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Could the AI Spending Boom Trigger a Stock Market Crash? · The Financial Exchange Show

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Speaker 1: is The Financial Exchange with Mike Armstrong and Mark Vandetti.
1:18
Speaker 2: Good morning.
1:19
Speaker 3: Welcome back to midterm election day here on The Financial Exchange.
1:23
Speaker 3: We've got markets in mixed territory as we open up
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Speaker 3: the 11 o'clock hour of the show here. The S
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Speaker 3: & P 500 up 43 points, just over half a percent.
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Speaker 3: The Nasdaq now up over one percentage point, and the
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Speaker 3: Dow Jones Industrial Average down a quarter of a percent.
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Speaker 2: Interesting market this morning.
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Speaker 3: This is roughly the same thing we saw in markets
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Speaker 3: yesterday in early trading before reversing themselves into the close
1:48
Speaker 3: yesterday with, I believe, all three.
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Speaker 2: Indices in the negative for the day.
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Speaker 3: I could be wrong about the Dow there, but I
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Speaker 3: believe they were all three in the negative. And That's
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Speaker 3: after the big sell-off that we had on Friday of
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Speaker 3: last week. NASDAQ, Friday of last week, down over 2.5%.
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Speaker 3: S & P down nearly 2%. And really, I think
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Speaker 3: what this comes down to, as far as I can tell,
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Speaker 3: doesn't have to do with concerns about elections. I don't
2:14
Speaker 3: think it's about affordability or the labor market. I think
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Speaker 3: really what it comes down to is the same thing
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Speaker 3: that's mattered to markets for the last three years, which
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Speaker 3: is AI. What's it going to do for us? How
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Speaker 3: much is it going to cost? How much is it
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Speaker 3: going to eat away at existing business models? And when
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Speaker 3: are we going to know the answers to those questions? That,
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Speaker 3: to me, more than anything else, is what's been defining
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Speaker 3: markets most recently. This time around, it's been about the negative,
2:42
Speaker 3: but we've seen the positive sides of that equation in
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Speaker 3: markets and the economy as well. And increasingly, I think
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Speaker 3: we're going to have, well, we're going to have more
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Speaker 3: clarity about that every.
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Speaker 2: Day that goes on.
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Speaker 3: But increasingly, I feel as though in the next year
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Speaker 3: to two, a lot of those questions are going to
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Speaker 3: need to be answered or the borrowing markets are going
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Speaker 3: to start to get a lot more ugly for those
3:06
Speaker 3: companies that are trying to do all this.
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Speaker 4: Yeah, everything is geared AI right now. Debt markets, of course,
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Speaker 4: equity markets, even sectors that don't seem to be. Some
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Speaker 4: have pointed out that on tech down days, there are
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Speaker 4: plenty of sectors, consumer staples, utilities, and others, which have
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Speaker 4: tended to move in the opposite direction. But if there's
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Speaker 4: a genuinely big washout, and I happen to think there
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Speaker 4: probably will be because it's always been the case following
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Speaker 4: periods of frantic, almost indiscriminate investment. When that comes, it's
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Speaker 4: going to take down not only risk... This is not
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Speaker 4: a prediction, by the way. I'm just saying it's like.
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Speaker 2: What happened in history? This is.
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Speaker 4: Thank you. It's sort of an empirical observation.
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Speaker 1: Yeah, thanks.
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Speaker 4: It's going to drag down everything with it, maybe except treasuries.
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Speaker 4: And I don't know, maybe gold will serve as a
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Speaker 4: safe haven. Sometimes it has, sometimes it hasn't. Even treasuries
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Speaker 4: may not be safe if you think about what the U.S.
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Speaker 4: government's going to have to do to backstop the economy
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Speaker 4: and capital markets if there is a big washout as
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Speaker 4: a result of all this investment, some of which, in retrospect,
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Speaker 4: will be proven to have been misguided.
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Speaker 3: Over the course of the last few weeks, we've gotten
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Speaker 3: earnings from the five major hyperscalers, Oracle, Amazon, Microsoft, Meta,
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Speaker 3: and Alphabet, received with kind of, I guess, mixed receptions
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Speaker 3: on the earnings calls from those five. I think clearly
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Speaker 3: some skepticism about the degree to which they want to
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Speaker 3: either borrow money or issue new shares to build out
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Speaker 3: the AI plans. But those concerns were expressed a lot
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Speaker 3: less for the likes of Microsoft than.
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Speaker 2: They were for Meta and Alphabet.
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Speaker 3: And so I think there's a little bit of disagreement
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Speaker 3: on the part of investors as to how long this
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Speaker 3: can continue and how much it's going to eat into
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Speaker 3: profits before the build-out is done. But again, nothing that
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Speaker 3: I'm seeing in markets is indicating... hey, we're done with
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Speaker 3: this spend and we're cutting it off and time.
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Speaker 2: To look elsewhere.
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Speaker 4: Because they can't. I mean, I don't know what a
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Speaker 4: good analogy is. It's like they know it's out of control,
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Speaker 4: these guys. They're sweating it when they wake up at
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Speaker 4: 3 a.m.
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Speaker 2: Sure.
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Speaker 4: I don't doubt it. But they can't concede that because
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Speaker 4: it would become self-fulfilling that the very act of admitting
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Speaker 4: that we've invested too much too fast and we can't
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Speaker 4: sustain this level of investment, revenues will not keep up,
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Speaker 4: would cause the whole thing to come to a screeching halt.
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Speaker 4: So everybody has to, kind of like Chuck Prince said
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Speaker 4: after 08, you've got to keep dancing until the, whatever,
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Speaker 4: dancing or whatever it is, until the music stops. Because
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Speaker 4: to do otherwise would be an admission that you know
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Speaker 4: it's going to.
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Speaker 2: Yeah, to put it plainly.
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Speaker 4: Which would bring about the very reckoning that you hope
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Speaker 4: wouldn't happen in the first place. Does that make sense?
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Speaker 3: Yeah, I mean, if Alphabet, for instance, were to say,
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Speaker 3: we don't think that this is sustainable... then they're borrowing costs.
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Speaker 4: Everything crashes a millisecond after they finish uttering that sentence, right?
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Speaker 4: So nobody can admit it.
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Speaker 3: Yeah.
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Speaker 4: It'll be obvious after the fact, though.
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Speaker 2: It will. It's just impossible to know in the moment, right?
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Speaker 2: Of course. We talk about the costs.
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Speaker 3: I forget the statistic I saw just yesterday, but it
6:26
Speaker 3: was the cost to rent NVIDIA's latest mainframe.
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Speaker 2: What's the hourly cost to do it? And it's up.
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Speaker 3: Again, you know, like another 100% year over year, that
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Speaker 3: cost to utilize that compute power is still rising dramatically.
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Speaker 3: And it's just so impossible to know in the moment
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Speaker 3: when you are building that compute capacity and data center capacity,
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Speaker 3: are we at the peak of that pricing? Or are
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Speaker 3: we going to see it double another three times before
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Speaker 3: we get there? That's the impossible part.
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Speaker 2: To know in the moment.
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Speaker 4: The crazy thing to me is it could kill some
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Speaker 4: of these companies. Companies that are household names today that
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Speaker 4: were printing money only two years ago and and they
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Speaker 4: did it to themselves.
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Speaker 3: By and large right i mean like i can't say
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Speaker 3: that you know alphabet didn't design any of the you
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Speaker 3: know the first language models but.
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Speaker 4: They could have exercised forbearance though yeah they could have
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Speaker 4: said no no we're the revenues won't compensate for this
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Speaker 4: for so no i i'm not saying i know better
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Speaker 4: they're surely they they know their industry better than uh
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Speaker 4: but a generalist shooting from the hip like me.
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Speaker 3: Alphabet to me is the is One of the most
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Speaker 3: interesting examples here, if ever there were a company that
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Speaker 3: felt threatened by the likes of ChatGPT, it was one
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Speaker 3: of the first names that was mentioned when ChatGPT came
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Speaker 3: out in, what was it, spring of 2023 was, wow,
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Speaker 3: if this can summarize search, why do I need Google?
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Speaker 2: It was like the first question that was asked.
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Speaker 3: Hey, if this can give me an answer, why would
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Speaker 3: I ever click through to a website again? And so
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Speaker 3: their reaction was honestly quite logical. Well, we better invest
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Speaker 3: pretty darn fast to build something else that's going to
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Speaker 3: be the revenue generator for us if this is going
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Speaker 3: to completely wipe out, what is it, like 80% of
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Speaker 3: their revenues or something like that? Advertising for Google is
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Speaker 3: the only thing that makes it all work. And so- Yeah,
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Speaker 3: it was a perfectly logical turn for a company like that.
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Speaker 3: You know, the likes of Amazon, Microsoft, it's a little
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Speaker 3: bit less obvious, but it's still the same story there, right?
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Speaker 3: They have business models that are contingent upon advertising and
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Speaker 3: the way the society, the online society works today. And AI,
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Speaker 3: as it was designed back then, is a threat to
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Speaker 3: all of them.
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Speaker 4: I guess they couldn't think of anything. What are they
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Speaker 4: going to do, make shoes?
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Speaker 1: Yeah.
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Speaker 4: Well, we can either pile on to AI. At least
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Speaker 4: we're good at that. We've got smart coders.
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Speaker 3: What the status of advertising is going to look like
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Speaker 3: in the future, I don't really know. You think about Amazon.
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Speaker 3: You go to Amazon.com, you search for a pair of shoes,
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Speaker 3: and the first things that you're going to see are
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Speaker 3: sponsored results. If Meta's Muse AI is doing the shopping
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Speaker 3: for you, I can't imagine that the first five results
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Speaker 3: on the page are going to be relevant to what
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Speaker 3: that bot chooses for you.
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Speaker 4: I was going to say video content because personally, you
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Speaker 4: were going to mention that.
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Speaker 3: No, I think you're right. I think the things that
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Speaker 3: capture the eyeballs might be what matters.
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Speaker 4: But if you look at the difficulty Netflix is having
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Speaker 4: right now, it makes you wonder whether that's viable. Will
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Speaker 4: we continue to engage with content that way?
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Speaker 3: I don't know.
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Speaker 2: I don't know either, obviously.
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Speaker 3: I guess NFL ads for the Super Bowl are just
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Speaker 3: going to continue to go through the roof because that's
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Speaker 3: the only... form of advertising that's going to capture eyeballs
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Speaker 3: i mean i'm not sure but it is.
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Speaker 4: Where do you have a captive audience in the car
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Speaker 4: but you can't show ads there.
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Speaker 2: Um you ever heard of radio commercials.
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Speaker 4: Hey mark podcast well people are increasingly turning to podcasts
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Speaker 4: though let's be realistic.
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Speaker 2: Uh yeah look i think the entire.
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Speaker 4: The very medium we're on didn't occur to me to
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Speaker 4: mention sorry i don't do this every.
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Speaker 3: Day i think the entire universe of and sorry Quite honestly,
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Speaker 3: like maybe that is.
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Speaker 5: So your radio is off when you're driving is what
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Speaker 5: you're telling us.
10:16
Speaker 4: You just sit in silence. You know, podcast.
10:19
Speaker 2: Sorry, podcast.
10:20
Speaker 4: Yeah, I brood. I brood and scheme against my enemies.
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Speaker 3: In any case, it's clear that it is upending all
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Speaker 3: the traditional advertising. And I have no idea where it
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Speaker 3: pans out. But, you know, Alphabet and Amazon's reaction to
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Speaker 3: all of that.
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Speaker 2: Perfectly logical.
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Speaker 4: I'm not saying it wasn't. Again, what are they going
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Speaker 4: to do?
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Speaker 2: Make hamburgers?
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Speaker 4: We're going to continue to be a company. What should
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Speaker 4: we do?
10:46
Speaker 3: Let's take a quick break. A lot more to cover
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Speaker 3: here next on The Financial Exchange.
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Speaker 2: We'll be right back.
11:01
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11:33
Speaker 3: Mark, we've got this piece that's of interest to me
11:37
Speaker 3: today in Bloomberg about how to build out a retirement paycheck.
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Speaker 3: And it's interesting because I, on a daily basis, kind
11:45
Speaker 3: of deal with the psychology of retirees more than, I guess,
11:49
Speaker 3: equally compared to the investor sentiment and everything else is
11:53
Speaker 3: just the psyche of the retiree and what it's like
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Speaker 3: to go through that transition from bringing home a paycheck
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Speaker 3: and saving for retirement to drawing down on your own assets.
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Speaker 3: And so we do talk about this idea of recreating
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Speaker 3: that paycheck. And here's why I think it's actually an
12:10
Speaker 3: important thing to do, right?
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Speaker 2: And, you know, it's, it's usually from multiple sources. It's
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Speaker 2: a paycheck from social security.
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Speaker 3: Maybe you've got a pension and then maybe it's also
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Speaker 3: a regular portfolio withdrawal. But without that, not everyone is
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Speaker 3: this way, but what I've found from people, like, let's
12:27
Speaker 3: say you've got, uh, a big savings account that you're
12:31
Speaker 3: planning to use when you don't have enough money or
12:34
Speaker 3: something along those lines, like, oh, I'll withdraw it from
12:36
Speaker 3: here if there's a shortfall every month, is that the
12:41
Speaker 3: way a lot of people work is just if it's
12:43
Speaker 3: not coming in as a direct deposit into my bank account,
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Speaker 3: I'm going to be terrified to spend it.
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Speaker 2: I'm going to be horrified of the fact that I
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Speaker 2: have to draw.
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Speaker 3: My savings account down from $ 30, 000 to $ 25, 000 to pay
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Speaker 3: that one-time bill, and I'm not actually going to enjoy
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Speaker 3: myself in retirement a whole lot because I am obsessed
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Speaker 3: with the fact that I don't have that paycheck anymore.
13:02
Speaker 3: And so there have been occasions actually where I've told
13:05
Speaker 3: people like, Hey, here's what you need to actually do
13:08
Speaker 3: is I know you got this, I don't know, you
13:10
Speaker 3: downsized your home, right? And you've got this, you know,
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Speaker 3: a hundred thousand dollars that you are sitting on in
13:15
Speaker 3: cash because you were fortunate enough to have that. And
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Speaker 3: I know you want to have that as this rainy
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Speaker 3: day fund, but here's what I'll encourage you to do
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Speaker 3: is put it somewhere else and then actually set up
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Speaker 3: a monthly withdrawal, just right from there into your checking
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Speaker 3: account every month. so that you know that you're going
13:30
Speaker 3: to have the certainty of that extra thousand bucks a
13:32
Speaker 3: month that's coming in. Because otherwise, you're just going to
13:35
Speaker 3: be hesitant to actually spend money. You're not going to
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Speaker 3: book that trip. You're not going to do the thing
13:40
Speaker 3: that you want to do. And so that's really as
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Speaker 3: much about psychology and the minutiae of how to build
13:51
Speaker 3: this stuff out as it is asset allocation and planning.
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Speaker 3: Bloomberg goes through a whole bunch of other things, like, hey,
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Speaker 3: you should be selling assets annually and setting aside the cash.
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Speaker 3: They talk about buying your own pension, hint, annuity, is
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Speaker 3: how you would go about doing that. If you can,
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Speaker 3: just coasting off the dividends and interest, which I don't
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Speaker 3: even know, Mark. The dividend rate on the S &
14:14
Speaker 3: P 500 now has to be, what, like 1.2%?
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Speaker 2: Yeah, I think, yeah.
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Speaker 3: So that seems pretty difficult to do in this day
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Speaker 3: and age. But I don't think there is one... certain
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Speaker 3: view of how you should do things, right? Like, yeah,
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Speaker 3: I'm not the person that's going to say every annuity
14:31
Speaker 3: that was ever created is bad, but certainly there are
14:34
Speaker 3: a lot of potential pitfalls when you look at those
14:36
Speaker 3: things and the lack of flexibility they give you. You know,
14:40
Speaker 3: coasting off of dividends and interest sounds great until you
14:43
Speaker 3: realize that there's only like three sectors in the market
14:45
Speaker 3: that actually pay a reasonable dividend that you could live
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Speaker 3: off of. And they, you know, maybe haven't grown for
14:51
Speaker 3: the last few years, right? And so you have all
14:53
Speaker 3: these different trade-offs. And I don't think you should use
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Speaker 3: this idea of creating a retirement paycheck to influence necessarily
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Speaker 3: the types of investments that you own, but rather how
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Speaker 3: can I set this up in a way that I
15:06
Speaker 3: am going to feel comfortable spending my own money in retirement?
15:11
Speaker 3: Because I'll tell you, there's like nothing sadder in my
15:14
Speaker 3: mind than seeing somebody retire feel uncomfortable spending their money,
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Speaker 3: their own money that they worked really hard for for
15:21
Speaker 3: a period of time, dying and then seeing the kids
15:25
Speaker 3: get to use it. I love when people think about
15:29
Speaker 3: intergenerational wealth, but when they kind of do it accidentally
15:32
Speaker 3: because they're not willing to spend their own.
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Speaker 2: Money, that to me is kind of sad.
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Speaker 3: And so I do very much buy into this idea
15:40
Speaker 3: of even if it's an artificial paycheck of you literally
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Speaker 3: paying yourself your own money from your own savings, That's
15:47
Speaker 3: an important step to take in order to kind of
15:50
Speaker 3: get into the mindset of retirement.
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Speaker 2: We practice it with our clients regularly here.
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Speaker 3: If you are building out these plans for yourself, I
15:59
Speaker 3: recognize that every circumstance is a little bit different. You
16:03
Speaker 3: might be a teacher that has a pension. You might
16:05
Speaker 3: have Social Security only. You might have a big or
16:09
Speaker 3: small 401k. Maybe all of your money is pre-tax. There's
16:13
Speaker 3: just a million different iterations of how this can go.
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Speaker 3: And if you're ever going to feel comfortable retiring, what
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Speaker 3: I really feel strongly is that you need to map
16:22
Speaker 3: it out and have a plan.
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Speaker 2: Maybe you're capable of doing that yourself, but if you
16:26
Speaker 2: don't feel.
16:26
Speaker 3: You are, if you could use that second opinion on
16:29
Speaker 3: what it is that you're attempting to do, give the
16:31
Speaker 3: folks at Armstrong a call.
16:33
Speaker 2: We're available at 800-393-4001.
16:37
Speaker 3: We work with our clients every day on issues besides
16:40
Speaker 3: how do I invest my money? It's all these other
16:42
Speaker 3: components that go into a successful retirement. That number again
16:46
Speaker 3: for your free consultation is 800-393-4001.
16:48
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
16:53
Speaker 1: registered investment advisor. Nothing in the ad or in any
16:56
Speaker 1: Armstrong guide is specific financial, legal, or tax advice. Consult
16:59
Speaker 1: your own financial, tax, and estate planning advisors before making
17:02
Speaker 1: any investment decisions. Armstrong may contact you to offer investment
17:05
Speaker 1: advisory services.
17:06
Speaker 3: Mark, on a scale of one to catastrophe, where do
17:11
Speaker 3: you put the Fed on?
17:13
Speaker 2: Where do you put the.
17:15
Speaker 3: The risk of the Fed going from eight rate-setting meetings
17:19
Speaker 3: down to seven in 2027.
17:20
Speaker 4: Well, they can always have an interim meeting in an
17:22
Speaker 4: emergency situation.
17:23
Speaker 2: They can, yeah. That's happened a lot of times.
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Speaker 1: Yeah.
17:26
Speaker 2: Did it happen during COVID? Possibly.
17:28
Speaker 5: Yeah, when it first went down, yeah. I remember there
17:31
Speaker 5: was an emergency one.
17:32
Speaker 2: Yeah.
17:33
Speaker 4: Yeah, they can raise or not or lower rates at
17:36
Speaker 4: any time. They're not slaves.
17:37
Speaker 3: That's why I think this stuff tends to be so
17:39
Speaker 3: silly is, oh, we're going from eight to seven meetings
17:43
Speaker 3: a year where we're going to have a rate-setting meeting
17:47
Speaker 3: where that's going to be the focus, or we're going
17:51
Speaker 3: to give three fewer speeches in 2027. Well, those things
17:56
Speaker 3: only really matter when things are becoming problematic in one
18:02
Speaker 3: direction or another. Either inflation is clearly taking off at
18:05
Speaker 3: an uncomfortable pace, or markets are cratering and the economy
18:09
Speaker 3: seems to be heading towards recession. Well, then you just
18:12
Speaker 3: change your mind at that point and call an emergency
18:15
Speaker 3: meeting and give an emergency press conference.
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Speaker 4: Their meeting schedule doesn't line up with the business cycle.
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Speaker 2: Can't.
18:24
Speaker 4: That would be like scheduling, I don't know, having a
18:30
Speaker 4: pre-scheduled appointment at the Minute Clinic or something. You don't
18:33
Speaker 4: know what the whole point is. You don't know when
18:34
Speaker 4: there's going to be a problem. You don't know when
18:36
Speaker 4: the Fed's going to have to act. They've always acted
18:38
Speaker 4: when they had to. So this formality, I get there
18:42
Speaker 4: are reporters and stuff who will grouse about this, of course.
18:47
Speaker 4: They like the eight meetings. They like to fly to D.C.
18:50
Speaker 4: and go, you know, and sit through these things and
18:52
Speaker 4: ask their question and get on camera. I'm sorry. They're
18:55
Speaker 4: not all like that, but some of them are. But
18:58
Speaker 4: in point of fact, they can act when they they
19:00
Speaker 4: could say we're not doing any formal meetings. We're going
19:02
Speaker 4: to talk. These guys talk in between meetings anyway. They
19:04
Speaker 4: get to win women. They could talk whenever they'd like.
19:08
Speaker 1: Yeah.
19:08
Speaker 4: Even for a year, I don't think it would be
19:10
Speaker 4: to our detriment.
19:11
Speaker 3: I recognize that Warsh is bucking some of the trends
19:14
Speaker 3: when it comes to tradition at the Fed. And while
19:17
Speaker 3: on one hand, I don't see the huge necessity for
19:20
Speaker 3: them to do so, it did not appear to me
19:22
Speaker 3: that things were completely broken in terms of.
19:24
Speaker 2: Their meeting schedule.
19:25
Speaker 3: I really don't see any of the actions as even
19:28
Speaker 3: potentially harming their ultimate outcomes.
19:31
Speaker 2: Quick break. Wall Street Watch is next.
19:40
Speaker 1: Bringing the latest financial news straight to your radio every day.
19:45
Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
19:50
Speaker 1: Time now for Wall Street Watch. Tracking the stocks, the data,
19:54
Speaker 1: and the headlines driving markets so far today. Right here
19:57
Speaker 1: on the Financial Exchange Radio Network.
19:59
Speaker 5: Well, after yesterday's wild swings, tech is rebounding by midday today.
20:04
Speaker 5: Oil also continuing to rise. dipped slightly around hopes of
20:08
Speaker 5: a potential deal with Iran. Right now, the Dow is
20:11
Speaker 5: down a third of a percent or 173 points lower.
20:14
Speaker 5: S & P 500 is up four-tenths of one percent
20:17
Speaker 5: or 29 points up. NASDAQ is up three-quarters of a
20:20
Speaker 5: percent or 186 points higher. Russell 2000 is up over
20:24
Speaker 5: one percent. Ten-year treasury yield is up four basis points
20:28
Speaker 5: at 4.935 percent. Crude is down half a percent to
20:33
Speaker 5: trade at $ 95 a barrel, while Brent is down one
20:35
Speaker 5: and a quarter percent. trading at $ 103 a barrel. Apple
20:39
Speaker 5: reported 12% revenue growth in the third quarter, just above
20:43
Speaker 5: expectations due to price increases. However, John Ternes, CEO, warned
20:48
Speaker 5: of weakening profit margins due to high memory costs. Apple
20:52
Speaker 5: is down by 2%. Meanwhile, Palantir reported soaring quarterly profit
20:56
Speaker 5: and raised its full-year revenue guidance. However, shares are down
20:59
Speaker 5: over 3% over worries of its ability to sustain growth.
21:05
Speaker 5: Bloomberg reported that Disney is moving toward thousands of job
21:08
Speaker 5: cuts with managers asked to target 20% in annual cost savings.
21:12
Speaker 5: The savings could come from job eliminations as well as
21:15
Speaker 5: expense reductions. And chipmaker AMD will report earnings after today's
21:21
Speaker 5: closing bell. AMD stock is up nearly 5% ahead of
21:25
Speaker 5: those earnings. I'm Tucker Silva and that is Wall Street Watch.
21:31
Speaker 3: Every time one of those companies like Disney talks about layoffs,
21:33
Speaker 3: I just always imagine someone like Moana walking out of
21:36
Speaker 3: the park all disappointed.
21:37
Speaker 2: They're like suitcases packed.
21:39
Speaker 5: Head down.
21:40
Speaker 2: Just head down, depressed.
21:42
Speaker 3: It's a lot like, remember when Toys R Us went
21:44
Speaker 3: belly up and there was that picture of... Jeffrey the Giraffe.
21:47
Speaker 3: Jeffrey the Giraffe with his suitcases, just like sad. It's
21:52
Speaker 3: one of the best memes I've seen in the last decade.
21:53
Speaker 2: What's wrong with you? There's a lot of things wrong, Mike. Yeah.
21:57
Speaker 2: Me too. Yeah. You have to talk to my shrink
22:01
Speaker 2: about that.
22:03
Speaker 3: Uh, Bloomberg reports that investors are split on earning season,
22:06
Speaker 3: job cuts tied to AI and costs.
22:09
Speaker 2: I really don't think so.
22:11
Speaker 3: Uh, one, I, I, I know you just mentioned Disney
22:14
Speaker 3: mentioning these, uh, thousands of layoffs targeting 20% cost savings.
22:19
Speaker 3: I don't even know what that 20% of their total
22:21
Speaker 3: labor costs. I'm unclear what that means for Disney, but, um,
22:26
Speaker 3: one thing that gets written about in this Bloomberg piece
22:28
Speaker 3: is that the CEO mentioned of job cuts, firing and
22:31
Speaker 3: layoffs are, uh, within news, within news reports, um, are
22:37
Speaker 3: reaching a high in October that they haven't seen since may.
22:41
Speaker 2: So, okay.
22:42
Speaker 3: They Bloomberg can detect an uptick in the reference to
22:45
Speaker 3: this sort of thing in news reports. But Mark, as
22:49
Speaker 3: far as I know, back in may, uh, Did we
22:51
Speaker 3: see then for the next few months an uptick in
22:54
Speaker 3: layoffs or unemployment of any detectable sort?
22:58
Speaker 2: No, Michael, we did not.
22:59
Speaker 3: No, we did not. Thank you for double-checking for me.
23:02
Speaker 3: So just because companies are talking about this stuff does
23:05
Speaker 3: not mean it's going to come to pass. And then furthermore,
23:09
Speaker 3: I really don't think that job cuts tied to AI
23:14
Speaker 3: are even ranking among the third or fourth top jobs
23:19
Speaker 3: items that investors are focused on right now, or voters
23:23
Speaker 3: for that matter.
23:24
Speaker 2: I don't know about you.
23:25
Speaker 3: When I talk to people, it is mainly a conversation
23:30
Speaker 3: of concerns about energy costs, concerns about inflation generally, and
23:36
Speaker 3: the idea of job cuts tied to AI.
23:39
Speaker 2: Just as not ranking among top issues.
23:41
Speaker 4: There were. We got jolts this morning. We talked about
23:45
Speaker 4: it earlier. We always talk about openings versus the unemployment
23:48
Speaker 4: rate to get a sense for slack or tightness in
23:51
Speaker 4: the labor market. It's also useful to keep in mind,
23:53
Speaker 4: according to the same report, 5.319 million people separated from
23:58
Speaker 4: their job last month. About the same number got new
24:03
Speaker 4: jobs last month. There's a tremendous amount of turnover. In
24:06
Speaker 4: the U.S. economy. And that's good. It's healthy. It's dynamic.
24:10
Speaker 4: Some of those are involuntary. I don't want to minimize that.
24:13
Speaker 4: But most, the overwhelming majority, are not. And that's a
24:16
Speaker 4: good thing.
24:17
Speaker 3: I will acknowledge here for a moment that the only
24:19
Speaker 3: way that you can probably make the math of this
24:22
Speaker 3: AI build that work is if you fire a whole
24:25
Speaker 3: bunch of people and replace them with technology. That's the
24:28
Speaker 3: only conceivable way I can think of today.
24:30
Speaker 4: That's going to happen either way, Mike, right?
24:32
Speaker 2: Did you see the.
24:34
Speaker 4: Who was it? Jason Furman, now at Harvard, was head
24:36
Speaker 4: of the CEA, chairman of the Council of Economic Advisors
24:41
Speaker 4: under Obama, said, and he got a lot of flack
24:45
Speaker 4: for this, most of the junior people I had at
24:48
Speaker 4: CEA could be replaced by AI.
24:53
Speaker 2: Today.
24:54
Speaker 3: Yeah, I think that's undoubtedly true. It's going to happen anyway.
24:57
Speaker 3: The question is, does that pace.
25:01
Speaker 2: Is the pace of those firings.
25:03
Speaker 3: And that lack of hiring so dramatic that it results
25:06
Speaker 3: in a really high unemployment rate, or does it end
25:08
Speaker 3: up much like other technologies that we've seen throughout history where, yeah,
25:12
Speaker 3: when the car was invented, the, what do you call
25:17
Speaker 3: somebody that drives a horse-drawn buggy? Whoever that guy was
25:22
Speaker 3: didn't have a job 10 years later, but the invention
25:27
Speaker 3: of the automobile allowed for the creation of all sorts
25:29
Speaker 3: of new jobs.
25:30
Speaker 2: And so that's the question with this technology.
25:32
Speaker 4: A coachman.
25:33
Speaker 2: Thanks.
25:36
Speaker 3: Yeah, of course, somebody, a mail courier in 1989 whose
25:41
Speaker 3: job was to deliver missives around New York City did
25:45
Speaker 3: not have that same job by 2000 because the internet existed.
25:49
Speaker 3: All sorts of these things occur, and certainly AI is
25:52
Speaker 3: going to replace jobs. The relevant question is, Will it
25:56
Speaker 3: do so at such a rapid pace that we have
25:58
Speaker 3: a high unemployment rate for some.
26:00
Speaker 2: Period of time?
26:02
Speaker 3: Or is it going to occur, much like all these
26:04
Speaker 3: other technologies have in the past, at a relatively slow pace?
26:10
Speaker 3: And in which case, I tend to have some pretty
26:12
Speaker 3: big concerns about the valuations on these companies, because I
26:15
Speaker 3: don't know how you sell the product to your customers
26:17
Speaker 3: if you can't replace your staff with it rather rapidly.
26:20
Speaker 2: But those are the two scenarios to me. And I really, again.
26:24
Speaker 3: I will buy the concern about the labor market if
26:27
Speaker 3: we start to see it, but there's just no signs.
26:32
Speaker 4: Yeah, I don't know if a recession, and they're inevitable,
26:35
Speaker 4: so one's going to happen. Will it accelerate the trend?
26:37
Speaker 4: Will it give businesses an excuse to pair large swaths
26:42
Speaker 4: of people? And this will be cost-cutting because AI will
26:45
Speaker 4: be cheaper. Maybe this happens during the next recession and
26:49
Speaker 4: it makes the recovery from that recession more challenging. Yeah,
26:53
Speaker 4: another sort of jobless like we saw in 1991 when
26:57
Speaker 4: we came out of that. Yeah, that recovery started in
27:02
Speaker 4: late 1990.
27:05
Speaker 1: Right.
27:05
Speaker 4: Yeah, yeah. Whatever.
27:09
Speaker 2: Shaking my head.
27:11
Speaker 4: I know you do. And again, in 2001, after we
27:16
Speaker 4: came out of... Yeah, recovery started in 91. Recovery started
27:20
Speaker 4: in 2001, late 2001. In both cases, though, joblessness remained high.
27:26
Speaker 4: The unemployment rate remained high for years for totally different reasons.
27:30
Speaker 3: Mark, we've got this piece on... From Financial Times, which
27:37
Speaker 3: the pieces from the FT are generally pretty well written
27:39
Speaker 3: and pretty well researched.
27:40
Speaker 2: The best.
27:42
Speaker 3: They're talking about the risk of higher volatility in stocks
27:44
Speaker 3: and the fact that that risk of higher volatility is rising.
27:49
Speaker 3: And you're right. It is a guest written piece. I
27:53
Speaker 3: didn't see much to it. I don't know how you
27:56
Speaker 3: predict this sort of thing.
27:57
Speaker 2: I don't know.
27:58
Speaker 3: Like, we're all seeing some of this volatility in stocks
28:01
Speaker 3: on the underlying components. But I don't know how you
28:05
Speaker 3: go about predicting it.
28:06
Speaker 4: I agree with the conclusion. I didn't even read most
28:09
Speaker 4: of the reasoning because you don't have to. You can
28:11
Speaker 4: just look at the last 20 days, the last month's
28:14
Speaker 4: actual or realized volatility. And that's just the fluctuation of
28:18
Speaker 4: the day-to-day returns. Standard deviation, if you're like a statistical type,
28:22
Speaker 4: that's all you're doing there. Realized vol, volatility, over the
28:26
Speaker 4: past month is in the lowest 5% of observations. It's
28:30
Speaker 4: like 10. It doesn't get much lower than a standard volatility. Well,
28:35
Speaker 4: they're both actually fancy words, right? So it doesn't help
28:38
Speaker 4: to define it because it doesn't get less complicated. But anyway,
28:42
Speaker 4: things are unusually calm. Maybe that's a good way to
28:44
Speaker 4: put it.
28:45
Speaker 3: Things have been unusually calm. Is this just saying in
28:48
Speaker 3: three pages what goes up must come down? Or what
28:51
Speaker 3: goes down must come up?
28:54
Speaker 2: Mean reversion is what we're talking about here? Bingo. It's
28:57
Speaker 2: not terribly insightful.
28:57
Speaker 4: Mean reversion, that's also jargony, though. I think most people
29:00
Speaker 4: have heard it. But like you said, there's sort of
29:03
Speaker 4: a natural level. The historical volatility fluctuation around an average
29:10
Speaker 4: is something like 20 on the S & P 500.
29:14
Speaker 4: Right now it's a 10.
29:16
Speaker 2: Okay.
29:16
Speaker 4: So like you said, unless you think something's changed structurally,
29:21
Speaker 4: that's probably not sustainable. So I think you could have
29:23
Speaker 4: got to the same conclusion a little more, frankly, rigorously
29:26
Speaker 4: than a bunch of, I don't want to criticize the author.
29:28
Speaker 4: They're very accomplished. But I would prefer that you rely
29:32
Speaker 4: on the explanation that you just advanced, Mike.
29:35
Speaker 3: Let's take a quick break. When we return, full market
29:38
Speaker 3: update and Stack Roulette is next.
29:40
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30:01
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30:01
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30:20
Speaker 3: Time for a Bit of stack roulette here, Mark, and
30:24
Speaker 3: I'll kick things off with this piece from Bloomberg. Wall
30:27
Speaker 3: Street CEOs, big money managers divided over AI risks. This
30:33
Speaker 3: is a piece that was alongside a piece about a
30:37
Speaker 3: hedge fund manager whose hedge fund is up something like
30:40
Speaker 3: 2% this year and explaining himself to investors insofar as
30:43
Speaker 3: he believes that we're heading for a.
30:44
Speaker 2: Bubble that's going to pop.
30:45
Speaker 3: And I got to tell you, look, everyone's opinion on
30:49
Speaker 3: the fact that we're in a bubble is interesting to
30:51
Speaker 3: me But it's all that anybody wants to talk about
30:54
Speaker 3: when it comes to AI risks is, hey, are we
30:56
Speaker 3: going to overbuild it and is it going to be
30:57
Speaker 3: a problem?
30:59
Speaker 2: And I feel like I've heard that story.
31:01
Speaker 3: If we do get the market crash at some point
31:02
Speaker 3: in the not-so-distant future, it will be easily the most
31:05
Speaker 3: predicted market crash in history. Maybe you can disagree with that,
31:09
Speaker 3: but it seems like everyone is predicting that right now.
31:13
Speaker 2: I would really rather.
31:15
Speaker 3: Hear from these big money managers and banks that are
31:19
Speaker 3: talking about the risks here So tell me about what
31:21
Speaker 3: they're doing about digital security and the other risks from AI, right?
31:26
Speaker 3: We just saw the biggest theft of cryptocurrency in history
31:30
Speaker 3: with a, what was the name of that?
31:32
Speaker 2: Was it Binance that happened?
31:34
Speaker 3: Like three something billion dollars gets siphoned out of wallets.
31:38
Speaker 3: And we're still focused on whether or not the stock
31:41
Speaker 3: market's going to crash. Like we had a bunch of
31:43
Speaker 3: AI agents that were in this sandbox that OpenAI created
31:48
Speaker 3: that broke out and hacked a major company. I'm not
31:52
Speaker 3: sure if I can call Hugging Face a major company,
31:53
Speaker 3: but a company and their database independently, autonomously, leaving hints
31:59
Speaker 3: for each other, sacrificing themselves in order to accomplish this
32:03
Speaker 3: common goal is literally how it was described. And we're
32:08
Speaker 3: sitting here focused on whether or not the stock market's
32:10
Speaker 3: going to go up or down before December 31st. Like,
32:14
Speaker 3: I'll tell you, that to me is probably the least
32:16
Speaker 3: interesting part of this technology that we've created.
32:18
Speaker 2: Yeah, absolutely.
32:20
Speaker 4: That's what they're in the business of, though, so you
32:22
Speaker 4: can understand why the head of an investment bank or
32:24
Speaker 4: an asset manager or money management firm would shy away
32:29
Speaker 4: from commenting on the civilizational risk, the existential risk of AI,
32:33
Speaker 4: which is interesting but a little more philosophical and sci-fi-ish.
32:37
Speaker 4: So I get that.
32:38
Speaker 2: I would appreciate some.
32:41
Speaker 3: Assurances, and I think there's a reason they're not giving them,
32:45
Speaker 3: but is anybody else just terrified that these things are
32:50
Speaker 3: going to be way better at breaking into your investment account,
32:54
Speaker 3: your 401k, your bank account, like all of these things.
32:57
Speaker 4: So Mike, what do you tell, let's be practical for
32:59
Speaker 4: a sec here. So you just gave the example of
33:01
Speaker 4: an investment account. If I have an online brokerage account,
33:03
Speaker 4: a Schwab or whomever, Fidelity, and I've set up two-factor
33:08
Speaker 4: authorization and I've locked my phone to make sure you
33:10
Speaker 4: can't transfer the number. I've set up voice authorization. I've
33:14
Speaker 4: set up a secret word.
33:16
Speaker 2: It's Mike Armstrong.
33:18
Speaker 4: I've set up, Everyone's secret word is Mike Armstrong.
33:20
Speaker 2: That's not unique.
33:22
Speaker 4: Mike Armstrong's a handsome guy. That's my secret word. What
33:26
Speaker 4: more can I do to protect? Now, they can easily
33:28
Speaker 4: grab my voice from like this.
33:31
Speaker 2: Great question, Mark. I don't have an answer. Also, I'll
33:33
Speaker 2: acknowledge here. I'll acknowledge here for.
33:36
Speaker 3: A moment that you doing all of those things probably
33:38
Speaker 3: puts you in the top 10 percentile.
33:40
Speaker 2: Of security actions. You think so? Yes.
33:42
Speaker 1: Yes.
33:43
Speaker 3: Go ask anyone over the age of, I'm going to
33:47
Speaker 3: choose 50 here pretty randomly, but go poll everyone over
33:50
Speaker 3: the age of 50 and figure out how many of
33:52
Speaker 3: them actually have their screen locked on their cell phone.
33:57
Speaker 2: I didn't know you.
33:57
Speaker 4: Could do that. AI told me that. I asked Gemini,
34:01
Speaker 4: how can I beef up security on my phone? Is
34:05
Speaker 4: two-factor authorization bulletproof or something is what I asked AI.
34:08
Speaker 4: It said, no, actually, someone could steal your phone number.
34:11
Speaker 4: They could transfer it to initiate. An illicit transfer to
34:15
Speaker 4: another phone.
34:16
Speaker 3: I'm not even talking about that. I'm talking about literally
34:18
Speaker 3: the unlock feature on your phone. The number of people
34:21
Speaker 3: that I run into who do not have any sort
34:23
Speaker 3: of combination or thumbprint or facial recognition to unlock their device.
34:27
Speaker 5: You still see people without that?
34:29
Speaker 2: Yes. Really? On a daily basis. And so, I mean,
34:34
Speaker 2: those people are like.
34:38
Speaker 2: I'll just give family story. I had to go through
34:40
Speaker 2: this for.
34:40
Speaker 3: A little while with my mother-in-law, and we got it sorted,
34:43
Speaker 3: and now it's done. But yes, there's an entire generation
34:46
Speaker 3: of people that do not take that sort of thing
34:48
Speaker 3: terribly seriously, and they're in trouble anyway.
34:51
Speaker 4: I want to be constructive, uncharacteristically here, and say most
34:55
Speaker 4: people have online access to their brokerage account. Most people's
34:59
Speaker 4: life savings are in their 401k or brokerage account. You
35:01
Speaker 4: can lock outgoing transfers. From all the major record keepers,
35:05
Speaker 4: 401k that is, and brokerage account providers. By that I
35:08
Speaker 4: mean you can tell Fidelity, money only goes into this sucker.
35:11
Speaker 4: It never comes out unless I log in, go through
35:14
Speaker 4: all my security steps, and then take off my outgoing lock.
35:20
Speaker 4: There are a pretty good number of safeguards you can
35:22
Speaker 4: put in place.
35:22
Speaker 5: There are.
35:23
Speaker 2: The good news... Well, I don't know if that's good
35:26
Speaker 2: news or bad news, but....
35:28
Speaker 3: It increasingly seems to me like we are getting to
35:31
Speaker 3: the point where you just can't trust things that happen online.
35:34
Speaker 4: As I say this, my account just got drained because
35:35
Speaker 4: I just revealed all my, like, damn, I just got
35:37
Speaker 4: a text from Schwab. Sorry to see you go.
35:42
Speaker 2: But I just, yeah, I don't know.
35:44
Speaker 3: I lack a lot of confidence that the safeguards that
35:48
Speaker 3: we believed in and really thought through over the course
35:52
Speaker 3: of the last 30 years to get these things secured
35:54
Speaker 3: just may not be relevant in the age of generative AI.
35:57
Speaker 4: Well, it's an arms race without question. What we think
36:00
Speaker 4: is state-of-the-art now will not be in a year.
36:02
Speaker 3: Agreed.
36:03
Speaker 5: Agreed.
36:04
Speaker 3: Maybe I'm looking in the wrong place. I'm looking in
36:06
Speaker 3: this place because this is where I live every day
36:08
Speaker 3: and it terrifies me. In all likelihood, the problem is
36:12
Speaker 3: going to come from somewhere else. But that's the piece
36:15
Speaker 3: that keeps me up at night about AI, not what's
36:18
Speaker 3: going to happen to the stock prices in the next
36:19
Speaker 3: 30 days.
36:20
Speaker 2: What do you have for us?
36:21
Speaker 4: Bloomberg with the sort of hysterical headline, gas prices rise
36:25
Speaker 4: above 4% for the first time. On election day, $ 4,
36:30
Speaker 4: excuse me, 4%.
36:30
Speaker 2: 4% of what?
36:31
Speaker 3: Sorry, fighting a little cold.
36:37
Speaker 4: So that's one way to think about it, but that
36:40
Speaker 4: doesn't speak to how big of a chunk it takes
36:43
Speaker 4: out of your budget. So you have to adjust for
36:46
Speaker 4: inflation at the very, very least, which they don't do, disappointingly.
36:50
Speaker 4: And as it turns out, when you do that very,
36:52
Speaker 4: very simple exercise, gas prices were about as high, maybe
36:55
Speaker 4: a little higher, at the point of the midterms in 2014,
36:59
Speaker 4: and also in 2006, about the same, maybe plus or
37:03
Speaker 4: minus a few percentage points.
37:05
Speaker 3: So this is the first midterm ever where national gas
37:08
Speaker 3: prices have been over $ 4 a gallon.
37:10
Speaker 4: Over $ 4 a gallon. I understand the psychological impact of that.
37:12
Speaker 4: People don't adjust, including me. We don't adjust for inflation
37:15
Speaker 4: in our heads. But in terms of its bite out
37:18
Speaker 4: of your standard of living, it has been higher at
37:22
Speaker 4: times outside of midterms, of course. At times it's been
37:25
Speaker 4: a lot higher in inflation-adjusted terms than it is today.
37:28
Speaker 4: For what that is worth, I don't mean to minimize it.
37:30
Speaker 3: All of that having been said, if there is, if
37:33
Speaker 3: we assume for a moment that Democrats do sweep Congress,
37:38
Speaker 3: I can think of few issues that I would be
37:41
Speaker 3: more likely to blame on it than the price of
37:43
Speaker 3: a gallon of gas.
37:44
Speaker 4: Oh, I think it comes down to inflation, yeah.
37:46
Speaker 3: I think it comes down very specifically to energy inflation.
37:49
Speaker 5: Yeah.
37:49
Speaker 4: Look what it did to the last guy. And look
37:51
Speaker 4: what it did to George W. in 2000. Of course,
37:54
Speaker 4: there was an unpopular war then, too.
37:56
Speaker 1: Yeah.
37:56
Speaker 4: Unpopular war plus high inflation. Elevated inflation, I should say.
37:59
Speaker 4: Not good.
38:00
Speaker 2: We shall see.
38:01
Speaker 3: That's all the time we have today on midterm day.
38:03
Speaker 3: We'll have election results tomorrow. Markets remain in positive territory.
38:08
Speaker 3: NASDAQ up 220 points, nine tenths of a percent. S
38:12
Speaker 3: & P 500 up 34, about half a percent. The
38:14
Speaker 3: Dow Jones Industrial Average down 220, or about four-tenths.
38:18
Speaker 2: Of a percent. Have a great rest of your day, folks.
38:20
Speaker 2: We will be back tomorrow.