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What happens to the economy if AI falters? · The Financial Exchange Show

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1:03
Speaker 1: This is the Financial Exchange with Chuck Zada, and Mike Armstrong.
1:10
Speaker 2: We've got a shortened trading week this week because of
1:13
Speaker 2: the Thanksgiving holiday that's going to be taking place on
1:16
Speaker 2: It's Thursday, right, Mike.
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Speaker 3: That's the one.
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Speaker 2: That's the one, Yeah, Thanksgiving Thursday, And so we've got
1:22
Speaker 2: a shortened trading week. Not too much expected in the
1:25
Speaker 2: way of economic data. Basically nothing expected as far as
1:32
Speaker 2: earnings that are likely to move the needle. The biggest
1:37
Speaker 2: company I think that you can look at from an
1:39
Speaker 2: earnings perspective this week is Deer, who reports on Wednesday.
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Speaker 2: They're not a tiny company by any means, but with
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Speaker 2: a market cap of one hundred and thirty billion dollars,
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Speaker 2: it's not one that really moves the market in general
1:52
Speaker 2: at this point, which kind of strange to say about Deer.
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Speaker 3: What is that like a thirtieth of an Nvidia?
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Speaker 4: Uh?
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Speaker 2: In that ballpark? Yeah, yeah, it's in that ballpark. I mean, Mike,
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Speaker 2: here's again, just like we're doing comparisons. It's half the
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Speaker 2: market cap of Salesforce. Yeah, despite having about the same
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Speaker 2: revenue that Salesforce does, and both of those companies Salesforce
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Speaker 2: actually reports next Wednesday, so about a week and a
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Speaker 2: half out. But in any case, we had quite a
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Speaker 2: bit of volatility last week in case you miss things
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Speaker 2: for whatever reason. It was about as choppy of a
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Speaker 2: week as you can have, not all in one direction.
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Speaker 2: But I think the star of the show was clearly
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Speaker 2: what we saw on Thursday post in Vidia, where you know,
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Speaker 2: we opened up about one and a half percent on
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Speaker 2: the S and P five hundred rows another half percent,
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Speaker 2: and then promptly fell three and a half percent from
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Speaker 2: there to close down more than one and a half percent,
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Speaker 2: only the fourth time in the last thirty two years
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Speaker 2: that we have seen such a move, and I think
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Speaker 2: it absolutely it's just kind of what markets are trying
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Speaker 2: to navigate right now, which is, hey, we've got concerns about,
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Speaker 2: you know, is there an AI bubble or not? We
3:09
Speaker 2: don't know. We've got concerns about is there a private
3:13
Speaker 2: credit bubble or not? We don't know. And we've got
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Speaker 2: concerns about the labor market. Is it going to continue
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Speaker 2: to slow or not? We don't know. And the market
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Speaker 2: was trying to reckon with all these things over the
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Speaker 2: past five trading days.
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Speaker 3: Yeah, so historic volatility on Thursday of last week, Friday,
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Speaker 3: some recovery this morning, some recovery, although the DOO is
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Speaker 3: doing weird things because the Dow is a stupid index
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Speaker 3: that price waits things. So Amgen and Honeywell are bringing
3:38
Speaker 3: down the Dow, which not terribly relevant to the rest
3:42
Speaker 3: of the market, but they are. The question remains to meet, Chuck.
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Speaker 3: I mean, every time in the last five years that
3:50
Speaker 3: we've had stocks sell off to any meaningful degree, you've
3:54
Speaker 3: had the buy the dip mentality come in and a
3:56
Speaker 3: bunch of cash backs up that market. And I think
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Speaker 3: through markets lofts like the one we saw in twenty
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Speaker 3: twenty five back in April. I think of the one
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Speaker 3: certainly during COVID in twenty twenty, and to a slightly
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Speaker 3: lesser degree, the one in twenty twenty two as well
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Speaker 3: twenty two.
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Speaker 2: I don't think that by the dip reflex. Really it
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Speaker 2: didn't kicked in the same way.
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Speaker 3: No people did re enter equities, but it wasn't because
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Speaker 3: they got cheaper. It was largely because the inflation concerns
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Speaker 3: that we were seeing started to dissipate and a new
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Speaker 3: narrative around AI took over. But still we have not
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Speaker 3: had that prolonged negative sentiment play out, and plenty of
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Speaker 3: people are asking if this is the time that we
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Speaker 3: will if the narrative is shifting now around what can
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Speaker 3: make this economy and market keep chugging along.
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Speaker 2: So these are questions that are not going to be
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Speaker 2: answered this week. Unfortunately. If if you are looking for
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Speaker 2: the market to give a resounding hey, this is a
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Speaker 2: problem or this is not. Thanksgiving week twenty twenty five
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Speaker 2: is not where these are going to be answered. I
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Speaker 2: think the labor market questions are going to play out
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Speaker 2: over the next three to six months. I think the
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Speaker 2: private credit questions are going to play out over the
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Speaker 2: next year, and I think the AI data center ones
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Speaker 2: are going to play out over the next twenty four months. Unfortunately,
5:22
Speaker 2: in the world of instant gratification, we need to know
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Speaker 2: whether the sixty point up move in the S and
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Speaker 2: P this morning means anything or not. And that's just
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Speaker 2: not in the cards. It's just not something that we're
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Speaker 2: going to be able to tell you. After all, if
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Speaker 2: the one hundred and ten point or one hundred and
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Speaker 2: three point down move on the S and P meant
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Speaker 2: something on Thursday, well it's been invalidated by the fact
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Speaker 2: that the market has retraced all of those losses in
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Speaker 2: the last two sessions now, but we still have a
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Speaker 2: ton of intra day volatility. I mean, I'm seeing half
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Speaker 2: a percent moves on the S ANDP every ten to
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Speaker 2: fifteen minutes. That's not really a healthy market environment at
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Speaker 2: the moment. So what I will tell you that the
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Speaker 2: market is actively trying to sort these things out, but
6:07
Speaker 2: we're not going to actually know what's going on with
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Speaker 2: them in the actual economy for an extended period of time,
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Speaker 2: which is disappointing. If you want, you know, if you
6:17
Speaker 2: need your answer now, you're not gonna get that. We
6:21
Speaker 2: could do other things now, you know, we still have
6:23
Speaker 2: some other stuff that we can talk about for this week,
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Speaker 2: and I think a good place to start is on
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Speaker 2: that AI boom, because even though I may, even though
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Speaker 2: I will admit to having some skepticism, I think is
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Speaker 2: the right word as to whether or not this will
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Speaker 2: pay off the way it's being priced right now. Sometimes
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Speaker 2: I think we go a little bit too far where
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Speaker 2: it's like, you know, people are talking, hey, like there's
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Speaker 2: too much AI spending going on right now, and it's
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Speaker 2: not good for the US economy. No, it's really good
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Speaker 2: for the US economy. This AI spending is going on
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Speaker 2: What potentially could be bad for it is if it
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Speaker 2: turns out there's too much and there's some stuff that
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Speaker 2: has to get sorted out during a few years. But
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Speaker 2: the amount of spending going into AI right now is
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Speaker 2: unquestionably good for the US economy at this particular point
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Speaker 2: in time.
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Speaker 3: Yeah, there's a New York Times piece out this morning,
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Speaker 3: and the headline of it just really bothers me. So
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Speaker 3: the headline the AI boom is driving the economy. What
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Speaker 3: happens if it falters, Well, it falters, it all falls apart.
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Speaker 3: You can't just it's not useful to just throw out
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Speaker 3: that possibility, right, Like, what are the circumstances under which
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Speaker 3: the AI boom starts to be called under further scrutiny
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Speaker 3: and starts to fall apart and that spending starts to
7:48
Speaker 3: dry up. I think we can all think of a
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Speaker 3: few of them, but just painting a picture of well,
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Speaker 3: what if the spending on AI suddenly disappears. Frankly, that's
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Speaker 3: not going to happen. It's not going to just disappear.
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Speaker 3: It could be valued differently, it could come in less
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Speaker 3: than is currently anticipated, and in all of those cases
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Speaker 3: it spells different scenarios but I find the more frequent
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Speaker 3: now conversation about, oh, well, you know, if it weren't
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Speaker 3: for AI, this economy would be falling apart. Yeah, that's true,
8:18
Speaker 3: but we do have artificial intelligence technology companies spending billions,
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Speaker 3: committing to trillions of dollars worth of spending. And so
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Speaker 3: you have to take the current status quo and kind
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Speaker 3: of extrapolate out what it might mean under different scenarios,
8:32
Speaker 3: because there are some in which it continues for several years.
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Speaker 2: And I think the other thing to remember is that
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Speaker 2: there is going to be something that everyone in the
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Speaker 2: world considers good that comes out of this a eye bubble,
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Speaker 2: despite all of the bad that I think is coming
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Speaker 2: out of it as well. And trust me, like every
8:50
Speaker 2: day now you read you know about some of the
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Speaker 2: stuff that these systems spit out to people that is
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Speaker 2: just quite honestly pretty horrible in terms of, you know,
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Speaker 2: the lack of guardrails on it. But I also do
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Speaker 2: think there are some real positives that are going to
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Speaker 2: come from it. Much as hey, despite the fact that
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Speaker 2: you know, at least once a week now I make
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Speaker 2: the joke of, hey, we should just turn the Internet off,
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Speaker 2: and you know, not turn it back on. I still
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Speaker 2: believe that overall the Internet is a force four good
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Speaker 2: in the world. It's just well, it's got some crap
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Speaker 2: that goes along with it. So the problem that you
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Speaker 2: see with this AI spend right now, in my opinion,
9:31
Speaker 2: is just that everyone's being priced as a winner. If
9:33
Speaker 2: you use AI, you're being priced as a winner. If
9:36
Speaker 2: you make AI programs you're being priced as a winner.
9:40
Speaker 2: If you make the chips, you're being priced as a winner.
9:42
Speaker 2: And as we've seen through basically every boom and bust
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Speaker 2: cycle in history, not everyone wins. There are some losers there.
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Speaker 2: And I say that in like the nicest way possible,
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Speaker 2: not like, oh, you're a loser, but no. I mean, look,
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Speaker 2: you develop railroads and there's you know, too much development there,
10:01
Speaker 2: and some of them go out of business. Radio, you know,
10:04
Speaker 2: kicks off and everyone in their grandmother starts, you know,
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Speaker 2: a radio station, and a bunch of them go out
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Speaker 2: of business. In the nineteen twenties, and you know, the
10:11
Speaker 2: tech bubble, we can obviously wax poetic about pets dot
10:14
Speaker 2: com and you know, the Patriots were originally going to
10:16
Speaker 2: play at CMGI field before everyone was like, wait, who's
10:20
Speaker 2: CMGI do you guys have any revenue, how are you
10:22
Speaker 2: gonna pay for the name on the stadium? This is
10:25
Speaker 2: going to have some losers as well. We just don't
10:28
Speaker 2: know who they are yet, and it's gonna take a
10:30
Speaker 2: little bit of time.
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Speaker 3: To get there to that point about everyone being priced
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Speaker 3: as a winner. We've focused on Oracle a lot of
10:36
Speaker 3: the last time.
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Speaker 2: We're starting to see a little bit of a shakeout there, maybe,
10:38
Speaker 2: but it's just based on today's.
10:39
Speaker 3: Information to that point. Even today, with the sell off
10:43
Speaker 3: at Oracle is seen right, their stock rows from to
10:46
Speaker 3: thirty to three hundred and then fell back down to
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Speaker 3: that two thirty level, still trading at a price earnings
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Speaker 3: ratio in the mid forties.
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Speaker 2: Yep, yep.
10:56
Speaker 3: So yes, you have a lot of winners still being
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Speaker 3: priced in.
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Speaker 2: Make a quick break when we return. Do we want
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Speaker 2: to talk about like whether the Fed cares about AI
11:05
Speaker 2: or not?
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Speaker 3: Yeah, we can talk about whether they do and whether
11:10
Speaker 3: they should.
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Speaker 2: Good. I think that's a great idea, Whether the Fed
11:14
Speaker 2: cares about AI? Should they care?
11:16
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Speaker 2: The feed is fixated on AI but not ready to
12:54
Speaker 2: make a Greenspan size bet. What does that mean?
12:58
Speaker 3: Michael So In the mid to late nineties, the FED
13:01
Speaker 3: was trying to decide what to do with monetary policy
13:04
Speaker 3: and effectively Alan Greenspan, with some disagreement from the rest
13:09
Speaker 3: of the Federal Reserve, decided that, Hey, we think we
13:11
Speaker 3: can keep rates lower in spite of a really rapidly
13:16
Speaker 3: growing economy. And the reason for it is we're going
13:19
Speaker 3: to see productivity growth, so, you know, effectively the pace
13:24
Speaker 3: at which the economy is growing can be justified and
13:26
Speaker 3: we'll be able to continue to see that growth without
13:29
Speaker 3: tremendous inflation because we won't need to pay you know,
13:35
Speaker 3: six hundred thousand more workers to do these jobs. The
13:37
Speaker 3: Internet is going to lead to productivity, and it's going
13:40
Speaker 3: to lead to, you know, justifying the increase in economic
13:45
Speaker 3: activity with fewer working hours, and so basically made a
13:49
Speaker 3: bed on Hey, we're not going to see inflation as
13:52
Speaker 3: a result of that boom period and kind of worked.
13:57
Speaker 3: I mean, there were certainly some ramifications of all that
14:00
Speaker 3: low interest rates might have contributed to the dot com bust,
14:04
Speaker 3: that might have contributed later to the Great Financial Crisis.
14:08
Speaker 3: But you know, he was right in so far as
14:11
Speaker 3: we did not have backbreaking inflation like the nineteen seventies.
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Speaker 2: I think the part that's challenging to me is like
14:23
Speaker 2: you talk to most people on most people in most industries,
14:30
Speaker 2: and here's what you generally hear. If it's a blue
14:35
Speaker 2: collar industry, you know, if you're working with your hands,
14:39
Speaker 2: what you hear is that's not relevant at all to
14:43
Speaker 2: my job right now. It's not affecting most blue collar
14:48
Speaker 2: jobs at this point, I think is fair sure, at
14:50
Speaker 2: least most employees, like maybe managers might be thinking about it, yep,
14:55
Speaker 2: But most employees that are you know, plumber's, electricians, carpenters
14:58
Speaker 2: like that, it's not impacting them. If you talk to
15:02
Speaker 2: the vast majority of office workers outside of the coding field,
15:08
Speaker 2: they'll tell you some variation of this. My boss has
15:11
Speaker 2: instructed me that we have to use AI on a
15:13
Speaker 2: regular basis, and so I'm doing so, but I'm not
15:17
Speaker 2: sure how much more productive it's actually making me.
15:19
Speaker 3: Right now, I tend to agree with a few industry exceptions.
15:23
Speaker 2: Coding's the big one, where like you're seeing some real
15:26
Speaker 2: push on that side, and everyone I talked to in
15:28
Speaker 2: the tech space is like, yeah, this is gonna you know,
15:31
Speaker 2: do the vast majority of coding work in short order.
15:35
Speaker 2: The other ones that I think you hear about it
15:37
Speaker 2: in the legal industry doing a lot of document review
15:40
Speaker 2: and stuff like that, and then occasionally like publishing like
15:44
Speaker 2: fraudulent legal briefs as a result of that and making
15:47
Speaker 2: stuff up, which.
15:48
Speaker 3: You saw in Australia with that famous attorney.
15:50
Speaker 2: Yeah, which is kind of funny. So like, there's some places,
15:53
Speaker 2: but I think the big thing is you talk to
15:56
Speaker 2: the vast majority of workers and they're not telling you
16:00
Speaker 2: about some productivity miracle that they're seeing from AI. It
16:04
Speaker 2: doesn't mean we're not going to see it. Because remember
16:08
Speaker 2: the Google's latest Gemini release that just came out now
16:13
Speaker 2: is one of the first ones, and it's one of
16:15
Speaker 2: the ones that people were talking about as being impressive.
16:17
Speaker 2: It's one of the first major releases on some of
16:19
Speaker 2: the new silicon from in videos. It's one of the
16:23
Speaker 2: first things that you know, Blackwell has helped to develop.
16:26
Speaker 2: And when you get those next generation of chips, maybe
16:28
Speaker 2: you see further improvements and things like that. So just
16:32
Speaker 2: because we're not seeing it today, I'm not going to say, oh,
16:35
Speaker 2: it's never going to happen. That would be like looking
16:38
Speaker 2: at pets dot Com in ninety seven and being like, yeah,
16:41
Speaker 2: this people buying all their pet food on the internet. No,
16:44
Speaker 2: not gonna happen when now we know that you know,
16:46
Speaker 2: Chewy and Amazon and all these things are things.
16:48
Speaker 3: So let's forget about the bet on productivity for a
16:51
Speaker 3: moment here, like and just admit that we don't know
16:54
Speaker 3: if it's going to lead to massively more productivity, if
16:57
Speaker 3: it's going to be a bigger productivity revolution than the Internet.
17:01
Speaker 3: I don't know what's different about the US fiscal situation
17:04
Speaker 3: this time compared to the mid nineties to justify you know,
17:09
Speaker 3: higher versus lower interest rates. That that, to me is
17:11
Speaker 3: a more interesting question because the fiscal situation of the
17:15
Speaker 3: US is well, frankly, it's unrecognizable compared to the nineteen nineties.
17:20
Speaker 3: Right we were running surpluses from the budget during the
17:23
Speaker 3: nineteen nineties, we had a you know, US deficit, a
17:27
Speaker 3: US debt stack that was fractions of what it is now,
17:30
Speaker 3: even though it was considered to be too big even
17:32
Speaker 3: back then. It puts US in a very different position.
17:36
Speaker 3: And by the way, our population growth is a fraction
17:38
Speaker 3: of what it was back in the nineteen nineties.
17:41
Speaker 2: So I think that ultimately, like you try to sort through,
17:47
Speaker 2: you know, whether the FED can and this even before
17:50
Speaker 2: you get into things like trade and restoring and all
17:52
Speaker 2: this stuff. And where I tend to get to on
17:59
Speaker 2: AI and robotics as well, is if the actual technology
18:05
Speaker 2: works the way people think it can, it has the
18:09
Speaker 2: potential to be hugely deflationary. And deflationary is not a
18:14
Speaker 2: good thing. It's different from what we call disinflationary.
18:19
Speaker 3: Yeah, if nobody's bringing home income because of robotics and AI,
18:22
Speaker 3: then prices are going to go down because nobody can
18:24
Speaker 3: afford anything.
18:25
Speaker 2: Correct. When we talk about you know, what we want
18:27
Speaker 2: to see, it's an increase in standard of living through
18:32
Speaker 2: income's relative to cost growing. That's what you like to see.
18:37
Speaker 2: If robots come in and replace all of our plumbers,
18:41
Speaker 2: Carpenter's electricians, and all of our programmers and half of
18:46
Speaker 2: our you know MRI, you know, radiologists and you know
18:49
Speaker 2: this and that. Okay, Like that's kind of a problem
18:53
Speaker 2: because all of that income goes away and we're not
18:55
Speaker 2: sure how to replace that. Like, that's a huge demand problem.
19:00
Speaker 2: You then have in the US economy. The thing people
19:04
Speaker 2: are hoping for is, hey, this can make us more productive,
19:09
Speaker 2: so it's cheaper to do these things, but we maintain
19:12
Speaker 2: our jobs and our standard of living goes up because
19:16
Speaker 2: the cost of everything becomes cheaper, which, by the.
19:20
Speaker 3: Way, is how the implementation of every technology in history
19:24
Speaker 3: so far has worked. We have is it different this time?
19:26
Speaker 3: With AI?
19:27
Speaker 2: Our population is tripled in the last one hundred years.
19:29
Speaker 2: Quadrupled actually in the last hundred years. We employ ten
19:32
Speaker 2: percent of the farmers that we used to and we
19:35
Speaker 2: still feed ourselves. But it happened over one hundred year period.
19:38
Speaker 2: And anyone who actually talks to, you know, a farmer
19:41
Speaker 2: now is like, Wow, your job's still really hard and
19:44
Speaker 2: you might be underpaid for you know, what you do,
19:46
Speaker 2: and YadA YadA. So I think this is the challenge
19:51
Speaker 2: that we try to sort through in this is what
19:54
Speaker 2: shape does this boom bust potentially take? And the Fed
19:58
Speaker 2: in US. I have no idea yet. Still quick break here.
20:02
Speaker 2: Wall Street Watch is next.
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.
20:32
Speaker 4: Oh after last week's wild ride, markets are beginning this
20:35
Speaker 4: holiday shortened trading week in positive territory as traders await
20:40
Speaker 4: or economic data releases, including the Producer Price Index and
20:44
Speaker 4: retail sales, among others. Right now, the Dow is up
20:49
Speaker 4: about a third of a percent, or one and forty
20:52
Speaker 4: nine points. S and P five hundred is up just
20:54
Speaker 4: over one percent or seventy points. Hired NASDAC rallying one
20:58
Speaker 4: point nine percent or four hundred and nineteen points. Hire
21:02
Speaker 4: Russell two thousand also up just over one percent. Ten
21:06
Speaker 4: year Treasure real flat at four point zero five four
21:09
Speaker 4: percent to Incrude oil down modestly, trading at fifty seven
21:12
Speaker 4: dollars and ninety six cents a barrel. Tesla CEO Elon
21:16
Speaker 4: Musk posted to x that the company has started work
21:20
Speaker 4: on the next generation of artificial intelligence chips to be
21:23
Speaker 4: used in cars in data centers. Tesla stock is jumping
21:28
Speaker 4: six percent on that post, sticking with AI, where Alphabet
21:31
Speaker 4: stock is rallying nearly six percent following glowing reviews of
21:35
Speaker 4: its recently launched Gemini three AI model. Meanwhile, Ali bob
21:40
Speaker 4: A stock is rising about five percent after the company
21:43
Speaker 4: announced its AI app Quinn, had ten million downloads within
21:48
Speaker 4: its first week of launching. Elsewhere, Novo nordes thinking about
21:52
Speaker 4: seven percent after the pharmaceutical company said its highly anticipated
21:56
Speaker 4: trial for Alzheimer's disease failed to meet its main goal.
22:01
Speaker 4: Over the weekend, Wicked for Good at an impressive box
22:05
Speaker 4: office debut, where ticket sales totaled about one hundred and
22:08
Speaker 4: fifty million dollars, which would mark one of the biggest
22:10
Speaker 4: domestic debuts this year. However, shares in Universal Pictures owner
22:14
Speaker 4: Comcast are down just over one percent, and struggling retailer
22:19
Speaker 4: Coles has named Michael Bender as its new CEO, marking
22:23
Speaker 4: the third CEO that the department store has had in
22:26
Speaker 4: the last three years. Bender has been serving as the
22:29
Speaker 4: company's interim CEO since May. Colestock is down modestly so
22:34
Speaker 4: far today. I'm Tucker Silva and that is Wall Street Watch.
22:38
Speaker 2: All right. So, one of the things that was one
22:41
Speaker 2: of the pieces of information released last week by the
22:43
Speaker 2: Bureau of Labor Statistics is that the October CPI caput
22:49
Speaker 2: it will not exist in a full final form. This
22:53
Speaker 2: is the first time that we have seen this since
22:57
Speaker 2: we have had instruments avail that basically are built to
23:03
Speaker 2: track the CPI in investment vehicles. Think about treasury bonds
23:08
Speaker 2: that are indexed for inflation TIPS bonds as they're more
23:12
Speaker 2: commonly referred to Treasury inflation protected securities. So the question
23:17
Speaker 2: that people ask is, okay, like, how does this actually
23:20
Speaker 2: work on something like that or in other areas of
23:23
Speaker 2: the market where you need a reading from the October
23:28
Speaker 2: CPI in order to be able to produce a result.
23:32
Speaker 2: And the answer is that the contracts for these have
23:35
Speaker 2: different covenants in them requiring fallback data to be used
23:40
Speaker 2: in order to actually provide some kind of reading for
23:45
Speaker 2: the value of the instrument. So, as an example for TIPS,
23:52
Speaker 2: an this is according to like again the guidelines for
23:56
Speaker 2: how TIPS work, you have to use a synthetic number
23:59
Speaker 2: quote based on the last available twelve month change in
24:04
Speaker 2: the CPI. So in this case, you would use CPI
24:06
Speaker 2: from September of twenty four to September of twenty five.
24:10
Speaker 2: But then if you go to the inflation derivatives market,
24:13
Speaker 2: they have a different fallback that they use that instead
24:18
Speaker 2: uses swap based numbers in order to provide their fallback
24:23
Speaker 2: from and officially released CPI. So what you end up
24:27
Speaker 2: with here is that you get a divergence in payouts
24:31
Speaker 2: depending on the fallback mechanism that is used. That diverges
24:35
Speaker 2: to the tune of about zero point two percent over
24:38
Speaker 2: the last year as a result of this. So when
24:42
Speaker 2: we talk about the impact of not getting an October CPI,
24:47
Speaker 2: look ultimately like, I don't think anyone wakes up and
24:50
Speaker 2: looks at their bank statement in the morning and then
24:52
Speaker 2: he gets the CPI and says, oh, inflation wasn't as
24:55
Speaker 2: bad last month as I thought. No, Like, you spent
24:57
Speaker 2: the money you spent, and that's how it is. So
25:00
Speaker 2: these are some of the ways that this actually creeps
25:02
Speaker 2: into market functioning and how you can see, you know,
25:06
Speaker 2: some funky things that might be there when you're trying
25:09
Speaker 2: to figure out some of these items in markets.
25:13
Speaker 3: I think what this comes back to for me, Chuck
25:15
Speaker 3: is over the last one hundred years, there has been
25:20
Speaker 3: a tremendous amount of trust built for the US financial
25:25
Speaker 3: system as a whole. And I know that sounds kind
25:27
Speaker 3: of strange coming from people because you know, I probably
25:30
Speaker 3: listen like I don't trust bankers on Wall Street.
25:33
Speaker 2: That's not what I write.
25:34
Speaker 3: What I mean is that internationally people settle trade in
25:38
Speaker 3: US dollars when they trade with other countries. They want
25:40
Speaker 3: to use US dollars because they know that it is
25:42
Speaker 3: the most stable currency and you know, capital system out there,
25:48
Speaker 3: and one month of missing CPI does nothing to damage that. No,
25:52
Speaker 3: But when we talk about why you know, investors don't
25:57
Speaker 3: settle funds in Chinese you on, for example, it's because
26:00
Speaker 3: because you don't trust the data that backs up the
26:02
Speaker 3: financial system. And again, like I said, one missing inflation
26:07
Speaker 3: read doesn't do anything to damage that reputation. But potential
26:13
Speaker 3: changes to how CPI gets calculated, if you have you know,
26:17
Speaker 3: people that are someday messing with the data or saying, hey,
26:20
Speaker 3: we don't want to release it on a monthly basis anymore,
26:23
Speaker 3: those are the things that we deem really concerning because
26:26
Speaker 3: any drawback of trust from the US financial system, and
26:30
Speaker 3: you know, the data that frankly sometimes seems pretty unimportant,
26:35
Speaker 3: like monthly CPI reads, actually is really important to the
26:38
Speaker 3: functioning of the overall US financial system, which we all
26:41
Speaker 3: as Americans benefit from dramatically.
26:44
Speaker 2: Yeah, this, as you said, like, this isn't going to
26:47
Speaker 2: cause anyone to rethink that type of investment, but it
26:52
Speaker 2: is something where if you start seeing more and more
26:54
Speaker 2: of these pockets that pick up, eventually you get to
26:58
Speaker 2: a point where you know, and again there needs to
27:01
Speaker 2: be a lot more like we are. We're nowhere near
27:04
Speaker 2: this right now, but eventually you get to a point where,
27:07
Speaker 2: you know, a pension fund that's you know overseas says, yeah,
27:11
Speaker 2: we need to rethink our capital allocation just because there's
27:15
Speaker 2: a material risk related to the quality or quantity of
27:20
Speaker 2: data being provided on instruments X, Y, and z. And
27:24
Speaker 2: that's where it starts to matter. This won't, but just
27:28
Speaker 2: give you an example. He Look, let's say that you're
27:29
Speaker 2: an institutional investor in wherever, Like let's even say you're
27:34
Speaker 2: an institutional investor in the United States, right and you
27:38
Speaker 2: have an allocation to tips in your portfolio, and if
27:41
Speaker 2: you miss this CPI reading once you say, whatever, it's
27:46
Speaker 2: not a big deal. It happens, you know, every month,
27:48
Speaker 2: and as long as we have data going forward, it's fine.
27:51
Speaker 2: If long shut downs and missing CPI data become the norm,
27:58
Speaker 2: then institutions may say, look, we buy these investments in
28:02
Speaker 2: order to hedge against inflation in our bond portfolio. If
28:07
Speaker 2: the data is not being provided such that they are
28:09
Speaker 2: not doing that hedging, we are not going to buy them.
28:12
Speaker 2: And then the US government has a funding problem related
28:15
Speaker 2: to now you've got to change the mix of your
28:17
Speaker 2: securities that you issue. You issue fewer tips and more
28:20
Speaker 2: conventional bonds, and maybe the yield rises as a result
28:23
Speaker 2: of that. So again one off. Quite honestly, I'll go
28:29
Speaker 2: far enough to say it doesn't matter, agreed, But if
28:32
Speaker 2: this becomes something that's happening once a year, which I
28:36
Speaker 2: don't think we have evidence of that, but if it
28:38
Speaker 2: were to, it starts to become kind of problematic. If
28:43
Speaker 2: you get to a frequency like that, I'm going to
28:46
Speaker 2: wait for that to happen before I start to say,
28:49
Speaker 2: you know, this is a problem, because, quite honestly, if
28:52
Speaker 2: it's just once and doesn't happen again, it's a non factored.
28:57
Speaker 2: Americans are on a year end shopping spree. I've seen
29:00
Speaker 2: so many divergent stories on the chuck.
29:03
Speaker 3: This is typical. So every year around Halloween, a bunch
29:08
Speaker 3: of companies go out there and start talking to consumers,
29:10
Speaker 3: and what they ask them is, hey, are you planning
29:12
Speaker 3: on spending as much as you did last year, more
29:14
Speaker 3: than last year or less than last year on the
29:16
Speaker 3: holiday season? Sure, and universally everyone says, oh, I'm going
29:20
Speaker 3: to pull back my spending because you know, that credit
29:22
Speaker 3: card bill that I had to pay off was really painful.
29:25
Speaker 3: And then you ask them again in mid November or
29:29
Speaker 3: late November or early December, and it's like, oh, yeah,
29:32
Speaker 3: we are spending like crazy. We are have been at TJ,
29:36
Speaker 3: you know, We've been at Home Goods and TJ Max
29:39
Speaker 3: every night for the last two weeks. And I'm definitely
29:42
Speaker 3: going to all the Black Friday sales. So yeah, this
29:45
Speaker 3: is not unique. This is typical. Every single year we
29:48
Speaker 3: deal with something. And by the way, I'm not saying
29:50
Speaker 3: that every retailer out there is going to have a
29:52
Speaker 3: great quarter. There will be winners and losers. But every
29:57
Speaker 3: time I read one of those stories like a corrugated
29:59
Speaker 3: box show, mients look bad or consumers are saying that
30:02
Speaker 3: they're going to pull back on their spending. I usually
30:06
Speaker 3: just kind of ignore it and say, let's take a
30:07
Speaker 3: look at it in January, because my guess is that
30:09
Speaker 3: the holiday shopping spending goes up by some two odd
30:12
Speaker 3: percent compared to last year.
30:15
Speaker 2: You know what, I think we can say conclusively at
30:17
Speaker 2: this point. Sure, any concern related to spending from households
30:24
Speaker 2: that you know, became any concern that we had because
30:27
Speaker 2: of what we were seeing in restaurants spending trends, which
30:31
Speaker 2: are real. There's a problem there. Yep, it's not spilling
30:34
Speaker 2: over into the rest of retail.
30:36
Speaker 3: Doesn't appear too.
30:39
Speaker 2: You can't look at, you know, anything out there in
30:41
Speaker 2: the broad macro picture for retail and say, yeah, this
30:46
Speaker 2: is the problem. It's basically restaurants are continuing to report
30:50
Speaker 2: some pretty concerning things. Travel amongst lower income households is
30:57
Speaker 2: still not doing particularly well, but retail spending on pretty
31:03
Speaker 2: much anything else seems to be cooking along at that
31:07
Speaker 2: standard four to six percent growth rate that we've been
31:09
Speaker 2: at all year with no change. Yeah, let's take a
31:12
Speaker 2: quick break when we come back. Yeah, we're going to
31:17
Speaker 2: cover this piece, but not for the reason you think.
31:20
Speaker 2: It's the Wall Street Journal analyzing five thousand earning calls
31:24
Speaker 2: to figure out what CEOs think about tariffs. We'll discuss
31:28
Speaker 2: that when we return.
31:31
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32:08
Speaker 2: Piece in the Wall Street Journal answering the question that
32:13
Speaker 2: everyone wants to know, do CEOs actually care about tariffs?
32:22
Speaker 2: The study that no one wanted. So here's the thing. Okay,
32:28
Speaker 2: I'm gonna make my view very very simple. CEOs. The
32:33
Speaker 2: Wall Street Journal covered. They studied whether or not CEOs
32:36
Speaker 2: were talking about tariffs positively or negatively on their phone calls,
32:39
Speaker 2: on their on their earnings calls. Guys, if you know
32:45
Speaker 2: it's going to antagonize the Trump administration to talk about
32:48
Speaker 2: tariffs on your earnings calls, you are not going to
32:52
Speaker 2: talk about them on your earnings calls.
32:54
Speaker 3: These are public, These are not private earnings calls between
32:58
Speaker 3: you and the Wall Street Journey.
32:59
Speaker 2: Right like the Amazon earlier this year when in a
33:02
Speaker 2: span of a morning they didn't about face on whether
33:04
Speaker 2: they were gonna slap a tariff's urcharge.
33:06
Speaker 3: Remember that, Remember that they're gonna publish it right on
33:08
Speaker 3: Amazon dot com when you went to buy an item.
33:10
Speaker 3: This is the It was not very long time.
33:14
Speaker 2: So I think that this study is worthless because even
33:17
Speaker 2: if corporate CEOs are, you know, thinking or actually making
33:21
Speaker 2: changes as a result of tariffs to their business, they're
33:24
Speaker 2: not going to go out and tell you directly on
33:27
Speaker 2: their conference call. They'll just figure out ways to make
33:29
Speaker 2: it happen under the surface, and it will happen. So
33:32
Speaker 2: I think that that's that's my view on this. I
33:34
Speaker 2: don't know where you were gonna land.
33:36
Speaker 3: I found it completely useless because I mean, once again,
33:39
Speaker 3: the Wall Street Journal has a tendency to put together
33:41
Speaker 3: some really useless charts. And you have another one here
33:45
Speaker 3: the share of Ernie's calls addressing tariffs, in which executives
33:49
Speaker 3: discuss tariff risks and it's a percentage, and they have
33:53
Speaker 3: these different like just useless to me. I think the
33:56
Speaker 3: big picture, the only thing that I can draw from,
34:01
Speaker 3: you know, conclusions about how CEOs feel about tariffs. And
34:05
Speaker 3: this does not come from the Wall Street Journal. It's
34:07
Speaker 3: just the general consensus that the journal agrees with is
34:11
Speaker 3: that CEOs were deathly afraid of tariffs in April on
34:15
Speaker 3: Liberation Day and are a lot less concerned about it today.
34:18
Speaker 2: Well, and look, here's the thing that I'll say about this.
34:22
Speaker 2: What matters for anything in the economy is the rate
34:25
Speaker 2: of change from where you were prior. Tariffs, in my opinion,
34:31
Speaker 2: are not a huge factor in the economy in twenty
34:33
Speaker 2: twenty six, either way, whether upeld by the Supreme Court, rejected,
34:38
Speaker 2: or anything in between. And the reason why is because
34:41
Speaker 2: the greatest possible risk is when something is first announced
34:45
Speaker 2: in that big shift like what we saw in April
34:47
Speaker 2: of this year, that can't happen again unless, like you see,
34:52
Speaker 2: like a similar announcement going forward. But once they're in place,
34:58
Speaker 2: it's not like you just like they don't just wear
35:01
Speaker 2: on you forever. In that same way, it's okay if
35:03
Speaker 2: you keep announcing more and more in changing the policy,
35:06
Speaker 2: yes that's a problem. But ultimately, if tariffs haven't caused
35:12
Speaker 2: problems in the economy to this point, they're not going to.
35:17
Speaker 3: Right, and there could be trade issues in our future.
35:21
Speaker 3: They don't really involve the rate of tariffs. They involve
35:24
Speaker 3: whether or not China wants to give us rare earth
35:27
Speaker 3: materials and whether to what extent we are willing to
35:30
Speaker 3: give them semiconductors. That's the only trade issue that really matters.
35:33
Speaker 3: The US.
35:33
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35:37
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35:43
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35:46
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35:50
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35:56
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35:59
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36:04
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36:07
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36:11
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36:15
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36:19
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36:24
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36:28
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36:35
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36:44
Speaker 2: Mike, we got a problem in beef world. Yeah, Tyson
36:48
Speaker 2: Foods is going to be closing a one of its
36:51
Speaker 2: largest beef processing plants in Nebraska's in Lexington, Nebraska, and
36:57
Speaker 2: it employs about three thousand people and slaughter there's almost
37:00
Speaker 2: five thousand cattle per day.
37:02
Speaker 3: Which on the surface seems surprising to me, given the
37:05
Speaker 3: only thing I'm focused on about beef is that prices
37:08
Speaker 3: are through the roof. I would think that that allows
37:11
Speaker 3: Tyson to wide margins and make a little bit more,
37:15
Speaker 3: But ultimately it looks like this is much more of
37:18
Speaker 3: a volume business than a price business.
37:20
Speaker 2: It is, and this is the issue is that apparently,
37:22
Speaker 2: and again I'm no expert on the you know, the
37:28
Speaker 2: beef process. I'm industry chuck.
37:30
Speaker 3: To be quite honest, If I knew that I was
37:32
Speaker 3: going to have to cover a story about Beef's not
37:36
Speaker 3: many people I would know that I would go to prioritize.
37:38
Speaker 2: I'm as close as you can get to an expert
37:40
Speaker 2: without being an expert. But here's the deal. It's like
37:44
Speaker 2: any other factory. You have to operate at max volume
37:47
Speaker 2: for as long as possible because it's a low margin business.
37:51
Speaker 2: And so when you have shrinking herds for a variety
37:55
Speaker 2: of reasons, you don't get the volume of cattle going through,
37:59
Speaker 2: and Ty makes the decision, Hey, we've got to close
38:02
Speaker 2: this because you can't just scale down to fifty percent
38:05
Speaker 2: on this and expect it to still work. Even in
38:08
Speaker 2: another one of their facilities in Emillo, Texas, they are
38:12
Speaker 2: moving to a one shift per day setup because again,
38:16
Speaker 2: you can't just tell like eighty percent of the people
38:18
Speaker 2: to come in for two shifts per day. It doesn't
38:21
Speaker 2: make money if you're running the equipment in facility round
38:24
Speaker 2: the cock like that. Instead, you get rid of a shift,
38:27
Speaker 2: and then if that doesn't work, you close the plant
38:28
Speaker 2: because that's the only way you can get there on it.
38:33
Speaker 2: I did happen to have a lovely rib roast over
38:35
Speaker 2: the weekend that I did, and I don't know if
38:38
Speaker 2: it came from this facility, but gosh, it was tasty.
38:42
Speaker 2: Getting the holiday season kicked off a little bit. We're
38:45
Speaker 2: going to take a quick break. Hour two coming up
38:47
Speaker 2: in a little bit