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What does it say about the economy when consumers are financing groceries? · The Financial Exchange Show

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Speaker 1: Face is the Financial Exchange with Mike Armstrong and Mark Vandetti.
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Speaker 2: Good morning, Welcome to the Financial Exchange. It's Mike, Mark
1:15
Speaker 2: and Tucker with you here on a Tuesday with markets
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Speaker 2: in slight rally mode after opening up about flat. We've
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Speaker 2: got the Dow up eighty five points a fifth of
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Speaker 2: a percent, the S and P up twenty two, about
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Speaker 2: four tenths of a percent, in the NASDAC up three
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Speaker 2: quarters of a percent as we head into the eleven
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Speaker 2: o'clock hour here This morning. At ten am, we had
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Speaker 2: a report from the Bureau of Labor Statistics on the
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Speaker 2: Job Openings and Labor Turnover Survey JOLTS report. It gives
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Speaker 2: us a few different data points. What we found was
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Speaker 2: at the end of April there were approximately seven point
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Speaker 2: four million jobs open that's up from March of seven
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Speaker 2: point two. In terms of total hires, that also moved
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Speaker 2: very slightly higher to about five point five cent seven million,
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Speaker 2: up from five point four the previous month. And then finally,
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Speaker 2: the total separations also increased a bit. These would be
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Speaker 2: quits plus layoffs at five point three million I'm rounding
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Speaker 2: a bit there, up from about five point two. Overall
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Speaker 2: the survey that did not change significantly month over month.
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Speaker 2: Nothing in here indicating that there were massed layoffs or
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Speaker 2: big hiring plans executed on in the month of April.
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Speaker 2: It's also a fairly backward looking survey. However, too. You know,
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Speaker 2: as I mentioned, this is giving us data on now
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Speaker 2: what is that a little bit over a month ago
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Speaker 2: is where this survey takes place, but overall indicates not
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Speaker 2: much change, but also a still underlying labor market that
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Speaker 2: does not have an excessive amount of slack in it.
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Speaker 3: Yeah, that's I think the key point. Researchers use this ratio,
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Speaker 3: and it's relatively new, I think in the public consciousness
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Speaker 3: because for years we looked at, say, the unemployment rate
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Speaker 3: is a measure of slack in the economy, the difference
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Speaker 3: between what the economy could produce it's potential if you like,
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Speaker 3: and what it is producing the unemployment. It's a many
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Speaker 3: variables you can look at to get a sense for
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Speaker 3: how hot or not the economy's running. The VU vacancy
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Speaker 3: to unemployment ratio Mike that you were just talking about
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Speaker 3: has come down a lot, from two to roughly one.
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Speaker 3: So it's come down by roughly app since the peak
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Speaker 3: of the frenzy of economic activity that followed the COVID
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Speaker 3: reopening and all the stimulus that was stimulus that was
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Speaker 3: plowed into the economy. So it's a lot lower than
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Speaker 3: it was, but it's still quite higher than it was,
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Speaker 3: say before twenty eighteen, twenty nineteen. It's running it roughly
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Speaker 3: fifty percent higher than it was throughout the twenty tens,
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Speaker 3: which is suggestive. Researchers like this variable, the vacancy to
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Speaker 3: unemployment ratio, because it's a better predictor of future inflation
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Speaker 3: than other variables that have traditionally served as proxies for
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Speaker 3: slack in the economy. So the fact that it remains
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Speaker 3: elevated relative to say, pre twenty eighteen twenty nineteen, is
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Speaker 3: consistent with high underlying variously measured and we can get
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Speaker 3: into this maybe later, consistent with the high underlying inflation
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Speaker 3: that continues to vex the FED right.
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Speaker 2: New York Times has a piece this morning on consumers,
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Speaker 2: and this is one of many different new recession indicators
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Speaker 2: that I think gen Z has been talking about online.
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Speaker 2: There are a few others, but the idea of using
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Speaker 2: financing apps like Klarna that are out there or a
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Speaker 2: firm is another major one that you probably see if
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Speaker 2: you shop on Amazon. Here's the basics of these. They
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Speaker 2: are lending apps that until very recently did not report
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Speaker 2: to major credit agencies. They are not banks, they are
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Speaker 2: not credit cards, but effectively they are to tech firms
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Speaker 2: that allow you to pay them in installments to purchase
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Speaker 2: any number of items. And so if I go on
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Speaker 2: to Amazon Rite this very moment, I'm sure that I can.
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Speaker 2: Let's see, I need a dog crate, and if I
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Speaker 2: want to go buy that dog crate for one hundred
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Speaker 2: and forty dollars, I can add it to my card
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Speaker 2: and it will offer me. If I want to use
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Speaker 2: a firm or another another payment system to buy this thing,
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Speaker 2: I gotta be careful that I don't actually buy it.
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Speaker 2: I actually don't see I actually don't see a firm
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Speaker 2: on here on Amazon. But they've been growing in popularity.
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Speaker 2: And here's the idea. You finance this through them. So
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Speaker 2: long as you make your payments on time let's call
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Speaker 2: it for installment payments over four months. There is no
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Speaker 2: interest charge. There is no financing charge. In most scenarios,
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Speaker 2: there's different deals placed by place, but generally speaking, that's
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Speaker 2: the way it works is we won't tack on any
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Speaker 2: fees unless you miss a payment, in which case they
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Speaker 2: will be pretty substantial. How the firms make money obviously
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Speaker 2: those default payments where people don't actually pay them. But
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Speaker 2: that's not a great system, because what are you going
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Speaker 2: to do repossess my used greate. It's not going to
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Speaker 2: have a ton of resale value. I don't think where
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Speaker 2: they do make a lot of money is they get
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Speaker 2: fees from the vendors that they are partnering with. So
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Speaker 2: the likes of Amazon or Nike dot Com or any
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Speaker 2: of these stores will actually pay these apps to say no,
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Speaker 2: you'll be the financing for these purchases, and will pay
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Speaker 2: you something to do that, maybe something like a similar
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Speaker 2: to a credit card fee. I can see how using
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Speaker 2: this to buy groceries would seem to be a very
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Speaker 2: financially irresponsible decision on the surface, and I don't think
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Speaker 2: it indicates much that would be good about the state
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Speaker 2: of the economy. But I'm actually gonna argue the flip
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Speaker 2: side of this, just for conversation's sake. If a company
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Speaker 2: is out there and is willing to loan me money
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Speaker 2: over four months at zero percent interest, why shouldn't I
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Speaker 2: take advantage of that? Give me one good reason I,
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Speaker 2: as a responsible user of my credit and user of
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Speaker 2: my money, should not take Clara up on paying for
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Speaker 2: equal installments for my grocery and raise one hundred dollars
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Speaker 2: per month.
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Speaker 3: Doesn't that reduce your credit capacity and raise lower, excuse me,
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Speaker 3: your credit score?
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Speaker 2: Yeah? So hypothetically, I guess that might be a good
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Speaker 2: reason if they are in fact now reporting to credit agencies,
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Speaker 2: which they are not universally doing so. But I look
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Speaker 2: at all this, and by the way, I took a
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Speaker 2: look before too, I can use my credit card to
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Speaker 2: pay off my Clarina balance and earn my points on
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Speaker 2: my credit card that I would otherwise do by paying
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Speaker 2: for my groceries and for separate installments. I'm not saying
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Speaker 2: that anyone should do this, because borrowing money to buy
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Speaker 2: groceries sounds to me like you are struggling financially. But
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Speaker 2: I'm just unsure that I want to conclude that, Hey,
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Speaker 2: because people are using these things, it necessarily means that
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Speaker 2: the economy is in a tough spot.
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Speaker 3: How is this any different than paying for groceries with
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Speaker 3: a credit card. If you pay the credit card down
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Speaker 3: before the grace period ends or at the end of.
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Speaker 2: The y doesn't seem to differt me.
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Speaker 3: You're taking a short term loan to groceries. On the
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Speaker 3: case of a credit card, there is one difference. It's
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Speaker 3: not new credit. As long as you pay the balance
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Speaker 3: down quickly enough, right, it's not going to register as
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Speaker 3: an increase in credit utilization. This might so this article's
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Speaker 3: asking is this a recession indicator? And a question like
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Speaker 3: that would drive a researcher, which you know I am
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Speaker 3: in my day job, nuts because these things are new.
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Speaker 3: We can't know if they predict recessions. We don't have
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Speaker 3: this data for previous cycles. The author does, and their
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Speaker 3: defense ask well, could this just be a change in
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Speaker 3: preferences or the recognition that this is just another tool.
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Speaker 3: That's the charitable interpretation. The more cynical, pessimistic interpretation is
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Speaker 3: that people are getting into something they don't understand, or worse,
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Speaker 3: they're so hard up right, they're not even living. Hand
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Speaker 3: to mouth This is like reverse hand. That's not reverse
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Speaker 3: hand of mouth, but you know what I mean. They
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Speaker 3: don't have the hand to put to the mouth. They
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Speaker 3: have to borrow another hand to put to their mouth.
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Speaker 3: Am I torturing this?
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Speaker 2: In the most distasteful version of this. I mean, I
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Speaker 2: did see. I know we covered a story a couple
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Speaker 2: of years ago where some was you could use a
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Speaker 2: firm or Klarna to buy a pizza from Papa John's,
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Speaker 2: and I remember reading that being like, Wow, if you
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Speaker 2: need to finance a pizza, you probably shouldn't be dining out.
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Speaker 2: But I keep second guessing this now because up until
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Speaker 2: very recently, like you know now, if they're reporting to
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Speaker 2: credit agencies, Yeah, if you have like fifty outstanding loans
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Speaker 2: for pizzas and groceries and everything, I can't imagine that's
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Speaker 2: going to do anything good for your credit. But I
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Speaker 2: don't know. I keep taking a step back and thinking
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Speaker 2: about this in the same way I do my credit card.
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Speaker 2: Why wouldn't I put everything I possibly can on my
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Speaker 2: credit card and pay it off on time every month
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Speaker 2: and save myself two to three percent in the form
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Speaker 2: of points.
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Speaker 3: Yeah.
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Speaker 2: I am perfectly willing to admit that a large portion
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Speaker 2: of the population cannot do that financially responsibly and end
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Speaker 2: up going into just wallowing amounts of debt and you know,
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Speaker 2: not being successful in that. But from a purely math
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Speaker 2: medical standpoint, I don't really have a problem with this. Yeah,
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Speaker 2: And I don't think it indicates much of anything, because
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Speaker 2: I think it's just changing consumer behavior.
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Speaker 3: Again, we don't have data on this for previous cycles,
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Speaker 3: so I can't tell you whether or not this is
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Speaker 3: a good predictor of economic slowdown or worse recession. Nobody can.
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Speaker 3: You can make educated guesses because payday loans are not new,
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Speaker 3: and increase utilization of payday loans or other means of
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Speaker 3: getting money in a short term are associated with economic distress,
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Speaker 3: so it's a logical deduction. We just don't have enough
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Speaker 3: data to say whether these in particular are flashing a red.
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Speaker 2: My best educated guess, this is another indicator to heap
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Speaker 2: on the big pile of indicators we have to tell
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Speaker 2: us that the lower half of income households have been
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Speaker 2: very much struggling over the last five years and are
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Speaker 2: continuing to do so in twenty twenty five, and this
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Speaker 2: is just probably another data point on that pile. I
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Speaker 2: very much doubt that a lot of people using Clarinet
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Speaker 2: for buying groceries are doing the math that I'm doing
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Speaker 2: in my head to say, well, I wouldn't I find
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Speaker 2: out it's those over four months and paid back and
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Speaker 2: during the interest that I have in my bank account
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Speaker 2: minus the points that I get on my credit card.
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Speaker 2: That's probably not what's happening. It's probably something a little
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Speaker 2: bit worse, which is people can't afford their groceries and
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Speaker 2: they're needing to use a service like that to do so.
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Speaker 2: And that's that's probably not a great story about the economy.
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Speaker 2: Let's take a quick break when we come back. We're
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Speaker 2: gonna play a little bit of trivia for you when
11:21
Speaker 2: we come back next. And then I want to talk
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Speaker 2: about private credit because while it's a hot topic within
11:27
Speaker 2: the investment industry, I don't think anyone outside of that
11:31
Speaker 2: space has much of an idea what's been going on
11:33
Speaker 2: in private credit over the last decade, and it's important.
11:35
Speaker 2: We'll tell you next. On The Financial Exchange.
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13:37
Speaker 2: Mark in two thousand and four, if I had a
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Speaker 2: new startup that I was getting going and I needed
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Speaker 2: to borrow twenty million dollars to finance the purchase and
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Speaker 2: building of a bunch of warehouses, I might have gone
13:49
Speaker 2: to one of the big banks across the country or
13:51
Speaker 2: even a regional one. Then you know, filled out a
13:53
Speaker 2: loan application, worked with my partners to get that loan approved,
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Speaker 2: and get started on construction. These days, from what I understand,
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Speaker 2: it is a lot less common for a twenty million
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Speaker 2: dollar loan to necessarily go through your bank, and instead
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Speaker 2: some other places are financing those loans and picking them
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Speaker 2: up and reselling them, repackaging them to other investors in
14:15
Speaker 2: a very different fashion. Talk to us about the private
14:18
Speaker 2: credit space, why it came to exist, and in the
14:20
Speaker 2: space it occupies today.
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Speaker 3: Sure, private credit is the name suggests, and I'm gonna
14:25
Speaker 3: call it private debt, even though private debt is a
14:27
Speaker 3: little bit broader, sure, but it better conveys what is
14:32
Speaker 3: happening in this part of the marketplace. A public loan
14:36
Speaker 3: like you make to the US Treasury, when you buy
14:38
Speaker 3: a Treasury bill, note or bond is tradable. You can
14:41
Speaker 3: trade it on, you can sell it to somebody else,
14:44
Speaker 3: You can buy it from somebody else on a secondary
14:46
Speaker 3: exchange basis.
14:46
Speaker 2: Likewise, if Apple raises debt, like buy an Apple.
14:49
Speaker 3: Bond at any time and go on your Charles Schwab
14:52
Speaker 3: account or whatever, just to pull a name out of
14:54
Speaker 3: thin air. Easy liquid and transparent. There are some borrowers
14:59
Speaker 3: who may not be credit worthy. They're smaller borrowers, so
15:03
Speaker 3: they may not have a rating with a credit agency.
15:08
Speaker 3: They may be associated with a firm that is owned
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Speaker 3: by private equity, which is the stock analog to private debt,
15:15
Speaker 3: also known as private credit. Again, I'm using those two
15:17
Speaker 3: terms interchangeably, private debt private credit, but they're not quite
15:20
Speaker 3: the same thing. Just keep that in mind. So these
15:23
Speaker 3: say a company that is owned by a private equity
15:26
Speaker 3: firm may need to raise capital to finance and expansion.
15:30
Speaker 3: You can do that by issuing debt to say a pension,
15:34
Speaker 3: by selling debt in that company or many companies to
15:38
Speaker 3: a pension fund or to a college in debt, and.
15:40
Speaker 2: This debt would most times not be raided by S
15:42
Speaker 2: and P or movies. It is not because they don't
15:46
Speaker 2: need to raise bonds in a public offering.
15:48
Speaker 3: Part of it is that part of it maybe it's
15:49
Speaker 3: too speculative. It wouldn't be worthwhile to pay to get
15:52
Speaker 3: the rating because it's going to below investment grade, which
15:55
Speaker 3: won't enable you to tap the amount of capital that
15:57
Speaker 3: you need to tap. So the shadow banking result, so
16:01
Speaker 3: called shadow banking system because these entities, private credit managers.
16:05
Speaker 3: Some of them are household names Blackstone, Apollo, Aries, I
16:09
Speaker 3: don't know, Adams Street. If you've never heard of them,
16:12
Speaker 3: but you have a pension, they're probably on your pension
16:14
Speaker 3: funds roster. Not They haven't made their way in a
16:17
Speaker 3: four oh one k lan yet, but they could so.
16:19
Speaker 3: After two thousand and eight and nine, when poor credits lending,
16:23
Speaker 3: the poor credits hurt the banking system and we consequently
16:27
Speaker 3: had to bail it out. As everybody remembers, banks typed
16:29
Speaker 3: up lending standards they were compelled to, and that allowed
16:33
Speaker 3: private credit or private debt again using those two terms interchangeably,
16:36
Speaker 3: though they aren't exactly the same thing to really blossom,
16:40
Speaker 3: and now private credit now switch to just using that
16:43
Speaker 3: term is one point five or six trillion dollar industry.
16:46
Speaker 3: It's bigger than I yield debt, something you could purchase,
16:49
Speaker 3: say on your four one K plan menu.
16:51
Speaker 2: And the loans that have been made are not sitting
16:55
Speaker 2: on the books of banks anymore, not directly, but kind
16:59
Speaker 2: of still might be, and are funneled into all sorts
17:02
Speaker 2: of other institutions. They're sitting on the balance sheet of
17:06
Speaker 2: major insurance companies.
17:09
Speaker 3: They owned shares in the general partner. Let me use
17:12
Speaker 3: Apollo as an example. There a general partner abbreviate that
17:14
Speaker 3: with GP. They own the bond, they own, they make
17:18
Speaker 3: the loans. You then buy shares in those loans through
17:22
Speaker 3: a fund managed by the GP. Apollo, you're an LP,
17:26
Speaker 3: a limited partner. If you have a pension, if you're
17:28
Speaker 3: in one of the construction trades, if you're a public
17:30
Speaker 3: or we're a public employee and you have a public
17:32
Speaker 3: employee pension benefit, you probably have some exposure to private
17:37
Speaker 3: credit through that fund, so and others.
17:40
Speaker 2: The arguments that those lenders make are, hey, we're better
17:43
Speaker 2: at this than the banks were. We also are repackaging
17:47
Speaker 2: and selling this to people that don't have liquidity needs
17:50
Speaker 2: in the same way that say, the retail investor does,
17:53
Speaker 2: and so we're going to be better able to withstand
17:57
Speaker 2: a downturn. But the Boston Federal Reserve is put out
18:00
Speaker 2: a piece recently, a research piece on you know just
18:03
Speaker 2: how far these tentacles they are into the overall financial system?
18:06
Speaker 2: And I think the question of Okay, why should I
18:09
Speaker 2: care would be, are these things becoming strategically important to
18:15
Speaker 2: the financial system in a way that well fell apart,
18:18
Speaker 2: our financial system might collapse.
18:20
Speaker 3: Well, banks get cleaned out if these funds, if the
18:23
Speaker 3: bonds I'll call them bonds even though they aren't. If
18:25
Speaker 3: if the loans is more accurate owned by these funds
18:29
Speaker 3: default because banks are to a degree funding private credit managers.
18:34
Speaker 2: Are insurance coans. Would insurance companies go bust if these
18:39
Speaker 2: private credit loans fell apart, and then we're not able
18:42
Speaker 2: to pay out claims on the next wildfire or flood
18:45
Speaker 2: that occurred. These are questions that I don't think any.
18:48
Speaker 3: They have a lot of fixed in insurance companies have
18:50
Speaker 3: a lot of traditional fixed income. Having worked in that
18:53
Speaker 3: part of the industry, I'm a little less concerned about that,
18:57
Speaker 3: though there could be knock on effects. It's it's hard
18:59
Speaker 3: to say, but the shot banking system generally is pretty opaque,
19:02
Speaker 3: as evidenced by the fact that few people have heard
19:04
Speaker 3: of what we're talking about, right and lightly relatively lightly regulated.
19:10
Speaker 2: Yeah, it's been a mounting and growing area and very
19:14
Speaker 2: little has been written about its strategic importance to the
19:17
Speaker 2: financial system, which I think is the overall big important
19:22
Speaker 2: question because that's the piece that leads to government needed
19:25
Speaker 2: to get involved. Let's take a quick break. When we
19:27
Speaker 2: come back, Wall Street Watch as well as the trivia Winners.
19:30
Speaker 5: Next, bringing the latest financial news straight to your radio.
19:44
Speaker 5: Every day, It's the Financial Exchange on the Financial Exchange
19:48
Speaker 5: Radio Network. Time now for Wall Street Watch.
19:53
Speaker 1: A complete look at what's moving market so far today
19:56
Speaker 1: right here on the Financial Exchange Radio Network.
20:00
Speaker 4: Well, markets are now trading higher? Is traders digest the
20:03
Speaker 4: JILTS report posted at ten o'clock this morning, which showed
20:06
Speaker 4: available jobs total nearly seven point four million, an increase
20:10
Speaker 4: of one hundred and ninety one thousand from March and
20:13
Speaker 4: higher than the seven point one million forecast. Right now,
20:17
Speaker 4: the Dow is up by about three tenths of a percent,
20:20
Speaker 4: SMP five hundred is up by nearly half a percent,
20:23
Speaker 4: or twenty four points, and the Nasdaq is up by
20:25
Speaker 4: about three quarters of a percent. Rusted to two thousand
20:29
Speaker 4: now up over one percent higher. Ten year treasure Field
20:32
Speaker 4: pulling back by one basis point, now at four point
20:35
Speaker 4: four five percent, and crude oil is I just clicked
20:41
Speaker 4: away from it. Stand by, what is going on with
20:43
Speaker 4: this computer?
20:44
Speaker 2: I don't know.
20:44
Speaker 4: It was traded higher earlier. It was right around sixty
20:47
Speaker 4: two dollars a barrel. I believe big news from Meta
20:50
Speaker 4: this morning, where the tech giant agreed to a deal
20:52
Speaker 4: with Constellation Energy to buy the power generation of an
20:56
Speaker 4: Illinois nuclear plant to fuel metas AI ambitions. Constellation shares
21:00
Speaker 4: are now up about one percent, actually lower than its
21:03
Speaker 4: initial jump at the open. Meanwhile, Dollar General up by
21:07
Speaker 4: over twelve percent after the discount retailer lifted its annual
21:11
Speaker 4: sales outlook, saying its updated guidance assumes that current teriff
21:15
Speaker 4: rates will remain through mid August. Elsewhere. Ford reported a
21:19
Speaker 4: sixteen percent year over year sales increase for May as
21:23
Speaker 4: the automaker continues in employee pricing program amid rising tariff
21:27
Speaker 4: costs and vehicle price increases. Ford saw a twenty nine
21:31
Speaker 4: percent jump in hybrid models and a twenty five percent
21:34
Speaker 4: drop in sales of all electric vehicles. Ford is up
21:38
Speaker 4: by over one and a half percent, and Peloton announced
21:41
Speaker 4: today a used equipment marketplace for bikes and treadmills that
21:45
Speaker 4: have been serving as cote racks in people's basements. The
21:48
Speaker 4: company said the platform, called Repowered, will allow members to
21:52
Speaker 4: post listings for their use Peloton equipment and gear instead
21:56
Speaker 4: a price. With the help with the Generative AI tool,
21:59
Speaker 4: Peloton is up by nearly two percent. I'm Tucker Silvan.
22:04
Speaker 4: That's Wall Street Watch and trivia question today was what
22:07
Speaker 4: was Muhammad Ali's name before his conversion and that would
22:10
Speaker 4: of course be Cash's. Clay Thomas from Derry, New Hampshire
22:14
Speaker 4: was our winner today, taking home a Financial Exchange Show
22:16
Speaker 4: T shirt and we play trivia every day here on
22:19
Speaker 4: the Financial Exchange. See complete contest rules at Financial Exchange
22:23
Speaker 4: Show dot com.
22:24
Speaker 2: Google is currently facing a well rather parent company, Alphabet
22:28
Speaker 2: is currently facing a threat of breakup and all sorts
22:31
Speaker 2: of lawsuits from the United States government on antitrust concerns.
22:35
Speaker 2: A lawyer, actually, two separate judges have now declared Alphabet
22:39
Speaker 2: to be a monopoly, and the only question remaining is
22:42
Speaker 2: really how hard does the administration push for a breakup.
22:45
Speaker 2: There's been discussions of requiring it to roll off their
22:49
Speaker 2: advertising business, their search business, having to share a bunch
22:53
Speaker 2: of analytics data with competitors.
22:55
Speaker 5: And.
22:57
Speaker 2: The piece from New York Times today is an interesting
23:02
Speaker 2: thought exercise that I don't think will actually happen. But
23:06
Speaker 2: the idea is, look, Google, just break yourself up. Why
23:12
Speaker 2: go through a court ordered breakup? You can actually probably
23:15
Speaker 2: take advantage of this if you go do it yourself.
23:18
Speaker 2: And perhaps the value of the individual components is more
23:25
Speaker 2: than the sum of its parts, is the argument that
23:28
Speaker 2: they would make with all of this.
23:30
Speaker 3: Yeah, if market forces are allowed to operate, presumably Google
23:33
Speaker 3: would come to that realization themselves, and it would be
23:36
Speaker 3: therefore being their economic interest. Do do just that. I
23:39
Speaker 3: don't think they need the suggestion. They don't need prompting. Yeah,
23:43
Speaker 3: from I don't know the credentials to the person who
23:47
Speaker 3: wrote this article, it just it strikes me as a
23:52
Speaker 3: little bit presumptuous to think you thought of something that
23:55
Speaker 3: never occurred to anybody on the board of Google or
23:57
Speaker 3: any of the any of their PhD economists and Ivy
24:03
Speaker 3: League MBA educated people in their treasury and finance departments.
24:07
Speaker 3: Give me a break.
24:07
Speaker 2: Yeah, I mean, look, I have a difficult time believing
24:12
Speaker 2: that the components is worth worth more than some of.
24:14
Speaker 3: The Google figure that out.
24:17
Speaker 2: They might, but I think the point would be that, look,
24:20
Speaker 2: you know, the reason you go to Google is because
24:23
Speaker 2: they do have all this data on how you search,
24:26
Speaker 2: what you do for email, how you view things via
24:30
Speaker 2: your YouTube subscription, and so the idea that yes, some
24:33
Speaker 2: other companies can be able to run that better and
24:36
Speaker 2: you know, find more economists scale. I have my doubts
24:39
Speaker 2: that that's going to be the case. But nonetheless, I
24:42
Speaker 2: think doesn't really matter. The company is going to be
24:44
Speaker 2: facing going to be facing breakup threats because of their
24:49
Speaker 2: monopoly status that these judges have determined, and so it
24:52
Speaker 2: sort of is what it is.
24:53
Speaker 3: I've not heard of one serious outside investor, say an
24:56
Speaker 3: institutional shareholder or something clamoring for a preemptive breakup. That's
25:03
Speaker 3: like saying I'm about to be sentenced to jail, I'm
25:06
Speaker 3: just gonna I'm gonna instead imprison myself in my basement
25:09
Speaker 3: for five years and see if that does the trick.
25:11
Speaker 3: Why would you do this preemptively?
25:12
Speaker 1: Right?
25:13
Speaker 2: Yeah? The lesson from Microsoft certainly was not that they
25:18
Speaker 2: successfully did get broken up a little bit, but it
25:21
Speaker 2: wasn't by preemptively doing what the judges threatening.
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26:23
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26:32
Speaker 2: Well. All eyes have been on the likes of Nvidia
26:35
Speaker 2: and Microsoft, whose stocks have appreciated massively on the backs
26:40
Speaker 2: of artificial intelligence. The lesser talked about nuclear power companies
26:45
Speaker 2: have been doing just fine as well. So Microsoft stock,
26:48
Speaker 2: for example, is up about one hundred and forty seven
26:50
Speaker 2: percent over the last five years. Constellation Energy stock is
26:53
Speaker 2: up about six hundred percent over the last five years,
26:56
Speaker 2: and largely on the back Like I said, of these
27:00
Speaker 2: nuclear power deals that they've been striking, Meta is the
27:02
Speaker 2: most recent one to sign a deal, with Constellation Energy
27:05
Speaker 2: making a bid for the energy that's generated from an
27:08
Speaker 2: Illinois power plant that was due to go offline. It's
27:11
Speaker 2: a twenty year purchase agreement that should keep the thing
27:16
Speaker 2: running for quite a bit longer than was anticipated. My
27:21
Speaker 2: main question about this, I don't know what this does
27:24
Speaker 2: to Constellation or Meta's business models, how serious Meta is
27:28
Speaker 2: about artificial intelligence. Although clearly you don't sign a twenty
27:31
Speaker 2: year power deal unless you're pretty serious about the applications
27:35
Speaker 2: and what sort of things you think you're going to
27:37
Speaker 2: need to run. My main question is about the supply
27:40
Speaker 2: and demand of electricity in the United States as a
27:43
Speaker 2: result of AI. One thing is I know one thing.
27:47
Speaker 2: Demand has surged through the roof because of all of
27:51
Speaker 2: these power centers, all of these data centers that they
27:54
Speaker 2: want to run twenty four hours a day to allow
27:57
Speaker 2: me to use chat GPT to write poems about my
28:01
Speaker 2: kids or you know, probably some better uses than that
28:04
Speaker 2: as well. But the power centers are sapping up a
28:09
Speaker 2: lot of the demand for electricity. And from what I understand,
28:14
Speaker 2: how would you describe it in economic terms? The supply
28:18
Speaker 2: of electricity is relatively inelastic. Is that? Is that a
28:21
Speaker 2: fair thing to say?
28:23
Speaker 3: In the short term?
28:24
Speaker 2: Yeah, in short term, it's tough demand to start a
28:27
Speaker 2: new nuclear power plant, for example, some of these other
28:30
Speaker 2: like you know, if you've got a gnat gas powered
28:32
Speaker 2: power plant, that doesn't run twenty four hours a day.
28:34
Speaker 2: You can usually ramp that up pretty quickly, and that's
28:36
Speaker 2: used to supplement. You know, every time there's a really
28:39
Speaker 2: cold period of time in the Northeast, we hear about
28:41
Speaker 2: those ramping up and going online. But it's not easy
28:45
Speaker 2: to generate all this, and so I just do wonder.
28:49
Speaker 2: I think it's a net positive for nuclear power and
28:52
Speaker 2: probably for total electricity generation and stabilization of the grid
28:56
Speaker 2: over the next thirty years. But I have to assume
28:59
Speaker 2: that it's going to come some big disruptions in that
29:02
Speaker 2: in between stage where suddenly you've introduced a whole bunch
29:05
Speaker 2: of new buyers for electricity, and by that very by
29:10
Speaker 2: their very nature, I would think they compete with me
29:14
Speaker 2: for that electricity. Therefy driving up prices, right.
29:18
Speaker 3: Are you asking me if a massive increase in demand
29:21
Speaker 3: in the face of fixed supply is going to push
29:22
Speaker 3: prices up there?
29:23
Speaker 2: That's what I'm asking you.
29:24
Speaker 3: I believe the answer is yes.
29:26
Speaker 2: Now. The weird answer, though, is it's all regulated. It's
29:30
Speaker 2: heavily regulated, right, So I don't think Massachusetts is just
29:34
Speaker 2: going to be fine with ever source saying hey, you know,
29:38
Speaker 2: we've got these massive profit margins. And also, you know,
29:41
Speaker 2: market prices for electricity are through the roofs that they're
29:44
Speaker 2: going up. And so I don't know how all this
29:47
Speaker 2: works out, because yeah, pretty much every state in the
29:49
Speaker 2: country has a heavily regulated market for electricity, but the
29:55
Speaker 2: fair market value of the electricity is likely headed much higher.
29:58
Speaker 2: So does it result in brown ounce? Does a result
30:01
Speaker 2: in when you have a regulated market like this, what's
30:04
Speaker 2: the I think the natural conclusion when you have fair
30:10
Speaker 2: market value going up but price controls in place is shortages.
30:14
Speaker 3: The question is will the benefits of AI offset the
30:20
Speaker 3: massive investments, And you could view this as just a
30:22
Speaker 3: cost of ramping up the capacity. Will the productivity enhancements
30:26
Speaker 3: that could result? And I use could advisedly this is
30:30
Speaker 3: all highly speculative. Justify the upward pressure on inflation and interest.
30:37
Speaker 3: I mean, there are huge macroeconomic consequences of making investments
30:40
Speaker 3: of this size, and this is not this is not
30:43
Speaker 3: the last one that we will see. All signals right
30:47
Speaker 3: now are pointing to higher inflation. I hate to have to,
30:51
Speaker 3: I hate to tie everything back to inflation, monetary policy
30:54
Speaker 3: and macroeconomics generally, but I think there's an obvious tie
30:57
Speaker 3: in here. Morepital is going to be required. These companies
31:01
Speaker 3: are generally cash flush. That's probably not This is not
31:05
Speaker 3: going to be a serious source of upward pressure on
31:08
Speaker 3: interest rates or impose a great burden on capital markets.
31:11
Speaker 2: But I don't know.
31:11
Speaker 3: Conditions could change, and the upward pressure on energy prices,
31:17
Speaker 3: even if it is only gradual. If it is gradual,
31:20
Speaker 3: that might be worse. That might make its way into
31:22
Speaker 3: inflation expectations indefinitely. And we've already got a big inflation
31:27
Speaker 3: expectation problem. See I squeezed that top again. Even though
31:29
Speaker 3: you move the story, yep, this will exacerbate that. So
31:32
Speaker 3: all things to me point to boy Ai better b
31:36
Speaker 3: the everything you're all, yeah, the cure for everything that
31:40
Speaker 3: ails the economy or else. This is going to be
31:43
Speaker 3: more than a disappointment for a few for investors in
31:45
Speaker 3: a few companies.
31:46
Speaker 2: Let's take a quick break when we come back, a
31:48
Speaker 2: little bit of stack roulette here on the Financial Exchange.
31:51
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32:35
Speaker 2: Time for a bit of secru let here on the
32:37
Speaker 2: Financial Exchange. I'm going to kick things off with a
32:40
Speaker 2: company that I continue to talk about because I think
32:43
Speaker 2: the experience is pretty cool if you have the chance
32:46
Speaker 2: to visit Phoenix or San Francisco. But it's way moo.
32:49
Speaker 2: Google's self driving car unit just passed ten million completed
32:54
Speaker 2: US driverless taxi rides apparently, and they continue to expand
33:00
Speaker 2: They are now in Phoenix, La San Francisco, I believe Huston, Sorry,
33:06
Speaker 2: I believe Austin, Texas, and are soon coming to Atlanta
33:11
Speaker 2: from what I understand. In addition to testing vehicles out
33:14
Speaker 2: in the Boston market, they have again, if you've completed
33:20
Speaker 2: ten million rides and what killed one person?
33:23
Speaker 1: I think.
33:25
Speaker 2: That's one person far too many. But they've had a
33:30
Speaker 2: fair bit of success with all of this. At the
33:33
Speaker 2: Easy Center. General conclusion and I'm sure when they set
33:37
Speaker 2: out they were well aware that they had the high
33:39
Speaker 2: possibility of something like this happening. My question on all this,
33:45
Speaker 2: I think they're going to continue to be household names.
33:48
Speaker 2: But the major criticism that you can have of WEIMO
33:52
Speaker 2: at this point is not their success in mapping this
33:54
Speaker 2: stuff out and doing well with it. It's that it
33:56
Speaker 2: costs an incredible amount of money. I don't know why
34:01
Speaker 2: they use Jaguars for every one of their self driving vehicles,
34:04
Speaker 2: but they do, which adds cost. But the real cost
34:07
Speaker 2: is all the computing power and dozens of cameras that
34:09
Speaker 2: go into these self driving cars. My big question would
34:14
Speaker 2: be why not license this technology? And maybe that's where
34:18
Speaker 2: they're eventually getting to, because I just have a tough
34:21
Speaker 2: time really understanding how you ever make money on self
34:25
Speaker 2: driving taxis. It seems like your costs are really really
34:31
Speaker 2: substantial no matter which way you cut it. But I'd
34:34
Speaker 2: be willing to pay a pretty substantial amount of money
34:37
Speaker 2: for my own car that I have that will drive
34:41
Speaker 2: me ninety percent of the places that I need to
34:44
Speaker 2: go without me touching the steering wheel or needing to
34:46
Speaker 2: pay attention whatsoever.
34:47
Speaker 3: Yeah, the valuable element is the software, not the equipment,
34:50
Speaker 3: I think. So that's my Elon's vision of while you're
34:55
Speaker 3: at work, your car's working for.
34:56
Speaker 2: You, and they seem substantially better at it than Tesla
34:59
Speaker 2: does this date Now, Tesla, you know, obviously untested on
35:02
Speaker 2: all of this. They are heading to Texas to try
35:05
Speaker 2: this out with something like ten vehicles. But again, Weaimo
35:08
Speaker 2: has done ten million rides, and yes there have been
35:12
Speaker 2: incidents here and there, but by and large, they have
35:14
Speaker 2: been successful. And I don't even I don't even really
35:18
Speaker 2: care if my car goes and does those driverless rides
35:20
Speaker 2: while I'm not paying attention to it. I just think
35:22
Speaker 2: it would be really nice to be able to drive
35:24
Speaker 2: from here to Chicago and barely pay attention to what
35:26
Speaker 2: I'm doing. Maybe I'm weird supposed to now, you know,
35:31
Speaker 2: especially when I have the kids in the car, I
35:33
Speaker 2: end up having to pay a fair bit of attention to
35:34
Speaker 2: what I'm doing. Oh my own, I'm texting, I'm doing
35:37
Speaker 2: a whole bunch of other things. But no, yeah, it's uh.
35:42
Speaker 2: They're sitting on something that I see is truly valuable.
35:44
Speaker 2: I see Tesla's technology and just how good that is,
35:47
Speaker 2: and from what I understand it's kind of far behind
35:50
Speaker 2: where WEIMO is. Obviously, since there's no drivers in these cars.
35:53
Speaker 2: What do you have for stack relet Mark.
35:55
Speaker 3: Well, Walmart's the country's biggest employee, right, one in every
35:57
Speaker 3: ten private sector workers works for one Walmart. Globally two
36:01
Speaker 3: point one million people. This is from the Financial Times.
36:04
Speaker 3: In the last five years, They've grown their revenue by
36:06
Speaker 3: about one hundred fifty billion dollars, haven't added to headcount at.
36:10
Speaker 2: All, one hundred and fifty billion dollars to revenue of
36:14
Speaker 2: the last desale without a single.
36:15
Speaker 3: Last the last several years, and they aim to continue
36:20
Speaker 3: to grow at mid single digit percentages top line sales,
36:24
Speaker 3: that is now.
36:24
Speaker 2: They haven't dramatically expanded margins. So where is this coming from?
36:30
Speaker 1: The point?
36:30
Speaker 3: I guess the point I wanted to make here was
36:34
Speaker 3: if you told somebody several years ago that Walmart was
36:37
Speaker 3: going to grow at a breakneck pace sales wise and
36:41
Speaker 3: not higher anybody. The response might have been some type
36:47
Speaker 3: of government reaction by some opportunistic, reactionary politician. Oh, let's
36:52
Speaker 3: tariff this or let's stop that trend. But if you
36:56
Speaker 3: just let the market now, people's jobs have changed Walmart
36:59
Speaker 3: is automating more, they're employing robotics in warehouse. Yes, the
37:05
Speaker 3: changes are really nothing short of miraculous, and this, to
37:08
Speaker 3: me is evidence of what the market will do if
37:10
Speaker 3: you just let it work and avoid letting reactionary politicians
37:15
Speaker 3: get their greasy little hands on it.
37:17
Speaker 2: The downside to that is they have grown over the
37:20
Speaker 2: last decade substantially and not hired, Like you said, a
37:23
Speaker 2: single additional.
37:24
Speaker 3: That's good if you're a share aspired to work in
37:27
Speaker 3: a Walmart warehouse, and maybe some people do. But if
37:31
Speaker 3: you're a shareholder, you love it. And if you're if
37:34
Speaker 3: you have a stake in the future of the growth
37:36
Speaker 3: in America's economy, which is in many ways still the
37:39
Speaker 3: engine of world economic growth and prosperity. This is a
37:42
Speaker 3: great example of how markets working benefit everybody.
37:46
Speaker 2: I would argue markets remain in positive territory. As we
37:49
Speaker 2: close out the show, the Nasdaq's leading the way, up
37:51
Speaker 2: one hundred and forty five points three quarters of one percent,
37:53
Speaker 2: the S and P up a little bit less than
37:55
Speaker 2: one half of one percent, and the Dow Jones Industrial
37:58
Speaker 2: Average up one hundred and twenty nine points about a
38:01
Speaker 2: third of one percent. As we close out the show.
38:03
Speaker 2: We'll be back at it tomorrow for our Wednesday edition. Folks,
38:06
Speaker 2: have a great rest of your day, enjoy that fantastic weather,
38:09
Speaker 2: and we'll see you then