Latest / The Financial Exchange Show / Those wishing for a drawn out bear market are fools

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Those wishing for a drawn out bear market are fools · The Financial Exchange Show

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Speaker 1: a donation today. This is the Financial Exchange with Chuck
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Speaker 1: Zada and Mike Armstrong.
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Speaker 2: Chuck Mike Tucker with you today, and we got a
1:13
Speaker 2: nice little week that we've got planned out here. As
1:18
Speaker 2: I take a look at the calendar, it's not you know,
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Speaker 2: a ten out of ten week where you're sitting there saying,
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Speaker 2: oh my goodness, like, how am I gonna sleep? I'm
1:27
Speaker 2: so excited about all the stuff we're gonna be getting.
1:31
Speaker 2: But I put it firmly as like, you know, a
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Speaker 2: solid seven out of ten on the economic data side
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Speaker 2: of things, A couple of decent reports that we're gonna
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Speaker 2: be getting FED minutes on Wednesday, which I'm more interested
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Speaker 2: in now just giving some of the you know, things
1:48
Speaker 2: that we're talking about as far as the December meeting,
1:51
Speaker 2: whether that is on off or you know, somewhere in between.
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Speaker 3: And so I think the things we're talking about is
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Speaker 3: many FED meetings being you know, you I don't care about,
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Speaker 3: I know, being brought out in front of a mic
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Speaker 3: saying we're not sure about this December rate cut that
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Speaker 3: was previously pretty baked into market, which is.
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Speaker 2: Kind of interesting to me. So I'm interested to hear
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Speaker 2: what we get from the FED meeting minutes on Thursday.
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Speaker 2: We are going to get the jobs report for September, so,
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Speaker 2: you know, little anti climactic just because it's kind of like, Okay,
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Speaker 2: you guys collected this data two months ago and now
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Speaker 2: you're going to show it to us. But it'll still
2:31
Speaker 2: at least fill in a data point that we've been missing,
2:34
Speaker 2: and I think that'll be informative. And by the way,
2:38
Speaker 2: we can compare this to the AI generated jobs reports
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Speaker 2: that and I shared back that first week in October,
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Speaker 2: and we'll see whose artificial intelligence was closest to what
2:51
Speaker 2: we actually get from the Bureau of Labor Statistics.
2:54
Speaker 3: So that September jobs report was fully collected and not released,
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Speaker 3: so we will get a release on unemployment rate. We
3:00
Speaker 3: will get a release on jobs created or lost. The
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Speaker 3: October report, you can get a partial, you won't get
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Speaker 3: the full one. And when will we be getting that one,
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Speaker 3: We don't know. We don't know. Okay, And the October
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Speaker 3: report again because it was not fully collected because of
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Speaker 3: the government shutdown. We expect to get the Establishment survey,
3:18
Speaker 3: which is the survey of businesses, so we'll get the
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Speaker 3: number of hires or fires. We will not get that
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Speaker 3: unemployment rate read because correct surveying ten times as many
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Speaker 3: households is apparently more strenuous A little bit of work, yeah,
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Speaker 3: you know, than getting the service little bit of work.
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Speaker 2: So we get the September jobs report on Thursday. I
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Speaker 2: do not believe we are going to get weekly jobless
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Speaker 2: claims from the d well then, yet I think they
3:43
Speaker 2: are still ramping back up, so I anticipate next week
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Speaker 2: maybe is when that starts to happen. We'll get existing
3:49
Speaker 2: home sales data Thursday as well, so that's going to
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Speaker 2: be fun. And then on the earning side of things,
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Speaker 2: everyone's kind of focused on in Vidia on Wednesday, just
4:00
Speaker 2: because the last couple of weeks has not been great
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Speaker 2: for AI adjacent stocks and obviously a monster report from
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Speaker 2: in Video could save that section of the market, which,
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Speaker 2: by the way, it's I was going through my notes.
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Speaker 2: I take daily notes on like what is going on
4:17
Speaker 2: in markets, just because it's nice to be able to
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Speaker 2: look back on them and they kind of see what
4:22
Speaker 2: what was happening.
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Speaker 3: Chuck's diary is even more boring than the typical diary.
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Speaker 2: It is like it's you know, most of the time,
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Speaker 2: it's like, oh, I wonder if he loves me. I
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Speaker 2: wonder if she mine's like, doesn't video love me? And
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Speaker 2: it's you know, it's it's just kind of it's doesn't
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Speaker 2: talk in that voice, but it would, uh in any case,
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Speaker 2: in video a bunch of times in the last couple
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Speaker 2: of years has come in and saved markets that looked
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Speaker 2: a little bit dodgy. Can it do that again? Beyond that,
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Speaker 2: other big names that I think are interesting. This is
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Speaker 2: the week that we get all the retail earnings home
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Speaker 2: depot on Tuesday, TJX Low's target on Wednesday. The target
5:02
Speaker 2: is you know, gradually drifting towards irrelevancy. It still is
5:06
Speaker 2: or irrelevance, irrelevance. Yeah, we don't need to add the
5:10
Speaker 2: Y at the end. And then on Thursday, we've got
5:13
Speaker 2: Walmart coming out with earnings, which is obviously a big
5:17
Speaker 2: one as well. So I think that this is I'm
5:22
Speaker 2: not gonna set this up and be like, this is,
5:24
Speaker 2: you know, the most pivotal week ever, but in video
5:27
Speaker 2: is going to give us some clarity hopefully on you know,
5:32
Speaker 2: what the market does or look, there's always the potential
5:37
Speaker 2: that it just acts as a vehicle for a bunch
5:39
Speaker 2: of people to go out and spend a bunch of
5:40
Speaker 2: options premium only for those options to expire worthless one
5:43
Speaker 2: the volatility doesn't materialize, which in turn then helps out
5:48
Speaker 2: our good friends at Citadel Securities to allow Ken Griffin
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Speaker 2: to buy another dinosaur skeleton, which is you know, fun too,
5:56
Speaker 2: like everyone needs a second one to keep the first
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Speaker 2: one company.
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Speaker 3: Sometimes we joke these are actually serious things, right.
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Speaker 2: Ken Griffin, a dinosaur skeleton probably wants a second one.
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Speaker 3: One thing that I don't think you mentioned was the
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Speaker 3: Import Price Index. We do get that Tuesday. Almost nobody
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Speaker 3: has ever cared about this, but people are actually looking
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Speaker 3: at it this year for one reason, to try and
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Speaker 3: determine who is actually absorbing tariffs. So you can actually
6:19
Speaker 3: take a look and say, oh, yeah, this was the
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Speaker 3: price of all imports as of October compared to October
6:25
Speaker 3: of twenty twenty four, which hypothetically tells you, oh yeah,
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Speaker 3: our Chinese suppliers eating the tariffs? Are we eating the tariffs?
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Speaker 3: Where is it coming from?
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Speaker 2: Because the Import Price Index does not include the tariffs,
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Speaker 2: and so you can see if there are discounts that
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Speaker 2: are being applied relative to where they previously.
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Speaker 3: That's technically the first data points since the government has reopened,
6:45
Speaker 3: so you know again I'm desperate for anything there.
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Speaker 2: I haven't seen confirmation that that's going to be published. Okay,
6:51
Speaker 2: I know it's on the schedule. Maybe I'll be disappointed.
6:54
Speaker 2: I haven't seen confirmation that it's been published. So it's
6:58
Speaker 2: it's a hard Maybe. The other thing that we are
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Speaker 2: getting now every week, which in the absence of other
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Speaker 2: employment statistics, we do pay attention to ADP's reporting their
7:08
Speaker 2: weekly four week moving average for their employment data. Again,
7:14
Speaker 2: it's kind of like, Okay, what do we do with this,
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Speaker 2: because ultimately there's two reasons why it doesn't matter normally.
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Speaker 2: The first is that historically ADP has not been a
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Speaker 2: great predictor of job gains. In the BLS report, It's
7:30
Speaker 2: gotten a lot better if you look at kind of
7:32
Speaker 2: rolling three month averages over the last year or two,
7:35
Speaker 2: so I think maybe there is a little bit more
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Speaker 2: value in that at this point. The other piece is
7:40
Speaker 2: that when we look at how the Fed makes policy,
7:43
Speaker 2: fit doesn't make policy based on the number of jobs added.
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Speaker 2: It makes policy based on the unemployment rate, and ADP
7:48
Speaker 2: never gives us an unemployment rate, So it's kind of like, okay, like,
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Speaker 2: what's the point of this. Then if I'm not getting it.
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Speaker 2: But in the absence of other real time job data, sure,
7:58
Speaker 2: I'll always take more. Like I'm not going to say no.
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Speaker 3: Yeah, I could probably detect big swings, but other than
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Speaker 3: that's not terribly useful.
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Speaker 2: I think when we're looking at some of the other
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Speaker 2: supporting job data, other things that we've looked at, you know, recently,
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Speaker 2: the INDEED Jobs Posting Index, they don't have the newest
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Speaker 2: data tabulated for it at the moment. I don't know why,
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Speaker 2: but the last week or so has not yet been updated,
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Speaker 2: so we're still running with the October thirty first data.
8:24
Speaker 2: It's nothing interesting to report there. Paychecks reports, a monthly
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Speaker 2: snapshot of small business hiring, there's nothing to report there
8:33
Speaker 2: because again it's you know, we've already done the month
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Speaker 2: of October. We're now waiting on November. So I think, yeah,
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Speaker 2: we're kind of in this holding pattern where we want
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Speaker 2: more data and we don't have all the data that
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Speaker 2: we want now. But this week's still going to give us,
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Speaker 2: you know, a little bit of information that I think
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Speaker 2: will be informative. Let's take a quick break. When we
8:55
Speaker 2: come back, let's dig in more to preview in videos ears,
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Speaker 2: I think There's a lot to talk about, and we
9:04
Speaker 2: will do exactly that.
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Speaker 2: Mike. We mentioned in our first segment that in Video
10:44
Speaker 2: reports earnings after the bell on Wednesday, and I do
10:50
Speaker 2: think this is coming at an important time for stocks
10:55
Speaker 2: related to artificial intelligence. I'm not saying that it comes
10:59
Speaker 2: at an importan in time for the overall you know,
11:04
Speaker 2: AI trajectory or the overall AI business, but there are
11:10
Speaker 2: some stocks that are tied to the AI trade that
11:12
Speaker 2: are showing signs of bending a little bit. And I
11:15
Speaker 2: think if in Video were to come out with, you know,
11:19
Speaker 2: some signs not of weakness, but just lacking the pop
11:23
Speaker 2: and pizzaz that these earnings have had for the last
11:26
Speaker 2: couple of years. It does suggest that it could be
11:29
Speaker 2: something to worry about for the stocks in the short term,
11:31
Speaker 2: without saying anything about where they go longer term.
11:34
Speaker 3: Yeah, to be clear, it does seem to both you
11:37
Speaker 3: and I that investors have been scrutinizing some of these
11:41
Speaker 3: fastest growing companies over the course of the last two
11:44
Speaker 3: to four weeks.
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Speaker 2: I said that the last week of October and the
11:48
Speaker 2: first week of November potentially represented a major inflection point
11:54
Speaker 2: that we could look back on years from now.
11:56
Speaker 3: So obviously in video could come out Wednesday afternoon and
11:59
Speaker 3: knock the cover off the doors, as they have many times,
12:02
Speaker 3: cover off the doors, the cover off, the doors, off
12:04
Speaker 3: the hinges, knock the cover off the ball, cover off
12:07
Speaker 3: the ball, door off the hinges.
12:09
Speaker 2: I like, knock the cover off the doors. That's almost
12:11
Speaker 2: as good as smooth as cucumber.
12:14
Speaker 3: Yeah, knock it off.
12:15
Speaker 2: It's as smooth as a door knocked off.
12:17
Speaker 3: That you guys, don't have covers on all your doors
12:20
Speaker 3: really keeps them in better shape long term.
12:22
Speaker 2: It does. It's kind of like the plastic couch covers.
12:26
Speaker 3: Yes, yeah, just like that. But anyway, it could come
12:29
Speaker 3: out and knock the covers off the doors, and that
12:31
Speaker 3: would be part of the course for Nvidia. I'm trying
12:34
Speaker 3: to think through precisely what CEO Jensen Wong could say
12:40
Speaker 3: about their earnings that would genuinely I could see a
12:44
Speaker 3: few things where it just kind of furthers that narrative
12:46
Speaker 3: of oh, we got to scrutinize this a little bit further.
12:49
Speaker 3: But is there anything they could do that would likely
12:52
Speaker 3: severely worsen the story around the scrutiny. I mean it
12:55
Speaker 3: would have to be pretty disappointing sales numbers, I think
12:58
Speaker 3: to really the narrative like, oh, yeah, we are not
13:02
Speaker 3: seeing growing sales from some of our biggest customers. I
13:06
Speaker 3: feel like we've already got confirmation that we are seeing
13:08
Speaker 3: that from their biggest customers who reported three weeks ago.
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Speaker 2: It's I don't know that we're going to get anything
13:16
Speaker 2: this quarter from in Nvidia that is particularly concerning.
13:22
Speaker 3: It'd be surprising to me, yeah, just because again we've
13:25
Speaker 3: already seen confirmation from elsewhere that the companies that represent
13:29
Speaker 3: their biggest buyers are planning to expand further.
13:33
Speaker 2: The danger zone for Invidia, in my mind, is twelve
13:38
Speaker 2: to eighteen months from now, and the reason why is
13:43
Speaker 2: at that point you'll be able to say, okay, like
13:46
Speaker 2: do we need to you know, you've gone through this
13:49
Speaker 2: huge ramp up in capex then, and you know, further
13:52
Speaker 2: development of the actual product, and now you've got to
13:55
Speaker 2: get to actually showing hey, companies and people are willing
13:58
Speaker 2: to pay up for them us in order to offset
14:02
Speaker 2: all of the CAPEX that we are doing, because I
14:05
Speaker 2: can guarantee you, like again, you will get to a
14:09
Speaker 2: certain point where this amount of CAPEX is going to
14:12
Speaker 2: start impacting financial statements through depreciation. And to me, that's
14:16
Speaker 2: like twelve to eighteen months from now. And will we
14:19
Speaker 2: hear it from Nvidia first? Probably not, because they always
14:22
Speaker 2: report after the main earning cycle. They're always three to
14:25
Speaker 2: four weeks after everyone else in tech reports. And I
14:31
Speaker 2: think the question for in Vidia is, look, do businesses
14:35
Speaker 2: right now? You're in a situation where companies are saying, look,
14:38
Speaker 2: we just need to grow the data center PI sure,
14:42
Speaker 2: because we think that there's a chance that if we
14:45
Speaker 2: spend two hundred and fifty billion dollars, it could represent
14:48
Speaker 2: a trillion dollar plus, you know, a multi trillion dollar opportunity,
14:51
Speaker 2: and so companies are doing that. As it becomes clear
14:55
Speaker 2: whether or not that is going to become a reality,
14:58
Speaker 2: those companies will start to make decisions as to whether
15:01
Speaker 2: they want to continue this because the question that's out there.
15:04
Speaker 2: And by the way, we first raised this in August.
15:07
Speaker 2: So I would like to thank you know, the Wall
15:10
Speaker 2: Street Journal and CNBC for listening to the Financial Exchange
15:14
Speaker 2: and you know, starting to publish pieces on this, because
15:17
Speaker 2: there was one that was published last week. It was like,
15:19
Speaker 2: the big question everyone's asking right now is about the
15:21
Speaker 2: depreciation of GPUs, the GPU's graphic processor units. It's what
15:26
Speaker 2: these Invidia chips actually are and what they're based on. Yeah,
15:30
Speaker 2: they're originally designed to process like three D graphics for
15:33
Speaker 2: you know, playing like Counterstrike and stuff like that.
15:35
Speaker 3: Instead you're gonna be running them hot in data warehouses
15:37
Speaker 3: twenty four hours a day. So how long do they
15:39
Speaker 3: actually last?
15:40
Speaker 2: Correct? And so this is the question, which is, Look,
15:43
Speaker 2: if you're spending like fifty grand on an Nvidia chip,
15:46
Speaker 2: how much use do you get out of it? And
15:49
Speaker 2: how often do you need to replace it? Because right now,
15:52
Speaker 2: what is fueling in Vidia's growth is companies building out
15:56
Speaker 2: initial capacity. If companies do need to replace those chips
16:01
Speaker 2: every two to three years, then it becomes something where
16:04
Speaker 2: that's a huge ongoing operating expense that they have, and
16:08
Speaker 2: that impacts the profitability of the companies making AI. If
16:13
Speaker 2: they don't need to replace them every two to three years,
16:16
Speaker 2: and they can get six to seven out of them,
16:18
Speaker 2: then at some point in video's growth rate plateaus and
16:21
Speaker 2: maybe even rolls over because you don't need to replace
16:23
Speaker 2: these every year, and that means less profitability for in video. Again,
16:29
Speaker 2: I don't see any world where you sit there and
16:31
Speaker 2: you're like, the chip makers are gonna make billions, the
16:34
Speaker 2: AI companies are gonna make billions, and the users are
16:37
Speaker 2: gonna make billions, because that's never happened in any tech
16:41
Speaker 2: revolution of any kind. There's always someone who's a loser
16:45
Speaker 2: in that piece. We just don't know who it is yet.
16:50
Speaker 2: I'm not saying like Jensen Hwang's a loser. I think
16:51
Speaker 2: he's a huge winner. But there's going to be some company,
16:56
Speaker 2: some industry or sub industry that and look, you're already
17:02
Speaker 2: starting to see kind of the commodification commoditization. I like
17:06
Speaker 2: commodification though of AI, and that if you ask people
17:11
Speaker 2: from most general things, let's say, yeah, like if I
17:14
Speaker 2: put a query into chat, GPT or Gemini or what's
17:19
Speaker 2: the Amazon one anthropic cod If I put you know,
17:22
Speaker 2: a general query into one of these, I get basically
17:26
Speaker 2: the same answers from all of them. There are some
17:29
Speaker 2: you know, niches within them where you know, from what
17:32
Speaker 2: I gather, coding people generally prefer CUD for some reason,
17:36
Speaker 2: and and some of the submodels in there. I don't
17:39
Speaker 2: know how. I don't know why because I don't understand coding,
17:43
Speaker 2: but this is what I gather is that they prefer QUAD.
17:46
Speaker 2: There are other areas that you know prefer you know,
17:48
Speaker 2: different ones, But in general, if I'm asking, hey, give
17:53
Speaker 2: me a list of you know, sixteen restaurants that you
17:58
Speaker 2: know offer tacos on them, they're all generally the same.
18:04
Speaker 3: I think where I get where I get caught up
18:07
Speaker 3: and concerned, and I'm not the only one. Is when
18:10
Speaker 3: you ask all sorts of businesses, whether it's the creators
18:13
Speaker 3: of the platforms, the generated AI tools themselves, or the
18:17
Speaker 3: users of them, they all will speak to the useful
18:20
Speaker 3: tools that they can do. And we've got a story
18:22
Speaker 3: covering how even some small business owners are using these
18:25
Speaker 3: tools successfully for their businesses. But then when you start
18:28
Speaker 3: asking about the financials behind that, and like, oh, but yeah,
18:33
Speaker 3: it seems like it would cost you a quarter million
18:35
Speaker 3: dollars to run those queries and is that really worth it?
18:39
Speaker 3: They shift the conversation. The conversation then shifts to well, yeah,
18:44
Speaker 3: these tools are useful, but we're really going for is
18:46
Speaker 3: this artificial general general intelligence, the AGI, the holy grail
18:53
Speaker 3: of AI, where it's going to be this unknown future
18:58
Speaker 3: entity that can do all sorts of new things. And
19:02
Speaker 3: there are clearly some really useful use cases for AI,
19:06
Speaker 3: but when you press somebody on the P and L,
19:09
Speaker 3: it's well, just wait for this future thing to come about.
19:12
Speaker 3: And I guess the point is the longer time goes on,
19:16
Speaker 3: the more clear what that future thing actually looks like
19:20
Speaker 3: and if there's any value to it, because the spending
19:22
Speaker 3: compared to the payoff of the tools that are available
19:25
Speaker 3: now useful, helpful, but not paying for themselves even close
19:31
Speaker 3: to it? Right, No, am I miss Potagra.
19:35
Speaker 2: I'm just having flashbacks to all of the talk we
19:37
Speaker 2: had about crypto, like six or seven years ago, when
19:39
Speaker 2: people are like, oh, Crypto's gonna be able to do
19:40
Speaker 2: this and do that. Yeah, and now it's like okay,
19:42
Speaker 2: like it's still pretty good at moving money, you know,
19:44
Speaker 2: across borders, sometimes legally, sometimes through laundering, but otherwise Crypto's
19:51
Speaker 2: not really doing much for the average person.
19:53
Speaker 3: Because the math stops working, you start making new promises,
19:56
Speaker 3: and that's what concerns me.
19:57
Speaker 2: Quick break here. When we come back, we got Wall
20:00
Speaker 2: Street Watch.
20:10
Speaker 1: Like us on Facebook and follow us on Twitter at
20:13
Speaker 1: TFE show. Breaking business news is always first right here
20:17
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
20:22
Speaker 1: Street Watch a complete look at what's moving markets so
20:25
Speaker 1: far today right here on the Financial Exchange Radio Network.
20:29
Speaker 5: After a bumpy week, markets today are mostly quiet, dipping
20:32
Speaker 5: into negative territory as investors ready for a new florry
20:35
Speaker 5: of third quarter earnings, including from AI and Chip Giant,
20:39
Speaker 5: in Vidia, as well as retailer's Home Depot, Target and Walmart.
20:43
Speaker 5: Wall Street's also bracing for the delayed September jobs report,
20:46
Speaker 5: due out Thursday morning. Right now, the Dow is down
20:49
Speaker 5: by two tenths of a percent or eighty eight points lower.
20:52
Speaker 5: SB five hundred down about a tenth of a percent
20:55
Speaker 5: or eight points. NASDAC down about a tenth of percent
20:58
Speaker 5: as well. Russe On thousand is down a tenth of
21:01
Speaker 5: a percent. Tenure treasure reeled is down one basis point
21:05
Speaker 5: at four point one three five percent, and crude oil
21:08
Speaker 5: down about two tenths of one percent, trating just below
21:10
Speaker 5: sixty dollars a barrel. Alphabet jumping nearly five percent after
21:15
Speaker 5: Warren Buffett's Berkshire Hathaway disclosed it took a stake in
21:18
Speaker 5: the Google parent company in the third quarter and further
21:21
Speaker 5: reduced its stake in Apple. Speaking of Apple, the Financial
21:25
Speaker 5: Times reported that the tech giant is ramping up its
21:28
Speaker 5: preparations around identifying and appointing a successor to CEO Tim Cook.
21:33
Speaker 5: Apple stock is down about one percent. Meanwhile, the fifteen
21:36
Speaker 5: days standoff between Disney and Google is over after both
21:40
Speaker 5: companies reached a deal to return ESPNABC and other Disney
21:44
Speaker 5: networks to about ten million YouTube TV customers. Disney shares
21:48
Speaker 5: up modestly. Elsewhere, Quantum Computing stock is surging nearly thirteen
21:53
Speaker 5: percent after the company issued a strategic roadmap towards scalable
21:57
Speaker 5: Quantum and photonic manuf factoring, and both Ford and Amazon
22:02
Speaker 5: announced a new partnership this morning where Ford's franchise dealers
22:07
Speaker 5: will be able to sell certified pre owned vehicles through Amazon.
22:10
Speaker 5: The deal comes a year after Amazon said it would
22:13
Speaker 5: allow auto dealers to sell cars through its sight starting
22:17
Speaker 5: with Hyundai. I'm Tucker Silva and that is Wall Street Watch.
22:22
Speaker 2: Okay, so we got a piece here in the Wall
22:25
Speaker 2: Street Journal. The headline is why we could use a
22:31
Speaker 2: good long bear market, And unless the reason is because
22:37
Speaker 2: you want to make everyone feel immense amounts of pain
22:41
Speaker 2: and not be able to do the things that they
22:43
Speaker 2: could do if you were not in a bear market,
22:46
Speaker 2: there's not really any good reason to do so, because
22:49
Speaker 2: bear markets sucking. And I feel like this piece is
22:51
Speaker 2: basically the equivalent of this piece really comes off as
22:58
Speaker 2: like the people online who in there's a hurricane announced
23:01
Speaker 2: get all excited about like, oh, it's gonna be a
23:02
Speaker 2: Cat five without like realizing, Hey, the actual storm kills
23:07
Speaker 2: people and damages lives and ruins entire metro areas.
23:11
Speaker 3: Like don't just feel like we've gotten a lot of
23:13
Speaker 3: this over the course of the last couple of years. Yes,
23:14
Speaker 3: and it's cheering for a recession.
23:16
Speaker 2: It sucks, Like I again, I feel like people just
23:20
Speaker 2: don't remember what a recession is actually like because it's
23:23
Speaker 2: been so long that since we've had I'm gonna quote.
23:26
Speaker 3: The piece here. A downturn like seven h nine, when
23:29
Speaker 3: US doocs fell by more than half, can be both
23:32
Speaker 3: awful and therapeutic. So let's focus on the therapeutic part.
23:38
Speaker 3: What part, like I need to go to therapy because
23:41
Speaker 3: like part of one in ten so much. What part
23:44
Speaker 3: of one in ten people looking for work and unable
23:48
Speaker 3: to find it is therapeutic? What part of people losing
23:52
Speaker 3: their homes, losing their livelihood permanently, unable to borrow money
23:56
Speaker 3: because their credit stories get destroyed is therapeutic? Again, I
24:01
Speaker 3: am not excusing the bad behavior that led to the
24:05
Speaker 3: Great Recession by doing this, Like you know, the bets
24:08
Speaker 3: that Wall Street was making and all of that stuff
24:11
Speaker 3: was stupid and you know, led to serious problems, but
24:17
Speaker 3: then a whole bunch of people that weren't responsible for
24:20
Speaker 3: it paid the price. So cheering for a prolonged downturn
24:27
Speaker 3: should just never really happen. I think it should be
24:29
Speaker 3: acknowledged that it's a natural part of the system that
24:33
Speaker 3: I do suspect at some point we will again have
24:35
Speaker 3: a prolonged downturn, And I acknowledge that it has been
24:39
Speaker 3: now fifteen plus years since we've had one, but I
24:44
Speaker 3: don't welcome it.
24:45
Speaker 2: No, it's it's not something that you root for. I
24:49
Speaker 2: think you can certainly say, hey, like when downturns happen, like, yes,
24:57
Speaker 2: you can end up getting rid of some of the
24:59
Speaker 2: problems that have and in markets, sure as a result,
25:02
Speaker 2: But like I don't think you can ever like you
25:05
Speaker 2: should never publish a piece like why we could use
25:07
Speaker 2: a good long bear market. I think you can also
25:10
Speaker 2: end up, by the way, with some of those the
25:14
Speaker 2: weeding out of like bad crap in markets without a
25:18
Speaker 2: really long bear market. Case in point, the spackmania of
25:23
Speaker 2: twenty twenty one and twenty two, specifically in the EV space,
25:27
Speaker 2: we've basically worked through without having to go through a
25:31
Speaker 2: broader bear market because people decided, hey, we don't want
25:36
Speaker 2: to buy evs and the quantity of the market is producing,
25:39
Speaker 2: and we definitely don't want to buy EV's that are
25:41
Speaker 2: being pushed down a hill by their founder to make
25:43
Speaker 2: it look like they're moving on their own power when
25:45
Speaker 2: they're not, and so we're actually going to prosecute those
25:49
Speaker 2: people for fraud. And so the market worked that out
25:53
Speaker 2: without having a larger blow up. Now some of that
25:57
Speaker 2: is just because the size of that bubble didn't get
26:00
Speaker 2: big enough to impact the broader economy. If we do
26:04
Speaker 2: end up finding out that this whole AI you know,
26:08
Speaker 2: valuation crazy, you know growth thing is is bubblicious, then
26:13
Speaker 2: there's going to be more pain that's felt over a
26:15
Speaker 2: broader swath of the market over a longer time period.
26:19
Speaker 2: And I don't think any of us are going to
26:20
Speaker 2: particularly like it because the consequences are likely pretty severe.
26:25
Speaker 3: The just again calling out some of the bad stuff.
26:29
Speaker 3: I'm gonna focus on the eight recession since that's what
26:32
Speaker 3: this piece focused on. Stocks dropped by fifty percent. It
26:36
Speaker 3: took sixty six months for them to recover back to
26:38
Speaker 3: where they were.
26:39
Speaker 2: Like, ask anyone who retired then what it was like
26:41
Speaker 2: trying to figure out how you could live off your
26:44
Speaker 2: portfolio during that time.
26:46
Speaker 3: It took. So it took sixty six months for the
26:49
Speaker 3: stock market to recover, It took I'm trying to find
26:54
Speaker 3: out eight now ten years for the labor marketter so one.
26:58
Speaker 2: Hundred and twenty months in twenty months.
27:01
Speaker 3: Ten years, there's unemployment rate to get back to where
27:06
Speaker 3: it was pre Great Recession. So again, you can I
27:12
Speaker 3: welcome all the you know complaining about the stock market,
27:15
Speaker 3: complaining about speculation. I am critical of the market or
27:21
Speaker 3: the gambling type of mentality that markets have created as
27:25
Speaker 3: of late, but remember what other stuff comes along with
27:30
Speaker 3: a prolonged downturn, Because it's not just oh, the stock
27:34
Speaker 3: market goes down by fifty percent, it stays there for
27:36
Speaker 3: a little while and I keep my home, I keep
27:38
Speaker 3: my job, and I'm able to put food on the table.
27:40
Speaker 2: You don't know if you're going to be one of
27:42
Speaker 2: the people that's you know, hugely impacted by this. And
27:45
Speaker 2: this is why no one should root for bear markets.
27:48
Speaker 2: It's not something Again, I do feel like the only
27:53
Speaker 2: reason this piece gets published is because we haven't had
27:55
Speaker 2: a problem bear market in a long time. Like imagine
28:00
Speaker 2: imagine writing this piece in twenty eleven and what people
28:03
Speaker 2: would have said about it then, Yeah, you know, it's
28:07
Speaker 2: just like no. Now, I do want to talk about
28:11
Speaker 2: something that Mark Fandetti forwarded over to me over the weekend.
28:17
Speaker 2: It ties into this a little in some of the
28:19
Speaker 2: concerns that we've had, and what I'm talking about is
28:21
Speaker 2: what's going on in the private credit space. Oh good,
28:24
Speaker 2: because this is getting pretty gnarly right now, and kind
28:29
Speaker 2: of gross what you would doing on the other side, Yeah,
28:35
Speaker 2: we could do it on the other side. Yeah, I
28:37
Speaker 2: got something great to talk about right after this.
28:41
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28:45
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28:52
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28:54
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28:58
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29:07
Speaker 2: All right, So here's the deal. There's a company by
29:08
Speaker 2: the name of Blue Owl.
29:12
Speaker 3: On their hats.
29:14
Speaker 2: They are an asset manager and they've got a huge
29:18
Speaker 2: presence in the private credit space. For those of you
29:21
Speaker 2: listening wondering, like what the heck is private credit? It's
29:23
Speaker 2: basically any loan that's made that doesn't trade on public markets.
29:27
Speaker 2: But like calling it private credit makes everyone think it's
29:30
Speaker 2: like something special, like there's a secret sauce there and
29:34
Speaker 2: there's not. Private credit managers like to tell you, hey,
29:38
Speaker 2: this gives you like a more stable path, like it's
29:41
Speaker 2: you know, it's more stable than public credit. Well that's
29:43
Speaker 2: only because they don't actually market to market on a
29:46
Speaker 2: day to day or months or week to week or
29:47
Speaker 2: minute to minute basis. They just only revalue them much
29:51
Speaker 2: less frequently. And it's like how your home gives you
29:54
Speaker 2: a much more stable path because you might get an
29:56
Speaker 2: update on the value of your home every thirty seconds.
29:58
Speaker 2: Or as an example, if you only look at your
30:00
Speaker 2: four oh one k at the end of each year,
30:02
Speaker 2: he'd be like, oh, like, it's pretty stable, when in
30:05
Speaker 2: reality it can be gyrating a ton in the middle.
30:07
Speaker 2: So Blue Owl is a huge manager of private credit
30:10
Speaker 2: and they love to manage private credit because the fees
30:12
Speaker 2: are high, and it's been a good spot to be
30:16
Speaker 2: in just raising money for the last ten to fifteen
30:18
Speaker 2: years quite honestly, Like, there's been a lot of money raised,
30:20
Speaker 2: and I understand why there has been. I understand the
30:23
Speaker 2: incentive structure. So here's the thing though, private credits started
30:27
Speaker 2: to come under some questions in September when we had
30:30
Speaker 2: a couple bankruptcies that popped up Tricolor and First Brands.
30:35
Speaker 2: And now you've got this over the weekend that the
30:40
Speaker 2: Financial Times is reporting the one billion I'll quote like effectively,
30:46
Speaker 2: here's here's what's going on. They have a private credit
30:50
Speaker 2: fund called Blue Owl Capital Corporation two. It's not listed,
30:55
Speaker 2: so again it's not publicly traded. You don't see it
30:57
Speaker 2: on markets or anything like that. And pretty much they
31:01
Speaker 2: received redemption requests for six percent of the value of
31:05
Speaker 2: that fund last quarter.
31:07
Speaker 3: Explain redemption requests.
31:08
Speaker 2: If you are a holder in a private credit fund,
31:11
Speaker 2: you can't just go and press the sell button on
31:13
Speaker 2: any particular day. You have to submit a written request.
31:16
Speaker 2: Usually it's a form template to the manager saying I
31:20
Speaker 2: want to redeem x shares at the next redemption date,
31:23
Speaker 2: which typically is on a quarterly basis.
31:25
Speaker 3: Got it.
31:27
Speaker 2: Blue Owl decided, Hey, we've seen six percent in redemption requests.
31:32
Speaker 2: We are closing the door and not allowing these redemption requests.
31:36
Speaker 2: And what we are going to do is instead, we
31:39
Speaker 2: are going to merge this Blue Owl Capital Corporation to
31:44
Speaker 2: fund into the publicly traded So this is a private
31:49
Speaker 2: credit vehicle that trades publicly Blue Owl Capital Corporation funded
31:53
Speaker 2: as the ticker OBDC, and that fund, by the way,
31:58
Speaker 2: happens to be trading at a twenty percent discount to
32:02
Speaker 2: its net asset value. What that means, in no uncertain terms,
32:06
Speaker 2: is the assets inside of there are valued at X,
32:11
Speaker 2: but the stock is trading it X minus twenty percent.
32:15
Speaker 3: Why would something like that happen?
32:17
Speaker 2: Because the public investors don't believe the valuations that are
32:20
Speaker 2: listed on it. So what this means is that the
32:23
Speaker 2: holders in this Blue Owl Capital Corp. Two fund are
32:27
Speaker 2: taking a twenty percent haircut in many cases instead of
32:32
Speaker 2: getting the liquidity they wanted. But now they can sell
32:35
Speaker 2: whenever they want on the public markets. But oh, you've
32:38
Speaker 2: got to take a twenty percent haircut in order to
32:40
Speaker 2: do so. This is just screaming to me. I don't
32:48
Speaker 2: think the deal's done by the way. I believe they
32:49
Speaker 2: have to vote on it. They have to vote on it,
32:51
Speaker 2: But this is screaming to me that it is mid
32:55
Speaker 2: two thousand and seven and mortgage backed security funds are
32:59
Speaker 2: facing redemptions and trying to figure out where the liquidity
33:02
Speaker 2: is going to come from, and merging funds and this
33:06
Speaker 2: and that like it. It feels like twenty twenty six
33:09
Speaker 2: is going to be the year of private credit blowing up.
33:11
Speaker 2: We just don't know how big that blow up is
33:14
Speaker 2: going to be.
33:14
Speaker 3: And I always like to bring it home, why does
33:17
Speaker 3: it matter if I don't own any private credit whatsoever?
33:20
Speaker 3: Because I think it could. It might not, but it
33:23
Speaker 3: could still matter to everyday Joe who learned about private
33:28
Speaker 3: credit five minutes ago when we started talking.
33:30
Speaker 2: There are a few different reasons. The first is one
33:33
Speaker 2: of the biggest buyers of private credit insurance companies. They
33:37
Speaker 2: love to buy the stuff, and I get why. It's
33:40
Speaker 2: generally yielding high single digits or low double digits. And
33:43
Speaker 2: if you are taking in a bunch of premiums each
33:46
Speaker 2: year from individuals and needing to invest them in something
33:49
Speaker 2: that generally has appeared to be stable while still earning
33:52
Speaker 2: a high rate of return, this has been the area
33:54
Speaker 2: that you've gone. So things that you could end up
33:57
Speaker 2: seeing as a result of this. Again, if this is
33:59
Speaker 2: if things go badly, which I don't know where we're going.
34:03
Speaker 2: No one knows how big this is going to be,
34:04
Speaker 2: so I want to be clear, like, I don't know
34:07
Speaker 2: if this is exactly where we go, but if things
34:10
Speaker 2: go badly, you could end up with insurance company bailouts.
34:14
Speaker 2: That's where this could go, or.
34:15
Speaker 3: Some that's the worst case.
34:16
Speaker 2: Yeah, small insurance companies even going under potentially, Yeah, that'd
34:20
Speaker 2: be a worst case. Other reasons why this matters. This
34:24
Speaker 2: affects overall lending markets.
34:26
Speaker 1: Right.
34:26
Speaker 2: Even though these are privately held instruments, they can still
34:30
Speaker 2: end up having an effect on broader credit markets, and
34:32
Speaker 2: that can affect the plumbing under the surface as well
34:35
Speaker 2: as you know overall lending to companies.
34:38
Speaker 3: A real direct connection here. One of the sparks in
34:41
Speaker 3: this private credit space was a company called Tricolor that
34:44
Speaker 3: made loans to general consumers who are trying to buy cars.
34:49
Speaker 3: They fund on private credit. If that drives out, their
34:51
Speaker 3: interest rates go up, and there's not the ability to
34:53
Speaker 3: do it. So any any drying up of credit conditions
34:57
Speaker 3: affects everybody, and it's just unclear how big that possibility is.
35:02
Speaker 2: And so everyone out there is going to be looking
35:04
Speaker 2: at their pools of private credit now being like okay,
35:07
Speaker 2: Blue Owls giving their investors a twenty percent haircut on
35:10
Speaker 2: this one fund? What's our stuff worthy? And nobody knows
35:14
Speaker 2: right now. It could be good, it could be bad,
35:15
Speaker 2: But if you're asking the question, it's usually not great.
35:19
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36:18
Speaker 1: The proceeding was paid for and the views expressed are
36:20
Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
36:23
Speaker 1: or Armstrong Advisory may contact you offering legal or investment services.
36:26
Speaker 1: Cushing and Armstrong did not endorse each other and are
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Speaker 1: not affiliated.
36:29
Speaker 3: Just one more point on this, you mentioned it, I
36:32
Speaker 3: think it's worth repeating. These types of assets, these types
36:36
Speaker 3: of alternative assets are specifically marketed and sold as Hey,
36:40
Speaker 3: look at this, it's a good return that does not
36:42
Speaker 3: correlate and it doesn't have the type of volatility baked
36:46
Speaker 3: into public equity markets. Investors in this specific fund today
36:50
Speaker 3: are learning that that's kind of irrelevant when you know
36:55
Speaker 3: what hits the fan. Yeah, because what happened today is
36:59
Speaker 3: yesterday this far was worth X. Now it's worth X
37:02
Speaker 3: minus twenty percent assuming the vote goes through. Yeah, And
37:05
Speaker 3: you know, being worth X on paper is pretty useless
37:09
Speaker 3: when you try to redeem your cash and the company says, oh,
37:12
Speaker 3: you can't do that.
37:14
Speaker 2: Volatility can never be Volatility is like energy, not to
37:18
Speaker 2: get like all physics on you. But this is one
37:21
Speaker 2: one thing that I do believe to be true. Volatility
37:23
Speaker 2: can't be destroyed. It can be transformed into a different form.
37:28
Speaker 2: In this case, the volatility is can I redeem when
37:32
Speaker 2: I want to for what I want to? This is
37:37
Speaker 2: like it doesn't go away, It just gets transformed into
37:41
Speaker 2: something else, and you have to be aware of that.
37:45
Speaker 2: Something that is volatile, such as the value of a loan,
37:48
Speaker 2: you can't just say, oh, well, we put this in
37:51
Speaker 2: a wrapper where like it's always worth this. Like, no,
37:54
Speaker 2: that doesn't work even if the company physically guarantees the value,
37:59
Speaker 2: which they don't in these cases, I want to be clear.
38:02
Speaker 2: Then you're saying, Okay, the volatility is not with what
38:04
Speaker 2: I own, but with the company's financials. Like, you can't
38:08
Speaker 2: ever eliminate volatility, you can just transform it into something else.
38:13
Speaker 2: And I think that's a really important concept to come
38:18
Speaker 2: back to, and as Mike said, like investors are kind
38:22
Speaker 2: of learning that in this case. Here, let's take a
38:26
Speaker 2: quick break when we return. We got a whole bunch
38:30
Speaker 2: more to get to. In our two. We're talking cost
38:33
Speaker 2: of living. We got Disney and YouTube finally getting together
38:38
Speaker 2: and saying, hey, we can do a deal. We got
38:41
Speaker 2: four to one K accounts that have been left behind.
38:43
Speaker 2: We got FED officials violating trading rules. Oh good again.
38:48
Speaker 2: Quick Break hour two is coming up.