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Walmart’s Growth Story Just Hit a Wall · The Financial Exchange Show

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Speaker 1: Chuck Zada and Mike Armstrong.
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Speaker 2: I hope everyone had a great Wednesday. We're now on
1:14
Speaker 2: to Thursday, as so often happens, And with that, we
1:20
Speaker 2: got some of the standard economic data that comes out
1:23
Speaker 2: weekly jobbles claims, if you will, continuing to just be
1:27
Speaker 2: very very muted weekly jobas claims not showing anything concerning
1:33
Speaker 2: in any way, shape or form. Two hundred and six
1:36
Speaker 2: thousand claims this week versus two hundred and twelve thousand
1:38
Speaker 2: last week. Continuing claims moved up by eighteen thousand, but
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Speaker 2: are still running about one one hundred and fifty thousand
1:44
Speaker 2: fewer than last year. So it's again, this is a
1:48
Speaker 2: labor market that is quiet, kind of cold, but not
1:54
Speaker 2: like bad. Agreed.
1:56
Speaker 3: Reminder about these weekly jabas claims, just in terms of
1:59
Speaker 3: what they actually are, it's been a little while since
2:01
Speaker 3: we've defined it. They are the aggregation of the states
2:06
Speaker 3: reporting into the federal government how many new people are
2:08
Speaker 3: signing up for unt employment, so that's not at the.
2:10
Speaker 2: State level and continuing ones.
2:12
Speaker 3: And then they also tell you how many people are
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Speaker 3: continuing to stay on unemployment versus dropping off. And so
2:16
Speaker 3: we look at this one for an early read on
2:19
Speaker 3: changes in the labor market.
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Speaker 4: We got a very early read on this during.
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Speaker 3: The COVID pandemic, and for the last few years it's
2:27
Speaker 3: been very calm, low turnover labor market. Not a lot
2:30
Speaker 3: of job opportunities out there for people who can't find work,
2:33
Speaker 3: especially as we'll talk about older workers struggling. But if
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Speaker 3: you got the job. Not a lot more people don't
2:43
Speaker 3: have work than they did a year ago, and we
2:45
Speaker 3: don't see that direction changing much right now.
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Speaker 2: Do you know what state has the fewest continuing unemployment claims? Hint,
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Speaker 2: it's not California. Fewest number. Yeah, fewest would be a number.
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Speaker 2: I was just one.
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Speaker 4: If it's a percentage change out like Wyoming.
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Speaker 2: Wyoming is close. Wyoming is the second fewest.
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Speaker 4: Rhode Island.
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Speaker 2: No, Rhode Island, Nope. Vermont is in the ballpark. Okay,
3:10
Speaker 2: who got South Dakota? Okay, I mean obviously very low populations.
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Speaker 2: What's the least populated state Wyoming? Yes, yeah, okay, and
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Speaker 2: South Dakota I think, I mean, I'm guessing it's in
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Speaker 2: the bottom five by the postulation. Let's see. Oh yeah,
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Speaker 2: there it is forty sixth nine hundred and thirty five
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Speaker 2: thousand people. It's basically like one in a quarter of Boston's.
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Speaker 4: Vermont, Rhode Island, Wyoming.
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Speaker 2: Yeah, don't forget about cute little Delaware. Yeah, it's down
3:37
Speaker 2: there too, and then you've got Alaska, yeah as well.
3:41
Speaker 4: Sure.
3:42
Speaker 2: So let's talk a little bit about Walmart. They reported
3:44
Speaker 2: earnings this morning, and here's what we are seeing from
3:48
Speaker 2: Walmart that is causing them to fall about nine percent today,
3:52
Speaker 2: which you'd be like Walmart, Like, I don't get that,
3:55
Speaker 2: Like Walmart's supposed to be, you know, steady eddie and boring. Well,
3:58
Speaker 2: here's the thing. Walmart has turned themselves in the last
4:00
Speaker 2: couple of years into or tried to into a growth story.
4:03
Speaker 2: And that is how you get a company that ends
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Speaker 2: up trading at like thirty five times forward earnings is
4:11
Speaker 2: through expectations of good growth. And Walmart indeed had like
4:15
Speaker 2: decent numbers for the quarter, but not good enough to
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Speaker 2: meet the expectations that are out there. And even though
4:24
Speaker 2: they guide it a little bit higher for the rest
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Speaker 2: of the year, it still is something where if your
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Speaker 2: price thirty five times earnings, you can't be delivering two
4:31
Speaker 2: point six percent same store sales growth.
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Speaker 3: Yeah, that was the number I was going to hone
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Speaker 3: in on as well, because we've been going through a
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Speaker 3: lot of retail earnings this week whose same store sales
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Speaker 3: have been all over the place, but that it matches
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Speaker 3: Target's same store sales. If you're not beating Target in
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Speaker 3: terms of the same store sales, and by the way, you're
4:48
Speaker 3: not beating inflation in terms of same store sales, then
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Speaker 3: investors have reason to be concerned.
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Speaker 2: Correct. So if you look at their earnings per share
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Speaker 2: over the last five years, EPs has grown by about
4:59
Speaker 2: a eleven and a half percent a year for the
5:01
Speaker 2: last five years on average, which is really good. If
5:05
Speaker 2: you look at the Walmart story. For let's look at
5:09
Speaker 2: kind of the post tech bubble period. In two thousand
5:12
Speaker 2: and one, Walmart's earnings were growing about eighteen percent a
5:15
Speaker 2: year over the previous five year period. By the time
5:19
Speaker 2: we got to twenty fifteen, Walmart's five year earnings growth
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Speaker 2: was compounding at a six point four percent anualized.
5:26
Speaker 4: Right.
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Speaker 2: As you get bigger, it gets harder to grow.
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Speaker 3: As you put it to you know, as you put
5:29
Speaker 3: sears to bed and become the giant behemoth in the
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Speaker 3: retail market.
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Speaker 2: Yeah, sure, but now you're at a point where okay,
5:37
Speaker 2: like that, that five year earnings growth has been cooking
5:40
Speaker 2: out a pretty good clip at this point. And so
5:44
Speaker 2: if your same store sales growth is slowing, there are
5:46
Speaker 2: a couple different ways that you can still try to
5:49
Speaker 2: maintain that earnings growth. Number one, you can try to
5:52
Speaker 2: figure out, hey, is there a way that we can
5:54
Speaker 2: expand margins? Okay, in the space that Walmart operates in,
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Speaker 2: it's tough to figure out how to expand margins meaningfully,
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Speaker 2: just because grocery stores, which remember half of Walmart's sales
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Speaker 2: come from groceries, low margin business. And when you're competing
6:12
Speaker 2: as the low price option, you know what I mean,
6:15
Speaker 2: think about it like that is what Walmart defines itself as,
6:18
Speaker 2: is the low price option. For other goods, margins are
6:21
Speaker 2: tough to come by as well, which is why Walmart's
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Speaker 2: margins right now four point one six percent operating margin.
6:27
Speaker 2: That's down from about six percent in twenty eleven. But
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Speaker 2: there's there's just not a lot of room to add,
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Speaker 2: you know, margin there if you want to be defined
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Speaker 2: as the low price option and you sell a ton
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Speaker 2: of groceries, so you can't really do that. What else
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Speaker 2: can you do? You can increase leverage in order to
6:46
Speaker 2: try to, you know, pick things up on that side. Well,
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Speaker 2: I think Walmart, again, being a pretty mature company, I
6:53
Speaker 2: don't think there's suddenly just gonna be like, hey, let's
6:55
Speaker 2: take out a bunch of debt and add a bunch
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Speaker 2: more stores that way. I don't. I don't think that's
6:59
Speaker 2: the way to do it either. It's not like you
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Speaker 2: can just throw more into the wild. The United States
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Speaker 2: is fairly saturated with Walmarts at this point. I'm sure
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Speaker 2: that you can still find, you know, and they always
7:10
Speaker 2: find places to open up new ones. I get that,
7:13
Speaker 2: but they're picking and choosing now. It's not just throw
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Speaker 2: them out there and see what happens. So Walmart's again,
7:21
Speaker 2: I want to be clear on this. Walmart's down eight
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Speaker 2: percent today, not because they're gonna go out of business
7:27
Speaker 2: or anything like that. But when your price thirty five
7:29
Speaker 2: times earnings and you have a miss on your growth, hey,
7:33
Speaker 2: that growth story gets dented. And that's what's happening today.
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Speaker 2: In my opinion, Yeah, I'm with you. It is not
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Speaker 2: a shock devastating story. It is not a complete missed
7:42
Speaker 2: execution story. It is a company that's been growing pretty
7:46
Speaker 2: quickly over the last few years and is now struggling
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Speaker 2: to find that next leg. Yeah. I think that's a
7:52
Speaker 2: fair assessment. To take a quick break when we return.
7:56
Speaker 2: We talked yesterday a lot about the bond market. We're
7:59
Speaker 2: gonna talk a lot more about it today because it's
8:03
Speaker 2: here's the thing about bonds. It matters more than the
8:05
Speaker 2: stock market. Yes, not right now, it always does. It's
8:09
Speaker 2: like the bond market is in the driver's seat because
8:12
Speaker 2: here's the hint, the little secret. There are bonds in
8:17
Speaker 2: your stocks. You're supposed to Oh sorry, there are bonds
8:21
Speaker 2: in your stocks. There you go. What, Let's take a
8:24
Speaker 2: quick break and we'll talk.
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Speaker 4: About them next.
8:27
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9:07
Speaker 2: So yesterday we spent a little bit of time talking
9:11
Speaker 2: about the US Treasury's announcement that came about eight thirty
9:14
Speaker 2: am yesterday that they were expanding the size of their
9:18
Speaker 2: Treasury buyback program for long term bonds. Specifically, this program
9:22
Speaker 2: was previously authorized to do about two billion dollars in
9:25
Speaker 2: purchases each time they did a buyback. They've expanded it too,
9:28
Speaker 2: about four billion. If you extrapolate how often they do
9:32
Speaker 2: this over the course of the year, it's about one
9:34
Speaker 2: hundred and twenty to one hundred and fifty billion dollars
9:37
Speaker 2: potentially of long term buybacks. Remember, the Treasury cannot print money.
9:42
Speaker 2: They have to issue other debts in order to do this.
9:45
Speaker 2: So the idea would be issue short term bills in
9:47
Speaker 2: order to fund it and buy longer term bonds in
9:50
Speaker 2: order to try to keep yields down. Is the thinking
9:53
Speaker 2: that we think is present there.
9:55
Speaker 3: Okay, so interesting, cool, But those dollar amounts probab They
10:00
Speaker 3: mean nothing to the average person. They don't mean much
10:02
Speaker 3: to me, so practice speaking, what the heck are we
10:04
Speaker 3: talking about?
10:05
Speaker 2: Well, and here's the thing. The US Treasury market is
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Speaker 2: a five point seven trillion dollar active market in the
10:12
Speaker 2: United States if you consider like the overall amount of
10:15
Speaker 2: debt outstanding. Remember we're talking to the US has as
10:18
Speaker 2: of yesterday, forty trillion dollars in debt. So I think
10:24
Speaker 2: that this can best be summed up using a musical accompaniment.
10:29
Speaker 3: Actually, oh, are you gonna beat box forest chair truck,
10:35
Speaker 3: because Scott Besen's gonna need a bigger boat.
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Speaker 2: Okay. The bond market, the bond market is not in
10:44
Speaker 2: a healthy place right now. And we know this. We
10:48
Speaker 2: know this because uh, it's it's it's there. It's the
10:51
Speaker 2: bond market. It's look today the US ten year treasury,
10:58
Speaker 2: it's right back to where it was before they made
11:00
Speaker 2: this announcement. Yields dropped for less than twenty four hours. Okay,
11:06
Speaker 2: so let's stop coming.
11:11
Speaker 3: Let's start with the premise that I don't believe Scott
11:13
Speaker 3: Bessant is a dumb person.
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Speaker 2: He's not. He's a accomplished trader who has, you know,
11:20
Speaker 2: a very good understanding of these markets.
11:23
Speaker 3: So yesterday's move and announcement today was completely wiped out
11:28
Speaker 3: and has not done anything. What was the is it
11:31
Speaker 3: to make a splashy announcement?
11:33
Speaker 1: No?
11:33
Speaker 4: Is that the point?
11:35
Speaker 2: This is the market testing the Treasury to see how
11:38
Speaker 2: far what are you guys actually gonna do? And remember,
11:41
Speaker 2: as Mark and I talked about yesterday, the Treasury is
11:44
Speaker 2: limited in terms of what they can do. They can't
11:46
Speaker 2: print money. I know that we had all of the
11:48
Speaker 2: you remember all the conversation about the trillion dollar platinum
11:51
Speaker 2: coin to try to pay off The Treasury can't just
11:54
Speaker 2: print money, and you wouldn't want them to just be
11:56
Speaker 2: able to print money. The Federal Reserve, on the other hand,
11:59
Speaker 2: can print money.
12:01
Speaker 3: Which is why it was in part why we make
12:04
Speaker 3: that a very different type of organization than the Treasury,
12:09
Speaker 3: try and insulate its independence and make it so changes
12:14
Speaker 3: in the White House cannot immediately change the money supply
12:17
Speaker 3: and things like that.
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Speaker 2: Yes, imagine again the example I give is, imagine that
12:21
Speaker 2: the least qualified person you know becomes Treasury secretary. Do
12:25
Speaker 2: you want them to be able to print print trillion
12:28
Speaker 2: dollar platinum coins whenever they have something they want to
12:31
Speaker 2: spend the money on the answer is no, you don't
12:33
Speaker 2: because you'd end.
12:33
Speaker 4: Up with like too many billion dollars.
12:36
Speaker 2: Okay, Here's like, you know, every state has like an
12:40
Speaker 2: Orca park, and it's like, why do we need this.
12:42
Speaker 2: I don't know the Treasury Secretary wanted them.
12:45
Speaker 1: So.
12:48
Speaker 3: Okay, I don't know where your mind goes to when
12:52
Speaker 3: you try and dream up. Okay, what would be the
12:53
Speaker 3: most expensive thing I could dream up? For every state
12:56
Speaker 3: to have an Orca whale park? It would be quite expensive.
13:00
Speaker 2: Go on, It's if I were running for president. Unlimited
13:03
Speaker 2: Sea worlds would be my my pitch. Clearly it's obviously
13:07
Speaker 2: a winning pitch. So here's the deal. The Treasury is
13:11
Speaker 2: going to be pushed on this because the market yesterday said, okay,
13:14
Speaker 2: like you want to do this, great, we're gonna We're
13:16
Speaker 2: gonna buy that you're doing this. But if you're really gonna,
13:21
Speaker 2: you know, if you really want to prove to us
13:23
Speaker 2: that you're serious about this, Okay, we're gonna push back
13:27
Speaker 2: a little bit. And you can see this, by the way,
13:29
Speaker 2: in how cross asset, you know, correlations are moving today.
13:33
Speaker 2: Cross asset just means like between different asset classes. So
13:36
Speaker 2: bonds are giving back all of their gains from yesterday.
13:40
Speaker 2: You know what's giving back none of its gains from yesterday, Michael,
13:44
Speaker 2: There are two things that are giving back none of
13:45
Speaker 2: its gains. Golden the dollar, dollar losses, but gold and
13:48
Speaker 2: the dollar are not moving today. And this is telling
13:51
Speaker 2: you that the bond market is what's being questioned here
13:55
Speaker 2: right now. So I think that when we look at this,
14:00
Speaker 2: it's going to be something. And here's why this matters
14:02
Speaker 2: to all of us, because you know, I get that
14:05
Speaker 2: you're you're driving around and you're sitting here and you're like, chuck, like,
14:07
Speaker 2: why do I care what like the bond market is doing.
14:10
Speaker 3: Why do I care what some billionaire did yesterday? When
14:13
Speaker 3: it comes to treasury issuance.
14:15
Speaker 2: The reason why it matters is that these borrowing rates
14:19
Speaker 2: are benchmarks that basically every other bond that's issued or
14:24
Speaker 2: every other loan that's issued is priced off of Yeah,
14:27
Speaker 2: and those relationships aren't always like one to one. Like
14:30
Speaker 2: if you look at our mortgages are priced, typically a
14:33
Speaker 2: thirty year fixed rate mortgage is usually somewhere between like
14:37
Speaker 2: one and two percent above the tenure treasury. That can
14:42
Speaker 2: vary based on like a number of things. But this
14:44
Speaker 2: is why when treasury rates go up, mortgage rates go up. Likewise,
14:48
Speaker 2: if you you know, look at borrowing that for you
14:53
Speaker 2: know that businesses do in order to like build data centers.
14:57
Speaker 2: If you've got you know, Google and Microsoft issuing you know,
15:00
Speaker 2: to do that kind of stuff. Hey, those are benchmarked
15:02
Speaker 2: against US treasuries of comparable maturity as well, and they're
15:06
Speaker 2: benchmarked at Okay, here's the spread that we're willing to
15:09
Speaker 2: lend to Microsoft at. So this stuff matters because ultimately
15:15
Speaker 2: a lot of the economic activity in the United States
15:17
Speaker 2: is funded through borrowing. When most people buy a house,
15:19
Speaker 2: they don't I know that, you know, I know, back
15:21
Speaker 2: in twenty twenty two we had, you know, the rise
15:23
Speaker 2: of the all cash buyer. But most people who buy
15:26
Speaker 2: homes take out a mortgage to do so. Most people
15:29
Speaker 2: who start businesses take out a loan to do so.
15:32
Speaker 2: Most businesses that build a new factory or facility take
15:36
Speaker 2: out a loan to do so.
15:38
Speaker 4: And so plain English.
15:40
Speaker 3: The message from Bessent yesterday yesterday I mispronounced that was
15:47
Speaker 3: we think those rates are getting too burdensome and high,
15:50
Speaker 3: and we are going to attempt to bring them down.
15:53
Speaker 4: Plain English. That was his message.
15:55
Speaker 2: Yes. Now, the other place where this is going to
15:57
Speaker 2: get interesting is we've got a new chair who came
16:00
Speaker 2: in three months ago, and Kevin Warrish, if if I
16:05
Speaker 2: had to pick his like North star his guiding principle,
16:09
Speaker 2: it's I want the market to do what the market does,
16:13
Speaker 2: not what it thinks we're gonna do.
16:14
Speaker 3: Yeah, let me give you two quotes on that, because
16:17
Speaker 3: he was questioned on this pretty heavily. One quote, market
16:21
Speaker 3: participants are learning to play the ball, not the referee. Two,
16:26
Speaker 3: We're trying to get an unfiltered message from markets, and
16:29
Speaker 3: he used this unfiltered message from markets. The message that
16:34
Speaker 3: he pretty much said he got was that we don't
16:37
Speaker 3: feel we need to move on our target interest rate
16:42
Speaker 3: even though inflation is running hot, because markets are solving
16:46
Speaker 3: the problem for us. They are moving higher term interest rate,
16:49
Speaker 3: longer term interest rates higher than it's making mortgages more expensive.
16:52
Speaker 3: And so therefore we as a committee do not believe
16:55
Speaker 3: that we need to hike interest rates in the face
16:57
Speaker 3: of high inflation. Those comments now look questionable and this
17:04
Speaker 3: is idiotic, irrelevant, questionable, you know, take your pick. I've
17:08
Speaker 3: heard all of them used over the last couple of days.
17:10
Speaker 3: But you no longer are getting an unfiltered message from
17:13
Speaker 3: the markets. And instead of investors playing the ball and
17:18
Speaker 3: ignoring the referee, they have changed referees from the Fed
17:23
Speaker 3: to the Treasury Secretary.
17:24
Speaker 2: And here's why this is a problem is if the
17:30
Speaker 2: rules of the game can change at any point in
17:33
Speaker 2: time without you knowing when and how they're going to change,
17:38
Speaker 2: this is exactly what's going to end up pushing yields
17:40
Speaker 2: higher and forcing the Treasury's hand again. Because let's say
17:44
Speaker 2: that you're a bond investor, Michael, you decide to lend
17:46
Speaker 2: the US government one hundred dollars. You say, hey, you
17:49
Speaker 2: got forty trillion dollars of dead outstanding. I'm going to
17:51
Speaker 2: take a hundred, not trillion, but one hundred dollars. Okay.
17:56
Speaker 2: US government says, great, we'll pay you four and a
17:57
Speaker 2: half percent. But now you don't know what the rules
18:01
Speaker 2: of the road are because the Fed saying one thing,
18:03
Speaker 2: the Treasury is doing something else. Because quite honestly, Kevin
18:06
Speaker 2: Worris doesn't need to pay the bills. It's not his job. Sure,
18:09
Speaker 2: his job is to keep the plumbing functioning. Scott Besson's
18:12
Speaker 2: job is to pay the bills. That's what the Treasury
18:14
Speaker 2: Secretary does. They pay the bills for the United States,
18:18
Speaker 2: plain and simple. And so best is sitting there going
18:23
Speaker 2: I've got thirty year real interest rates net of inflation
18:27
Speaker 2: expectations at three percent. I can't fund that. I can't
18:33
Speaker 2: do that. It's not going to work. Any Treasury secretary
18:37
Speaker 2: sitting there would be doing it. Janet Yellen, okay, was
18:40
Speaker 2: the best at this. Like this, this is what she did.
18:43
Speaker 2: This is exactly what Scott Besson got upset at her
18:45
Speaker 2: for doing. Was Okay, like you're trying to like manipulate,
18:49
Speaker 2: not not even manipulate, but you're just trying to like
18:51
Speaker 2: skew the bond issuance to try to make yields look
18:55
Speaker 2: better than they are. Well, Scott, now that you got
18:57
Speaker 2: to pay the bills, you doing the same thing. And
18:59
Speaker 2: this iss what I said before worsh came into the
19:02
Speaker 2: seat was, hey, he promises to do a whole bunch
19:05
Speaker 2: of different things. But ultimately Besen promised to do a
19:08
Speaker 2: bunch of different things, and he's had to do a
19:10
Speaker 2: lot of the same things that Yellen did, just because
19:12
Speaker 2: once you're in that seat and you gotta pay the bills, Okay,
19:15
Speaker 2: this is how it is, and you just say I
19:17
Speaker 2: gotta do this and put my head down. Worsh is
19:19
Speaker 2: gonna have his hand forced the same way. In my opinion,
19:23
Speaker 2: let's take a quick break when we return. It's Wall
19:26
Speaker 2: Street Watch.
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19:50
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19:58
Speaker 5: Markets and negative terrork Sorry. One day after the Treasury's
20:02
Speaker 5: bond buy back surprise, however, thirty year treasuries have now
20:06
Speaker 5: erase gains in reaction to the buy back announcement. Right now,
20:10
Speaker 5: the Dow is down two thirds of a percent or
20:12
Speaker 5: three hundred and forty eight points lower, SMP five hundred,
20:15
Speaker 5: down just over quarter percent or twenty one points lower,
20:18
Speaker 5: NASDAC down about two thirds of a percent or one
20:21
Speaker 5: hundred and seventy four points lower. RUSS two thousand selling
20:24
Speaker 5: off over one percent. Tenure treas reeled up three basis
20:27
Speaker 5: points at four point six eight percent, and oil up
20:31
Speaker 5: over one and a half percent, rating at eighty seven
20:33
Speaker 5: dollars a barrel. Walmart dropping nine percent after the retail
20:37
Speaker 5: giant posted its slowest quarter for US sales growth in
20:41
Speaker 5: six years, leading two concerns of cautious consumer spending. Despite
20:46
Speaker 5: the slower quarterly growth, Walmart raised its full year estimates
20:49
Speaker 5: for both net sales in operating income. Meanwhile, beauty company
20:53
Speaker 5: Cody reported at bigger loss than expected and guided for
20:56
Speaker 5: drop in sales in the current quarter, sending shares down
20:59
Speaker 5: by ten percent after its one hundred and seventy seven
21:03
Speaker 5: percent rally yesterday. Moderna is retreating seventeen percent today. Yesterday's
21:08
Speaker 5: rally was driven by encouraging study results for its vaccine
21:12
Speaker 5: and high risk melanoma patients and marked the largest rally
21:15
Speaker 5: for any SMP five hundred stock in the past twenty
21:18
Speaker 5: five years. And Ali Baba down about three percent after
21:22
Speaker 5: the Chinese company reported a steep drop in net profit
21:26
Speaker 5: and increase investments in a I'm Tucker Silva and that
21:31
Speaker 5: is Wall Street watch.
21:32
Speaker 2: Mike, anyways, cleanup that we want to do talking about
21:35
Speaker 2: the bond markets.
21:38
Speaker 3: So we don't know precisely what's causing this messiness in
21:42
Speaker 3: the bond market right now, right like certainly the Treasury's
21:45
Speaker 3: interference in it was part of it, but part of
21:47
Speaker 3: it is lack of guidance from the Fed.
21:49
Speaker 4: Part of it might be you know, global.
21:52
Speaker 3: Inflation concerns, energy shock concerns, the deficit concerns, All of
22:00
Speaker 3: these things seem to be playing a role right now.
22:03
Speaker 3: The problem, as I see it for they Fed now
22:08
Speaker 3: is that the new chair came in and convinced, seemingly
22:12
Speaker 3: convinced a bunch of the voting members that, hey, we
22:14
Speaker 3: can hold off on rates for right now because of
22:17
Speaker 3: what's going on in the in the markets for bonds.
22:22
Speaker 2: Bondyields are going up because investors are demanding additional interest
22:27
Speaker 2: in order to give them a suitable cushion to hold
22:31
Speaker 2: those bonds depending on where inflation and growth may go.
22:33
Speaker 4: Right.
22:34
Speaker 3: And by the way, you know that still held true
22:36
Speaker 3: today because all the action that was done by Treasury
22:39
Speaker 3: yesterday reversed itself. If Treasury is going to stick with
22:42
Speaker 3: this strategy, then that argument, to me is out the window,
22:46
Speaker 3: and you're going to have a bunch of voting members
22:50
Speaker 3: of the Fed who are feeling painted into a corner. Hey,
22:54
Speaker 3: we bought your argument. Now we can't anymore because of
22:58
Speaker 3: what the Treasury is doing, so we need to move
23:00
Speaker 3: So that that's one potential outcome here. The other one
23:04
Speaker 3: is very simply bestn't And every future Treasury secretary is
23:09
Speaker 3: going to have a big old pilot debt to pay
23:11
Speaker 3: interest on, and they're gonna need to figure out how
23:13
Speaker 3: to do it. And the main easiest way that you
23:18
Speaker 3: can do so right without you know, pressuring lawmakers to
23:23
Speaker 3: be more finite fysically disciplined, without raising taxes. The easiest
23:27
Speaker 3: way to do it is inflate your way out of it. Sure,
23:29
Speaker 3: And this you know without saying it out loud. That
23:33
Speaker 3: was the message that I think was sent to a
23:36
Speaker 3: lot of investors yesterday, as displayed by the fact that
23:38
Speaker 3: the dollars sold off, gold got a bit, bitcoin got
23:41
Speaker 3: a bid. All of these different things that are looked
23:42
Speaker 3: at as a hedge against the US dollar or hedge
23:47
Speaker 3: against inflation got bid up yesterday. Who knows if this
23:51
Speaker 3: will stick around, but you know that that is the
23:54
Speaker 3: message that I took away at least is and when
23:58
Speaker 3: you when you think about that in the content of
24:00
Speaker 3: the Fed rethinking its framework on inflation and all these
24:03
Speaker 3: other things, it's very easy to come away from that saying, wow,
24:07
Speaker 3: I am a lot more concerned about where inflation might go.
24:09
Speaker 3: Is this the Treasury and the Fed telling me that
24:12
Speaker 3: they are more comfortable with three to four percent inflation
24:15
Speaker 3: going forward instead of two to three.
24:17
Speaker 2: And here's why this matters. So, Mike, let's say that
24:20
Speaker 2: I lent you again, you bought one hundred dollars of
24:23
Speaker 2: US treasuries if inflation is low and growth is low.
24:28
Speaker 2: So let's say you've got an economy that looks a
24:30
Speaker 2: lot like twenty twelve, just as an example, and I say, look,
24:34
Speaker 2: I'm going to give you two percent interest. You say, well,
24:37
Speaker 2: inflation's running one, there's no growth like the stock market.
24:41
Speaker 2: I'm not very convinced there. Yeah, you can give me
24:43
Speaker 2: two dollars an interest, and even if it's really me
24:46
Speaker 2: only making one, I'm okay with that. Yeah, okay with
24:49
Speaker 2: the stability in today's world. If I were to give
24:52
Speaker 2: you two dollars an interest on your one hundred dollars bond,
24:54
Speaker 2: you'd say, well, inflations inflation's running three and a half
25:00
Speaker 2: and the stock market's been ripping for a few years. No,
25:04
Speaker 2: I don't think two dollars an interest is enough. You're
25:07
Speaker 2: going to say I need more. And if enough market
25:09
Speaker 2: participants say they need more because they're either concerned about
25:12
Speaker 2: too much inflation or the prospects for growth are too high,
25:17
Speaker 2: then you end up with bond yields rising because people say, no,
25:21
Speaker 2: you're not paying me enough interest to be content there.
25:25
Speaker 2: Now the big players when we talk about like the
25:28
Speaker 2: thirty year bond, the thirty year bond, like most people
25:31
Speaker 2: don't like trade these things on a regular basis. Sure
25:34
Speaker 2: tends to be a lot of insurance companies. And if
25:36
Speaker 2: there's one thing that insurance companies are good at, it's
25:41
Speaker 2: denying your claim.
25:43
Speaker 4: What's the second thing here?
25:44
Speaker 2: If there are two things that insurance companies are good at,
25:47
Speaker 2: it's math. And insurance companies they understand, Okay, if I
25:53
Speaker 2: have liabilities that I'm going to have down the road,
25:57
Speaker 2: I need to make sure that I have sufficient cushion
26:01
Speaker 2: to be able to pay those liabilities out. And so
26:04
Speaker 2: they're the ones who are saying, no, this isn't going
26:06
Speaker 2: to be enough for me, Or you've got endowments that
26:09
Speaker 2: hold these things, and they say, yeah, I know where
26:12
Speaker 2: this is going to be thirty years from now, I
26:14
Speaker 2: need more cushion. I'm not going to buy those bonds
26:17
Speaker 2: until yields move a little bit higher. So this stuff
26:22
Speaker 2: all kind of feeds into itself. And the problem with
26:25
Speaker 2: the different messages is if you've got Treasury saying one
26:28
Speaker 2: thing and the FED saying another. Now you've got the
26:32
Speaker 2: question of like who do I believe? And that means
26:35
Speaker 2: that you need to demand more premium in order to
26:38
Speaker 2: hold those bonds because you don't know who's going to
26:40
Speaker 2: change the rules in which direction at what particular point
26:42
Speaker 2: in time.
26:43
Speaker 3: Yeah, the main message I'm taking away is I think
26:46
Speaker 3: the which people were already adapting to, but I think
26:48
Speaker 3: the risk of higher inflation for a lot longer is
26:52
Speaker 3: really cementing itself into this economy right now. And I
26:55
Speaker 3: hope I'm wrong, but you know, that's the takeaway that
27:00
Speaker 3: I've been getting over the last several years across administrations
27:04
Speaker 3: is we have no plan to deal with the debt problems. No,
27:07
Speaker 3: we have no deal, no plan to deal with the
27:10
Speaker 3: looming issues on Social Security and Medicare, and so the
27:13
Speaker 3: easiest solution is to inflate our way out of it,
27:17
Speaker 3: which I don't think the average American is prepared for.
27:21
Speaker 3: Like the average person I talk to is still petrified
27:24
Speaker 3: of the stock market and the crash that's going to
27:28
Speaker 3: someday occur, and is not all paying attention to what
27:31
Speaker 3: happens to them if inflation runs four percent over the
27:34
Speaker 3: next twenty years.
27:34
Speaker 2: Well, it's it's because the stock market crash is the
27:38
Speaker 2: great White shark. Yeah, it's oh like I saw Jaws,
27:43
Speaker 2: and that's going to happen to me. I'm gonna get
27:45
Speaker 2: eaten by the shark, or I'm gonna get struck by lightning.
27:48
Speaker 2: That's what's gonna get me, when in fact, the bond
27:50
Speaker 2: market is heart disease. It's what gets all of us.
27:55
Speaker 4: Folks.
27:56
Speaker 3: If you are in that camp where you're again rightly
28:01
Speaker 3: concerned about what could happen if the stock market pops
28:04
Speaker 3: and the bubble drops and the floor falls out from
28:08
Speaker 3: under you. I get that concern. If you are not
28:11
Speaker 3: testing out your financial assumptions for what happens to you
28:15
Speaker 3: if inflation runs four percent instead of two and a half,
28:19
Speaker 3: I'm telling you that is a far bigger concern for
28:21
Speaker 3: the average person.
28:22
Speaker 4: That I talk to.
28:23
Speaker 3: If you'd like to test out your strategy and figure
28:27
Speaker 3: out how it's going to hedge against what could be
28:30
Speaker 3: higher inflation for longer, give the folks at Armstrong Advisory
28:33
Speaker 3: Group a call. We help you test this theory out
28:36
Speaker 3: and help align that portfolio with those risk factors. The
28:41
Speaker 3: numbers eight hundred three nine three for zero zero one
28:45
Speaker 3: for your free consultation. You go to Armstrong Advisory dot
28:48
Speaker 3: com to learn more about the phone number eight hundred
28:51
Speaker 3: three nine three for zero zero one.
28:53
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
28:56
Speaker 1: registered investment advisor. Nothing in the ad or in any
28:59
Speaker 1: Armstrong guide a specific financial, legal, or tax advice. Consult
29:02
Speaker 1: your own financial tax into state planning advisors before making
29:04
Speaker 1: any investment decisions. Armstrong may contact you to offer investment
29:08
Speaker 1: advisory services.
29:09
Speaker 2: Take a quick break here. When we return, let's talk
29:13
Speaker 2: about crackspreads. Next.
29:14
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29:18
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29:21
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29:23
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29:35
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29:47
Speaker 2: Oh right, all right, all right, all right, So let's
29:50
Speaker 2: talk a little bit about crackspreads. We've mentioned them a
29:54
Speaker 2: few times on the show. Crackspread is a fancy way
29:56
Speaker 2: of saying, hey, how much money does an oil refinery make?
30:00
Speaker 2: Or the product relative to the crude that is used
30:03
Speaker 2: to produce it.
30:04
Speaker 4: Got it.
30:04
Speaker 2: So today, just as an example, West Text Intermediate is
30:08
Speaker 2: trading at eighty seven dollars per barrel. Diesel distillates heating
30:14
Speaker 2: oil again, diesel, we'll call it, is trading at one
30:19
Speaker 2: hundred and eighty eight dollars a barrel. That means that
30:22
Speaker 2: the crack spread is one hundred and one dollars per barrel.
30:24
Speaker 3: So if you make diesel, find a way to refine
30:27
Speaker 3: oil in your basement into diesel.
30:30
Speaker 2: Mark Fandetti and I have bought a barrel of crude
30:32
Speaker 2: and we're gonna try it this weekend.
30:34
Speaker 4: Good luck.
30:35
Speaker 2: So, oh well, we'll see how things go there. But uh,
30:40
Speaker 2: I don't even know where you start. Because here's the
30:42
Speaker 2: thing about oil refineries.
30:44
Speaker 4: Defend it. I got a friend who's a chemist.
30:45
Speaker 2: Do you guys know how oil refineries actually work? No,
30:49
Speaker 2: So here's what they do. They take crude oil and
30:52
Speaker 2: somehow like again I don't know the exact mechanics of it,
30:57
Speaker 2: but you heat it up without lighting it on fire,
31:01
Speaker 2: and through that it eventually evaporates and then it it's
31:06
Speaker 2: again it's distillation. And so basically what you have is
31:09
Speaker 2: the different products. They go up this smoke stack or
31:12
Speaker 2: not smoke stack, but up this like heating stack, and
31:16
Speaker 2: then there are areas where it cools, and based on
31:18
Speaker 2: how high it is, you get the separation of the
31:19
Speaker 2: different fuels that come off of it. And so you know,
31:23
Speaker 2: gasoline comes off or I think diesel comes off first,
31:26
Speaker 2: then like your gasoline, then you know your your lighter
31:28
Speaker 2: stuff as you get further and further up, and then
31:31
Speaker 2: from there you The reason that it's called cracking is
31:34
Speaker 2: you then can also like crack these molecules in order
31:37
Speaker 2: to like improve them in terms of making them more
31:41
Speaker 2: like the product that you actually need at a chemical level.
31:45
Speaker 2: So it's it's kind of wild. I wouldn't try it
31:47
Speaker 2: at home if I'm being honest here. But the reason
31:51
Speaker 2: why this matters is that if all you're tracking is
31:54
Speaker 2: the price of crude oil, you might say, hey, like
31:57
Speaker 2: cruse not back at you know, one hundred and twenty
32:00
Speaker 2: dollars a barrel? Why is diesel back at five point
32:03
Speaker 2: fifty four right now? Like what gives? I don't understand
32:06
Speaker 2: what's happening. And the reason why is because there are
32:11
Speaker 2: two inputs to the price of the final product. The
32:14
Speaker 2: first is, okay, what's the crude price that people have
32:17
Speaker 2: to pay to get into a refinery. The second is, hey,
32:21
Speaker 2: if there's a lack of product available, then the end
32:26
Speaker 2: buyer says, okay, that's fine that you know crud's going
32:29
Speaker 2: for eighty four barrel, but I need diesel and I
32:33
Speaker 2: can't find it anywhere. I'll give you two hundred dollars
32:35
Speaker 2: for that barrel of diesel.
32:36
Speaker 3: Yeah, and again those are the market mechanics. But practically speaking,
32:40
Speaker 3: here two major factors that we can tell.
32:42
Speaker 4: One Ukraine.
32:44
Speaker 3: Ukrainian military has been pretty successful at striking refining and
32:47
Speaker 3: transportation capacity in Russia.
32:50
Speaker 2: They're sending hundreds of drones per night into Russia, striking
32:53
Speaker 2: oil refineries, tanker trucks, like basically anything that makes the
32:57
Speaker 2: Russian petroleum industry.
32:59
Speaker 3: Work, to the point where there's serious concerns among farmers
33:02
Speaker 3: about being able to harvest you know this this.
33:04
Speaker 2: Year's Russia has banned exports of diesel and gasoline through
33:07
Speaker 2: the end of this year and now are importing product
33:10
Speaker 2: because they.
33:10
Speaker 4: Don't have enough. Second is China.
33:12
Speaker 3: So China has been helping out as we've talked about,
33:17
Speaker 3: you know, not saying that they're helping out, but you know,
33:20
Speaker 3: seemingly they have reduced the amount of crude oil that
33:24
Speaker 3: they are importing into their country, and that's been keeping
33:27
Speaker 3: the ad overall price at a reasonable level. But at
33:29
Speaker 3: the same time, they have been refining less because they
33:33
Speaker 3: don't have as much oil to refine, and too, they've
33:36
Speaker 3: been again not selling that refined product onto the public markets.
33:40
Speaker 3: They're keeping it inside their own borders, and therefore, once
33:44
Speaker 3: again supply is not keeping pace with demands, driving those
33:49
Speaker 3: prices higher for diesel than other fuels.
33:53
Speaker 2: The other thing I'll continue to point out for people
33:55
Speaker 2: in the Northeast, if there's one product that tracks the
33:58
Speaker 2: price of diesel closely, it is home heating oil, which
34:00
Speaker 2: means that as you are seeing diesel going sky high,
34:03
Speaker 2: if you are trying to figure out when to fill
34:06
Speaker 2: your tank for this year, I don't know what the
34:08
Speaker 2: right answer is, but it's very possible that we continue
34:13
Speaker 2: to see upward pressure here. Already, diesel prices and by extension,
34:18
Speaker 2: home heating oil prices are about fifty percent higher than
34:21
Speaker 2: at this time last year, and so this is something
34:24
Speaker 2: that has the potential to really stress families in the region.
34:29
Speaker 2: About twenty to twenty five percent of households in the
34:32
Speaker 2: Northeast to use home heating oil for their heat supply.
34:36
Speaker 2: The rest of the country basically no one uses it.
34:38
Speaker 2: You get north of Pennsylvania and it's not really a thing,
34:41
Speaker 2: but it's something that absolutely has the potential to stress
34:47
Speaker 2: out households trying to figure out their budgets. And I
34:51
Speaker 2: gotta tell you, like, no one's really talking about the
34:53
Speaker 2: diesel side, because look, none of us, the vast majority
34:57
Speaker 2: of people have never filled up a tank with diesel
35:00
Speaker 2: except by mistake.
35:01
Speaker 4: But this winter it's gonna be messy.
35:03
Speaker 2: But this is the stuff that seeps into all parts
35:07
Speaker 2: of the economy because it's all the transportation, Like all
35:10
Speaker 2: of your Think about all of the stocking that is
35:16
Speaker 2: being done in the next two months for the holiday
35:18
Speaker 2: shopping season, all the goods that come to West Coast
35:21
Speaker 2: ports and then are driven across the country by semi
35:26
Speaker 2: trucks that are powered by diesel. Think about all of
35:29
Speaker 2: the combines that are getting fired up for the fall
35:33
Speaker 2: harvest season in the next couple months. Driving season is
35:36
Speaker 2: July and August, that's the peak there. Peak diesel season
35:39
Speaker 2: is September October, and so This is a problem that
35:43
Speaker 2: is going to rear its head over the next couple months.
35:47
Speaker 2: No one's talking about it right now. I can't wait
35:50
Speaker 2: for three weeks from now when all the big news
35:53
Speaker 2: stories are about like the price of diesel and how
35:55
Speaker 2: it's going to impact things. And if you were listening
35:57
Speaker 2: to our show today on August twenty, twenty twenty six,
36:01
Speaker 2: you'll be like, Chuck and Mike told me about this first. Yeah,
36:04
Speaker 2: And they won't care because everybody's can be pissing and
36:06
Speaker 2: then they'll be upset at us. Yeah, because you know
36:08
Speaker 2: the messenger always gets it.
36:10
Speaker 3: So, speaking of being pissed, the Business Insider has a
36:15
Speaker 3: piece about the one big thing that's dragging down Americans
36:18
Speaker 3: vibes about the economy, and I'm.
36:19
Speaker 2: Here to say, not enough, orchiparks, they are wrong.
36:22
Speaker 3: So here's the thing that they are mentioning, which is
36:25
Speaker 3: that wages are not keeping pace with inflation. Yes, seems
36:29
Speaker 3: like a logical thing that would make somebody upset, and
36:31
Speaker 3: you know, I don't like to see that. Over the
36:34
Speaker 3: last in July, average hourly earnings came in at three
36:37
Speaker 3: point one five percent. Inflation came in at three point
36:40
Speaker 3: three percent, So sure they did not keep pace with
36:43
Speaker 3: inflation on average. That's not why people are upset.
36:45
Speaker 2: Why are people upset?
36:47
Speaker 3: From what I can tell, three things play into this,
36:50
Speaker 3: and two of them are pretty related. One phone seems
36:52
Speaker 3: to be whether or not the party that you like
36:56
Speaker 3: is in power. Seems to be consistently a big driver
36:59
Speaker 3: of whether or not you're happy about the economy. Sure,
37:01
Speaker 3: Two prices, just generally regardless of wages. It's the change
37:05
Speaker 3: in prices and how recent it's changed. Three Gasoline, So
37:09
Speaker 3: those two are related, Like, you know, the price of
37:10
Speaker 3: gasoline more than much else. I think makes people upset.
37:14
Speaker 3: But you know, ask me answer this chuck. From May
37:18
Speaker 3: of twenty twenty three right through March of twenty twenty six, Yes,
37:23
Speaker 3: average hourly earnings were growing at a faster rate year
37:27
Speaker 3: over year than inflation. Did anybody suddenly say, Hey, this
37:30
Speaker 3: economy's fantastic.
37:32
Speaker 4: I love it here?
37:33
Speaker 3: Furthermore, since the COVID pandemic, while prices in the aggregate
37:38
Speaker 3: are up twenty eight point four percent wages, average hourly
37:42
Speaker 3: earnings are up thirty one point eight percent, do you
37:44
Speaker 3: hear anybody saying, what a fantastic economy?
37:46
Speaker 4: I love it here?
37:47
Speaker 3: No?
37:47
Speaker 2: It's because there are two things that people care about.
37:50
Speaker 2: When people think about inflation, they think of the price
37:51
Speaker 2: level like no one, no one actually sits there and
37:54
Speaker 2: is like, ah, this two percent inflation is lovely, while
37:56
Speaker 2: this three percent inflation is bothersome like no one thinks
37:59
Speaker 2: that way. But the other piece is just that I
38:05
Speaker 2: think ultimately the economy has just been There's been one
38:09
Speaker 2: thing after another for the last seven years now, and
38:12
Speaker 2: people are just tired. And I get that. Let's take
38:16
Speaker 2: a quick break. Hot or two's coming up in a bit.