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Inflation Cools as Oil Prices Surge Again · The Financial Exchange Show

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Speaker 1: donation today. Base is the Financial Exchange with Mike Armstrong
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Speaker 1: and Mark Vandetti.
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Speaker 2: Good morning, Welcome back to the Financial Exchange. It's Mike,
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Speaker 2: Mark and Tucker with you on a busy Tuesday, which
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Speaker 2: is why I'm driven, why I'm talking so fast. It's
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Speaker 2: also probably because I had a big old cup of
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Speaker 2: espresso before the show started, So it's both of those factors.
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Speaker 2: But we do have a busy program today. We've got
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Speaker 2: earnings from five of the largest banks in the world.
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Speaker 2: We've got oil prices moving up for a second day
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Speaker 2: in a row after escalations in Iran. We've got mister
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Speaker 2: Warsh taking to Congress, testifying in front of the House Panel.
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Speaker 2: Inflation out this morning, IBM warning of bad earnings.
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Speaker 3: Lots of news all over.
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Speaker 2: The place, and in the latter half of this hour
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Speaker 2: we'll be joined by Riley Sullivan from the New England
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Speaker 2: Policy Center at the Federal Reserve Bank of Boston. So
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Speaker 2: a lot to cover today, but probably the first thing
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Speaker 2: to get into, especially given that Kevin worsh just started
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Speaker 2: his testimony just seven minutes ago in front of the
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Speaker 2: House Panel, would be inflation, by the way I'm looking
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Speaker 2: at the camera him, and not that I would want
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Speaker 2: to be testifying in front of a House panel either,
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Speaker 2: but he just gave like the fakest smile laugh. He
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Speaker 2: could see it in his eyes, like really don't want
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Speaker 2: to be here, but I feel like I have to
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Speaker 2: smile and laugh, and then it just immediately went away
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Speaker 2: back to a frown. So you know, as anyone would
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Speaker 2: be testifying in front of a house panel, he's taking
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Speaker 2: it seriously, but probably doesn't want to be there, like
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Speaker 2: nobody else would want to either. Part of the job
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Speaker 2: CPI released at eight thirty this morning, Mark we saw
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Speaker 2: an overall price decline. Prices became cheaper according to the
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Speaker 2: BLS in June compared to May. No big surprise here
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Speaker 2: with gas prices cratering after the what are we calling it,
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Speaker 2: the Memorandum of UNDERSTANDINGU between US and Iran that is
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Speaker 2: now being pretty much canceled this morning. But let's talk
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Speaker 2: about prices in the month of June, because that's what
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Speaker 2: we got at eight thirty. Prices declined by four tenths
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Speaker 2: of a percent in the month of June. That was
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Speaker 2: more than anticipated by the average economist. That means that
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Speaker 2: they're still up a good three and a half percent
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Speaker 2: year over year, mainly because energy prices are still up
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Speaker 2: by sixteen percent compared to June of twenty twenty five.
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Speaker 3: What I found most.
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Speaker 2: Interesting though, market and you know this is where I
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Speaker 2: want your input. Like we knew energy prices were going
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Speaker 2: to decline, What I don't think we had a firm
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Speaker 2: sense on is what you know prices outside of that
3:40
Speaker 2: area would do. And they flatlined for the month of
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Speaker 2: June compared to May, which I think I can only
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Speaker 2: take as good news unless we're heading into a recession.
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Speaker 2: But talk to me about how rare price declines actually
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Speaker 2: are because we don't see them very often.
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Speaker 4: They're rare.
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Speaker 2: Oh thanks, okay, but I can move on only twelve
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Speaker 2: You see them in recessions for obvious reasons.
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Speaker 4: Demand collapses and prices come down.
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Speaker 3: Houses get cheaper, cars get cheaper people.
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Speaker 4: Let me let me qualify that you see them in
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Speaker 4: some recessions. They were very common in the pre World
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Speaker 4: War two era, But that's not really a good comp
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Speaker 4: right since the since the FED became activist really trying
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Speaker 4: to manage business cycles, trying to smooth them, stimulate demand
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Speaker 4: when it SAgs, and vice versa. Disinflation, Falling prices aka
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Speaker 4: disinflation has become far less common, even in recessions, but
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Speaker 4: it does happen, and when it happens, like in mid
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Speaker 4: twenty twenty two June or July, energy prices fell after
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Speaker 4: the initial Russian surge in Ukraine, and then CPI came
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Speaker 4: down and it happened again a couple of years later.
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Speaker 4: When energy prices fell, it tends to be very fleeting.
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Speaker 4: And this is the well got before I.
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Speaker 2: Was gonna say, this seems like the definition of fleeting.
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Speaker 2: Given them, we're seeing oil prices spike again this week.
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Speaker 4: This is why the FED can take some heart, but
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Speaker 4: not much from this. The Fed is it's concerned about
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Speaker 4: not what inflation does month over month. It's concerned in
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Speaker 4: with what inflation is doing over longer periods. It's concerned
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Speaker 4: with the trend in inflation. And that's why headline CPI
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Speaker 4: typically takes a back seat in policy discussions to not
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Speaker 4: just core, which strips out food and energy, which we
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Speaker 4: all know can be jumpy, but other measures that trim
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Speaker 4: extreme price movements. Sometimes we talk about the median, which
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Speaker 4: is an extreme version of trimming at trims everything but
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Speaker 4: the very middle observation. There are other ways of getting
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Speaker 4: at the trend in inflation to unfortunately, none tells you
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Speaker 4: in real time what the true picture of inflation is.
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Speaker 4: And this is this is the challenge for the Fed.
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Speaker 2: So again, headline numbers here month over month price decline
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Speaker 2: of four tenths percent, most of that coming from energy
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Speaker 2: prices which declined nearly six percent on the month. Gasoline stations,
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Speaker 2: for example, you saw gasoline prices down nine point seven
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Speaker 2: percent in June compared to May. They're still up, like
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Speaker 2: I mentioned, compared to last year, to the tune of
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Speaker 2: twenty six percent. So you know, we have a ways
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Speaker 2: to go on all of this. But I want to
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Speaker 2: for a moment strip this piece out because, like you mentioned,
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Speaker 2: while we while the FED cannot completely ignore energy prices
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Speaker 2: because energy price shocks can lead to prolonged inflation like
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Speaker 2: we saw in the nineteen seventies, they do tend to
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Speaker 2: look through it and are more willing to, I guess,
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Speaker 2: look past an energy shock than you know than prices
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Speaker 2: overall moving up in one direction. When we do just
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Speaker 2: ignore for a moment the food and energy picture. Prices
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Speaker 2: excluding food and energy were flat month of a month
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Speaker 2: according to this survey June to May, zero points zero
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Speaker 2: percent inflation and some of the big heavy hitters. There
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Speaker 2: saw very little in the way of price increases, so
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Speaker 2: shelter a huge component of the of the core prices
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Speaker 2: up zero point one percent month over month, New and
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Speaker 2: used vehicles both flat to down month over month, apparel
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Speaker 2: down month over month, and so overall. Like across the board,
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Speaker 2: we saw a period here of again one single month,
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Speaker 2: but it appears to me moderation really across the board.
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Speaker 2: I'll be interested to see what that media number looks
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Speaker 2: like when it comes out. I don't know if we
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Speaker 2: have it quite yet. I don't think we should count
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Speaker 2: a single month. And you never hang the banner of
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Speaker 2: never you accomplish.
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Speaker 4: If you're trying to lose weight, you wouldn't declare mission
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Speaker 4: accomplished after a good day. We all know that you
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Speaker 4: need to take an average. The same is true of
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Speaker 4: any estimate. We don't know what's really going on with inflation,
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Speaker 4: we never do, or with employment. These are all estimates.
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Speaker 5: Yep.
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Speaker 4: Therefore, you need to take, as you often do, several
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Speaker 4: months and then annualize it. You need to somehow turn
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Speaker 4: several observations into a trend. There are lots of different
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Speaker 4: ways to do that.
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Speaker 2: Nonetheless, I think when you look at this report, while
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Speaker 2: not immensely surprising, right, we knew that energy prices were
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Speaker 2: going to decline in June given what we were seeing
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Speaker 2: at the gas pump. We knew that food prices were
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Speaker 2: continuing to increase, but no new signs of spiking, So
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Speaker 2: not surprising on those items. But I think, well, to
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Speaker 2: put it plainly, were the core prices when you strip
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Speaker 2: out the food and energy stuff. If you see core
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Speaker 2: prices to consumers follow the trend that they did in
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Speaker 2: June for a few more months, this would have to
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Speaker 2: be a great.
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Speaker 4: We'd be worried if they did, because that would indicate
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Speaker 4: demand is contracting. Probably, think about core inflation is a
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Speaker 4: measure of the degree to which overall demand is growing
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Speaker 4: faster or not than overall supply. Disinflation in a modern
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Speaker 4: economy is not a healthy sign you don't want prolonged.
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Speaker 4: The Fed spent years hand ringing about low inflation in
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Speaker 4: the early twenty tens. You'll recall it was a real
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Speaker 4: concern because of the Japanese experience. Greenspan worried about it
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Speaker 4: too the decade before that. So the Fed wants neither
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Speaker 4: disinflation nor uncomfortable inflation. It wants stable prices, by which
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Speaker 4: they mean a slow rate of increase, so slow that
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Speaker 4: nobody's even thinking about it that it doesn't affect decision making.
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Speaker 2: Again, the reason you don't want disinflation or frankly deflation,
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Speaker 2: you don't.
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Speaker 4: Want disinflation is okay, I'm sorry, I should have got.
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Speaker 2: The reason you don't want really high inflation. Just you know,
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Speaker 2: from a pure consumer behavior standpoint, if you think prices
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Speaker 2: are going to skyrocket in the future, then you bring
9:54
Speaker 2: your prices forward.
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Speaker 3: You're bringing your purchases forward, and it can cause more inflation.
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Speaker 2: Defly, prices going down in the future has a different
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Speaker 2: economic effect.
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Speaker 3: Right.
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Speaker 2: If I think that my Volkswagon is going to be
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Speaker 2: cheaper six months from now than it is today, then
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Speaker 2: I'm going to delay my purchases, and I can sink
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Speaker 2: the economy into a further recession by delaying purchase.
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Speaker 4: I mean, this was the problem in the early stages
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Speaker 4: of the Great Depression. We were on a gold exchange standard,
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Speaker 4: which meant you could only do so much monetary policy effectively,
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Speaker 4: couldn't stimulate the economy without jeopardizing the ratio of dollars
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Speaker 4: to gold. So we had serious and all the developed
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Speaker 4: economies did. It's the last big case study, which is
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Speaker 4: why I'm going back one hundred years. Sorry. We had
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Speaker 4: serious deflation, actual falling prices. What happens to the value
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Speaker 4: of what you owe your mortgage, car loan, stuff like that.
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Speaker 4: During periods of deflation, it goes up. You're going to default,
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Speaker 4: banks are going to fail. It's very bad. So the
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Speaker 4: FED once again.
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Speaker 2: Why moderate, moderate pricing creas two percent would be great.
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Speaker 4: Two to four percent most researchers think is reasonable. Some
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Speaker 4: are on the site, and there's an argument for higher
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Speaker 4: inflation because the FED can only cut rates by so
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Speaker 4: much in a recession, and you want real rates as
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Speaker 4: low as possible under some circumstances. That's a little bit technical,
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Speaker 4: but I guess the takeaway is honest. People can disagree
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Speaker 4: about the right rate of inflation. Very few think it's zero.
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Speaker 4: A good number think it's two, which is the Fed's goal.
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Speaker 4: A few could tolerate higher inflation, and theory the economy
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Speaker 4: should be able to adapt to any rate of inflation.
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Speaker 3: In any case.
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Speaker 2: Head of the Federal Reserve, Kevin Warsh, as we mentioned,
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Speaker 2: testifying before the House panel this morning.
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Speaker 3: Most certainly he will have.
11:31
Speaker 2: Commentary about this inflation report, even though it's not their
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Speaker 2: preferred measure of inflation. In any case, a surprisingly low
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Speaker 2: rate of inflation is surprisingly good inflation report out this
11:42
Speaker 2: morning not only because of.
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Speaker 3: Energy prices, but other areas as well.
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Speaker 2: And we'll be looking at the coming months reports to
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Speaker 2: see where we get confirmation or do we see oil
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Speaker 2: prices swing back in the other direction. As we'll be
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Speaker 2: talking about more on the program. Let's take a quick
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Speaker 2: break when we come back. Do you want to talk
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Speaker 2: about the oil price surge that we are seeing a big,
12:03
Speaker 2: big move, most in such a short period since twenty twenty,
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Speaker 2: So quick break. We'll be right back with oil prices next.
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12:54
Speaker 2: Well, the West Texas Crewed benchmark is up another two
12:57
Speaker 2: percent this morning. On July second, we were down at
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Speaker 2: sixty eight dollars fifty eight cents a barrel. Since then,
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Speaker 2: we've surged about eleven dollars to where we are now
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Speaker 2: just shy of eighty dollars per barrel on that West
13:11
Speaker 2: Texas benchmark. Taking a look at gasoline prices here, which
13:15
Speaker 2: are as we're all used to, probably swinging upward rather rapidly,
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Speaker 2: but faster than they came down. Most certainly, the national
13:23
Speaker 2: average for a gallon of gas, according to Triple A,
13:25
Speaker 2: is sitting at three dollars and eighty six cents per gallon.
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Speaker 3: A week ago.
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Speaker 2: Actually, no, not swinging up as rapidly as oil prices.
13:34
Speaker 2: A week ago that average was three dollars and seventy
13:37
Speaker 2: nine cents. So a month ago we were sitting over
13:40
Speaker 2: four bucks a gallon. I'll be surprised if we don't
13:42
Speaker 2: get there again, should oil prices.
13:45
Speaker 3: Remain this high.
13:46
Speaker 2: But all comes after yesterday's announcement from well, the weekend's
13:52
Speaker 2: increase in hostilities, and yesterday's announcement that President Trump wanted
13:58
Speaker 2: to impose a twenty percent.
14:03
Speaker 3: What are we even calling it? Told terror? I think
14:06
Speaker 3: he called it something like that or something.
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Speaker 2: Yeah, I do, honestly take this a lot like I
14:13
Speaker 2: would look at the initial announcement of tariffs back in
14:18
Speaker 2: April of twenty twenty five. I'm not certain how serious
14:21
Speaker 2: any of it is or how much thought has gone
14:24
Speaker 2: into it. I certainly don't think that there is much
14:27
Speaker 2: of a means of collecting this without a congressional approval or.
14:31
Speaker 3: Even negotiating with foreign countries. So I'll take it with
14:34
Speaker 3: a grain of salt.
14:35
Speaker 2: But I think the important thing to understand is that
14:37
Speaker 2: tensions have escalated again in the Middle East, as is
14:41
Speaker 2: not terribly surprising to anyone, and we aren't really.
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Speaker 3: Certain to what degree traffic will be able to flow thet.
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Speaker 4: Yeah, as you and Chuck have talked about a lot,
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Speaker 4: we're not going back to the pre war status quo.
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Speaker 2: Right to that end, I think countries surrounding the Middle
14:56
Speaker 2: East are going to continue to pile money into infrastructure
14:59
Speaker 2: to avoid the straight of Horror moves, or have at
15:01
Speaker 2: least a secondary option for moving their oil outside of
15:04
Speaker 2: the strait. But you know that's only so useful, right
15:07
Speaker 2: There isn't just oil prices. It's not just oil that
15:10
Speaker 2: moves through this strait, although that is one of the
15:13
Speaker 2: most important factors. Right, You can't exactly ship aluminum through
15:17
Speaker 2: a pipeline. You can't easily ship fertilizer so far as
15:20
Speaker 2: I know, through a pipeline. So that's, you know, not
15:22
Speaker 2: exactly a permanent solution. Not to mention, I would think
15:27
Speaker 2: if you are the Iranians and you see the Saudis
15:31
Speaker 2: and everybody else building infrastructure to avoid the Strait of
15:33
Speaker 2: horror Moves, you're likely going to consider that a legitimate
15:37
Speaker 2: target for you know, good point bombing it with a
15:41
Speaker 2: missile or a drone. So this is not a perfect solution.
15:46
Speaker 2: I do think generally ten years from now, the Strait
15:49
Speaker 2: of Hormoves is probably going to be less critical in
15:52
Speaker 2: terms of the percentage of stuff that goes through it
15:54
Speaker 2: than it was a year ago. But here we sit
15:59
Speaker 2: and yeah, to get oil prices moving up.
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Speaker 4: That's a good point. How do you secure all this
16:03
Speaker 4: new infrastructure? Look at what Ukraine is doing against Russian
16:06
Speaker 4: energy infrastructure right now in Crimea and deeper, way deeper,
16:10
Speaker 4: hundreds of miles into Russia. Why could a Ran now
16:14
Speaker 4: they're using similar technology it Ran. I assume you make
16:17
Speaker 4: a great point. I hadn't thought of it. I'm embarrassed
16:19
Speaker 4: to say they'll probably devise means of doing the same thing.
16:22
Speaker 4: Now that they've learned that they can put the put
16:26
Speaker 4: the world economy in a choke hold, they're not going
16:29
Speaker 4: to let go of that leverage lightly.
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Speaker 3: Yeah, I'll be interested to see look how all of
16:35
Speaker 3: this develops.
16:36
Speaker 5: Right.
16:36
Speaker 3: It's I still feel that oil prices.
16:39
Speaker 2: Even where they got to what one hundred and twelve
16:41
Speaker 2: dollars a barrel, I thin one hundred and twenty overnight
16:43
Speaker 2: one of those days when the things were really hot,
16:46
Speaker 2: I still don't feel that there was an immense amount
16:48
Speaker 2: of pressure on the Trump administration to make moves there.
16:51
Speaker 2: There's clearly they knew where the path was going if
16:54
Speaker 2: they didn't.
16:54
Speaker 3: Make some changes there.
16:56
Speaker 2: But I do wonder if we just settle into this
16:59
Speaker 2: status quo of Okay, we're heating up with Iran, and
17:03
Speaker 2: then we're cooling down enough for enough traffic to get
17:07
Speaker 2: through the Strait to avoid all out catastrophe when it
17:09
Speaker 2: comes to oil supplies, while not getting to a place
17:12
Speaker 2: where things are overly.
17:14
Speaker 4: Stain our presence there indefinitely. The veil is already into
17:18
Speaker 4: the hundreds of billions properly accounted for sure, even at
17:20
Speaker 4: some lower level of conflict, it's still it still adds
17:24
Speaker 4: a like a non like, a not insignificant percentage to
17:28
Speaker 4: annual defense budget. So either way there's going to be
17:30
Speaker 4: an interest rate cost is my point. We have to
17:32
Speaker 4: borrow more that p which is it breaks. There will
17:34
Speaker 4: be a premium on oil from now on because on
17:36
Speaker 4: any given day we may toll it, the Iranians may
17:39
Speaker 4: toll it, Oman may decide to toll it. Everybody's in
17:41
Speaker 4: on that game. It's just a different, riskier world.
17:45
Speaker 2: And then one other, you know, heavily overlooked factor that
17:50
Speaker 2: nobody has a perfect read on is China. Not that
17:53
Speaker 2: China is controlling anything through the strait of horror moves,
17:55
Speaker 2: but as we've talked about on this program, they have
17:58
Speaker 2: been the world's largest net buyer of oil. They have
18:04
Speaker 2: dramatically reduced how much they are importing. You can look
18:08
Speaker 2: at some of these charts from the IEA and others
18:12
Speaker 2: where they really show just how dramatically the oil imports
18:16
Speaker 2: from China have dropped off a cliff. And the question
18:21
Speaker 2: is how long do they a want to or be
18:24
Speaker 2: are capable of doing this. Most experts think quite a
18:28
Speaker 2: bit longer than they have. But China does not produce oil,
18:32
Speaker 2: at least not in significant enough quantities to be able
18:36
Speaker 2: to curtail their appetite for it. They have significant reserves
18:41
Speaker 2: of oil, but how long those might last is an
18:45
Speaker 2: open question. Most estimates that I've seen have been that
18:48
Speaker 2: China's demand drop has been to the tune of four
18:52
Speaker 2: to six million barrels per day, that they are not
18:54
Speaker 2: buying on the open market and therefore allowing other countries
18:58
Speaker 2: to purchase refine and do so at relatively lower prices.
19:03
Speaker 2: Should that need to change or should they choose to
19:07
Speaker 2: change that at any point in the future, you could
19:08
Speaker 2: see a pretty significant price surge in oil, and so
19:13
Speaker 2: big questions about this kind of silent player in all
19:16
Speaker 2: of this and how they develop their own policy when
19:19
Speaker 2: it comes to energy over the course of the next
19:20
Speaker 2: few months. We've got to take a quick break when
19:23
Speaker 2: we return a full market update with Wall Street Watch now.
19:28
Speaker 2: Was negative in pre market trading, but it's turned positive.
19:31
Speaker 3: We'll have a full recap next.
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20:00
Speaker 5: Very busy Dan Wall Street as traders digest second quarter
20:03
Speaker 5: bank earnings and inflation reading and ongoing testimony from FED
20:06
Speaker 5: Chairman Kevin worsh Right now, the Dow is up two
20:10
Speaker 5: tenths of one percent, SMP five hundred up about four
20:13
Speaker 5: tenths of a percent, NASDAC up seven tenths of one percent,
20:16
Speaker 5: RUSS two thousand is up two tenths of one percent,
20:20
Speaker 5: Tenure Treasure reeled down four basis points at four point
20:23
Speaker 5: five to six percent, and oil jumping over one and
20:26
Speaker 5: a half percent. Hired trading right around seventy nine dollars
20:29
Speaker 5: at Beryl investors saw software then expected inflation reading. The
20:33
Speaker 5: slowed to three point five percent in June, better than
20:36
Speaker 5: estimates of three point eight percent and down from the
20:39
Speaker 5: four point two percent reading in May. Kevin Walsh also
20:42
Speaker 5: began his testimony before the House Financial Services Committee, stating
20:47
Speaker 5: the FED has no tolerance for persistently elevated inflation. As
20:51
Speaker 5: for bank earnings, JP Morgan Chase, Bank of America, Goldman, Sachs,
20:54
Speaker 5: City Group, and Wells Fargo all reported better than expected
20:58
Speaker 5: results for the second quarter. All of those stocks are
21:02
Speaker 5: in positive territory on the day, and outside of bank earnings,
21:06
Speaker 5: IBM stock is plunging nearly twenty five percent after the
21:10
Speaker 5: tech giant posted weaker than expected preliminary second quarter earnings,
21:15
Speaker 5: attributing the miss two customers spending their money on chips
21:18
Speaker 5: and servers amid AI driven shortages. Sales from IBM's infrastructure
21:23
Speaker 5: division were especially hit hard, dropping seven percent. Once again,
21:29
Speaker 5: IBM stock down by about twenty five percent. I'm Tucker Silva,
21:34
Speaker 5: and that is Wall Street Watch.
21:35
Speaker 2: Tucker mentioned the big bank's reporting earnings Wells Fargo actually
21:39
Speaker 2: slightly negative now for the day, down about a third
21:42
Speaker 2: of a percent after being positive for the morning.
21:44
Speaker 3: I don't see any news.
21:45
Speaker 2: That's sent it this way, but their earnings beat wasn't
21:47
Speaker 2: all that impressive. First thing to say about these giant
21:50
Speaker 2: banks and their earnings one, unless your job is to
21:54
Speaker 2: analyze bank earnings, The way that they report and how
21:57
Speaker 2: their businesses work are so complex and looted and heavily
22:00
Speaker 2: regulated that it does take a degree of expertise that
22:03
Speaker 2: Mark and I don't admittedly have, So I don't want
22:06
Speaker 2: to consider myself some sort of bank analyst. It is complicated.
22:10
Speaker 2: These banks do everything under the sun. They are almost
22:13
Speaker 2: regulated utilities from that perspective. But I think the big
22:17
Speaker 2: news from the quarter was that a few things pushed
22:20
Speaker 2: in the right direction for these giant banks, and the
22:24
Speaker 2: two of them that I can point to concisely across
22:27
Speaker 2: the board for all of them. One, there's more investment
22:30
Speaker 2: banking activity going on companies when public, space X when public.
22:34
Speaker 2: Several other companies are talking about going public or issuing
22:37
Speaker 2: new debt, issuing new equity, all of which they rely
22:40
Speaker 2: upon giant investment banks like Golden Sacks, JP, Morgan, Bank
22:44
Speaker 2: of America, City Group in Wells.
22:45
Speaker 3: Fargo in order to do.
22:47
Speaker 2: In addition, all of these banks tend to make money
22:52
Speaker 2: almost like a toll maker, in equity markets and bond
22:55
Speaker 2: markets and everywhere else, currency markets everything. So if you
22:58
Speaker 2: trade a whole bunch, even though you might not be
23:01
Speaker 2: paying Bank of pardon me, Bank of America commission for
23:05
Speaker 2: trading like you used to for Fidelity and CHWAB and
23:09
Speaker 2: everything else like a trading cost, all of these banks
23:12
Speaker 2: make money when you trade more.
23:15
Speaker 3: They're market makers. They make money on the spread.
23:17
Speaker 2: They sell you the stock that they have an inventory
23:19
Speaker 2: and they're able to make a lot more money when
23:21
Speaker 2: things are volatile, especially when they're volatile and heading in
23:24
Speaker 2: a positive direction, but even when they're volatile and heading
23:27
Speaker 2: in a negative direction, these banks tend to make money
23:29
Speaker 2: on trading. In terms of most to least impressive, Goldman
23:33
Speaker 2: sachs up about eight point three percent today. Obviously, Goldman
23:38
Speaker 2: Sacks not exactly famous for a retail facing bank. They
23:43
Speaker 2: are in institutional bank that serves the very wealthy, and
23:47
Speaker 2: so where they're specifically seeing gains here. One, They're earnings
23:51
Speaker 2: per share came in at twenty dollars and ninety eight
23:53
Speaker 2: cents the consensus estimate for US for about fourteen bucks,
23:56
Speaker 2: so dramatically beating expectations here. And you know where it
24:01
Speaker 2: primarily came from. Investment banking was a.
24:04
Speaker 3: Huge surge here, their.
24:06
Speaker 2: Global banking and market segment search fifty three percent year
24:09
Speaker 2: over year, mainly by you know, underwriting fees and all
24:14
Speaker 2: the stuff that we know that Goldman does and has
24:17
Speaker 2: been pretty slow frankly for quite a period of time here,
24:21
Speaker 2: when higher interest rates and things prevented companies.
24:24
Speaker 3: From going public.
24:25
Speaker 2: All of a sudden you're seeing a surge in deal
24:27
Speaker 2: making acquisitions, IPOs, all that stuff that's helping out the
24:31
Speaker 2: likes of Goldman Sacks. JP Morgan also up today about
24:35
Speaker 2: two and three quarters of a percent. Similar story there,
24:39
Speaker 2: obviously a little bit more of a retail facing bank.
24:41
Speaker 2: You can actually walk into a JP Morgan Chase Bank
24:45
Speaker 2: branch and do business with them, but nonetheless huge, huge
24:50
Speaker 2: status for deal making and IPOs and all sorts of
24:54
Speaker 2: investment banking business. Bank of America stock up about two
24:57
Speaker 2: percent today, City Group up nearly two percent, and Wells
25:02
Speaker 2: Fargo now down about seven tenths of a percent. Company
25:07
Speaker 2: just can't get out of its own way, it seems constantly.
25:10
Speaker 3: With Wells Fargo, the stocks.
25:11
Speaker 2: About flat, up about four percent over the course of
25:15
Speaker 2: the last twelve months. The one thing to say about
25:17
Speaker 2: Wells Fargo is they did just have pretty recently the
25:22
Speaker 2: lifting of their asset cap. Remember that in the wake
25:26
Speaker 2: of their massive what are we we're calling it a
25:30
Speaker 2: fraud scandal. I mean, they effectively ripped off a bunch
25:33
Speaker 2: of their customers by opening fake accounts for them, and
25:35
Speaker 2: we're litigated for it and agreed to an asset cap
25:39
Speaker 2: for a long period of time. That's done now, and
25:42
Speaker 2: so they are. You know, they were effectively prevented from
25:45
Speaker 2: growing their business for a prolonged period of time that
25:48
Speaker 2: has now been lifted. They're able to do so again,
25:50
Speaker 2: and Wells Fargo, you know, likely doing everything they can
25:54
Speaker 2: to grow their business down the road. In any case,
25:58
Speaker 2: I don't think you saw anything that would be concerning.
26:00
Speaker 1: No.
26:01
Speaker 2: You know, oftentimes banks, if they're concerned about the future,
26:04
Speaker 2: will take big loan loss provisions for what they deem
26:06
Speaker 2: to be future losses.
26:08
Speaker 3: On loans that they've made.
26:09
Speaker 2: We did not see any big uptick there overall, as
26:13
Speaker 2: wouldn't be, you know, is not terribly surprising, a massive
26:17
Speaker 2: beat from all these major banks in a period of
26:20
Speaker 2: high volatility, rising equity prices, and uncertainty around pretty much
26:26
Speaker 2: every area of the market, right energy prices, currency prices,
26:30
Speaker 2: a lot of concern out of the Middle East, alongside
26:34
Speaker 2: a very hot period of time for deal making IPOs,
26:36
Speaker 2: et cetera, which these banks all make good money on.
26:40
Speaker 4: Yeah, the environment's been favorable, like you said, yeap.
26:42
Speaker 2: So I don't have a ton else to say other
26:44
Speaker 2: than report what they did. I don't have much of
26:46
Speaker 2: an outlook about what they might do in the future.
26:48
Speaker 2: Suffice to say, if there is a prolonged period of
26:52
Speaker 2: again more deal making, more IPOs as we seem to
26:55
Speaker 2: be getting hints on, right, I mean, Anthropic wants to
26:57
Speaker 2: go public. Open AI wants to go public. And we'll
27:01
Speaker 2: be talking later in the program about anyone in and
27:04
Speaker 2: around the artificial intelligence supply chain is looking to cash
27:08
Speaker 2: in at this moment in time. And so how do
27:11
Speaker 2: you cash in? If you are a large company that
27:14
Speaker 2: is looking to sell your product or sell your company,
27:18
Speaker 2: you go to a giant bank like this to try
27:20
Speaker 2: and structure a deal. And so should that continue, I
27:24
Speaker 2: can envision a scenario where things continue to look rosy
27:27
Speaker 2: for these giant deal making banks that are at least
27:30
Speaker 2: facing less regulation than they have been for the last
27:33
Speaker 2: fifteen years or so.
27:34
Speaker 4: Yeah, it's hard to think of a more favorable climate
27:38
Speaker 4: for the new business I say, new post Dodd Frank
27:41
Speaker 4: post twenty ten business model for these they're now banks
27:45
Speaker 4: holding They used to be investment banks that did their
27:47
Speaker 4: own trading. They've been there rest forbidden to do that
27:54
Speaker 4: because we allow them to continue to exist. Yeah, as
27:59
Speaker 4: you said, many there, I guess many elements of their
28:01
Speaker 4: business are utila there. They coin money in many ways.
28:07
Speaker 4: That also limits return potential.
28:09
Speaker 2: It does, but in markets like this and in environments
28:12
Speaker 2: like this, they can really Yeah, they can make a
28:15
Speaker 2: buck or two. Let's take a quick break when we return.
28:17
Speaker 2: Riley Sullivan from the Federal Reserve Bank of Boston joining
28:21
Speaker 2: us next to talk about analysis of regional economic and
28:25
Speaker 2: issues facing New England. That is next here on the
28:27
Speaker 2: Financial Exchange.
28:29
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29:05
Speaker 2: Joining us now is Riley Sullivan. Riley is the lead
29:08
Speaker 2: policy Analyst with the New England Public Policy Center at
29:11
Speaker 2: the Federal Reserve Bank of Boston and conducts analysis of
29:14
Speaker 2: regional economic and policy issues in New England. Riley, thanks
29:18
Speaker 2: so much for coming on and joining us.
29:19
Speaker 3: Appreciate it.
29:20
Speaker 6: Yeah, thank you so much for having me.
29:22
Speaker 2: So we're gonna be talking a bit about small businesses
29:25
Speaker 2: today of which we are one here in New England, and.
29:28
Speaker 3: You point out that the contributions.
29:32
Speaker 2: Of small businesses in New England outpaces the rest of
29:36
Speaker 2: the country. Can you talk to us just about what
29:39
Speaker 2: you were able to measure here over the last It
29:42
Speaker 2: looks like you looked at a twenty three year time
29:44
Speaker 2: period of employment here in New England from small businesses.
29:48
Speaker 6: Yeah, so we looked from the period from twenty through
29:51
Speaker 6: twenty twenty three and we found that, you know, small businesses,
29:55
Speaker 6: which are defined by the Small Business Administration as firms
29:58
Speaker 6: with fewer than five hundred employees employed roughly about three
30:02
Speaker 6: point two million workers in New England. That accounted for
30:06
Speaker 6: about forty seven percent of the region's total employment. The
30:10
Speaker 6: national rate is about forty six percent, so it's really
30:12
Speaker 6: only slightly larger New England but on average, but throughout
30:18
Speaker 6: the region there's quite a bit of variation. So some
30:21
Speaker 6: of the other states out besides Massachusetts, they were all
30:25
Speaker 6: above the national rate by quite a bit. Massachusetts was
30:28
Speaker 6: a little below. So there's a lot of variation within
30:32
Speaker 6: our small region.
30:34
Speaker 3: What is your sense of all this.
30:35
Speaker 2: Does this have to do with major population centers attracting
30:39
Speaker 2: very large employers, Is it that you know, parts.
30:42
Speaker 3: Of New England are so rural that you know, you.
30:45
Speaker 2: Can't have a fifty thousand person company in you.
30:50
Speaker 3: Know, rural Maine for example.
30:51
Speaker 2: What what did you find in terms of the differences
30:54
Speaker 2: between say, Massachusetts, Connecticut, Rhode Island, and some of the
30:57
Speaker 2: other New England states.
30:58
Speaker 6: Yeah, no, you're exactly right. So it has a lot
31:01
Speaker 6: to do with the population density. So Vermont, which is
31:06
Speaker 6: the has the highest share in the region. About sixty
31:08
Speaker 6: three percent of their total employment is within small businesses.
31:13
Speaker 6: Over twenty five percent of that is in small businesses
31:17
Speaker 6: with under twenty workers, and they are the third highest
31:21
Speaker 6: concentration of small businesses in the country, behind just Montana
31:25
Speaker 6: and Wyoming. So, you know, it really has a lot
31:28
Speaker 6: to do with you know, this high concentration has to
31:32
Speaker 6: do with these large businesses not being able to really
31:35
Speaker 6: concentrate in a city if they're not able to attract
31:39
Speaker 6: a lot of workers. So the parts of the region
31:42
Speaker 6: that have much lower shares of small business concentration are
31:46
Speaker 6: you know, Suffolk County that has Boston, you know, around Worcester, Springfield,
31:51
Speaker 6: parts of parts of Connecticut with New Haven and Hartford,
31:57
Speaker 6: even you know around Grafton County in New Hampshire that
32:02
Speaker 6: has Dartmouth Hitchcock Hospital. That makes it the outlier in
32:05
Speaker 6: northern New England. It's the only county that has below
32:09
Speaker 6: the share of national share of small business employment.
32:13
Speaker 3: Talk to me a bit about more about Vermont.
32:15
Speaker 2: I mean, they do stand out, like you mentioned, one
32:17
Speaker 2: of the highest share of workers employed at small businesses
32:21
Speaker 2: across the entire country. I don't know in detail Vermont's
32:25
Speaker 2: you know, population density. But is this purely a story
32:29
Speaker 2: of population density and joining states like Montana in attracting
32:34
Speaker 2: small businesses or are they doing something specifically from your
32:37
Speaker 2: perspective to cater to those small businesses and you know,
32:41
Speaker 2: really favor them over large employers.
32:44
Speaker 6: Yeah, no, really, A lot of it does have to
32:46
Speaker 6: do with the population density, but also the combination of
32:51
Speaker 6: you know, the sectoral composition of employment. So there are
32:55
Speaker 6: a lot of healthcare and social assistance jobs in New England.
32:59
Speaker 6: A lot of those in other parts of the country
33:01
Speaker 6: are more likely to be in larger firms, whereas in
33:04
Speaker 6: New England they're a little more likely to be in
33:06
Speaker 6: these smaller businesses. So these smaller independent hospitals, small health centers,
33:11
Speaker 6: those are big employers around Vermont. There's also more small
33:17
Speaker 6: retail trade. Also hospitality, leisure and hospitality, accommodations, food services.
33:25
Speaker 6: They're less likely to be these large chains in Vermont.
33:28
Speaker 6: They are more likely to be these small firms.
33:31
Speaker 2: The data do show that New England's small businesses generated
33:34
Speaker 2: nearly ninety percent of net job creation during the period
33:37
Speaker 2: that you looked at, And I mean that's pretty massive.
33:42
Speaker 2: Do you have a sense from the data of what's
33:45
Speaker 2: I can think of two factors here, right.
33:47
Speaker 3: It can be really strong small businesses.
33:49
Speaker 2: It can also be big businesses who are locating jobs elsewhere.
33:54
Speaker 2: I think of one of the largest employers in our region,
33:56
Speaker 2: Fidelity Investments, hiring a lot more outside of New England
33:59
Speaker 2: over the course the last twenty plus years. Are you
34:02
Speaker 2: able to measure that effect of hey, what is the
34:04
Speaker 2: driver here? Is it really strong job creation from small
34:07
Speaker 2: businesses or just weak job creation from larger ones.
34:10
Speaker 6: Yeah, so, like you said, ninety percent of the job
34:14
Speaker 6: growth over that period was generated by these small businesses,
34:19
Speaker 6: and we find that it's very concentrated in in Vermont.
34:27
Speaker 6: The other states at besides Massachusetts saw this effect much more,
34:33
Speaker 6: and it was surprising just given that you know, like
34:35
Speaker 6: I said, they're under half of the total employment, so
34:37
Speaker 6: it was surprising that so much of the job creation
34:41
Speaker 6: was by these small businesses, but a lot of it
34:44
Speaker 6: other research has shown that a lot of that it's
34:47
Speaker 6: more dependent on the age of these businesses. So a
34:50
Speaker 6: lot of this job growth has been from young firms
34:53
Speaker 6: that are small and grow into being larger firms. And
34:57
Speaker 6: then larger firms tend to have more stable employment levels,
35:00
Speaker 6: they have fewer fluctuations on average, so it's these small
35:04
Speaker 6: firms eventually are growing into larger businesses, the successful ones.
35:08
Speaker 3: Riley.
35:08
Speaker 2: I suspect that when most of our listeners think of
35:10
Speaker 2: the Federal Reserve, they think about, you know, big policy
35:13
Speaker 2: decisions around interest rates. Testimony today from the head of
35:16
Speaker 2: the Federal Reserve in DC. Why does the Boston Fed
35:19
Speaker 2: do this kind of research and you know what makes
35:22
Speaker 2: this important to the Federal Reserve's mission?
35:26
Speaker 6: Yeah, absolutely, thanks for asking that. So the Boston FED,
35:29
Speaker 6: it's one of twelve regional banks around the country, so
35:34
Speaker 6: we cover the six New England states. So each research
35:37
Speaker 6: department at the twelve regional banks has a regional research group.
35:41
Speaker 6: So at the Boston FED, that is the New England
35:44
Speaker 6: Public Policy Center where I sit. We conduct a lot
35:47
Speaker 6: of research related to the New England labor market, amongst
35:50
Speaker 6: some other policy related regional work, and we just thought
35:54
Speaker 6: it was important to try and quantify and highlight some
35:56
Speaker 6: of the contributions of small businesses to just the broader picture.
36:01
Speaker 5: Of the region.
36:01
Speaker 3: Again.
36:02
Speaker 2: Riley Sullivan is the lead policy analyst with the New
36:04
Speaker 2: England Public Policy Center at the Federal Reserve Bank of Boston,
36:07
Speaker 2: joining us today to talk about the contribution of small.
36:10
Speaker 3: Businesses to employment in the region.
36:12
Speaker 2: Riley said, thank you so much for joining us, appreciate
36:15
Speaker 2: it and hopefully we get to chat again soon.
36:17
Speaker 6: Yes, thanks so much for having me.
36:19
Speaker 2: As I mentioned Kevin Warresh continuing his testimony in front
36:23
Speaker 2: of the House, we'll have a full recap on what
36:25
Speaker 2: he did say on tomorrow's program. I do want to
36:28
Speaker 2: shift away from that, though, and speak for a moment
36:31
Speaker 2: about IBM, who, in pre market trading stock was down
36:35
Speaker 2: by more than twenty percent now even more down twenty
36:39
Speaker 2: five percent this morning, a quarter of its share price
36:42
Speaker 2: being wiped out. And this comes after IBM reported preliminary
36:48
Speaker 2: quarterly sales results that missed analyst expectations.
36:51
Speaker 3: So this was not a scheduled earnings call.
36:54
Speaker 2: Instead IPM finding that their earnings were I guess why
36:58
Speaker 2: do companies do this?
36:59
Speaker 3: Mark?
36:59
Speaker 2: I think it's twofold one to prepare investors for what's
37:03
Speaker 2: going to come during their earnings call. Two would probably be, Hey,
37:06
Speaker 2: you know, when something's this significant, we've got to get
37:08
Speaker 2: it out there so that you know there's no possibility
37:10
Speaker 2: inside or trading and you know probably you know problems
37:13
Speaker 2: from that perspective.
37:14
Speaker 3: Go ahead, no, no, go ahead.
37:18
Speaker 2: Big picture from what I can tell here is that
37:21
Speaker 2: IBM has spent a lot of money and effort over
37:23
Speaker 2: the course of the last decade transitioning from a old
37:28
Speaker 2: hardware business that was you know, in every business during
37:32
Speaker 2: the nineteen sixties, seventies and eighties, and trying to transition
37:36
Speaker 2: that into.
37:36
Speaker 3: Something more modern.
37:37
Speaker 2: They've made major acquisitions of big software companies like red Hat, Hashi, Confluent,
37:43
Speaker 2: and we're in this moment now where if you are
37:47
Speaker 2: a company, the only spending you want to be doing
37:49
Speaker 2: is with an AI player. IBM is not front and
37:53
Speaker 2: center there, and at the same time, you're being hit
37:57
Speaker 2: with this double whammy of AI kind of scaring a
38:00
Speaker 2: bunch of traditional software businesses that IBM just acquired yah AF.
38:04
Speaker 4: Their revenue comes from software, thirty percent from consulting. If
38:08
Speaker 4: you're increasing spending on AI infrastructure dramatically with the other stuff.
38:14
Speaker 3: Quick break. A lot more to cover in the second
38:16
Speaker 3: hour the financial exchange. We'll be right back