker 4: put it, He said he wants.
36:28
Speaker 2: To be the referee. Yeah.
36:31
Speaker 4: Effectively, they're not going to stack the deck. Bond traders
36:37
Speaker 4: have to now, based on either internal forecasts or other means,
36:43
Speaker 4: make a guess as to what the right rate of
36:45
Speaker 4: long term is vis a vis short term interest rates.
36:48
Speaker 4: And that was maybe worsh could have put that more clearly,
36:51
Speaker 4: And part of me is, you know what we're coming
36:53
Speaker 4: up against the really fired up. I feel like I
36:57
Speaker 4: could go a while longer or so in the interest
36:59
Speaker 4: of well respecting the radio clock.
37:02
Speaker 2: My takeaway was.
37:03
Speaker 3: That I think there are a lot of bond traders
37:06
Speaker 3: who were, yeah, not sure what to do with themselves
37:11
Speaker 3: and maybe lost their clients some money over the.
37:13
Speaker 4: Course of fascinating study just published. Can I tell you
37:16
Speaker 4: about it in the next hour.
37:17
Speaker 3: Yeah, you can okay, but the overall changes, Like, I
37:22
Speaker 3: don't have really an issue with the FED going to
37:25
Speaker 3: fewer than eight meetings a year.
37:27
Speaker 2: I don't have any sort of issue with them wanting
37:29
Speaker 2: to talk less.
37:30
Speaker 3: My main criticism of worsh was that he came across
37:34
Speaker 3: as not really knowing what he what he was talking about.
37:37
Speaker 3: And I get the sense that he does know what
37:38
Speaker 3: he's talking about, and when asked specific questions about why
37:42
Speaker 3: with inflation pushing did you not move, I thought that
37:45
Speaker 3: his answer could have been conveyed a lot better than
37:48
Speaker 3: it was. And so, as we said from the beginning,
37:52
Speaker 3: this person should be judged based on how their actions
37:56
Speaker 3: actually perform over the course of a longer period of time,
37:59
Speaker 3: not based on what they say. But he might need
38:02
Speaker 3: to say even less than he already has if that's
38:04
Speaker 3: going to be his preser.
38:04
Speaker 4: I want to give a spirited defensive war sounds.
38:07
Speaker 2: Let's take a quick break.
38:08
Speaker 3: When we come back, a spirited defense of warsh Next,
38:10
Speaker 3: on the financial exchange