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Oil Risks Return as Gas Prices Stay Stubbornly High · The Financial Exchange Show

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  Speaker 1: Zada and Mark Vandetti.
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  Speaker 2: It's's Chuck, Mark and Tucker with you, and we've got
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  Speaker 2: a bunch to get to and so we're just gonna
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  Speaker 2: get right to it, starting with our first story of
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  Speaker 2: the day, touching on the renewed hostilities between the United
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  Speaker 2: States and Iran. Yesterday around this time, maybe a little
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  Speaker 2: bit before, President Trump indicated during a press conference that
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  Speaker 2: he believed the ceasefire between Iran and the United States
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  Speaker 2: was over.
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  Speaker 3: His words, not mine.
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  Speaker 2: And we've seen a number of barrages from the United
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  Speaker 2: States in terms of air strikes that have happened in
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  Speaker 2: the last couple of days. We have seen retaliatory ballistic
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  Speaker 2: missile and drone attacks from Iran on American air bases
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  Speaker 2: in the region. And as a result of these renewed hostilestilities,
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  Speaker 2: the price of crude oil West Texas Intermediate has moved
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  Speaker 2: from again a range of you know, probably sitting in
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  Speaker 2: the high sixties, like sixty eight, sixty nine dollars a barrel,
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  Speaker 2: up to one point yesterday, seventy six. It's now settled
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  Speaker 2: around you know, seventy three dollars a barrel. But this
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  Speaker 2: is in turn pushed up the price of gas by
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  Speaker 2: five cents overnight, from three seventy nine and six tenths
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  Speaker 2: to three eighty four and six tenths. So the question
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  Speaker 2: that matters is, hey, is this the start of, you know,
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  Speaker 2: a renewed wave of hostilities that could shut down any
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  Speaker 2: improvement in transits through the straight of horror moves that
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  Speaker 2: we've seen over the last few weeks, or is this
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  Speaker 2: just a blip that is going to go away in
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  Speaker 2: a day or two and not have any meaningful impact.
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  Speaker 2: And got to be honest, I don't know. What we
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  Speaker 2: can do is we can look at some of the
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  Speaker 2: surrounding you know, signs to try to get a sense of,
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  Speaker 2: you know, what people more informed than I am are
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  Speaker 2: thinking about this, and specifically the people that I always
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  Speaker 2: love to look at in the region in terms of
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  Speaker 2: like the ones who know everything that's going on, it's Qatar.
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  Speaker 2: Qatar is Look, they've they've really tried in the last
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  Speaker 2: fifteen to twenty years to expand their role as an
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  Speaker 2: international mediator and deal maker, and they're basically friends with everyone,
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  Speaker 2: not not necessarily friends, but they're basically on friendly terms
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  Speaker 2: with everyone because they like to be right in the
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  Speaker 2: middle so they can know what's going on, and like
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  Speaker 2: all deal makers, get something out of it. And what's
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  Speaker 2: interesting to me is that, as of this morning, indications
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  Speaker 2: and I can't remember who published it first, so I
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  Speaker 2: can't cite it appropriately, but there are indications that Qatar
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  Speaker 2: is pausing its ramp up of LNG production as of
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  Speaker 2: this morning. And the reason why is Katar doesn't really
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  Speaker 2: need LNG for you know, itself and its own operations
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  Speaker 2: in large numbers. Not in large numbers, it doesn't if
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  Speaker 2: you have natural gas and you can just pipe it
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  Speaker 2: where you want, you don't need to spend a bunch
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  Speaker 2: of time, money, and effort making it into a liquid.
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  Speaker 2: You just pump it where you want and then light
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  Speaker 2: it on fire to make heat. So when you hear
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  Speaker 2: that Qatar's pausing their LNG operations are some of their
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  Speaker 2: you know, return to normalcy of those operations, it certainly
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  Speaker 2: makes me think, Okay, someone in Katar who's been very
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  Speaker 2: involved in this mediation process knows something about what is
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  Speaker 2: going to be happening with shipping in the near future.
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  Speaker 2: Because if you thought things were gonna just continue as normal,
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  Speaker 2: you wouldn't pause those operations. You'd say this is a blip.
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  Speaker 2: And we're just gonna keep going. There have been a
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  Speaker 2: number of blips the last few weeks, and no one's
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  Speaker 2: changed course on anything. So that's one thing that I
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  Speaker 2: look at when I say, okay, like this could mean something. Also,
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  Speaker 2: as of this morning, with these renewed hostilities, we've seen
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  Speaker 2: rants to the straight of Hoo moves returned back to
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  Speaker 2: like low single digit numbers after you know, creeping into
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  Speaker 2: like the thirty to forty transit per day range in
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  Speaker 2: the last several weeks. That's meaningful as well. Again, there's
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  Speaker 2: been like things that have been lobbed back and forth
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  Speaker 2: for the last couple of weeks, even during the ceasefire,
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  Speaker 2: but transits have continued. This is fundamentally different if they're
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  Speaker 2: they're slowing or stopping. So I don't know where this goes.
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  Speaker 2: But some of the early signs are not necessarily the
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  Speaker 2: most promising, and we'll see if that is, you know,
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  Speaker 2: something that continues or or not. But I'm I'm not
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  Speaker 2: sure exactly where this is going to go, and we're
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  Speaker 2: just gonna need to see how it evolves over the
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  Speaker 2: next you know, week or so. Some of this is
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  Speaker 2: also happening, you know, concurrent with the funeral of the
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  Speaker 2: previous ayahtola that's been going on all week, and so
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  Speaker 2: it's hard to know like whether Iran's response is more
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  Speaker 2: moderated because of that, if it's more intense, Like we
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  Speaker 2: just don't really know. So I cautioned people in terms
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  Speaker 2: of yes, like this this may be something that starts to,
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  Speaker 2: you know, cause some additional pressure and energy markets which
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  Speaker 2: don't have a lot of wiggle room right now. But
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  Speaker 2: I'm just not sure that that's the case, because it's
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  Speaker 2: it's really hard to read between the lines on all
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  Speaker 2: this and challenging to get a read on it your thoughts.
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  Speaker 4: Mark rates aren't moving much today, down.
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  Speaker 3: A bit they did yesterday, Yeah they did.
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  Speaker 4: So they've gone up, say, over the past week or so,
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  Speaker 4: by about a tenth of eight percentage point ten basis
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  Speaker 4: points if you prefer the finance vocabulary. I guess markets
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  Speaker 4: and therefore policy makers just aren't sure how long if
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  Speaker 4: there will be another inflation shock and other burst in
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  Speaker 4: energy prices that translates into higher headline inflation. That's one questions,
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  Speaker 4: just gonna be a blip, this little fracas, you know,
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  Speaker 4: and if not, how long does it? If so, no
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  Speaker 4: problem fed doesn't really have to take it into account
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  Speaker 4: unless it unless it levers up. Inflation expectations always a
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  Speaker 4: complicating factor and an important part of the inflation generating process.
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  Speaker 4: I mean, we keep saying we just don't know, we
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  Speaker 4: just don't know, and it's actually true, and the FED
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  Speaker 4: doesn't know either. I mean gauging whether the economy is
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  Speaker 4: running too hot, too cold, or just right, whether growth
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  Speaker 4: is exceeding potential GDP, in line with or lower than,
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  Speaker 4: which is how the FED thinks about the world all
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  Speaker 4: the time. Do we need to stimulate demand and they
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  Speaker 4: do it by printing money, and that lowers interest rates.
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  Speaker 4: They control more or less short term interest rates. That's
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  Speaker 4: their policy tool, and their usual framework is do we
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  Speaker 4: need to speed things up, slow things down, or just
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  Speaker 4: keep them cruising? This muddies everything.
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  Speaker 2: Yeah, it's the next few months are are kind of this,
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  Speaker 2: this period where I've talked about. Look that the threat
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  Speaker 2: to energy prices, in my opinion, really exists over the
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  Speaker 2: remainder of twenty twenty six. As you get into next year,
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  Speaker 2: there are some additional bypass pipelines that have been already
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  Speaker 2: you know, construction has already been started on them. You
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  Speaker 2: also have additional production that you know, if prices do
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  Speaker 2: end up moving, higher production that can come online from
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  Speaker 2: different parts of the world. You know, US production is
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  Speaker 2: up a few hundred thousand barrels a year over year.
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  Speaker 2: You've got some increased flow from Venezuela that's happening now.
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  Speaker 2: So there's there's a path where if you look out
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  Speaker 2: to the middle of twenty seven, you say, look, even
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  Speaker 2: if things are still a little dodgy around Hormuz, you
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  Speaker 2: can see a more normal energy market. Those things are
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  Speaker 2: not able to come online and fix the situation in
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  Speaker 2: the next two to three months. On top of that,
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  Speaker 2: you also are having lower flow rates now coming out
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  Speaker 2: of these strategic petroleum reserve because as that reserve is depleted,
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  Speaker 2: the rate at which you can pump things out of
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  Speaker 2: it decreases.
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  Speaker 3: And so I think it's it's really.
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  Speaker 2: Something where in my mind, looking the next six months,
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  Speaker 2: in particular the second half of the year, but really
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  Speaker 2: like the next two to three, like hitting into September,
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  Speaker 2: I think are the critical ones to watch because that
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  Speaker 2: still is where the highest risk is if you know,
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  Speaker 2: we return to a broader conflict that snarls traffic in
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  Speaker 2: the region.
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  Speaker 4: Again, I think snarling might be the theme here. Maybe
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  Speaker 4: it's not energy prices that are going to be the problem.
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  Speaker 4: Maybe it's the breakdown of supply chains or the rerouting
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  Speaker 4: of them, or the creation of the necessary redundancies to
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  Speaker 4: make them more robust. That's kind of a garbled way
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  Speaker 4: of saying companies need to change the way they do
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  Speaker 4: business a little bit. All that adds to price pressure
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  Speaker 4: on the margin, and then all the spending this conflict
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  Speaker 4: has cost us hundreds of billions of dollars when properly
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  Speaker 4: accounted for. If this is going to drag on so well,
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  Speaker 4: the spending that will put upward pressure on deficits and
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  Speaker 4: interest rates. So maybe the story here isn't a short
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  Speaker 4: term burst of inflation. Maybe this story here is this
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  Speaker 4: exacerbates the structural problems that we've been talking about for
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  Speaker 4: years that will result in higher inflation on average. Not
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  Speaker 4: I'm not talking ten percent. I'm talking from three and
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  Speaker 4: a half or four instead of two, which we could
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  Speaker 4: all adjust to and live with. But it's a lot
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  Speaker 4: higher than we've been accustomed to over the past few decades,
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  Speaker 4: and higher interest rates consequently, you know.
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  Speaker 2: Let's take a quick break when we return, begetting some
• 10:24
  Speaker 2: questions on gas prices recently. Specifically, Hey, look, you know
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  Speaker 2: oil prices have fallen, you know, thirty forty percent from
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  Speaker 2: their highs. Whire gas price is not down as much,
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  Speaker 2: and why have they you know, kind of remained higher.
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  Speaker 3: In recent weeks.
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  Speaker 2: I want to touch on that before going and talking
• 10:41
  Speaker 2: a little bit more about the FEDS.
• 10:43
  Speaker 3: So let's do that when we return.
• 10:46
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• 11:21
  Speaker 2: All right, So I want to talk a little bit
• 11:23
  Speaker 2: about gas prices because in the last couple of weeks,
• 11:28
  Speaker 2: prior to the last day or two, oil prices had
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  Speaker 2: fallen from again we've been kind of peeking out around
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  Speaker 2: like one hundred and ten bucks barrel.
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  Speaker 3: We fell down to sixty eight.
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  Speaker 2: So, like you do the math and you're like, okay,
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  Speaker 2: it's like a almost you know, forty percent drop in
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  Speaker 2: oil prices. Why haven't gas prices fallen further? Again, it's
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  Speaker 2: it's not a direct one for one thing, so you
• 11:50
  Speaker 2: don't always see like a straight pass through that way.
• 11:53
  Speaker 2: But still, based on some of the more conventional pricing
• 11:56
  Speaker 2: models that you see, you could have made a case, okay,
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  Speaker 2: gas prices be in like the three thirty to three
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  Speaker 2: fifty range instead of you know, three eighty range. So
• 12:04
  Speaker 2: what gives is the question that the people have asked,
• 12:08
  Speaker 2: and when you think about it, ultimately, the two biggest
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  Speaker 2: costs that drive the price of gasoline Number one, the
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  Speaker 2: price of a barrel of oil. Number two, the price
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  Speaker 2: of refining that barrel of oil. And the second one
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  Speaker 2: is the one that I want to really focus on here.
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  Speaker 3: Because no one really, no.
• 12:29
  Speaker 2: One watches it, Like the average person doesn't watch it
• 12:33
  Speaker 2: or know how to watch it. It's just okay, the
• 12:36
  Speaker 2: price of oil came down, so the price of gas
• 12:37
  Speaker 2: should come down. And that's usually true, by the way,
• 12:40
  Speaker 2: like more often than not, when the price of oil
• 12:44
  Speaker 2: comes down, the price of gas does too. The piece
• 12:48
  Speaker 2: that we look at in order to measure the cost
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  Speaker 2: of refining is what's known as a crackspread, and the
• 12:53
  Speaker 2: most common one that we talk about is what's called
• 12:56
  Speaker 2: the three two one crack spread that the term comes from.
• 12:59
  Speaker 2: Cracking is the term in the industry that people use
• 13:02
  Speaker 2: to talk about the process of turning crude oil into
• 13:06
  Speaker 2: refined product. They're cracking the crude into what it is.
• 13:10
  Speaker 2: And three two one it's again the most common crackspread
• 13:14
  Speaker 2: that's discussed. It is you take three barrels of crude
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  Speaker 2: and out of it you produce two barrels of gasoline
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  Speaker 2: and one barrel of diesel. So think of it in
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  Speaker 2: that from that perspective, three barrels in, three out crude
• 13:29
  Speaker 2: to gas and diesel. And if you look at you know,
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  Speaker 2: the last fifteen twenty years, crackspreads have typically been anywhere
• 13:37
  Speaker 2: between like fifteen and twenty five dollars a barrel, which means,
• 13:40
  Speaker 2: if you have to pay seventy dollars for your barrel
• 13:43
  Speaker 2: of oil, when you factor in the refining, you're somewhere
• 13:47
  Speaker 2: between like eighty five and ninety five dollars a barrel
• 13:50
  Speaker 2: all in for that refined product. Here's what's happened over
• 13:55
  Speaker 2: the course of twenty twenty six. We open the year
• 13:59
  Speaker 2: with crack spreads right at the top end of that
• 14:01
  Speaker 2: range about twenty six, twenty seven dollars a barrel.
• 14:04
  Speaker 3: Find it was a little.
• 14:05
  Speaker 2: High, but you know, nothing crazy. It's kind of where
• 14:07
  Speaker 2: it's been for the last few years. Ever since Russia
• 14:11
  Speaker 2: Ukraine kicked off and crackspreads blew out to you know,
• 14:14
  Speaker 2: fifty dollars a barrel initially.
• 14:16
  Speaker 3: But here's what happened.
• 14:17
  Speaker 2: Immediately after the start of hostilities in the Middle East,
• 14:22
  Speaker 2: that crackspread the three two to one went to north
• 14:26
  Speaker 2: of thirty dollars a barrel pretty much instantly because you
• 14:30
  Speaker 2: had a ton of refining capacity in the Middle East
• 14:32
  Speaker 2: that was taken offline. You couldn't get stuff in and out,
• 14:35
  Speaker 2: and so okay, other refiners need to make it up.
• 14:39
  Speaker 2: That crackspread grew through April to top out at around
• 14:43
  Speaker 2: fifty three fifty four dollars per barrel. It then came
• 14:49
  Speaker 2: down a little bit with the cessation of hostilities, and
• 14:53
  Speaker 2: then in the last month or so has blown out
• 14:55
  Speaker 2: top side again to north of sixty five dollars a barrel,
• 14:59
  Speaker 2: which is the highest that we have on record. And
• 15:02
  Speaker 2: the impulse that a lot of people listening will probably
• 15:05
  Speaker 2: have is see, I knew the oil companies were being
• 15:08
  Speaker 2: greedy it's just they're being greedy on on the refining side.
• 15:10
  Speaker 2: And look, here's the dirty little secret of most large businesses.
• 15:18
  Speaker 3: They're all greedy.
• 15:19
  Speaker 2: Like it's greed is nothing new, Like it's it's not
• 15:22
  Speaker 2: like it's not like oil companies suddenly woke up in
• 15:24
  Speaker 2: twenty six and they're like, Hey, did you hear about greed?
• 15:29
  Speaker 2: You think we should try some of that? Should should
• 15:32
  Speaker 2: we try greed? No, Like, these are big businesses, they're
• 15:34
  Speaker 2: always greedy. Like it's we can go back to you know,
• 15:37
  Speaker 2: Wall Street and you know greed is good, Like this
• 15:40
  Speaker 2: is not greed is not a new invention. It's a
• 15:43
  Speaker 2: like the CEO of Chevron didn't wake up today and be.
• 15:46
  Speaker 4: Like, is that that speech gives me goosebumps?
• 15:49
  Speaker 3: It's so good?
• 15:49
  Speaker 4: Is there something am I two capitalists? That is?
• 15:52
  Speaker 3: It's a great speech. It's it's it's a great speech.
• 15:55
  Speaker 4: Google it if you if you've never seen it. We're
• 15:58
  Speaker 4: talking about the movie Walls eighty seven, So this goes
• 16:00
  Speaker 4: back a little bit. We're talking about Michael Douglass in
• 16:02
  Speaker 4: Wall Street.
• 16:03
  Speaker 3: It's free.
• 16:03
  Speaker 2: Money never sleeps. You know you don't want to watch
• 16:05
  Speaker 2: Wall Street. Money never sleeps.
• 16:07
  Speaker 4: Let's forget that happened, google it and watch it. Would
• 16:09
  Speaker 4: you agree that's worth somebody's time like three minutes?
• 16:12
  Speaker 2: Yes, I still would argue it is not the best
• 16:15
  Speaker 2: finance movie in my opinion. If you want to watch
• 16:18
  Speaker 2: the best finance movie, it's Margin Call and nothing else
• 16:22
  Speaker 2: comes close.
• 16:23
  Speaker 5: I saw that during the blizzard in a hotel room.
• 16:26
  Speaker 2: Jeremy Irons, the Jeremy iron speech in the boardroom. We
• 16:30
  Speaker 2: are selling to willing buyers at the fair market price.
• 16:35
  Speaker 2: Or I could do like more of a Jeremy Irons,
• 16:37
  Speaker 2: we are selling to fair market bot.
• 16:39
  Speaker 3: No, that's more Sean Connery.
• 16:42
  Speaker 5: He's tough to do.
• 16:43
  Speaker 2: He is he is in any case, So crackspreads have
• 16:47
  Speaker 2: gone to sixty five. It's not oil companies suddenly deciding
• 16:50
  Speaker 2: to be greedy. Rather the piece that's happening here. There's
• 16:55
  Speaker 2: again another little country north of the Middle East called Russia,
• 16:59
  Speaker 2: big Petro state, and Russia has been subject to nightly
• 17:03
  Speaker 2: drone raids by Ukraine over the course of this spring.
• 17:07
  Speaker 2: And when I say drone raids from Ukraine, we're not
• 17:09
  Speaker 2: talking like five drones. We're talking like several hundred a
• 17:11
  Speaker 2: night now that are making their way into Russian territory
• 17:14
  Speaker 2: often like hundreds of miles from Ukraine, so it's kind
• 17:18
  Speaker 2: of hard to defend. And Ukraine has been doing what
• 17:20
  Speaker 2: any enterprising country would do, and they say, hey, Russia's
• 17:24
  Speaker 2: lifeblood for their economy is their oil industry. We're going
• 17:27
  Speaker 2: to target it, just like you saw from you know, Iran,
• 17:30
  Speaker 2: targeting Middle Eastern you know, energy apparatus and things like that.
• 17:35
  Speaker 2: So Russia has gotten to the point it's so bad
• 17:38
  Speaker 2: in Russia now, which again, like the one thing you
• 17:41
  Speaker 2: can say about the Russian economy in the last fifty years,
• 17:44
  Speaker 2: they produce a ton of oil and a refined product.
• 17:47
  Speaker 2: It's gotten so bad in Russia now that as of
• 17:49
  Speaker 2: yesterday they had to ban diesel exports because they don't
• 17:53
  Speaker 2: have they can't produce enough diesel to operate domestically. So
• 17:57
  Speaker 2: when you have a country like Russia that has banned
• 17:59
  Speaker 2: exports of diesel, they already had banned exports of gasoline
• 18:02
  Speaker 2: and in fact, we're importing gasoline, Like this is how
• 18:05
  Speaker 2: bad it's gotten there that Russia is now importing gasoline
• 18:08
  Speaker 2: and diesel and jet fuel. What it does is, hey,
• 18:12
  Speaker 2: there's so much demand for refined product and not enough
• 18:16
  Speaker 2: refineries there. Okay, you've got a drop in refinery capacity,
• 18:20
  Speaker 2: so crude isn't as much in demand, and you have
• 18:23
  Speaker 2: this crazy demand that's still there for refined product. Great,
• 18:27
  Speaker 2: the crackspread is remember it's refined product price minus crude price. Well,
• 18:32
  Speaker 2: crude prices are down significantly, but there's still huge demand
• 18:35
  Speaker 2: for the refined product and not enough refineries. That's why
• 18:39
  Speaker 2: your crack spreads have blown out. And that is why
• 18:41
  Speaker 2: gas is not thirty to forty cents cheaper.
• 18:43
  Speaker 4: Yeah, I mean empirically speaking, like if you just look
• 18:46
  Speaker 4: at the price movements, and it's easy to do. When
• 18:48
  Speaker 4: oil goes down, gas goes down to but by less
• 18:51
  Speaker 4: and how.
• 18:51
  Speaker 3: Typically it's about a fifty percent pass through.
• 18:53
  Speaker 4: That's how much like you know, if you look at
• 18:55
  Speaker 4: the relationship, it really it depends. It's very as researchers
• 18:59
  Speaker 4: like to say, non linear as oil goes down.
• 19:02
  Speaker 3: Very elastic oil.
• 19:03
  Speaker 4: It's it's it's very curvy. It's a very curvy relationship
• 19:06
  Speaker 4: if you plot and then try to fit.
• 19:07
  Speaker 3: It's not physics, No, definitely not it is, but not Yes,
• 19:12
  Speaker 3: the price is not physics.
• 19:14
  Speaker 4: And similarly, on the upside, oil goes up, gas goes
• 19:16
  Speaker 4: up a by less, so take that to the bank.
• 19:18
  Speaker 2: This is why if you're wondering, hey, why doesn't gas
• 19:21
  Speaker 2: come back down into the three fifty range, it's because
• 19:24
  Speaker 2: there's so much refinery capacity offline worldwide that refiners have
• 19:28
  Speaker 2: huge demand for refined product if they can get it
• 19:31
  Speaker 2: to someone quick break. When we come back, we're talking
• 19:33
  Speaker 2: the FED and we got Wall Street Watch.
• 19:40
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• 19:42
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• 19:47
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• 19:52
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• 19:55
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• 19:59
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• 20:01
  Speaker 5: Markets are edging higher as traders continue to monitor developments
• 20:05
  Speaker 5: out of the Middle East after the US and Iran
• 20:07
  Speaker 5: exchange attacks. Right now, the Dow is up just over
• 20:12
  Speaker 5: a tenth of a percent higher, SMP five hundred is
• 20:15
  Speaker 5: up a quarter of a percent, Nasdaq also up about
• 20:18
  Speaker 5: a quarter of a percent. Russell two thousand is up
• 20:21
  Speaker 5: just over eight tenths of a percent higher at ten.
• 20:23
  Speaker 5: Your treasureeled is down one basis point at four point
• 20:26
  Speaker 5: five five percent, and Oiled down one percent lower. Today
• 20:31
  Speaker 5: trading at seventy two dollars a barrel. Micron Technology said
• 20:34
  Speaker 5: it's raising its plan spending on new plants in the
• 20:37
  Speaker 5: US to two hundred and fifty billion dollars to help
• 20:40
  Speaker 5: meet unprecedented demand for its memory chips driven by the
• 20:44
  Speaker 5: fast growth of AI infrastructure. Micron shares rallying seven percent
• 20:49
  Speaker 5: this morning. Meanwhile, Pepsi reported mixed quarterly results ahead of
• 20:53
  Speaker 5: the open, citing consumer budgets we're tightening due to rising
• 20:57
  Speaker 5: inflationary pressures. However, Pepsi saw solid international demand. However, shares
• 21:03
  Speaker 5: are down by four percent. Elsewhere asked for Zenka shares
• 21:07
  Speaker 5: plunging seven percent after the bios pharmaceutical Compani's heart disease
• 21:12
  Speaker 5: drug failed to meet its target in a late stage
• 21:15
  Speaker 5: clinical trial, and shares and Levi Strauss aer up slightly
• 21:19
  Speaker 5: after the dena maker issued disappointing third quarter guidance. However,
• 21:23
  Speaker 5: it did beat second quarter expectations on the top and
• 21:28
  Speaker 5: bottom lines. I'm talker Silva and that is Wall Street
• 21:32
  Speaker 5: watch Marke.
• 21:33
  Speaker 2: Let's talk a little bit about the FED. Yesterday we
• 21:36
  Speaker 2: got FED meeting minutes. If I'm being honest, ninety nine
• 21:40
  Speaker 2: point nine percent of the time I don't actually read
• 21:44
  Speaker 2: the minutes because what am I going to glean from them?
• 21:49
  Speaker 2: This one was a little bit more interesting, just because
• 21:51
  Speaker 2: it was the first set of minutes after, you know,
• 21:54
  Speaker 2: Kevin Warsh's first FED meeting, and so part of me
• 21:57
  Speaker 2: was looking at it being like, is like, you know,
• 22:00
  Speaker 2: wors is very much trying to move the FED. It
• 22:03
  Speaker 2: seems in a direction of less communication is better. Is
• 22:09
  Speaker 2: that a fair statement?
• 22:10
  Speaker 3: I think that's consistent with this philosophy, And so part
• 22:13
  Speaker 3: of me was.
• 22:13
  Speaker 2: Hoping that, like the meeting minutes were just like we met,
• 22:17
  Speaker 2: we decided, and we'll be ready for the next I
• 22:21
  Speaker 2: was really hoping for just like nothing to really like
• 22:23
  Speaker 2: cement that did we glean anything from the FED meeting minutes.
• 22:27
  Speaker 4: Other than that nothing we didn't know? I don't think
• 22:33
  Speaker 4: the main takeaway for man I won't claim to have
• 22:36
  Speaker 4: read every paragraph either, is that several members noted that
• 22:40
  Speaker 4: it may be necessary to raise rates to stem inflation
• 22:44
  Speaker 4: pressures to staunch inflation if it persists. We knew this,
• 22:50
  Speaker 4: but to see it in writing might for some people
• 22:53
  Speaker 4: be jarring. It might concentrate there some investors' minds on
• 22:57
  Speaker 4: the proposition that this could actually happened. It shouldn't be
• 23:01
  Speaker 4: a surprise. We thought inflation was behind us. It had
• 23:04
  Speaker 4: been trending down since twenty twenty four. To have it
• 23:08
  Speaker 4: pop back up again is what disheartening, deflating.
• 23:14
  Speaker 3: I don't know.
• 23:15
  Speaker 4: Did the reality of that hit me when I read
• 23:17
  Speaker 4: those statements, even though I knew in theory it was
• 23:20
  Speaker 4: a possibility.
• 23:21
  Speaker 2: Yeah, we Again, you never really get much from these,
• 23:24
  Speaker 2: I will say so if you look at again, I'm
• 23:28
  Speaker 2: just things stylistically that I'm trying to poke around on.
• 23:32
  Speaker 2: If you look at the previous three meeting minutes from
• 23:36
  Speaker 2: the FED or previous three meetings minutes from the FED,
• 23:41
  Speaker 2: they range between sixteen and eighteen pages. This one was fifteen.
• 23:47
  Speaker 2: So again, for all of the talk about, hey, we
• 23:49
  Speaker 2: want to communicate less, there was no real change in
• 23:53
  Speaker 2: the meeting minutes, even though the FED statement was significantly
• 23:57
  Speaker 2: shorter when accompanying.
• 24:00
  Speaker 3: The interest rate decision at the meeting.
• 24:03
  Speaker 2: So again, I'm just looking for stylistically, like, hey, like
• 24:07
  Speaker 2: show me how worsh is actually you know, altering things
• 24:10
  Speaker 2: and changing things, and at least from the minute's perspective,
• 24:14
  Speaker 2: a very basic measure, they were, you know, one page
• 24:18
  Speaker 2: shorter than you know the previous one, and I'm not
• 24:21
  Speaker 2: sure that means anything.
• 24:22
  Speaker 4: Yeah, I think this obsession with with detail this is
• 24:27
  Speaker 4: gonna sound stupid. But forget about the all these details.
• 24:31
  Speaker 4: What's important is that Warsh thinks price stability is paramount,
• 24:34
  Speaker 4: and that he appears credible in that assertion, and moreover,
• 24:38
  Speaker 4: that he seems credible when he innimates, because he hadn't
• 24:42
  Speaker 4: actually he hasn't actually said he will inflict pain on
• 24:45
  Speaker 4: this economy if he needs to to stifle inflation. I
• 24:49
  Speaker 4: get that sense from him. He's trying to channel vulgar.
• 24:51
  Speaker 2: The question the markets are going to ask him if
• 24:55
  Speaker 2: inflation remains elevated, is are you going to prove it now?
• 25:00
  Speaker 3: Right? Yeah? Oh yeah, he doesn't because.
• 25:02
  Speaker 2: Here's the thing. Like your first meeting, like your first
• 25:06
  Speaker 2: meeting anywhere, is kind of like the honeymoon figures. It's
• 25:08
  Speaker 2: it's like, okay, so you said this and and yeah,
• 25:11
  Speaker 2: that really sounds great, but then it's okay, now show
• 25:14
  Speaker 2: me how you're actually going to execute. And if inflation
• 25:19
  Speaker 2: remains elevated, the market is then going to force Worsh's
• 25:23
  Speaker 2: hand in order to say, now you've got to prove
• 25:27
  Speaker 2: that you're who you said you were.
• 25:29
  Speaker 4: Yeah, I mean a plurality favored now, favor of voting members,
• 25:34
  Speaker 4: favor raising rates, all l sequel this year. If nothing
• 25:38
  Speaker 4: changes that somewhat.
• 25:41
  Speaker 3: You're right.
• 25:41
  Speaker 4: That puts pressure on Warsh because now he's got the backing,
• 25:45
  Speaker 4: he's got the support of, say, the majority of the
• 25:47
  Speaker 4: f OMC at a piece. Right, he's got to put
• 25:50
  Speaker 4: his money or ours where his mouth has been. You're
• 25:53
  Speaker 4: absolutely right, now, JAWBONI did.
• 25:55
  Speaker 2: He did exactly what I would have wanted him to
• 25:56
  Speaker 2: do in his f I think he's I said in advance, like, Look,
• 25:59
  Speaker 2: even if if you want to cut, you come in
• 26:02
  Speaker 2: the first meeting you say inflation is too high and
• 26:04
  Speaker 2: we need to get inflation down.
• 26:06
  Speaker 4: Look, if a fed chair is credible, according to theory
• 26:10
  Speaker 4: and evidence, it's a lot easier to get inflation down
• 26:13
  Speaker 4: because prices will change more quickly. I'll just put it
• 26:16
  Speaker 4: that way. I'm glossing over a lot, but that's the
• 26:18
  Speaker 4: essence of it. Credibility is like priceless. But you're right,
• 26:22
  Speaker 4: he has to actually follow through. And a quarter point
• 26:25
  Speaker 4: cut sooner rather than later could be worth a half
• 26:29
  Speaker 4: or excuse me, increase, increase could be worth a half
• 26:33
  Speaker 4: or a full percentage point increase. That's two that comes
• 26:36
  Speaker 4: too late.
• 26:37
  Speaker 2: So that's kind of what we see things looking like here.
• 26:42
  Speaker 2: Also one item, as it relates to inflation, the PCE
• 26:48
  Speaker 2: price Index, the Personal Consumption Expenditure Price Index is going
• 26:53
  Speaker 2: through an update. It's not related to worsh coming into
• 26:59
  Speaker 2: the FED, because again, the FED doesn't you know, the
• 27:04
  Speaker 2: FED is not the ones who publish the PCE price Index.
• 27:07
  Speaker 2: It's it's not you know, it's not internal to them.
• 27:09
  Speaker 2: So this is not worst being like, hey, I want
• 27:11
  Speaker 2: you to do the X, Y and z. But here's
• 27:13
  Speaker 2: the big thing is within the PCE price Index, there
• 27:18
  Speaker 2: are a few categories that the it's the BA that
• 27:22
  Speaker 2: runs the PCE, right, a lot of acronyms. So the
• 27:26
  Speaker 2: Bureau of Economic Analysis decided, hey, some of this stuff
• 27:30
  Speaker 2: that is in here is just moving around too much
• 27:34
  Speaker 2: and not giving us an accurate picture of what's actually happening.
• 27:39
  Speaker 2: As an example, one of the categories that they measure
• 27:42
  Speaker 2: in the PCE price index is the price of investment management.
• 27:48
  Speaker 2: And pretty much the way like what you end up
• 27:50
  Speaker 2: seeing is, hey, when stocks go up a lot in
• 27:53
  Speaker 2: a month, the price of investment management goes up because
• 27:57
  Speaker 2: investment management fees are typically a percentage of you know,
• 28:01
  Speaker 2: the what what a portfolio is, and so, hey, that's
• 28:05
  Speaker 2: moving the cost of investment management too much. Other areas
• 28:09
  Speaker 2: where you're seeing this legal services, computer software, different you know,
• 28:13
  Speaker 2: reasons than what I just outlined. But the BA has
• 28:16
  Speaker 2: pretty much looked at it and said, yeah, this isn't
• 28:19
  Speaker 2: measuring how we want it to measure, and so we're
• 28:22
  Speaker 2: going to update the the the PCE price Index in
• 28:27
  Speaker 2: order to you know, get a better picture of what's
• 28:30
  Speaker 2: going on. The estimates are that this will end up
• 28:34
  Speaker 2: making inflation. They're doing this retroactively back to twenty twenty one,
• 28:38
  Speaker 2: so it's gonna make inflation look a little bit tamer
• 28:41
  Speaker 2: during that period than it otherwise would than it otherwise
• 28:45
  Speaker 2: was previously reported. What this is again, like if you
• 28:50
  Speaker 2: just think about this in terms of, hey, the FED
• 28:53
  Speaker 2: mandate is for you know, two percent inflation right now,
• 28:57
  Speaker 2: not their mandate, but they're, you know, the their target
• 29:00
  Speaker 2: for two percent inflation. If you think of it from
• 29:03
  Speaker 2: the perspective of, look, their target is on measured inflation.
• 29:06
  Speaker 2: It's not on what any person, any one person actually
• 29:11
  Speaker 2: experience as inflation. And so if these changes are making
• 29:15
  Speaker 2: it easier for PCE to hit that two percent target,
• 29:20
  Speaker 2: then in theory it should give the FED a little
• 29:22
  Speaker 2: bit more breathing room as well, with which two operate.
• 29:27
  Speaker 2: It doesn't mean that the inflation picture actually changes for
• 29:30
  Speaker 2: any of us necessarily. It's more just, Hey, if you
• 29:35
  Speaker 2: have a metric that is changing its methodology in order,
• 29:39
  Speaker 2: you know, for whatever reason, and that change is going
• 29:42
  Speaker 2: to make it more in line with your target, then
• 29:44
  Speaker 2: you don't have to do as much in order to
• 29:45
  Speaker 2: hit that time.
• 29:46
  Speaker 4: I'm not sure I see it that way. It might
• 29:47
  Speaker 4: make past inflation look better, but we don't know what
• 29:50
  Speaker 4: the relative price changes will be going forward. It could
• 29:52
  Speaker 4: be that the biggest relative price increases Hamburger's relative ishoes.
• 29:56
  Speaker 4: I'm talking about real prices. Yeah, they could come in
• 29:58
  Speaker 4: sectors that aren't affected this.
• 30:01
  Speaker 2: It's true, I guess, And again I'll the huge phrase
• 30:06
  Speaker 2: here is all else being equal. The trend in equity
• 30:10
  Speaker 2: markets over the long term is up, which is why
• 30:14
  Speaker 2: one would think that if you are reducing the sensitivity
• 30:17
  Speaker 2: of that investment management item too equity prices, you're going
• 30:22
  Speaker 2: to likely end up with an inflation number that looks
• 30:24
  Speaker 2: lower than it did otherwise.
• 30:26
  Speaker 4: Yeah, if you do hold all else equal, that's not really.
• 30:30
  Speaker 3: But that's what it is. But that's what they're doing.
• 30:32
  Speaker 3: They're not changing.
• 30:34
  Speaker 4: Oh no, I don't doubt it's going to change past,
• 30:36
  Speaker 4: and it's going to change the past.
• 30:38
  Speaker 2: Yeah, yes, of course, So we'll see again. I don't know,
• 30:42
  Speaker 2: as you said, like none of us know exactly how
• 30:44
  Speaker 2: this is going to play out. But if the next
• 30:46
  Speaker 2: ten years looks anything like the last ten, it will
• 30:49
  Speaker 2: make inflation look tamer and give the Fed an easier job.
• 30:53
  Speaker 2: Even if the inflation we're experiencing is the same as.
• 30:56
  Speaker 4: What it was before, it looked like they did a
• 30:59
  Speaker 4: better job than than the horrible They did a slightly
• 31:01
  Speaker 4: less horrible job than they did.
• 31:03
  Speaker 1: Yeah.
• 31:03
  Speaker 4: Plus, Warsh wants to target trimmed measures, so media and
• 31:07
  Speaker 4: you trim everything but the middle. There are other trims
• 31:10
  Speaker 4: you can do, trim the top and bottom ten So
• 31:12
  Speaker 4: this may not matter at all for war and I
• 31:14
  Speaker 4: loved it. I love that he's on Bank of Canada's
• 31:16
  Speaker 4: done it for a long time, or New Zealand somebody.
• 31:19
  Speaker 4: Canada's done it for a while. Others have done it too.
• 31:21
  Speaker 4: Warsh is on board with trimming to get a sense
• 31:23
  Speaker 4: for the trend in inflation, which is another feather in
• 31:27
  Speaker 4: his cap in my view.
• 31:28
  Speaker 2: Let's take a quick break. When we return, talk a
• 31:30
  Speaker 2: little bit about what's going on in the labor market.
• 31:34
  Speaker 3: Next.
• 31:35
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• 32:48
  Speaker 3: Peace from USA. Today.
• 32:50
  Speaker 2: Workers keep leaving the US labor force. Experts can't agree why? Mark,
• 32:56
  Speaker 2: Let me ask the question that I think God needs
• 32:58
  Speaker 2: to be asked before this. Does it matter if we
• 33:02
  Speaker 2: know why workers are leaving.
• 33:04
  Speaker 3: The labor force?
• 33:05
  Speaker 4: If you're a labor economist and you need to publish it,
• 33:08
  Speaker 4: probably does. Does it matter that we know?
• 33:10
  Speaker 5: No?
• 33:11
  Speaker 4: I don't think for it depends on, Like with all data,
• 33:13
  Speaker 4: what are you using it for? And for us, I
• 33:15
  Speaker 4: don't know that the details matter as much as the
• 33:17
  Speaker 4: slowdown and the growth in the civilian labor force.
• 33:19
  Speaker 2: My two cents, Let's look at some of the possibilities
• 33:24
  Speaker 2: in terms of why the US labor force growth could
• 33:27
  Speaker 2: be slowing down or why workers are leaving. Sure, people
• 33:30
  Speaker 2: are getting older and when you get older, you work less.
• 33:34
  Speaker 4: Agreed?
• 33:35
  Speaker 3: Right?
• 33:35
  Speaker 1: Yeah?
• 33:36
  Speaker 3: Number two?
• 33:37
  Speaker 2: Immigration has been significantly curtailed in the past eighteen months.
• 33:42
  Speaker 3: It's one way to put it.
• 33:43
  Speaker 2: Yeah, Are there any other factors that are likely major
• 33:47
  Speaker 2: contributors to this?
• 33:48
  Speaker 4: I mean they talk about the idea that someone who's
• 33:51
  Speaker 4: been employed for unemployed for a long time has increasing
• 33:54
  Speaker 4: difficulty finding a job.
• 33:58
  Speaker 3: Researchers is we have high numbers of those people right now.
• 34:00
  Speaker 4: Now, they're not a big part of the pool that
• 34:03
  Speaker 4: we're talking about here. The answer is all of the above,
• 34:07
  Speaker 4: and the article does a good job of citing the
• 34:09
  Speaker 4: main culprits that researchers have identified over the years. I
• 34:12
  Speaker 4: think the point you made a second ago is the
• 34:16
  Speaker 4: key point, which is it why matters less than the
• 34:20
  Speaker 4: fact that it is happening. For a generalist, I'd call
• 34:22
  Speaker 4: myself a generalist, and most people listening are sort of generalists.
• 34:26
  Speaker 4: I just need to know what does this mean for
• 34:27
  Speaker 4: like stock prices, because that's what we do for a living,
• 34:30
  Speaker 4: and it's what most people listening are really concerned about.
• 34:32
  Speaker 4: I think they're not concerned about like the time path
• 34:35
  Speaker 4: of macroeconomic time series.
• 34:36
  Speaker 2: No, but there's a few things that I think are interesting.
• 34:39
  Speaker 2: The first is, look, I don't know the exact reason
• 34:43
  Speaker 2: why workers are leaving the US labor force, but the
• 34:46
  Speaker 2: two things that I outlined are the two biggest ones.
• 34:48
  Speaker 2: I don't know exactly what proportion. What I also know
• 34:52
  Speaker 2: is Mark, Is there anything that we can do to
• 34:55
  Speaker 2: make old people work more? Put in like really simple terms,
• 35:01
  Speaker 2: got social Security.
• 35:03
  Speaker 3: So the answer is no. The answer is no.
• 35:07
  Speaker 2: We're not going to be like, hey, you turned seventy
• 35:10
  Speaker 2: time to get your mandatory job. Like, no, we're not
• 35:14
  Speaker 2: gonna do that because we're not stupid. Like I think
• 35:18
  Speaker 2: Number two, Uh, immigration in the last year and a
• 35:22
  Speaker 2: half has dropped precipitously to the point where it looks like,
• 35:26
  Speaker 2: based on most estimates, immigration is probably net neutral somewhere
• 35:31
  Speaker 2: in that ballpark. Maybe it's like slightly positive, maybe slightly negative.
• 35:35
  Speaker 2: But this is a big change from the US previously
• 35:39
  Speaker 2: being a net recipient of anywhere from like one to
• 35:41
  Speaker 2: one point five million immigrants in any given year. Excuse me, So,
• 35:48
  Speaker 2: do we think there's going to be any major shift
• 35:50
  Speaker 2: in the level of immigration in the near future?
• 35:53
  Speaker 3: I don't. As such. Is there anything that I can
• 35:57
  Speaker 3: do about this? The answer is no.
• 35:59
  Speaker 2: Like, I can't do anything to change the shape of
• 36:01
  Speaker 2: the labor force. And this is why I think it's
• 36:05
  Speaker 2: It's interesting to me is that if you have a
• 36:09
  Speaker 2: labor force that isn't showing much growth, but you still
• 36:15
  Speaker 2: have a growing amount of work to be done. That
• 36:20
  Speaker 2: is the situation in which you potentially run into problems
• 36:24
  Speaker 2: with wages starting to accelerate in a way that can
• 36:27
  Speaker 2: cause some problems for the FED. And again, this is
• 36:31
  Speaker 2: a speculation that I've had that I first voiced maybe
• 36:33
  Speaker 2: two or three years ago. Is a question of, Hey,
• 36:37
  Speaker 2: are we past the event horizon of this where, regardless
• 36:41
  Speaker 2: of what happens, we may have, you know, perpetually tight
• 36:45
  Speaker 2: labor forces for the next five to fifteen years because
• 36:49
  Speaker 2: of these trends that are in place. And does that
• 36:52
  Speaker 2: create a situation where the US economy absent you know
• 36:56
  Speaker 2: this ai boom And I don't know you can necessarily say,
• 36:59
  Speaker 2: but absent you know, running six percent seven percent deficits forever? Hey,
• 37:04
  Speaker 2: does the US economy start to look more stagflationary because
• 37:07
  Speaker 2: you don't have much population growth going on, but you
• 37:10
  Speaker 2: do have more work that needs to be done that
• 37:12
  Speaker 2: pushes up costs. And is that something that might put
• 37:15
  Speaker 2: us in a structurally higher inflation environment than the previous.
• 37:19
  Speaker 3: Twenty thirty years.
• 37:20
  Speaker 4: You know what I'm gonna say. I'm gonna say absent
• 37:22
  Speaker 4: of productivity. Miracles may be too strong a word. Boom,
• 37:25
  Speaker 4: The answer is yes, yeah, yeah, absent an increase in
• 37:28
  Speaker 4: the rate of productivity output per hour, if we all
• 37:32
  Speaker 4: get more productive, the solution is like is it presents?
• 37:37
  Speaker 4: It is very straightforward.
• 37:40
  Speaker 2: Let's let's take a quick break as we head to
• 37:44
  Speaker 2: the top of the hour. We do have a bunch
• 37:46
  Speaker 2: coming up in the second hour that we still need
• 37:49
  Speaker 2: to get to, including a little bit more chatter about earnings. Uh,
• 37:53
  Speaker 2: we'll talk about social security and the fact that hey,
• 37:57
  Speaker 2: with six years to go until the trust fund is
• 37:59
  Speaker 2: not empty but tail the trust fund is no longer
• 38:02
  Speaker 2: self sufficient, we still aren't doing anything about it. And
• 38:05
  Speaker 2: then we've also got this great piece from MarketWatch. The
• 38:11
  Speaker 2: duck com crash was a five trillion dollar blip where
• 38:15
  Speaker 2: the next financial crisis could hit four times harder. We'll
• 38:18
  Speaker 2: discuss whether there's any merit to that in the next
• 38:22
  Speaker 2: hour