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Weak Jobs Data Raises Fed Questions Again · The Financial Exchange Show

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Speaker 2: It's Chuck Mark and been with you today and got
1:20
Speaker 2: a nice little stack put together here. We're going to
1:23
Speaker 2: start off with a little bit of economic data. We
1:25
Speaker 2: got a decent amount that's actually coming out this week.
1:30
Speaker 2: It's all gonna culminate on Friday with the None of
1:34
Speaker 2: these are unofficial, but I guess the official jobs report
1:37
Speaker 2: is on Friday. Today we got data from ADP. They
1:41
Speaker 2: put out a weekly report, but also they still do
1:43
Speaker 2: their monthly one as well, which I don't know why
1:48
Speaker 2: they don't just do the weekly one every week, but
1:50
Speaker 2: this is a unique distinct publication from the weekly one,
1:53
Speaker 2: so it just it's how they do it. But ADP
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Speaker 2: came out this morning forty four thousand jobs created. Estimates
2:01
Speaker 2: were somewhere in the seventy to ninety thousand range. No
2:04
Speaker 2: one pays really close attention to ADP, at least on
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Speaker 2: a monthly basis, even though what I will say, if
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Speaker 2: you plot the three month average of ADP with the
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Speaker 2: three month average of the government Jobs Report, they're pretty
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Speaker 2: darn close. These days, there's a pretty strong correlation between them,
2:23
Speaker 2: and what we are seeing is that the ADP numbers
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Speaker 2: the last couple months have weakened after a stronger spring.
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Speaker 2: When I say weakened, I don't mean anything concerning I
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Speaker 2: just mean, hey, the spring, it looked like maybe we
2:34
Speaker 2: were starting to achieve escape velocity on the labor market,
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Speaker 2: some green shoots popping up, and now it looks like, okay,
2:42
Speaker 2: more than that, it's twenty twenty six, in my opinion,
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Speaker 2: now that we have seven months of data, or nearly
2:50
Speaker 2: seven months once we get the jobs report for July,
2:53
Speaker 2: I think twenty twenty six so far can be described
2:56
Speaker 2: from a labor market perspective as it hasn't gotten worse.
3:02
Speaker 2: It's gotten modestly better around the edges. And that's fine
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Speaker 2: because the big concern that we had in the second
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Speaker 2: half of last year was the labor market's slowing, and
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Speaker 2: at least that isn't happening anymore. But it's unclear that
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Speaker 2: there's anything pointing towards a resurgent labor market. It's just
3:22
Speaker 2: tough to tell if that's more a function of labor
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Speaker 2: demand or labor supply, which is unique for the United States.
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Speaker 3: Yeah, there's that cyclical component related to whether the economy
3:34
Speaker 3: is growing above or below trend in any particular quarter.
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Speaker 3: Then there's the long term secular trends toward less turnover
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Speaker 3: in the labor market. The higher rate, the separation rate
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Speaker 3: that we saw yesterday and the Jolts report have been
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Speaker 3: trending down for like decades, possibly due to demographics, the
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Speaker 3: changing structure of the economy. So there are you never
4:01
Speaker 3: know whether you're when you're looking at a series. You
4:04
Speaker 3: don't know if you're looking at the trend and changes
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Speaker 3: in the trend which are driven by structural forces and
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Speaker 3: long term i e. You can't do anything about them.
4:14
Speaker 3: They're just playing out or something cyclical, something that causes
4:19
Speaker 3: a series to move around if you like. It's not
4:22
Speaker 3: like periodic, but to depart from its trend line. And
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Speaker 3: I don't know whether this low higher, low fire kind
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Speaker 3: of stagnant's not quite the right word, but not too
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Speaker 3: exciting kind of labor market that we've been living through
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Speaker 3: is just part of those secular trends, you know, the
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Speaker 3: demographic evolution of the labor force. Againstructural changes in the economy,
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Speaker 3: less immigration is going to be a contributor to that
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Speaker 3: going forward, or something cyclical that we need to be
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Speaker 3: concerned with. And this is a challenge for the Fed
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Speaker 3: by the way because they could do something about the
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Speaker 3: cyclical sure component, but they can't do anything about the
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Speaker 3: structural forces.
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Speaker 2: All they can do is the FED. Like we've talked
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Speaker 2: about this before with Jay Powell, Kevin Warsh now Kevin
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Speaker 2: Worsh cannot add people to the labor market at least today.
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Speaker 2: He can't add labor supply. He could have a kid today,
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Speaker 2: but that kid's not reaching, you know, the labor force
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Speaker 2: until you know, sixteen eighteen years from now. So the
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Speaker 2: FED can't control labor supply. I think you would make
5:30
Speaker 2: the case that what they can influence is labor demand.
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Speaker 2: Is that affair said, through.
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Speaker 3: Its control of the supply. Just to be sort of
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Speaker 3: rigorous about this, they control a supply of money. We
5:44
Speaker 3: all know that FED prints money. They do that currently
5:48
Speaker 3: to target a short term interest rate. They haven't always
5:50
Speaker 3: conducted policy that way, but that's the way it's done
5:52
Speaker 3: today and that in turn influences perfect verbu on your
5:55
Speaker 3: part demand. Can they do anything about labor supply? I
5:59
Speaker 3: think most mus would say no. There are some who
6:01
Speaker 3: would say though, that because of the scarring effects of
6:06
Speaker 3: a say, recession, the FED can influence real variables, real
6:12
Speaker 3: meaning anything that's not money. Money, if you think about it,
6:15
Speaker 3: is just like a unit, whether I pay one hundred
6:17
Speaker 3: dollars for something or two hundred dollars after you double
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Speaker 3: my salary like I'm not. I'm presuming you would if
6:23
Speaker 3: inflation doubled, but we'd have to have that discussion.
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Speaker 2: I guess people do feel worse about that because it's, oh,
6:28
Speaker 2: I'm getting paid a lot more, but yeah, I'm not
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Speaker 2: getting more.
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Speaker 3: Even though it's not real. Yeah, you're not actually working more.
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Speaker 2: You're not worse, but you thought you would be better.
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Speaker 3: It feels bad. Yeah, yeah, yeah, like just like inflation
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Speaker 3: feels bad even if your salary is keeping up. Sure,
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Speaker 3: for the same reason you're not getting ahead in real turn.
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Speaker 2: But no one's ever figured out why people hate inflation
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Speaker 2: other than they don't like it.
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Speaker 3: Yeah, they sort of agree that.
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Speaker 2: Yeah, it's basically, hey, my income went up and I'm
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Speaker 2: not you know, I'm not able to do more with it,
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Speaker 2: and that feels worse. Like that, that's basically the best
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Speaker 2: explanation we have for why people don't like it.
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Speaker 3: But there are real costs to this is a totally
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Speaker 3: different discussion. I don't want to let myself get sidetracked,
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Speaker 3: I'll just start rambling. But what the heck we talking? Oh,
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Speaker 3: the unemployment? Can the FED do anything about the supply
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Speaker 3: side of the economy. I think most researchers would say no.
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Speaker 3: It's most useful to think about money is neutral in
7:18
Speaker 3: the long run the unemployment. This is this is if
7:21
Speaker 3: you like Milton Friedman, and I know a lot of
7:23
Speaker 3: you are of the age where you remember him, this
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Speaker 3: insight is attributable to him and at Phelps, who died
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Speaker 3: last year. In the long run, you know, money's neutral.
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Speaker 3: The unemployment rate's going to settle on whatever the so
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Speaker 3: called natural rate of unemployment is. That's the result of
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Speaker 3: structural forces in the economy. FED. Arguably not every economist
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Speaker 3: would agree with this, but the FED argument we can't
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Speaker 3: do anything about that.
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Speaker 2: Let's take a quick break here. When we return, we'll
7:47
Speaker 2: talk a little bit about the latest out of the
7:50
Speaker 2: Middle East, what we're seeing there, and then a little
7:53
Speaker 2: bit of Data center chatter after that.
7:57
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9:07
Speaker 2: Piece In Bloomberg, trump Field fuels hopes of horm moves
9:11
Speaker 2: opening with hints. Deal is close and has been talked
9:15
Speaker 2: about the last couple of days. You know, President Trump's
9:18
Speaker 2: been talking about it. Treasury Secretary Besson has been talking
9:22
Speaker 2: about things potentially moving in this direction. What we do
9:27
Speaker 2: and don't know, it's it's a it's a muddled picture.
9:29
Speaker 2: And so here's kind of the delay of the land
9:34
Speaker 2: right now and things that point towards something improving, things
9:38
Speaker 2: that point towards things getting worse. Let's let's start first
9:41
Speaker 2: on the good news side of things. And again, you
9:45
Speaker 2: you have to interpret price action for what it is,
9:48
Speaker 2: which is you know, people saying, okay, here's you know,
9:51
Speaker 2: where we think things are going. And basically before any
9:54
Speaker 2: of the other you know, deal announcements that we've had,
9:58
Speaker 2: oil prices have moved down. You've had that in the
10:01
Speaker 2: last you know, two three days, You've you've had a
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Speaker 2: meaningful move down in oil prices, you know, specifically looking
10:07
Speaker 2: at I will get Brent crew just because again the
10:10
Speaker 2: international market is more tied to what goes on in
10:12
Speaker 2: the Middle East than what we're seeing domestically. Brent's gone
10:16
Speaker 2: from you know, ninety one down to seventy eight, so
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Speaker 2: you know, meaningful down shift there. The piece that has
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Speaker 2: me interested and thinking there's a little bit more meat
10:26
Speaker 2: on this bone. One of the things we've talked about
10:29
Speaker 2: over the last few months is what's known as crackspreads
10:33
Speaker 2: and crackspreads are a fancy way of saying, hey, if
10:36
Speaker 2: an oil refinery has to pay seventy nine dollars a
10:39
Speaker 2: barrel for it's crude oil, but can then sell diesel
10:44
Speaker 2: and gasoline for called an average if you know, one
10:46
Speaker 2: hundred and thirty bucks, the crackspread on that is fifty one.
10:50
Speaker 2: Thus seventy nine called fifty one actually, but that is
10:54
Speaker 2: the crackspread. It's it's called out because the process of
10:56
Speaker 2: refining oils is you know, talking about you know, cracking
11:00
Speaker 2: them into different refined product. So here's what's interesting to
11:05
Speaker 2: me is that if you look at previous deals, you
11:10
Speaker 2: know that were signed. The memorandum of understanding was signed
11:12
Speaker 2: on June seventeenth. The three two one crack spread, which
11:16
Speaker 2: is three barrels of crude producing two of gas and
11:18
Speaker 2: one of diesel, was it forty nine at that point.
11:22
Speaker 2: Over the next couple of weeks, that crackspread went from
11:25
Speaker 2: forty nine to sixty one. It blew out top side,
11:28
Speaker 2: which is interesting to me. It suggested further tightness in
11:33
Speaker 2: the product market even though you had crude that was
11:35
Speaker 2: coming out of the straight offour moves that had been
11:37
Speaker 2: bottled up there. So that's kind of interesting today. In
11:40
Speaker 2: the last few weeks, not a few weeks, last week now,
11:44
Speaker 2: since July twenty ninth, which was last Wednesday, the three
11:46
Speaker 2: to one crack has gone from seventy one down to
11:49
Speaker 2: fifty six, suggesting things loosening up on the refined product side.
11:54
Speaker 2: And I'm trying to figure out why US refineries are
11:59
Speaker 2: running max capak already. Basically everyone in the world is
12:02
Speaker 2: Russia still has a ton of capacity offline because of
12:05
Speaker 2: Ukrainian raids and things like that. And so the only
12:09
Speaker 2: piece that I get to is something that happened over
12:11
Speaker 2: the weekend, which is China decided to increase the selling
12:18
Speaker 2: price of gasoline domestically. Remember China top down economy, and
12:21
Speaker 2: so you know, the Chinese government helps to set the
12:24
Speaker 2: price of you know, commodities such as gasoline within its borders.
12:30
Speaker 2: And so I sit there and I go, okay, interesting.
12:32
Speaker 2: You know, remember China stopped importing about five million barrels
12:37
Speaker 2: a day of crude, and a bunch of their refinery
12:39
Speaker 2: capacity spooled down alongside that. If China's increasing the amount
12:45
Speaker 2: that consumers have to pay for gas domestically, could it
12:50
Speaker 2: be a precursor to them spooling up refinery capacity and
12:53
Speaker 2: and so easing some of the refined product burden worldwide,
12:57
Speaker 2: because again, these are commodities and you know they do,
13:01
Speaker 2: you know, travel around the world where demand pulls them.
13:05
Speaker 2: And so the logical place I go with that is, look,
13:09
Speaker 2: China stayed on the sidelines for the last three and
13:12
Speaker 2: a half months when it comes to buying you know, crude,
13:15
Speaker 2: They've dramatically dropped how much crude they buy by about
13:18
Speaker 2: fifty percent. If they're potentially moving in this direction now,
13:23
Speaker 2: and there's also you know, more ships now signaling that
13:25
Speaker 2: they're going to be bringing crude to China. Okay, China
13:29
Speaker 2: doesn't usually do this just on a whim. Is there
13:32
Speaker 2: maybe some meat on the bone that they have, you know,
13:34
Speaker 2: back channel relationships with Iran and think that this is
13:36
Speaker 2: going to be more durable than what we saw in June?
13:41
Speaker 2: Maybe like this this is the positive case that I'm
13:44
Speaker 2: I'm connecting. The negative case is that overnight there was
13:50
Speaker 2: at least one ship hit in the Strait of Horror Moves,
13:53
Speaker 2: so things are still being struck there. The Huthis hit
13:56
Speaker 2: a couple in the Red Sea and also indicated they're
13:58
Speaker 2: starting to target ships further north in the Red Sea
14:02
Speaker 2: to stop them from going through the Suez Canal, because
14:06
Speaker 2: they're basically saying, Okay, we don't want Saudi oil getting
14:09
Speaker 2: out from the Red Sea, whether it's north or south.
14:12
Speaker 2: So that's not a great sign. There was something on
14:15
Speaker 2: fire in Dubai, but no one knows what because the
14:19
Speaker 2: UAE government is basically locked down any photographic evidence and
14:23
Speaker 2: now has two people under arrest because they took pictures
14:27
Speaker 2: of something burning and no one really knows what it was.
14:31
Speaker 2: So the counter to the potential good news of prices
14:35
Speaker 2: coming down in China, maybe signaling refineries spooling up, is
14:39
Speaker 2: there's still ships being targeted in the Red Sea and
14:42
Speaker 2: the Straight of Horror moves. And so I'm pretty much
14:46
Speaker 2: in the same place I've been for the last five months,
14:48
Speaker 2: which is I don't really know what's going to happen.
14:52
Speaker 2: I understand the incentives for this to be dragged out
14:54
Speaker 2: by Iran. I understand that at some point you're gonna
14:57
Speaker 2: get a negotiated settlement just because the I'd say enough
15:00
Speaker 2: is enough. But I don't know if we're there yet,
15:03
Speaker 2: and we'll see if this is another false start or
15:07
Speaker 2: if it's a real move that has legs. I don't know.
15:12
Speaker 2: I'm hopeful that it has legs and can you know,
15:16
Speaker 2: prove to be durable, because otherwise we're a couple of
15:19
Speaker 2: weeks closer to bingo on you know, us creude inventories
15:24
Speaker 2: and things like that, and so I don't know. It's
15:29
Speaker 2: it's we're in a pretty dangerous spot where this this
15:32
Speaker 2: can't go on too much longer, pingponging back and forth,
15:36
Speaker 2: which without the you know, negative instances starting to have,
15:40
Speaker 2: you know, parabolic rises in the price of energy commodities.
15:45
Speaker 2: We'll see what happens, but something positive needs to happen
15:49
Speaker 2: soon otherwise things are gonna get pretty gnarly. It's kind
15:53
Speaker 2: of where we are.
15:54
Speaker 3: I haven't heard any respected commentators say they expect a
15:58
Speaker 3: RAN to just fold give up their their choke point.
16:03
Speaker 2: Well, everyone has, you know, there's always for any assets,
16:10
Speaker 2: there's always an offer that is okay, can't pass this up.
16:15
Speaker 2: You know, if you if you own you know, a
16:18
Speaker 2: family house that's been in your family for years, and
16:22
Speaker 2: Warren Buffett comes to you and says, hey, Mark sold,
16:26
Speaker 2: how I want that? Are you gonna I want that?
16:29
Speaker 2: House for you know, five hundred thousand. You're like, no,
16:32
Speaker 2: I'm not doing it. Yeah, you already had Okay, what
16:35
Speaker 2: about five what about five hundred million? Yeah, yeah, I
16:39
Speaker 2: do it for five hundred mills.
16:40
Speaker 3: But we're not gonna make that concession. I'm not going
16:42
Speaker 3: to try to game this out obviously. I just haven't
16:45
Speaker 3: heard any convincing analysis, never mind convincing me, but convincing
16:50
Speaker 3: a reasonably level headed expert in the field that there's
16:54
Speaker 3: an easy way to resolve this that doesn't involve a
16:57
Speaker 3: level of humiliation or cost that the US government probably
17:01
Speaker 3: can't afford to swallow.
17:03
Speaker 4: It.
17:03
Speaker 2: It's one where, you know, it's interesting as I've I've
17:09
Speaker 2: spent almost you know, seventeen years in you know, the
17:13
Speaker 2: the uh the investment business, and the thing that I
17:18
Speaker 2: do come back to sometimes is there's always a creative
17:24
Speaker 2: way to get a deal across the finish line, like,
17:27
Speaker 2: regardless of what it is and whether.
17:29
Speaker 3: I've never seen anything like this though, no.
17:31
Speaker 2: But it's you know, it could be something where okay,
17:34
Speaker 2: like if the US is like, hey, we're not going
17:37
Speaker 2: to you know, give any money to make this work, okay,
17:41
Speaker 2: maybe the money comes from you know, the Saudi's and
17:44
Speaker 2: the UAE and the Sere no no no go there are.
17:49
Speaker 3: The problem is there's fanatics on both sides.
17:51
Speaker 2: I agree, established, but even fanatics have something that they
17:54
Speaker 2: eventually want.
17:56
Speaker 3: Yeah, a total victory, unqualified, and they will fight to
18:01
Speaker 3: the death. That's what worries me. There are fanatics on
18:03
Speaker 3: both sides. There are people who want to ran wipe
18:05
Speaker 3: off the map YEP and Iran's sentiments are well known.
18:08
Speaker 2: Sure, so I think again, I've been saying since the
18:11
Speaker 2: beginning that my gut said that this would drag out
18:15
Speaker 2: longer than anticipate. So I tend to think that any
18:20
Speaker 2: agreement signed at this point is not durable self evidence
18:25
Speaker 2: for a few reasons. The first is, well, anything to
18:28
Speaker 2: this point has not been durable, and I'm not sure
18:31
Speaker 2: that the facts on the ground have changed very much
18:33
Speaker 2: since the last couple of you know times we've gone
18:37
Speaker 2: through this, So I tend to be skeptical. But at
18:41
Speaker 2: some point in every conflict, you get to, you know,
18:44
Speaker 2: some deal where it's you know what, one side hates this,
18:49
Speaker 2: but we're gonna do a negotiated settlement, like.
18:51
Speaker 3: We're gonna get back to January twenty twenty six anytime
18:54
Speaker 3: soon for what status quo standus quo.
18:57
Speaker 2: No, No, that world's done. That world's done. It's not
19:02
Speaker 2: going to look like January of this year in the
19:05
Speaker 2: Middle East. What it looks like. I have no idea,
19:10
Speaker 2: and I don't think we're at the point yet where
19:12
Speaker 2: we can say that maybe this is a step in
19:15
Speaker 2: the right direction, maybe it's not, but we'll have to
19:18
Speaker 2: see what develops from it. Let's take a quick break.
19:21
Speaker 2: When we come back, we got Wall Street Watch, and
19:22
Speaker 2: then we're talking SpaceX earnings.
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20:00
Speaker 4: Well, a lot of green on the board right about now.
20:03
Speaker 4: Dow Jones is up over one percent, the S and
20:05
Speaker 4: P five hundred is flirting with up about half a percent.
20:08
Speaker 4: The Nasdaq's up a little bit over a quarter of
20:10
Speaker 4: a percent. Gold is surging up over three percent, while
20:13
Speaker 4: silver is up over four percent. Taking a look at
20:17
Speaker 4: some of the companies right now, SpaceX fallen seven percent
20:20
Speaker 4: after releasing its first quarterly report since going public in June.
20:24
Speaker 4: SpaceX reported capital expenditures of eighteen point three seven billion
20:28
Speaker 4: in the second quarter, largely driven by artificial intelligence in
20:31
Speaker 4: up five hundred and fifty percent from a year ago.
20:34
Speaker 4: Second quarter revenue came in at seven point eight one
20:36
Speaker 4: billion dollars, topping the LSEG consensus of six point nine
20:40
Speaker 4: three billion dollars. Disney stock is up more than two
20:43
Speaker 4: percent despite the media giant reporting a mixed fiscal third quarter.
20:47
Speaker 4: While earnings per share came in above expectations, revenue missed slightly.
20:51
Speaker 4: Revenue for the company's experiences business, which includes its theme parks,
20:55
Speaker 4: was up ten percent annually. AMD has plunged six percent
20:58
Speaker 4: in early trading on the back of second order results
21:00
Speaker 4: that failed to impress investors. The company earned an adjusted
21:04
Speaker 4: one dollar and sixty six cents per share on revenue
21:06
Speaker 4: of eleven point five four billion dollars. And finally, the
21:10
Speaker 4: pharmaceutical giant Eli Lily has jumped more than three and
21:12
Speaker 4: a half percent after reported in earnings and revenue beat
21:16
Speaker 4: in its second quarter financial report. Eli Lilly also raised
21:19
Speaker 4: its full year revenue guidance for twenty twenty six as
21:22
Speaker 4: demand for its weight loss drug zet bound and diabetes treatment.
21:26
Speaker 4: Munjaro continues to surge. I am Ben Kitchen and that
21:30
Speaker 4: was Wall Street Watch.
21:33
Speaker 2: So yesterday SpaceX reported earnings. And I want to read
21:37
Speaker 2: a quote from god by the name of Brent Donald
21:40
Speaker 2: and Brent someone who I've followed for I don't know,
21:43
Speaker 2: probably about a decade or so. And he publishes a
21:49
Speaker 2: morning newsletter. Usually it's on foreign exchange, which good. I
21:53
Speaker 2: don't know anything about foreign exchange, but occasionally he talks
21:56
Speaker 2: about you know, some some other tangential topics and things
22:00
Speaker 2: like that. And in talking about SpaceX, I think that
22:05
Speaker 2: he has a great way of phrasing this just that
22:08
Speaker 2: I want to get at because it encapsulates like the
22:12
Speaker 2: view that I have on both SpaceX and Tesla, in
22:15
Speaker 2: a far more elegant way than I've ever explained it.
22:17
Speaker 2: I'll quote him here. I have no view on the
22:19
Speaker 2: underlying business. I believe the best lens for Tesla and
22:22
Speaker 2: SpaceX stock is to think of them as meme coins.
22:25
Speaker 2: There's no rational valuation anchor. These are bets on hopes
22:29
Speaker 2: and dreams. This is not a sarcastic comment. Sometimes hopes
22:32
Speaker 2: and dreams come true. Using DCF for anything else of
22:36
Speaker 2: that sort to study these stocks is a waste of time.
22:40
Speaker 2: And I think that that really gets at these It's look,
22:43
Speaker 2: these are you know, people investing in them because they
22:45
Speaker 2: want to believe, without any rational basis for you know,
22:51
Speaker 2: the you know numbers or anything, just that, hey, these
22:54
Speaker 2: companies are going to be able to do amazing things
22:56
Speaker 2: in the future. And that's that's that's what they are
22:59
Speaker 2: the vehicles for that. And I don't say that dismissively.
23:05
Speaker 2: There are plenty of investors that have made millions or
23:07
Speaker 2: tens of millions of dollars in Tesla doing exactly that. Yes,
23:13
Speaker 2: I was.
23:13
Speaker 3: Gonna say, there's no CF to d DCF has discounted
23:16
Speaker 3: cash flow. There are no cash flow, there are some
23:19
Speaker 3: I mean, there's there's no shoulder cash flow to discount.
23:22
Speaker 2: So if if but it doesn't matter, No, well.
23:24
Speaker 3: No one's ever The guys that make a lot of
23:27
Speaker 3: money make it on speculative if it were if DCF
23:31
Speaker 3: discounted cash flow type of not Graham and Dadd, the
23:33
Speaker 3: sort of pioneers of this approach. Sure, if that worked,
23:36
Speaker 3: all you'd need is excel to make money or you know,
23:39
Speaker 3: a calculator.
23:41
Speaker 2: That doesn't it works for Warren Buffett.
23:44
Speaker 3: No, he but he mean yeah, I think he was. Yeah, okay,
23:48
Speaker 3: so he's a value type investor. Yeah, I'm not going
23:50
Speaker 3: to overthink what you just said. Yeah, okay, he's a
23:52
Speaker 3: value oriented guy. And it works better with some investment styles,
23:57
Speaker 3: I guess, than others. But you have to predict the
24:00
Speaker 3: accurately to and you've got to get the discount rate right,
24:03
Speaker 3: and you know.
24:04
Speaker 2: Well and Buffet. The thing that everyone leaves out is
24:07
Speaker 2: that Warren Buffett, despite publicly talking about, you know, be
24:10
Speaker 2: careful with leverage, Warren used plenty of leverage in building
24:14
Speaker 2: his portfolio. Just applied it, you know, the right time
24:17
Speaker 2: so that it was able to be used effectively.
24:20
Speaker 3: Sure, So, I guess the point I was going to
24:22
Speaker 3: make was that people who make the most money in finance,
24:26
Speaker 3: and I don't mean average investors who use a four
24:29
Speaker 3: oh one K vehicle dollar cost average in and all
24:31
Speaker 3: that over time, But the guys that have made really
24:33
Speaker 3: and women who've made really big money in finance, they're
24:35
Speaker 3: not doing the type of investing that's amenable to discounted
24:39
Speaker 3: cash flow analysis. So a generalist like us wouldn't have
24:44
Speaker 3: anything to put in our little Excel spreadsheet, it'd all
24:46
Speaker 3: be guessing. It would all be get And that's that's fine.
24:49
Speaker 3: The good guessers are rewarded.
24:52
Speaker 2: So again, I just think that when you're talking about SpaceX,
24:57
Speaker 2: if you're talking about valuation, you're not You're not in
25:01
Speaker 2: the conversation. Like it's just not the conversation that they're having.
25:05
Speaker 2: It's it's it's like if you walked into a Ferrari
25:08
Speaker 2: deal and you're like, well, what kind of deal can
25:10
Speaker 2: you get me? It's not the right place to ask
25:13
Speaker 2: that question, right, Like, you know, can it is it
25:17
Speaker 2: comfortable for you know, adults in the back? I don't
25:20
Speaker 2: think this is the right car for you. Like that's
25:22
Speaker 2: the deal with SpaceX. It's it's you can't talk about
25:26
Speaker 2: it from a valuation perspective. Ultimately, what you can talk
25:30
Speaker 2: about it in terms of is I think there are
25:34
Speaker 2: two things that that drive the ship for both of
25:38
Speaker 2: Elon Musk's publicly traded companies.
25:40
Speaker 4: Uh.
25:41
Speaker 2: The first and foremost thing is public sentiment about Elon
25:44
Speaker 2: at any particular point in time, And the second is, Okay,
25:49
Speaker 2: what are we seeing just in terms of you know,
25:51
Speaker 2: revenue growth? Because it's for these companies, it's not about
25:55
Speaker 2: like free cash flow again, it's just hey, like, are
25:58
Speaker 2: you showing you know, the rev new growth that you
26:00
Speaker 2: need to And I think the piece with SpaceX is, hey,
26:06
Speaker 2: they came out and they had better than expected revenue.
26:09
Speaker 2: It's still is something where investors were, you know, disappointed
26:14
Speaker 2: enough that it didn't make a difference, and stock was
26:16
Speaker 2: down as much as twelve percent. Now it's down about eight. Again,
26:20
Speaker 2: I'm not going to judge the company as you know,
26:22
Speaker 2: a failure or success for its first quarter earnings that
26:26
Speaker 2: they've ever had as a publicly traded company. But I
26:29
Speaker 2: think at some point, and we saw this with Tesla
26:34
Speaker 2: by the way, when they were rolling out the Model three,
26:36
Speaker 2: Tesla stock came under pressure because the question was, hey,
26:40
Speaker 2: can you ramp this quickly enough to be able to
26:42
Speaker 2: survive the cash flow problems that that will inevitably come
26:47
Speaker 2: if you don't. At some point, the market's going to
26:51
Speaker 2: force SpaceX to make the same decision. Can you ramp
26:55
Speaker 2: this this being revenue quickly enough to justify this spending
27:00
Speaker 2: that you're doing, Otherwise we're going to force you to pivot.
27:04
Speaker 2: And it's not there yet. It might not be there
27:07
Speaker 2: for a year or two where it might not ever
27:09
Speaker 2: be there depending on how the business goes. But if
27:12
Speaker 2: you're going to come in and talk to me about like, well,
27:15
Speaker 2: you know SpaceX has you know negative, of course they
27:18
Speaker 2: get out.
27:20
Speaker 3: Conversation.
27:21
Speaker 2: It's not the right converat out of there you and
27:23
Speaker 2: have conversations about free cash flow. Let's talk Procter and Gamble,
27:27
Speaker 2: you know, let's talk Johnson and Johnson.
27:29
Speaker 3: Yeah, you're using the wrong instrument there.
27:30
Speaker 2: You know SpaceX. Hey, if if it's going to fail,
27:35
Speaker 2: you're not going to be the one that figures it
27:37
Speaker 2: out because of its free cash.
27:38
Speaker 3: Which Kino raises an interesting question about valuation of the
27:40
Speaker 3: overall market. We talk about multiples a lot, sure, and
27:44
Speaker 3: a lot of people wring their hands, myself included about multiples.
27:47
Speaker 3: They're in uncharted virtually uncharted territory, sure right now at
27:53
Speaker 3: levels and I just mean their high stocks are expensive.
27:56
Speaker 3: And historically when this has happened, returns have been low.
27:59
Speaker 3: I'm not saying markets have crashed, though that has happened
28:02
Speaker 3: a lot. Returns, subsequent returns have been modest relative to
28:06
Speaker 3: historical returns. To be specific, instead of ten might expect
28:10
Speaker 3: something in the mid or low single digits on average
28:12
Speaker 3: over the next decade, just to put a put something
28:15
Speaker 3: concrete to that, you know, to what extent if traditional measures,
28:21
Speaker 3: if these instruments we use, don't matter in certain cases
28:25
Speaker 3: for companies driving the market. And that's arguably all the
28:28
Speaker 3: hyperscalers up to a point because ugure earnings. I know
28:33
Speaker 3: they've got a track record, but they're veering into something
28:37
Speaker 3: now very different than as we talked about last week
28:40
Speaker 3: or two weeks ago, veering into something very different than
28:42
Speaker 3: they've done historically. So how in the world could you
28:45
Speaker 3: do your DCF or whatever fundamental measure you like to
28:49
Speaker 3: apply in circumstances like this.
28:52
Speaker 2: So I think again, SpaceX, they reported their first earnings yesterday.
28:59
Speaker 2: I don't really think that matter. I don't think they matter.
29:03
Speaker 2: It's not to say it they won't matter at some point,
29:06
Speaker 2: but they don't matter right now. And you should be
29:08
Speaker 2: fine holding that view, because no one who's a serious
29:13
Speaker 2: person is looking at SpaceX and trying to build a
29:15
Speaker 2: DCF modeler say that they're fairly valued. It's just not
29:19
Speaker 2: the right conversation with this stock at this point in time.
29:23
Speaker 2: Maybe it will be at some point but think about
29:25
Speaker 2: that for when it happens. Let's take a quick break.
29:28
Speaker 2: When we return, let's talk about an anthropic data center
29:34
Speaker 2: and who wants to own the debt that's backing it.
29:37
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30:02
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30:14
Speaker 2: So one of the things that we've talked about over
30:15
Speaker 2: the course of the last year or two is with
30:18
Speaker 2: this data center build out, a few different things happening.
30:22
Speaker 2: Number one, you've got some bank's institutions that want to
30:26
Speaker 2: hold data center debt because they want to hold it.
30:30
Speaker 2: You also have as part of that sometimes you've got
30:35
Speaker 2: you know, these special purpose vehicles that get set up
30:38
Speaker 2: so that you're not necessarily holding Google's debt, but instead
30:42
Speaker 2: you're holding the spv's debt so that it's off Google's books.
30:46
Speaker 2: And ultimately, like this is, you know, you're trying to
30:50
Speaker 2: figure out Okay, how do we keep you know, the
30:52
Speaker 2: plate spinning because you're in We've talked about this, you know,
30:57
Speaker 2: kind of U shaped curve from free cash flow Ideally,
31:00
Speaker 2: you know, you've got to spend money to make money. Hey,
31:02
Speaker 2: these hyperscalers are starting with high cash flow. They are
31:05
Speaker 2: spending down, so going down the U and then they
31:09
Speaker 2: hope at some point that revenue will rise and their
31:11
Speaker 2: free cash flow will as well, and their profit will
31:14
Speaker 2: in conjunction. But the question is how do you get
31:16
Speaker 2: through the U? And does the other side of the
31:18
Speaker 2: U exist? So you got banks holding this debt, you
31:22
Speaker 2: got individual investors, and there's only so much appetite for it.
31:26
Speaker 2: So what we've got here is a story that is
31:29
Speaker 2: out of the Financial Times that banks are holding about
31:32
Speaker 2: fifteen billion dollars in debt tied to a Google data
31:35
Speaker 2: center in Texas, and they're trying to offload it, presumably
31:39
Speaker 2: to make room for doing another deal of similar size.
31:43
Speaker 2: Is the sense I guess sorry, excuse me your thoughts Mark,
31:47
Speaker 2: aside from your just s.
31:48
Speaker 3: I just conveyed them for the record. Oh yes, no,
31:51
Speaker 3: I mean, look, if this all works out, great, brilliant.
31:53
Speaker 3: If it doesn't, it's going to bring the bond market
31:55
Speaker 3: as well as the equity market down. Are the lower
31:57
Speaker 3: quality segments of the bond market. I know that sounds
32:01
Speaker 3: a little flip. I don't know what else to say.
32:03
Speaker 3: Massive over investment on the prospect, perhaps realistic, perhaps a
32:09
Speaker 3: fantasy that AI's benefits will accrue to these early movers,
32:13
Speaker 3: the so called hyperscalers, and those who support them. If
32:17
Speaker 3: history's any guide, this over investment will lead to ruinous competition,
32:20
Speaker 3: which will lead to bankruptcies, recession, and big declines and
32:23
Speaker 3: asset values, including the bonds used to finance these undertakings.
32:28
Speaker 3: This is even if AI is life changing, much like
32:31
Speaker 3: the Internet was life changing. All those things I just described,
32:34
Speaker 3: I'm oversimplifying a little bit, but they more or less happened.
32:36
Speaker 3: It's also true of electricity and every other general purpose
32:39
Speaker 3: technology that we've introduced over the last call it two centuries,
32:44
Speaker 3: just starting from the Industrial Revolution, starting a little early
32:47
Speaker 3: for our Industrial revolution, but you get the point. Look,
32:50
Speaker 3: I don't know people say this is not a general
32:52
Speaker 3: purpose technology because electricity doesn't jump out of the socket
32:56
Speaker 3: and tell you how to use it better. AI can
32:58
Speaker 3: improve itself, whereas other examples have not been self learning,
33:03
Speaker 3: self improving. If true, this will be different. If not true,
33:08
Speaker 3: it won't be different.
33:09
Speaker 2: I do want to read just one quote from this piece.
33:12
Speaker 2: Just I had a funny thought enter my mind as
33:17
Speaker 2: I was reading this. The new Texas campus will be
33:20
Speaker 2: powered by its own natural gas power plant to avoid
33:23
Speaker 2: delays and surging costs. The large number of data center
33:26
Speaker 2: projects set to be built in the lone star status
33:28
Speaker 2: led to rising concerns around strain power and water supplies,
33:31
Speaker 2: as well as rising utility prices. And the interesting thought
33:34
Speaker 2: that I had was, you know how we often talk
33:37
Speaker 2: about the the Internet bubble, tech bubble if you will,
33:43
Speaker 2: and you know, particularly with the telecom companies that were
33:47
Speaker 2: laying all this fiber and you know, building out the infrastructure.
33:49
Speaker 2: And we've noted multiple times, hey, the tech bubble burst,
33:53
Speaker 2: but it left behind like all this usable infrastructure. And
33:58
Speaker 2: we've said, look, wouldn't it be interesting if some thing
34:00
Speaker 2: similar happened here? But the interesting the piece that I
34:03
Speaker 2: have that's I guess I just hadn't really thought of,
34:07
Speaker 2: is look, the data center stuff. What if that's useless?
34:10
Speaker 2: You know, data center's a data center's a data center.
34:13
Speaker 2: And I'm not saying that this will be the case.
34:15
Speaker 2: But suppose that, okay, ten years from now, like that
34:18
Speaker 2: data center is useless. But what if the happy accident
34:23
Speaker 2: that we luck into on this Now I'm not saying
34:26
Speaker 2: this is like, I have no idea exactly how the
34:28
Speaker 2: AI thing is going to progress for the next decade.
34:31
Speaker 2: But what if the happy accident that we end up
34:33
Speaker 2: in is, Hey, we tried you know, generative AI and
34:36
Speaker 2: spending trillions of dollars and it didn't work. But we
34:39
Speaker 2: accidentally left behind all of these nat gas plants that
34:42
Speaker 2: we built that now helped to cover the lack of
34:47
Speaker 2: buildout of generation capacity that we've been talking about four years.
34:51
Speaker 2: And you know what if we end up accidentally doing
34:54
Speaker 2: a bunch of work to improve the electrical grid because
34:58
Speaker 2: we thought the data center thing was going to to
35:00
Speaker 2: be a thing.
35:01
Speaker 3: The money's gonna be there to hook it up, obviously.
35:03
Speaker 2: Sure, but it's I it was just a thought that
35:06
Speaker 2: went through my head.
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36:11
Speaker 2: Mark Davinidio, one of the vics just jumped two points.
36:14
Speaker 2: Something happened, so.
36:15
Speaker 3: The VIX that that measure of what investors think the volatility.
36:21
Speaker 2: Some headline just hit'll be thirty days from now.
36:23
Speaker 3: That's I just wanted to set that VIX jumped. You
36:26
Speaker 3: said expected volatility, expected risk jump to.
36:29
Speaker 2: Jump from sixteen five to eighteen five, which.
36:32
Speaker 3: Is everything's going nuts, right, I know that.
36:36
Speaker 2: No, I'm just there has to be some headline that
36:38
Speaker 2: cold you.
36:39
Speaker 3: No stocks have pulled back to I don't know.
36:41
Speaker 2: I like, but something just hit as we were talking,
36:45
Speaker 2: and I'm scouring to figure out what it is and
36:50
Speaker 2: I can't find the headline.
36:51
Speaker 3: I don't know.
36:52
Speaker 2: I don't either. But we started that sentence and VIX
36:56
Speaker 2: was in the sixteens. Now it's in the eighteens, and
36:59
Speaker 2: a two ball moves was a pretty big move for
37:01
Speaker 2: a minute. So some headline just hit somewhere and I
37:06
Speaker 2: don't know what it is.
37:09
Speaker 3: Yeah, all acid classes are responding. We just don't know
37:12
Speaker 3: where the impact was at this time.
37:15
Speaker 2: I'm going with something in the Middle East, just because
37:18
Speaker 2: bond yields jumped by fifteen by like, yeah, they that
37:22
Speaker 2: turned around by around two basis points as well, So
37:25
Speaker 2: like something something happened here. Let's see what's going on
37:30
Speaker 2: with oil again. I kind of like the uh, the
37:34
Speaker 2: search for what's what's happening on is now oil is
37:37
Speaker 2: still down. It's not that I don't know what it is,
37:40
Speaker 2: but something just spooked markets and not like it didn't move,
37:46
Speaker 2: you know, the actual prices for stocks that much, maybe
37:50
Speaker 2: a couple tenths of a percent. Oh now the vis
37:54
Speaker 2: now it's gone. It literally was there for a minute
37:57
Speaker 2: and now it's gone. It's back to sixteen.
38:00
Speaker 3: This is this is why we don't work at NORAD.
38:04
Speaker 2: I'm I'm going with someone fat fingered something trying to
38:09
Speaker 2: buy something volatility related. I can't make heads or tails
38:14
Speaker 2: of it.
38:14
Speaker 3: Otherwise panic.
38:16
Speaker 2: No, I don't know what it is, but whatever it
38:19
Speaker 2: is is back to normal. Quick break here, our two
38:22
Speaker 2: coming up just a minute