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Oil Price Shock: Why Markets Are Staying Calm Despite Rising Energy Prices · The Financial Exchange Show

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Speaker 1: and Paul.
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Speaker 2: Lane, Good morning, Happy Thursday, Welcome back to the Financial exchange.
1:14
Speaker 2: Markets continue to bounce all over, but really not go
1:18
Speaker 2: very far following Saturdays or Friday nights strikes on Iran
1:24
Speaker 2: and disruption to the oil markets. Will be of course
1:27
Speaker 2: continuing to talk about market reactions to the events across
1:32
Speaker 2: the Middle East. But life goes on here to Mesically two,
1:35
Speaker 2: we have some earnings to get into. Sarah Foster from
1:38
Speaker 2: bank Rate we'll be joining us in the second hour
1:40
Speaker 2: of the show talking to us about how AI is
1:43
Speaker 2: evolving in the area of scam targeting and what we're
1:48
Speaker 2: all dealing with on a day to day basis when
1:51
Speaker 2: it comes to people trying to steal our money. Markets
1:55
Speaker 2: are mixed as we open up the show here. The
1:57
Speaker 2: Nasdaq is slightly up for the moment, Jones Industrial Average
2:01
Speaker 2: off two hundred and eighty five points, and SMP off
2:04
Speaker 2: about fifteen in early trading. And that's really where I
2:06
Speaker 2: want to start off, Paul, because I think the reaction
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Speaker 2: I keep getting from people is surprised at how remarkably
2:14
Speaker 2: calm markets have been, and to be clear about this,
2:18
Speaker 2: while they haven't been calm in terms of their daily movements,
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Speaker 2: on Friday, pardon me on Friday of last Wow.
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Speaker 3: Give me just a second off button that hurt my years.
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Speaker 2: That's much better. Thank you everybody for your patience. On Friday,
2:35
Speaker 2: the S and P five hundred closed, it's sixty eight
2:39
Speaker 2: seventy eight. Today we're at sixty eight fifty four. The
2:43
Speaker 2: markets have barely moved in total, while swinging a fair
2:47
Speaker 2: bit in the interim. We had one percent plus down
2:50
Speaker 2: days and then one percent up days, and investors really
2:54
Speaker 2: unsure what to do with this news. In the Middle
2:56
Speaker 2: East pretty much a fair bit clearer what to do
2:59
Speaker 2: when it comes to bidding up the price of oil,
3:01
Speaker 2: which is now sitting at nearly seventy eight dollars a
3:05
Speaker 2: barrel after closing Friday of last week in the mid sixties.
3:09
Speaker 2: So that part is clear. There's some clarity around what
3:12
Speaker 2: it might mean for interest rates and bonds, but in
3:15
Speaker 2: terms of stocks, I think investors continue to sit here
3:17
Speaker 2: and say, at least my read would be look, oil
3:22
Speaker 2: prices and price shocks can be a risk to the
3:25
Speaker 2: markets in the economy, but not if it lasts a
3:28
Speaker 2: week or a month, And that is ultimately where I
3:32
Speaker 2: land with a lot of this is so much of
3:34
Speaker 2: this is unknowable, so much it is difficult to see
3:39
Speaker 2: through the fog at the moment and determine, okay, where
3:42
Speaker 2: might things go next, because honestly, you know, you have
3:46
Speaker 2: oil prices that have now climbed about fifteen percent from
3:49
Speaker 2: their pre iron strikes low, and that has led to
3:53
Speaker 2: higher gas prices. And I think everybody would acknowledge there's
3:55
Speaker 2: a few problems with higher gas prices. Right. One. We've
3:59
Speaker 2: talked about this phenomenon before, but while it's not the
4:02
Speaker 2: largest part of your budget on a day to day basis,
4:05
Speaker 2: it is the most visible in terms of price changes
4:08
Speaker 2: of any price that we pay on a regular.
4:09
Speaker 3: BA big psychological impact, right.
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Speaker 2: Huge psychological impact in terms of your expectations about how
4:14
Speaker 2: the economy is doing, is what you pay at the
4:16
Speaker 2: gas pump, and that doesn't seem to have changed much
4:20
Speaker 2: in the last two decades. The other big piece here
4:25
Speaker 2: would be, you know it is closing in on spring. Here,
4:28
Speaker 2: the timing for gas prices is most important in the summer.
4:32
Speaker 2: It's when people are doing road trips. It is right
4:34
Speaker 2: before the midterm elections, So there are political consequences of
4:38
Speaker 2: gas prices moving up at any given point in time,
4:41
Speaker 2: and then the third piece would be the inflation impact.
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Speaker 2: And I know that these are all tied together, but
4:48
Speaker 2: you know, the phrase of oil seeps into everything is
4:50
Speaker 2: particularly true. And you know, forget for a moment about
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Speaker 2: the gas prices you pay at the pump, which are important.
4:57
Speaker 2: I recognize all of that, but think through how we
5:00
Speaker 2: consume in this economy. It's all goods that are shipped
5:02
Speaker 2: across the world and the nation, and you know they're
5:06
Speaker 2: filling up. There are eighteen wheelers with diesel, and those
5:08
Speaker 2: diesel prices jumped thirty four percent in two days. And
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Speaker 2: so it is very easy for me to paint a
5:15
Speaker 2: picture where higher oil prices eventually seep into higher prices
5:21
Speaker 2: overall and lead to more pressure on the FED to
5:24
Speaker 2: do something about it. But that only really happens if
5:27
Speaker 2: it happens for a long time. Right. People have talked
5:29
Speaker 2: about airlines and other industries, and frankly, airlines lock in
5:32
Speaker 2: their jet fuel prices. You're in advance and by futures,
5:36
Speaker 2: and so a one month price bike probably doesn't matter much.
5:40
Speaker 2: But if they're still here a year from now, it's
5:41
Speaker 2: a real.
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Speaker 3: Problem, exactly, And that is really the crux of this
5:45
Speaker 3: issue is how long is it going to be? And
5:49
Speaker 3: then you have on the energy front, just several different
5:52
Speaker 3: issues that you're dealing with in the Strait of Hormez.
5:57
Speaker 3: As this goes on longer and longer, the will be
6:00
Speaker 3: more and more severe. And that particularly that straight up
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Speaker 3: forward MEZ is the biggest focus at the moment because
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Speaker 3: twenty percent of the world's oil goes through that channel.
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Speaker 3: Right now, you have between two to three hundred ships
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Speaker 3: stranded in there, and then thousands outside of the Persian
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Speaker 3: Gulf sort of waiting to proceed along through And so
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Speaker 3: the further and further you make these companies store oil
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Speaker 3: and have no place to put it on ships to
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Speaker 3: be able to deliver it, that creates a cascading effect
6:29
Speaker 3: where they're only real choices. If they can't store the oil,
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Speaker 3: they have to cut down production. So while we have
6:35
Speaker 3: to talk about the risk of inflation running up because
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Speaker 3: of the impact on increased energy prices trickling down to
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Speaker 3: the economy, it's hard to make a declarative statement one
6:46
Speaker 3: way or another as to how concerned we should be
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Speaker 3: on this, because if this changes next week, then all
6:52
Speaker 3: of this concern is for not and it's not something
6:55
Speaker 3: that has to be worried about. But energy prices can
6:59
Speaker 3: move very quickly in one direction another We've just seen it,
7:02
Speaker 3: and they can revert back in the other direction and
7:04
Speaker 3: go downward. So that's why we find ourselves in a
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Speaker 3: place of uncertainty, and I feel as if markets are
7:10
Speaker 3: sort of reflecting that the last few days here.
7:12
Speaker 2: We saw that effect on Tuesday afternoon, by the way,
7:14
Speaker 2: I believe, if I'm not mistaken, Tuesday afternoon was when
7:17
Speaker 2: President Trump spoke about the Strait and his plan to
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Speaker 2: escort ships through it, as well as the US government
7:26
Speaker 2: to provide insurance to ships who right now, if you're
7:28
Speaker 2: not familiar, hundreds of insurance policies for big tankers have
7:34
Speaker 2: just been canceled until there is clarity around safeties navigating
7:39
Speaker 2: the Strait. And so immediately when the President announced all this,
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Speaker 2: oil prices fell. They went from we had oil prices
7:48
Speaker 2: at seventy seven dollars a barrel at nine am, and
7:52
Speaker 2: by two forty five pm they were sent at seventy
7:56
Speaker 2: two dollars a barrel, and they moved that quickly. Really
7:59
Speaker 2: on this one statement that nothing has truly happened on
8:01
Speaker 2: to this point there still are no ships navigating the strait.
8:04
Speaker 2: They ultimately, you know, prices climb back up yesterday, they're
8:08
Speaker 2: moving today again. Ultimately, as we talked about, the one
8:13
Speaker 2: thing that I think is clear with an event like
8:15
Speaker 2: this is that all else equal, energy prices higher. The
8:24
Speaker 2: important question with all of that is how long is
8:28
Speaker 2: the duration, what is the scope? How much are other
8:34
Speaker 2: nations and militaries brought into this, and you know, experiencing
8:38
Speaker 2: strikes on their own soil, because that is going to
8:42
Speaker 2: ultimately determine a number of these different factors and until
8:45
Speaker 2: it comes to pass. While I'm a little bit surprised
8:48
Speaker 2: by equity US equity investors mentality with all this, it's
8:53
Speaker 2: pretty logical.
8:55
Speaker 3: It is something.
8:56
Speaker 2: Oil price shocks are not what they were thirty years ago.
8:58
Speaker 2: It is not the critical commodity that it was in
9:00
Speaker 2: the nineteen seventies. And this market continues to be driven
9:05
Speaker 2: by things like semiconductor demand. And I don't know that
9:09
Speaker 2: anything when it comes to oil prices is going to
9:11
Speaker 2: dramatically reshape that. No, I agree we need to take
9:15
Speaker 2: a quick break. When we come back, I want to
9:17
Speaker 2: talk a little bit just about this event in particular
9:21
Speaker 2: and how events of the last year or so have
9:25
Speaker 2: shaped what the White House has done in terms of
9:29
Speaker 2: market reaction, driving actions by the administration. Where might they
9:35
Speaker 2: need to pivot if real pressure comes on markets? And
9:38
Speaker 2: then what it all means for investors. That's next here
9:41
Speaker 2: on the Financial.
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Speaker 2: One thing that I think has become pretty clear, mostly
10:52
Speaker 2: through this time for the Trump White House, but including
10:57
Speaker 2: the first term as well, it's been a focus on
11:02
Speaker 2: and reaction to what markets are doing. And know, whether
11:05
Speaker 2: you think this is a good idea or a bad idea,
11:07
Speaker 2: I'm not you know, I'm not judging that, but it
11:10
Speaker 2: seems pretty evident to me through the President's actions and
11:13
Speaker 2: the White House's timing of actions that they are focused
11:16
Speaker 2: on how do equity markets, bond markets, oil markets respond
11:20
Speaker 2: to the actions that they take. We've highlighted the fact,
11:23
Speaker 2: for instance, that of the three strikes that have been
11:27
Speaker 2: undertaken by the US military, or the three primary ones
11:30
Speaker 2: that I can think of undertaken by the US military
11:34
Speaker 2: on Venezuela and then twice on our Iran, all three
11:37
Speaker 2: orchestrated over the weekend during non trading hours for the
11:41
Speaker 2: stock market, giving investors time to digest and react. Back
11:46
Speaker 2: to April second of twenty twenty five, Liberation Yep, Liberation Day,
11:53
Speaker 2: is that what we called it. Yes, the announcement of
11:57
Speaker 2: the tariffs sunk markets pretty significant. Bond markets freaked out,
12:02
Speaker 2: and it from reporting from inside the White House and
12:06
Speaker 2: acknowledgment by the President himself. The push from the bond
12:10
Speaker 2: market in particular drove the policy to change when it
12:15
Speaker 2: came to those tariffs. Now, those tariffs are ultimately irrelevant
12:17
Speaker 2: because the Supreme Court deemed them unconstitutional, but the initial
12:22
Speaker 2: reaction by the Trump White House to walk those initial
12:25
Speaker 2: teriffs back and implement something a little bit better thought
12:27
Speaker 2: out was in response to markets. And so that is
12:31
Speaker 2: the interesting piece here to me. Again, markets not really
12:34
Speaker 2: pressuring the administration to do much, at least not on
12:38
Speaker 2: the equity side. But on the bond side we have
12:40
Speaker 2: seen more movement, and this part is again an area
12:45
Speaker 2: that I think they will focus on and want to
12:48
Speaker 2: react to, because the push from the White House over
12:52
Speaker 2: the last several months has been all about affordability and
12:55
Speaker 2: this move from the bond market works directly contradictory to that.
13:00
Speaker 2: So forgetting equity markets for a moment and looking at
13:03
Speaker 2: the bond market. On Friday, you had the ten year
13:07
Speaker 2: treasury closing out the day at around three point nine
13:10
Speaker 2: to five percent. We're now up to four point one
13:14
Speaker 2: three percent. And what that has practically meant for those
13:18
Speaker 2: out there considering a mortgage has been a jump in
13:21
Speaker 2: those interest rates. We had the.
13:24
Speaker 3: Week thirty below six percent.
13:26
Speaker 2: Yeah, we spent the entire last week under six percent,
13:30
Speaker 2: and then since these events, you've been bouncing around six
13:34
Speaker 2: point one percent on that thirty year mortgage, according to
13:36
Speaker 2: Mortgage News Daily. I don't think that's enough pressure to
13:40
Speaker 2: do an about face, but I think clearly the administration's
13:43
Speaker 2: conscious of this. They are conscious of midterm elections, and
13:46
Speaker 2: they're conscious of the affordability story, especially heading into the
13:50
Speaker 2: summer prior to midterms. And so I think there's a
13:54
Speaker 2: number of things that make me believe if this gets
13:57
Speaker 2: truly ugly on the oil side of things, that there
14:00
Speaker 2: could be some form of pivot or just you know,
14:04
Speaker 2: goal of wrapping it up quickly. In spite of the
14:06
Speaker 2: comments from the military leadership.
14:08
Speaker 3: I'm in agreement with you if using the past patterns
14:10
Speaker 3: of what we've seen from this administration, they do seem
14:13
Speaker 3: to be very market conscious. There are risks that loom
14:16
Speaker 3: out there for their administration. As you mentioned the midterms
14:20
Speaker 3: being one of them. Any prolonged period of increased energy
14:25
Speaker 3: prices and the impact on the pump when affordability is
14:28
Speaker 3: such a critical issue when it comes to those midterms,
14:30
Speaker 3: would also hurt the party's case. So I continue to
14:34
Speaker 3: feel that, judging based on what it's done previously, that
14:39
Speaker 3: they are going to try and stick to their word
14:41
Speaker 3: to keep this relatively short in terms of military action,
14:44
Speaker 3: because there are so many risks that looms out there
14:46
Speaker 3: if this continues on longer and longer.
14:48
Speaker 2: Political risks, political risks.
14:50
Speaker 3: Yeah, this continues to linger on more. You have energy concerns,
14:55
Speaker 3: you have inflationary impacts, all of that at the crux
14:57
Speaker 3: of the midterm elections would be a more uphill battle
15:01
Speaker 3: for the administration to fight, which is already going to
15:04
Speaker 3: be affordability the center stage on those midterms.
15:07
Speaker 2: Jonathan Levine has a piece in Bloomberg today, this oil
15:09
Speaker 2: shock hits differently for the US. It's always going to
15:13
Speaker 2: be different. Obviously, anytime it's always different. It's always different
15:16
Speaker 2: this time. That's the definition of history. But what is
15:21
Speaker 2: different about an oil shock in twenty twenty six? Because
15:25
Speaker 2: he makes some points, I've made the point for instance,
15:28
Speaker 2: that oil as a commodity is far less strategic to
15:32
Speaker 2: the US economy than it was half a century ago,
15:35
Speaker 2: and I very much stand by that. You know, the
15:37
Speaker 2: oil price shocks of the nineteen seventies, where domestic production
15:42
Speaker 2: was a fraction of what it is today, hit differently
15:45
Speaker 2: than it does now, and anybody that lived through the
15:48
Speaker 2: gas lines and everything in the nineteen seventies can speak
15:51
Speaker 2: to that. So it's different from that perspective. But he
15:54
Speaker 2: makes the point that perhaps the economy and consumers are
15:57
Speaker 2: a bit more fragile in twenty twenty six and other times.
16:01
Speaker 2: Do you buy it?
16:01
Speaker 3: I guess I thought it was a compelling case that
16:04
Speaker 3: he made. Back in twenty twenty two, this is the
16:06
Speaker 3: last time we had oil over one hundred dollars a barrel.
16:08
Speaker 3: It was a much different backdrop where inflation had been
16:12
Speaker 3: running at nine percent, and a huge part of that
16:14
Speaker 3: was that we were coming out of the post pandemic
16:17
Speaker 3: period where there was a tremendous amount of appetite and
16:19
Speaker 3: consumer demand for supply of products, and that led to
16:25
Speaker 3: the oil impact being more negative on the inflationary front,
16:29
Speaker 3: where he makes the argument this time we head into
16:31
Speaker 3: a period where job growth has relatively flatlined, You've got
16:35
Speaker 3: jobs openings that have plummeted. You have all of these
16:40
Speaker 3: other disinflationary forces in place where the consumer is in
16:45
Speaker 3: I wouldn't say a bad place, but in perhaps a
16:49
Speaker 3: more fragile one, particularly lower income consumers. If you have
16:52
Speaker 3: higher energy prices, this is going to have a significantly
16:56
Speaker 3: greater impact on their wallet share. The piece or the
17:01
Speaker 3: argument that Jonathan Levine makes is that everyone is assuming
17:04
Speaker 3: that because we'll see inflation and perhaps pick up if
17:08
Speaker 3: this energy price shock sustains for longer, that that would
17:11
Speaker 3: justify for increasing rates or holding rates to staining. He
17:13
Speaker 3: makes the counter argument that that would lead to if
17:16
Speaker 3: this was prolonged again a long period of time six
17:18
Speaker 3: months plus, this would lead to slowing economic growth and
17:21
Speaker 3: actually could have the Federal Reserve looking at it from
17:24
Speaker 3: the other direction of cutting rates. I'm not saying that
17:27
Speaker 3: I wholeheardly believe or in full agreement, but I think
17:30
Speaker 3: it's a compelling counter argument that he makes.
17:33
Speaker 2: Yeah, Mark and I talked about this earlier this week,
17:36
Speaker 2: which is, while energy prices shooting up can seep into
17:42
Speaker 2: other prices and see further inflation, it is a compelling
17:47
Speaker 2: point that, look, you have to be able to afford
17:50
Speaker 2: those prices, like we could back in twenty twenty two
17:53
Speaker 2: with all the stimulus money to be able to do so,
17:55
Speaker 2: because gasoline as a good is what we call it,
18:01
Speaker 2: sees inelastic demand. Just what that means is you're going
18:04
Speaker 2: to continue to buy gas regardless of the price, and
18:07
Speaker 2: you're going to buy about the same amount if gas
18:09
Speaker 2: prices go down. You know, unless you're the guys from
18:11
Speaker 2: Always Sunny in Philadelphia, you're not going to load up
18:14
Speaker 2: on it and put it in the back of your
18:15
Speaker 2: truck and just wait for gas prices to go back up.
18:18
Speaker 2: If gas prices go higher, you're generally speaking not going
18:22
Speaker 2: to you know, most people at least are not going
18:25
Speaker 2: to start carpooling to work and avoiding trips. And because
18:28
Speaker 2: of higher gas prices, you're just going to put more
18:30
Speaker 2: of your budget towards gasoline and less of it if
18:33
Speaker 2: it's if gas prices are lower, and so from that perspective,
18:38
Speaker 2: in some ways, it almost serves as a tax change, right, Like,
18:41
Speaker 2: you more or less of your income is going to
18:43
Speaker 2: this good that you really have no choice about. And
18:46
Speaker 2: if consumers are already cash strapped as there's some evidence
18:50
Speaker 2: to support, right, I mean, defaults on all sorts of
18:54
Speaker 2: different debt. So yeah, a number of these factors that hey,
18:58
Speaker 2: consumers already cash strapped, and so if gas prices eat
19:02
Speaker 2: up more of their budget, then they're gonna have to
19:04
Speaker 2: cut back elsewhere. We'll see. Those are the pieces that
19:08
Speaker 2: I kind of doubt a little bit, Like I agree
19:10
Speaker 2: that we are more cash strapped than we were in
19:13
Speaker 2: twenty twenty two, but would that actually lead to people
19:16
Speaker 2: pulling back? I think is a bit of an open
19:18
Speaker 2: question in my mind. At least, we've got to take
19:21
Speaker 2: a quick break, but we're going to have a full
19:22
Speaker 2: market recap when we return with Wall Street Watch.
19:25
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19:48
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20:00
Speaker 4: While silting in Wall streethere with markets selling off as
20:02
Speaker 4: the US and Iran conflicts extends another day, sending oil
20:06
Speaker 4: prices higher over fears of disruption. Wall Street's also rating
20:09
Speaker 4: for the February jobs report tomorrow morning. Right now, the
20:12
Speaker 4: Dow is down one point three percent or six hundred
20:15
Speaker 4: and forty three points. S and P five hundred down
20:17
Speaker 4: about three quarters of a percent. Nasdack down two thirds
20:20
Speaker 4: of a percent or one hundred and forty eight points lower.
20:23
Speaker 4: Rusted two thousand selling off about one percent. Ten You're
20:27
Speaker 4: Treasure Reel jumping five basis points at four point one
20:30
Speaker 4: three four percent. In Oil up five percent today, trading
20:34
Speaker 4: at seventy eight dollars and fifty one cents a barrel.
20:37
Speaker 4: Broadcom stock climbing three percent after the chip and software
20:40
Speaker 4: makeup report it solid quarterly results where it's AI revenue
20:43
Speaker 4: more than doubled. Broadcom also authorized a ten billion dollar
20:47
Speaker 4: share buyback. Meanwhile, shares in digital marketing platform Trade Desk
20:51
Speaker 4: rallying eighteen percent after the information report of that Open
20:55
Speaker 4: AI had early discussions with the company to sell adshere.
21:00
Speaker 4: The Wall Street Journal reported that Morgan Stanley will lay
21:02
Speaker 4: off about three percent of its staff, for about twenty
21:05
Speaker 4: five hundred employees. Morgan Stanley shares are down about one percent.
21:09
Speaker 4: OCTA shares jumping nearly nine percent after the identity management
21:13
Speaker 4: and security company beat earnings expectations, but its outlook for
21:17
Speaker 4: the current quarter disappointed, and BJ's wholesale club is dropping
21:21
Speaker 4: about three percent after its full year guidance fell short
21:25
Speaker 4: of street forecasts. Wherever it's fourth quarter earnings and revenue
21:29
Speaker 4: beat expectations. I'm Tucker Silvan, that is Wall Street Watch.
21:34
Speaker 2: Well, if anybody out there somehow had avoided having their
21:39
Speaker 2: data breached over the course of the last decade, I
21:41
Speaker 2: think that chance is now up. As of yesterday, Lexis
21:45
Speaker 2: Nexus to disclose that they had experienced a hack and
21:49
Speaker 2: data breach. Granted it was data that they said the
21:55
Speaker 2: compromise systems mostly stored legacy and deprecated data from prior
21:59
Speaker 2: to twenty twenty, but they confirmed that customer names, user ietes,
22:04
Speaker 2: business contacted details and IPS of customer survey respondents, and
22:08
Speaker 2: supported tickets was compromised. If you're unfamiliar with lexus Nexus,
22:14
Speaker 2: they provide this giant database that is utilized frequently by hackers.
22:19
Speaker 2: No well stolen by hackers, but utilized by DocuSign for example,
22:26
Speaker 2: and even I believe government data systems will use this.
22:30
Speaker 2: So if you've ever logged into Social Security Administration, they've
22:34
Speaker 2: probably asked you some creepy questions. I constantly get asked
22:38
Speaker 2: the color of my car from twenty ten. They'll ask you,
22:42
Speaker 2: you know how tall you are according to your driver's
22:45
Speaker 2: license and.
22:45
Speaker 3: There's four eleven.
22:47
Speaker 2: Yeah, ohay, how'd you know I was wearing heels that?
22:54
Speaker 2: So they pull all that data and then allow these
22:57
Speaker 2: systems to basically use it for knowledge based authentication. So
23:00
Speaker 2: if you've ever used DocuSign or one of these services,
23:03
Speaker 2: then they oftentimes pull from a Lexus Nexus database and
23:06
Speaker 2: that data was just hacked, although you know, according to them,
23:09
Speaker 2: on a pretty limited basis. So I almost feel like
23:13
Speaker 2: this is not news anymore because we are so growing
23:16
Speaker 2: used to all of this information just being out there
23:19
Speaker 2: and available for any hacker to use whenever they want.
23:22
Speaker 3: But no, it's interesting. I was having a conversation with
23:25
Speaker 3: a client the other day just about cybersecurity in general,
23:28
Speaker 3: and he had mentioned that he had subscribed to LifeLock,
23:32
Speaker 3: which is a service that can be useful. But he
23:35
Speaker 3: posed the question to well, what happens if LifeLock gets hacked? Yeah,
23:38
Speaker 3: I have informiating there, And I said to him, it's like,
23:41
Speaker 3: quite honestly, you're entrusting them with you know, your information
23:45
Speaker 3: to try and protect you from any cybersecurity issues and
23:48
Speaker 3: to monitor your credit and things like that. But nobody
23:52
Speaker 3: is safe. I was like, you know, their whole business
23:53
Speaker 3: should be built around not getting hacked, and Lexus Nexus
23:56
Speaker 3: is another business that should spend all their time and
23:58
Speaker 3: energy trying not to be hacked. But I couldn't just
24:02
Speaker 3: complily it that it that isn't risk, you know, of
24:05
Speaker 3: course it Yeah.
24:06
Speaker 2: Of course it's risk. But I think the point that
24:08
Speaker 2: I would make is any data that you're storing there
24:10
Speaker 2: at you know, any of those monitoring agencies, it's probably
24:14
Speaker 2: out there, right, It's already there. But yeah, it's it's
24:19
Speaker 2: a fair point. Peace from CNBC Why around war oil
24:25
Speaker 2: price shock won't stop Worsh from cutting interest rates? Now, One,
24:31
Speaker 2: I'm not sure this is a relevant question. Worsh won't
24:33
Speaker 2: be taking office until May or June, and nobody has
24:37
Speaker 2: any idea what this crisis is going to look like
24:39
Speaker 2: by may or June, so let's start there. That this
24:43
Speaker 2: is probably preemptive at this stage. They do point out that,
24:47
Speaker 2: you know, Worsh's view on inflation does not model in
24:52
Speaker 2: a whole lot when it comes to oil price shocks,
24:54
Speaker 2: and so it might not be relevant. But to me,
25:00
Speaker 2: just ignoring a price shock like oil would be doing
25:04
Speaker 2: the exact same thing that Jay Powells feder Reserve did
25:06
Speaker 2: in February of twenty twenty two when Russia invaded Ukraine
25:11
Speaker 2: and we all saw how that turned out. So I
25:16
Speaker 2: there's one you know, there's one thing to be said when, hey,
25:18
Speaker 2: this nominee might not really care about it. When you're
25:22
Speaker 2: actually in the role and you are deciding what to
25:25
Speaker 2: do for the US economy and there is a you know,
25:29
Speaker 2: big geopolitical event, a war going on in the Middle
25:32
Speaker 2: East that has driven oil prices up, you might say
25:35
Speaker 2: that it doesn't you know, inject thoughts onto your model,
25:39
Speaker 2: but I'm not sure I would actually agree.
25:42
Speaker 3: I'm with you the argument that's made in this piece
25:44
Speaker 3: by CNBC. I don't want to make it seem as
25:47
Speaker 3: this is Kevin Worse coming directly from his mouth. They
25:50
Speaker 3: use some quotes from Kevin Worse that were made back
25:53
Speaker 3: in the fall, where basically he disputed the fed's core
25:57
Speaker 3: in theory of inflation, stating that he was less concerned
26:01
Speaker 3: about the supply and demand imbalances as being the critical
26:06
Speaker 3: catalyst for inflation, but more focused on the government, and
26:10
Speaker 3: it's spending too much money and printing too much money, being.
26:13
Speaker 2: Which a war in the Middle East shouldn't impact that
26:15
Speaker 2: at all.
26:15
Speaker 3: Good point there, and I was going to definitely go
26:17
Speaker 3: that direction is I don't know how he's going to
26:19
Speaker 3: resolve that war. Aside, we're still spending more, We're still
26:23
Speaker 3: doing all those things, so it's not as if they're
26:25
Speaker 3: not an issue. And then secondly, I'm not saying that
26:29
Speaker 3: he was ignoring this fact, but ultimately, if you look
26:31
Speaker 3: back at inflationary spites over history, it's always a mix
26:34
Speaker 3: of all these different elements. It is supply and demand
26:36
Speaker 3: in balance. It's also can be situations where the government
26:39
Speaker 3: was printing too much money. So the problem that I
26:42
Speaker 3: have specific to this piece is making it seem that
26:44
Speaker 3: it is just all that comes down to government spending.
26:47
Speaker 3: First of all, that would be problematic from an inflatiarty perspective,
26:50
Speaker 3: as Mike and I just said. Secondly, it's not always
26:52
Speaker 3: just that. It's multiple factors, including the supply and demands.
26:56
Speaker 2: As we talked about, the inflation that we saw in
26:57
Speaker 2: twenty twenty two, was not just a factor of Sushia
27:00
Speaker 2: invading Ukraine. It was not purely a factor of the
27:02
Speaker 2: government spending too much. It was a combination of massive
27:06
Speaker 2: government spending, supply chain shutdowns, war in Ukraine, and all
27:11
Speaker 2: of those led to a number of different price hikes
27:14
Speaker 2: across the board. And I don't think you can easily
27:17
Speaker 2: just look at any one of them and say this
27:19
Speaker 2: is the issue to blame. No, it's because all three
27:21
Speaker 2: of them happened at the same time that we led
27:23
Speaker 2: to a whole bunch of inflation exactly.
27:24
Speaker 3: And the counter example to the government spending a lot
27:26
Speaker 3: of money but not causing inflation will be coming out
27:29
Speaker 3: of two thousand and eight. The Fed's balance sheet exploded
27:31
Speaker 3: in terms of the assets that they added to it.
27:33
Speaker 3: Interest rates were kept low, and the government spent a
27:35
Speaker 3: lot of money to try and get us out of
27:38
Speaker 3: the Great Financial Crisis. But we didn't talk about inflation
27:41
Speaker 3: for a decade because of some of the dynamics in
27:43
Speaker 3: place that kept costs more suppressed. So it's always a
27:47
Speaker 3: mixture of factors that goes into this stuff.
27:49
Speaker 2: Broadcom reported earning stock is up about four and a
27:53
Speaker 2: half percent. If you're unfamiliar with Broadcom, they are again
27:56
Speaker 2: another player in the chip space. They have expanded dramatically
27:59
Speaker 2: in to AI chips after spending a lot of time
28:03
Speaker 2: really building you know, basic radio frequency chips for Apple
28:07
Speaker 2: and and other businesses. They also acquired a number of
28:10
Speaker 2: years VMware, a big player in the software space, but
28:13
Speaker 2: their big expansion and all of their focus for the
28:16
Speaker 2: last couple of years has been all about AI and
28:18
Speaker 2: whether or not they can get a piece of that business.
28:21
Speaker 2: Their entire annual revenue right now sits at just under
28:24
Speaker 2: seventy billion dollars. Their CEO pointed out that, uh, they
28:28
Speaker 2: see a line of sight to sales from just their
28:31
Speaker 2: AI chip business topping one hundred billion dollars in twenty
28:35
Speaker 2: twenty seven, so that would be a pretty massive expansion. Nonetheless,
28:39
Speaker 2: this stock, it's you know, over the intermediate term, is
28:42
Speaker 2: falling into the same position that Nvidia has, where yes,
28:45
Speaker 2: it's up four and a half percent or four percent
28:47
Speaker 2: now for the day, but last six months, you know,
28:50
Speaker 2: going all the way back to September, it's lost one percent. Yeah.
28:54
Speaker 3: The concern with Broadcon that loomed out there is they
28:58
Speaker 3: are the significant partner behind the design and build out
29:01
Speaker 3: of TPUs for Google. That is the alternative that Google
29:06
Speaker 3: has developed in house to in videos chips. That has
29:08
Speaker 3: led to the tremendous growth on the GPU side for
29:12
Speaker 3: in video specifically. There has been this concern out there
29:15
Speaker 3: that Google would potentially just shift some of this in
29:18
Speaker 3: house because they command Broadcom that is pretty high margins
29:22
Speaker 3: on the Google business that they do. They have customer
29:24
Speaker 3: concentration like everybody does in this AI game where a
29:27
Speaker 3: lot of the revenue is tied up in these big hyperscalers.
29:30
Speaker 3: But the chips that Broadcom have have seen continued demand.
29:34
Speaker 3: The AI specific revenue was eight and a half billion
29:38
Speaker 3: in this quarter. So to get to that one hundred
29:40
Speaker 3: billion MIC that you're talking about before, you're talking about
29:42
Speaker 3: more than a doubling on a quarterly basis of revenue
29:46
Speaker 3: that they would generate to get to that almost a tripling,
29:51
Speaker 3: to get to that level that they're talking about in
29:53
Speaker 3: twenty twenty seven ambitious goals set out here by the CEO.
29:57
Speaker 2: Let's take a quick break here on the Financial Exchange.
30:00
Speaker 2: When we come back at layoffs in the financial services area,
30:03
Speaker 2: we'll be covering that on the Financial Exchange.
30:05
Speaker 1: Text us at six one seven three six two one
30:08
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30:10
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30:12
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30:17
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30:21
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30:23
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30:39
Speaker 2: Layoffs are coming for Morgan Stanley. They've laid off twenty
30:42
Speaker 2: five and twenty five hundred employees across all of their divisions.
30:45
Speaker 2: It represents about three percent of their workforce. They're saying
30:49
Speaker 2: it's time to business priorities individual job performance. The question
30:53
Speaker 2: is can they pivot it as a success story for
30:58
Speaker 2: artificial intelligence, because that's what every employer wants to do
31:01
Speaker 2: right now. Now, we only got rid of those people
31:03
Speaker 2: because AI can do their jobs anyway. That does not
31:06
Speaker 2: seem to be the focus of Morgan Stanley's layoffs here,
31:08
Speaker 2: but I'm sure someone somewhere is going to write about
31:11
Speaker 2: how it is.
31:12
Speaker 3: There are a lot of times on the show where
31:13
Speaker 3: we have to cover areas that we're not that sophisticated
31:16
Speaker 3: in and we don't understand their business. This is one
31:18
Speaker 3: company that I absolutely know their business because I used
31:21
Speaker 3: to work for them and I have a good understanding
31:23
Speaker 3: of what goes On, unlike some of the other ones
31:25
Speaker 3: that we talk about, like Exon or Chevron. I don't
31:29
Speaker 3: know my oil rigging that well, but certainly no Morgan Stanley,
31:33
Speaker 3: and I can confidently say to you, Mike that this
31:36
Speaker 3: is not a reflection of AI improvements to eliminate some
31:41
Speaker 3: of the roles that are discussed here. Specifically, I can
31:43
Speaker 3: speak to the wealth management division where they mentioned that
31:45
Speaker 3: they laid off some private bankers. The private bankers typically
31:48
Speaker 3: would work within a branch office to assist for your
31:52
Speaker 3: wealth management client, mortgages and other offerings. I can imagine
31:56
Speaker 3: as the housing market has been pretty frozen over the
31:59
Speaker 3: course few years, that the demand for refinancing or MORGASA
32:03
Speaker 3: applications specific to these these wealth management bakers, they saw
32:07
Speaker 3: a decline there, so lesser need for that type of
32:11
Speaker 3: employee and the back office stuff. Maybe they can make
32:13
Speaker 3: the argument on the back office side that there's some improvements,
32:16
Speaker 3: but knowing the way that technology was typically adopted there
32:20
Speaker 3: a little bit slower than Silicon Valley, I would hope.
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33:34
Speaker 2: I feel like we might finally be getting the point
33:37
Speaker 2: on housing here, because NPR has a piece about how
33:41
Speaker 2: building houses for rent can help the American affordability crisis.
33:46
Speaker 2: And if NPR is acknowledging that, you know, even giant
33:50
Speaker 2: companies building homes for the express purpose of renting them
33:53
Speaker 2: out rather than selling them can benefit I think we
33:56
Speaker 2: can all kind of get on the page of how
33:59
Speaker 2: free markets work. But here is the critical piece that
34:02
Speaker 2: I keep trying to make to people. Building houses is
34:07
Speaker 2: how you bring down house prices. I don't care if
34:11
Speaker 2: they're big houses, luxury houses, small houses, houses from the
34:16
Speaker 2: Adams family. It does not unless you're building houses for
34:20
Speaker 2: the express purpose of the next day burning those houses down.
34:24
Speaker 2: Then building houses of any sort will help with the
34:27
Speaker 2: American affordability crisis. So let's play this out. You're a giant,
34:31
Speaker 2: evil corporation that is building houses for the express purpose
34:34
Speaker 2: of renting them. You're going to build a thousand homes
34:37
Speaker 2: in Mesa, Arizona, and you are going to only rent
34:40
Speaker 2: them out. And then what happens is you rent them
34:44
Speaker 2: out and you realize that, oh, I've oversupplied Mesa, Arizona
34:48
Speaker 2: with rental homes, and I cannot get the thirty six
34:53
Speaker 2: hundred dollars a month that I was expecting to be
34:56
Speaker 2: able to rent these homes for. But looking at this
35:00
Speaker 2: seller's market, I can actually sell this thing for a
35:03
Speaker 2: pretty decent clip at seven hundred thousand dollars. Where would
35:08
Speaker 2: my rent need to fall for me as a corporation
35:11
Speaker 2: whose only care is profits, get to to say I'm
35:15
Speaker 2: going to sell this home and so again. If you
35:18
Speaker 2: want to make housing more affordable, then set up the
35:22
Speaker 2: conditions under which anyone, big company, small company Johnny next
35:27
Speaker 2: door will build more homes. That that that is the
35:30
Speaker 2: only thing that matters if you are trying to bring
35:32
Speaker 2: down home affordability. It's not about building specific types of homes,
35:38
Speaker 2: building homes for only this person or that person. It's
35:41
Speaker 2: about just building more homes.
35:44
Speaker 3: Except the only thing right with you? No disagreements here,
35:48
Speaker 3: because you're ready to shot my head. I don't feeling
35:51
Speaker 3: I just popped out of my head. But how to
35:55
Speaker 3: incentivize people to build more homes? Sure is the biggest
35:59
Speaker 3: question looms out there. I don't have a great answer
36:01
Speaker 3: for it. I don't think that there's one sweeping measure. Unfortunately,
36:05
Speaker 3: that the administration can just come up with that is
36:08
Speaker 3: going to incentivize builders, because ultimately builders look at their
36:12
Speaker 3: business the same way a corporation owning a home would
36:15
Speaker 3: be what are going to be my margins? What are
36:17
Speaker 3: my material costs? Where are my labor costs? What justifies
36:21
Speaker 3: me wanting to build more homes so that I can
36:24
Speaker 3: make money for it?
36:26
Speaker 2: Yeah?
36:26
Speaker 3: Money?
36:26
Speaker 2: I mean. Congress has talked about wiping away some of
36:29
Speaker 2: the environmental reviews that are required at the federal level. Again,
36:34
Speaker 2: I'm not really I say, create the environment to build
36:39
Speaker 2: more homes. Could you build a giant tax credit for
36:42
Speaker 2: home builders? Yes? Am I thinking that's a good idea. No,
36:45
Speaker 2: I think that's a bad idea. I don't want more.
36:48
Speaker 2: I don't want a whole bunch more government intervention into
36:51
Speaker 2: the housing market. That's not what I'm proposing. But if
36:54
Speaker 2: local municipalities and cities, states, towns, and the federal government
36:59
Speaker 2: can set of conditions where there are fewer roadblocks to building,
37:03
Speaker 2: then that is what's going to bring down housing prices.
37:06
Speaker 2: Like everything else that we're talking about, I'm annoyed about
37:09
Speaker 2: this issue because now we're talking about rent control in
37:12
Speaker 2: the state of Massachusetts. It's probably going to be on
37:14
Speaker 2: the ballot this fall would be my guess.
37:18
Speaker 3: And.
37:20
Speaker 2: In my mind, at least in my personal opinion, there
37:23
Speaker 2: cannot be a worse policy for housing affordability than rent control.
37:28
Speaker 2: It's just going to do the exact opposite thing that
37:31
Speaker 2: you want it to. And at the same time that
37:33
Speaker 2: we're talking about rent control, there's something like twelve towns
37:36
Speaker 2: that are still not complying with the rules that were
37:40
Speaker 2: put into place about zoning requirements for Massachusetts towns serviced
37:43
Speaker 2: by the MBTA because they don't want more dense house
37:46
Speaker 2: like we are talking about the exact wrong solutions to
37:50
Speaker 2: the problems. If you want cheaper housing, create rules that
37:54
Speaker 2: force towns or incentivized towns to allow more house building.
37:57
Speaker 2: Don't put in rules around what land lords can charge,
38:00
Speaker 2: because all it's going to do is lead to less construction.
38:04
Speaker 2: Quick break a lot more to cover in the second
38:05
Speaker 2: hour the financial exchange. We'll be right right back, folks,