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What does historical data say about how long a bull run can go? · The Financial Exchange Show

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Face is the Financial Exchange with Mike Armstrong and Mark Vandetti.
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Speaker 2: Good morning, Happy Friday, Welcome back to the Financial Exchange
1:17
as we officially kick off earning season here in October
1:22
with some very exciting large banks reporting earning, so we'll
1:26
be diving into that. We also received an additional inflation
1:28
report after yesterday's CPI reading, which, if you missed, came
1:32
in a little bit hotter than anticipated. That's what the
1:34
Producer Price Index, and I haven't had time to read
1:37
it yet, but six minutes ago we've got a reading
1:39
out on consumer sentiment as markets which were slightly in
1:43
negative territory to open opened up positive here with the
1:48
Dow and sp so far in positive territory, with Nasdaq
1:51
off slightly. But I want to get first mark too.
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Those incredibly exciting bank earnings and if you cannot here
1:59
are the star arcasm in my voice. These companies are
2:02
effectively utilities at this point in time, subsidized and backed
2:05
by the US taxpayer, and so they don't generally do
2:09
anything or tell you much. That's incredibly exciting. Although JP
2:13
Morgan tries Jamie Chase, Jamie Diamond of JP Morgan Chase
2:18
that's his name, does try and spice that up a
2:20
little bit by telling you that the world's coming to
2:22
an end every thirty to sixty days, but generally speaking
2:25
well received on markets this morning, after Wells Fargo and
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JP Morgan reported earnings. JP Morgan up over five percent,
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Wells Fargo the same here big picture mark as rates
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have started to come down beginning of a rate cutting cycle.
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Any major takeaways you had from these two companies who
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reported this one, We'll.
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Speaker 3: Just talk generally about the key metric of bank profitability,
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whether it's a big bank or a small bank. It's
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so called net interest margin.
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Speaker 2: That is good. What banks do. They take your money
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and they lend it.
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Speaker 3: So it's just a spread. I'm oversimplifying a little bit.
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And you would think when rates were coming down when
3:05
the Fed lowers, I should be I should qualify that
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when the Fed lowers short term rates, longer term rates
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tend to come down at least that's the immediate effect.
3:14
But that hasn't happened over.
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Speaker 2: The past four exact opposite. But yeah, yeah, except.
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Speaker 3: For the five million times that hasn't happened. No, But seriously,
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on average, the Fed, FED easing reverber rates down, the
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so called yelker. We talk about that later, we talked
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about the FED. The point I wanted to make was
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you would think when rates come down that banks net
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interest margins would suffer because compression.
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Speaker 2: Right, If rates are coming down, you would imagine there's
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less of us.
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Speaker 3: You're making new loans, so you make a mortgage. You
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you're able to get less for the interest rates lower
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on that mortgage. You're paying out roughly the same, maybe
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slightly less to depositors. That spread historically for small banks anyway,
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interestingly enough, but not large banks has becomes has been
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subjected to pressure when the FED is easy. So I
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guess the point I'm trying to make is is that
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don't assume that just because the FED is lowering rates,
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it's going to be a tougher net interest margin environment
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for banks, large banks in particular. It's hard to say
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whether or not the FED cutting rates is good or
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bad small banks. Yeah, academics who've looked at this, and
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as you could tell, I looked it up this morning
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because a contrary to my history when we talk about
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individual companies, I actually wanted to make a contribution to
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this segment, and my contribution here is, don't assume that
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falling rates are necessarily bad for big banks with complicated assets,
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some of which are very long lived. They're far less sensitive,
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as it turns out, to changes in the FED Funds
4:39
rate than smaller or local banks are.
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Speaker 2: Yeah, so if you're a local regional bank, let's talk
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about why this would be. You know, rates coming down
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would be a clear hit to the margin. You know,
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just think about your local experience. If you have money
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in your checking account, regardless of whether you're with Bank
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America or Marx Credit Union and hot Dog Stand, you're
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probably not making a whole lot of money in your
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checking account. And in that local bank, that net interest
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margin is. Again, all that they do at that local
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bank is take your money and lend it out. They
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don't have usually wealth management divisions, they don't have investment banks.
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If your Marx Bank and hot Dog Stand, they just
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do lending and deposits. JP Morgan and Wells Fargo are
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very different companies in that regard. They have their own
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credit card businesses, They have their own wealth management divisions,
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some of the largest wealth management divisions in the world.
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They have their own investment banks, and when some of
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the like the perfect example here would be, did JP
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Morgan and Wells Fargo and all these banks lose all money,
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you know, lose a ton of money in the twenty tens. No,
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they were doing all right because even though net interest
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margin was quite low, they make all sorts of money
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on trading, wealth management, and investment banking in addition to
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what they see on net interest margin, which is quite
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frankly why these banks are so boring. Yeah.
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Speaker 3: So, I guess for an individual investor, if you are
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concerned about the effect of falling rates on bank profits,
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larger banks, because of their longer dated assets, are less
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their net interest margin is less sensitive. Academics of research
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this have found it. This is not my work, just
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regurgitating the sort of consensus. They should be less volatile
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in a falling interest rate in falling profitability environment, and
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a bank, as you point out, like JP Morgan or Wells,
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if they've gotten their act together, may actually be able
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to do just find because of their various business lines
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and sources of potential profitability.
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Speaker 2: But as you can tell, our general consensus here is
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that when you're talking about companies that are by definition
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and by law too big to fail, their earnings are
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kind of boring in terms of what they end up reporting.
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So banks have done quite well this year. Wells Fargo
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up five and a half percent today, up twenty three
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and a half percent for the year, JP Morgan Chase
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up five percent today, up thirty percent for the year.
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Speaker 3: Well handily beating the broad market.
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Speaker 2: Yeah, the entire banking sector doing quite well this year
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in spite of the new you know trend which is
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going to be rates coming down and again the net
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impact on a bank like JP. Like who in the
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last year do you know anyone who has gotten a
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mortgage from Wells Fargo or Japen Morgan Chase. I don't
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know anyone who has ever gotten a mortgage from Bank
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America jpall in.
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Speaker 3: Our region but maybe elsewhere.
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Speaker 2: But even Bank of America, which has a huge presence,
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like nobody actually goes to them for mortgages from what
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I see, because they don't tend to be competitive. And
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so the traditional banking as I think of it, these
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giant banks don't do that much of it anymore. They
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just don't get all that much into the home equity
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line of credit to end mortgage origination space. They leave
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that to other players, and they have bigger fish to
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fry in terms of you know, giant corporate lending arms
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and different and things that they do today.
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Speaker 3: So I don't know off and with there. If I
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had to guess, I'd say they have a substantial share
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nationally mortgage marshals. They may have in every market, yeah,
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and a bigger share in maybe big metro areas or
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areas where they're headquartered.
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Speaker 2: What I find what I find incredibly interesting about again,
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not every bank, but Bank America and JP Morgan have
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made it a real point that they want to expand
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their physical banking presence. I know this isn't necessarily about
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their their earnings right here, but that is a substantial
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reversal from where it seemed the industry was going over
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the last few years. Right I did a bunch of
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my banking through a brokerage firm where they didn't even
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have any branches. It was literally just an online bank
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checking account. What they seem to be finding here is
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a lot of people are okay with digital banking, but
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a prerequisite to opening a new account is having a
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local branch in their area, which.
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Speaker 3: I agree with, you know, on a person I ended
9:03
up with TD because they have a bank in my town. Tucker,
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would you will lunder your money?
9:07
Speaker 2: Tucker? Oh they will, Yeah, have any money's jus they'll
9:10
they'll clean it up for you, Tucker.
9:12
Speaker 3: Would I don't. I don't want to slander them, although.
9:16
Speaker 2: I just did, and they were just find a whole
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bunch of money for exactly.
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Speaker 3: I'm also a loyal customer. I think they're absolutely fantastic.
9:23
Speaker 2: I mean, Tucker, would you open up a checking account,
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like a primary checking account with a bank that doesn't
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have a local presence, because I think even I, who
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am very comfortable with the digital experience.
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Speaker 4: Yeah, in this day and age, I have no problem
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with that. You would, Yeah, I wouldn't have a problem
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with that.
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Speaker 2: See for me, it's the one in every three years
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that I actually have to go into the branch. I
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would be very It.
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Speaker 3: Caused me to change. It was a one in multi
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year experience where I threw my hands up and said.
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Speaker 2: I can't.
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Speaker 4: I can't remember the last time I went inside my bank.
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Speaker 2: You know, Actually, the same story I have. I have
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a colleague who was down in Tennessee for years, had
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an account with Wells Fargo, had an issue where he
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had to be at a branch. And guess what, there's
10:06
zero branches for Wells Fargo anywhere. I think it's southern Connecticut.
10:11
Speaker 3: You need debit cards same day because you lost your
10:13
wallet stupidly as I did. You will wish you had
10:17
a branch within your area.
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Speaker 2: Again.
10:19
Speaker 3: It's why I switched, But it's different for everybody.
10:21
Speaker 2: Let's take a quick break when we come back. We've
10:24
had dual inflation reports over the last two days. I
10:27
want to break them down and get Mark Fandeaty's take
10:29
on yesterday's all important CPI report and what it might
10:33
mean for the Federal Reserve. We'll be right back after this.
10:36
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Speaker 2: Mark. One week ago, according to Chicago Mercantyle Exchange, there
11:38
was almost no doubt that the Federal Reserve would be
11:40
cutting interest rates by fifty basis points. There was even
11:43
a possibility of seventy five basis points by year end. Still,
11:49
overall likelihood seems to be pointing for two rate cuts
11:52
before year end. Here, with the final meeting of the
11:54
year occurring on December eighteenth, we will see what plays out.
11:58
But since about a week ago, we've now gotten a
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hot unexpected jobs report, two hundred and fifty four thousand
12:05
jobs created, with the unemployment dropping down to four to
12:08
one or nearly to four point you know, nearly to
12:11
four percent if you round down. We yesterday got a
12:15
CPI report which was by no means catastrophic, but also
12:20
didn't quite play into the Fed's narrative of rapidly reducing,
12:26
not reducing, rapidly shrinking inflation rapidly disinflating. So talk to
12:33
me about what we actually saw in the report yesterday,
12:36
because we're continuing to get a lot of help from
12:38
gas prices, which I personally enjoy quite a bit. But
12:43
when you take a look at the numbers here, we're
12:46
not in that perfect two percent range right now.
12:50
Speaker 3: Yeah, I'll use the analogy of weight and weight loss
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because we can all relate. I'm sorry, I know this much.
12:57
I haven't heard this one is my old standby. Yeah,
13:00
you guys, I think inflation is like fat people.
13:03
Speaker 2: No, it's consistent.
13:05
Speaker 3: If you were trying to measure your progress toward a
13:08
weight loss goal, you wouldn't look at the gain or
13:11
the decrease over any short period like a few hours
13:14
or even a day. You would take a multi day average,
13:18
and you might take even a longer term perspective than that,
13:23
depending on your goal and the time frame. And we
13:27
all know from our experience with that that progress can
13:30
be reversed. You could see a good mini trend in
13:33
weight loss and you could have a bad weekend and
13:36
that sets you back. The inflation process is similar and
13:40
that inflation price pressures. And by inflation we mean the
13:43
change in prices. Prices have gone up by about twenty
13:47
five percent since COVID started. Sure they're not going back
13:50
down abs in a severe economic contraction. We can talk
13:53
more about those dynamics maybe at some point, but you
13:55
ask specifically, where are we today, and it's really hard
13:59
to say. Inflation has come down a lot. The rate
14:01
of change in prices has come down a lot over
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the past two years or so. We know that it
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peaked at about nine percent. I'm using the CPI, the
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Consumer Price Index as an example. There are others peaked
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at about nine. Now it's down two year over year,
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about two and a half. I'm going round up a
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little bit. That's really good considering there hasn't been a
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major economic calamity, which is usually what's required to get
14:22
inflation down by that much.
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Speaker 2: Arguably, every time you've seen inflation come down, you know.
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Speaker 3: The estimated sacrifice ratio is somewhere around three percentage points
14:29
of unemployment for every percentage point of inflation. That was
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roughly the so called sacrifice ratio of the disinflation experience
14:36
of the early nineteen eighties. So by past disinflation standards,
14:41
this was a miracle economically. And I know a lot
14:44
of you your lived experience is different than that. You
14:46
don't think the economy's great. I get that, but this
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has been a really good disinflation in historical terms. So
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is the job done? Have we achieved the soft landing?
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That question isn't settled. And one reason for that is
14:59
one point in yesterday's report, which is so called core inflation,
15:03
which is a better measure of what's actually going on
15:06
with inflation because it strips out the erratic stuff. I'll
15:09
go back to the weight analogy. If you're weighing yourself,
15:11
you wouldn't do it right after dinner. You'd probably wait
15:13
till the next morning. We all do it. Sure, Core
15:16
inflation's a little bit like that. You want to strip
15:19
out recent disturbances that are going to be fleeting. So
15:23
core inflation was up point three percent month over month.
15:26
That's up about three and a half percent. I'm rounding
15:27
up a little bit over the past year. So core
15:30
inflation's up a lot more over the past year than
15:33
is so called headline inflation. And if you look at
15:37
another measure, of course, so called median, which is literally
15:41
just the price in the middle of all the prices
15:44
that the Bureau of Labor Statistics.
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Speaker 2: Measures, thousands of them they do.
15:48
Speaker 3: And one way, you know, we talk about median home
15:50
prices and median salaries and stuff because you don't want
15:53
the big outliers or the you don't want the extremes
15:57
on either end to distort the true picture. So you
15:59
look at the median, Mike. You like to take three
16:02
and six month averages and then annualize them. You do
16:04
this all the time. That's why we call you three
16:06
month average Armstrongs right. Internally, if you look at the
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three month median, it's about three point seven percent when
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you annualize it, six month medium three point five. So
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they tell a story similar to the recent history of core.
16:20
So there are measures, Mike, and I'll wrap with this.
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There are measures of the trend and inflation which researchers
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favor because they do filter out the noise that can
16:30
distort the true picture. That suggests that inflation has settled down,
16:34
but it's settled down a good percentage point to a
16:37
percentage point and a half higher than the fed's goal.
16:40
And this is important. The fed's goal is two percent.
16:42
Speaker 2: Yeah, and you can't, unlike in months past, we can't
16:46
look at any one item here and say, well, it's
16:49
that darn shelter costs, for instance, that's just keeping core
16:51
inflation higher. This was a big story that we talked
16:54
about over the last several years. Like, ah, man, we
16:57
can see on other sources that rents are coming down,
17:00
it's just not feeding into the CPI. Well guess what
17:02
it did. And inflation is still a little bit higher
17:06
than you would learn.
17:06
Speaker 3: You in mind, we talk about this a lot internally. Yeah,
17:09
it becomes a game of whack a mole. Yeah, we
17:10
just gonna get shelter in the control.
17:11
Speaker 2: Great, we did that.
17:12
Speaker 3: It's again like dieting, I just got to cut out Dorito's. Yeah,
17:15
but you substituted it with two ring dings every day.
17:19
So it doesn't that suggest that there's something underlying all
17:23
of this? The answer is I'm being rhetorical. The answers, yes,
17:26
there is, and it's the economy running an excess of
17:29
its speed limit. That's what puts upward pressure on inflation.
17:33
That was the key lesson of the nineteen seventies. Even
17:36
though rates were high, they weren't high enough. And economic
17:38
growth it may not seem gangbusters relative to the eighties
17:41
and nineties, but it's pretty strong relative potential that might
17:44
be putting upward pressure on inflation.
17:46
Speaker 2: Like, so, thus far, like I said, you've had a
17:49
job's report that came in hotter than expected, albeit nothing catastrophic,
17:55
no massive wage spikes. And I would not call this
17:58
inflation report catastrophic either. Uh you know, by no means
18:03
is it catastrophic. But you do start asking yourself, like,
18:05
all right, well, if we weren't getting all this help
18:06
from oil prices, which we know do seep through to
18:10
other costs ultimately, what would this all look like, right?
18:14
If if energy prices were moving upwards instead of downwards,
18:17
What would this overall narrative look like and sound like,
18:20
because that's completely out of it if.
18:22
Speaker 3: They were just neutral instead of down seven percent of
18:24
right the past year.
18:25
Speaker 2: So I think where I go with all this though,
18:28
is I'm not sure how much this sways Jerome Powell
18:33
and the other governors from their current path. They've been
18:36
pretty clear about it, and furthermore, their data that they're
18:40
going to get on both inflation and jobs for the
18:43
month of October, and my mind is muddied. I don't
18:47
know how you feel about it, but you know, looking
18:49
at the way hurricanes have, you know, affected data in
18:52
the past, I think the data you're going to get
18:54
on both of these figures is going to be a
18:56
little bit muddied in October, at least maybe in November,
19:00
and so probably not enough to alter their path unless
19:04
it's just a gangbuster inflation and jobs report.
19:07
Speaker 3: Sounds like these guys are hell bent on continuing to
19:09
cut raids. Based on their public remarks, this is reminiscent
19:13
of the nineteen seventies. I don't need to be so
19:17
apocalyptic here, but we did make similar mistakes. We misread
19:21
the economy's potential relative to what it was actually doing,
19:24
and as a result, inflation kept popping up again.
19:27
Speaker 2: Quick Break Wall Street watches next.
19:41
Speaker 1: Like us on Facebook and follow us on Twitter at
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TFE show. Breaking business news is always first right here
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19:53
Street Watch a complete look at what's moving markets so
19:56
far today. Right here on the Financial Exchange Radio netw work.
20:00
Speaker 4: Well markets are in positive territories. Wall Street sifts through
20:04
third quarter bank earnings unveiled this morning, in addition to
20:07
the Producer Price Index, which was flat for the month
20:10
of September, below expectations. Right now, the Dow is up
20:13
by three quarters of a percent or three hundred points,
20:16
SMP five hundred is up by two thirds of a
20:19
percent or thirty six points in the Nasdaq up by
20:22
over a third of a percent or sixty five points.
20:24
Russell two thousand up one in a third percent as well.
20:28
A ten year treasure yield is flat at four point
20:32
zero nine percent, and crude oil is off two thirds
20:36
of a percent, rating a seventy five dollars in thirty
20:38
six cents a barrel. JP Morgan up by four and
20:41
a half percent after beating third quarter expectations and reporting
20:45
a shallow we're then expected two percent drop in quarterly profit.
20:48
Wells Fargo also said its profit fell less than expected,
20:52
with net income dropping eleven percent to five point one
20:55
billion dollars. Wells Fargo up by six percent today and
20:58
black Rock shares by three percent after its earnings also
21:02
beat Street or excuse me, beat analyst forecasts. Instead, it
21:06
now oversees a record eleven and a half trillion dollars
21:09
of assets outside of bank earnings. Tesla shares down nearly
21:13
eight percent following its Robotaxi event last night that seemingly
21:18
underwhelmed investors. Uber and Lift stocks are seeing gained so
21:24
far today in reaction to the event, after Bank of
21:27
America said the event's conclusion ended six months of worrying
21:30
about what it could mean for the ride sharing stocks,
21:34
and Stilanta's shares are down by three percent after the
21:37
automaker announced major management changes, including ousting its chief financial officer.
21:43
I'm Tucker Silvan. That's Wall Street.
21:44
Speaker 2: Watch, folks. If you haven't already signed up, time is
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22:16
host of the XTK Morning Show, and I'm personally excited.
22:19
We's gonna be able to drive down to the Cape
22:20
in fewer than three hours for once, so this is
22:23
gonna be an exciting time. You're gonna join us for
22:25
the live broadcast of the Financial Exchange Show. Following that,
22:29
we're gonna be doing a free educational lunch from the
22:31
Armstrong Advisory Group. Will be taking your questions, talking to
22:34
you about the upcoming election state of markets at the moment.
22:37
We're having deep conversations right now obviously about inflation and
22:40
unemployment and where all of that might go, as well
22:43
as policy proposals from both the Harris and the Trump campaigns.
22:48
If you'd like to join us again, the date is
22:51
Thursday October twenty fourth. You can go to Armstrong Advisory
22:55
dot com slash events, fill out a form there and
22:59
we'll sign you up and get more information there as well.
23:01
But once again, it's Thursday October twenty fourth at the
23:04
Double Tree Resort and Suite in Hyannas. You can go
23:08
to Armstrong Advisory dot Com, slash events or call us
23:11
at eight hundred three nine three four zero zero one.
23:15
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
23:17
registered investment advisor. Nothing in the ad or in any
23:20
Armstrong guide a specific financial, legal, or tax advice. Consult
23:23
your own financial tax into state planning advisors before making
23:26
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23:29
advisory services.
23:31
Speaker 2: Mark. I've maintained that if we get to year end
23:35
with both inflation and unemployment under four and a half percent,
23:39
then I'm calling it a soft landing for twenty twenty four. Ultimately,
23:43
an economy never actually lands. It's constantly evolving and changing.
23:46
But that's been my attempted definition of what this would
23:50
look like for a temporary soft landing. At least Federal
23:53
Reserve is meeting next November seventh, right day after the election,
23:59
I believe it is, and they will be setting policy.
24:03
There's been some talk now of Fed governors maybe disagreeing
24:09
a little bit with the direction of the path, and
24:11
it's going to probably get more challenging here now that
24:13
you've got these two reports, and you will get just
24:16
one more jobs report before that next meeting, as well
24:19
as the PCE inflation metric. But what do you suppose
24:22
the conversations are going on behind closed doors? And where
24:26
would you be Obviously neither of us are on the
24:28
federal reserve, but where would you be leading this conversation.
24:33
Speaker 3: It seems like, as we talked about in the last segment,
24:36
they're determined to continue to cut rates. They're highly confident
24:40
in their view that disinflation will continue. We talked about
24:44
reasons why that might be wrong. You talked about the
24:47
big special factor energy prices. Food prices can serve this
24:52
role as well, but energy prices are the historical special
24:55
factor culprit. They can push inflation up and distort the
24:57
true trend. They can pull it down and distort the
24:59
true trend.
25:01
Speaker 2: That's been the case for the last couple of years.
25:02
Speaker 3: It would seem that to be uh, yeah, it would
25:06
seem that that has been so so, Mike, I don't know,
25:10
and I don't think. Look, we're not privy to the
25:13
information that they're privy to. I tend to be opinionated
25:18
about this type of thing because I don't know enough
25:22
about it to be nuanced. To be honest, they get
25:25
you know, I take a sort of textbook. This is
25:27
what they taught us in college and after college, if
25:32
you had the privilege of studying it later. This is
25:34
what they taught us. This is what the models say.
25:37
I'm limited to that. So I see growth faster than
25:40
trend or potential. I see unemployment very low, and it's
25:44
not clear to me that this is that these are
25:46
circumstances that would normally be associated with a disinflation, a
25:49
disinflationary environment with with with price increases easing. They may
25:54
have information, They know these models as well as I do.
25:57
Some of them wrote chapter wrote papers on which the
26:01
textbooks that I read are based. So you know, I'm
26:03
not going to claim to know more than a PhD
26:05
academic now on the Federal Reserve if it doesn't give
26:08
them pause. Part of me says, why should it give
26:11
me pause? But at the same time, go ahead, really, no, no,
26:15
you're fine.
26:16
Speaker 2: I mean my point is much the same as yours,
26:19
which is, over the last few years, I thought that
26:21
the Federal Reserve was too slow to raise rates, didn't
26:23
go far enough quickly enough, and then kept kind of
26:28
having moments where they declared victory here and there or
26:31
at least alluded to a path to victory sooner than
26:34
they should have. And I've been critical all along the way.
26:38
To be fair to the Federal Reserve, the level of
26:41
disinflation that we've seen so far I didn't think was
26:44
possible given the path that has happened. I thought that
26:47
was completely impossible to get there. And they know they've
26:51
been proven right on that one factor.
26:54
Speaker 3: I think they got lucky. I think special factors, as
26:56
you talked about, energy prices have helped them a lot.
26:59
Supply chain unsnarling help them a lot, and to their credit,
27:03
I've not heard any FED official take take credit for
27:07
the disinflation without economic sacrifice that we've experienced over the
27:10
past two years. And the reason you and I and
27:13
others didn't think it was possible, it's because it's never
27:15
happened historically. Again, going back to my weight, my favorite
27:19
analogy weight loss analogy surprise. It'd be like saying I'm
27:22
gonna lose weight. I'm not gonna change a thing.
27:23
Speaker 2: Yeah, you know so. I mean, were I in the
27:26
Federal Reserve and I'm sitting on these two reports, I
27:29
would be a little bit hesitant about the path downwards.
27:32
And for a few reasons. One, you know, jobs report
27:35
is looking like the labor market remains a little bit
27:37
tight here, that could shift rapidly, and if it does,
27:39
then you can always continue your way down. The other
27:42
piece about this would just be I hate talking about
27:46
political uncertainty, but here's something that actually seems relatively certain.
27:51
Whether you have a Republican or Democrat administration taking control
27:57
of the White House next year, and assuming that the
27:59
House and Senate follow suit, which is not a sure
28:01
thing at all, but assuming they do, what does it
28:05
look like to me from an economic policy perspective is
28:08
either a whole bunch of tax cuts or a whole
28:09
bunch of spending. And so if you're worried about inflation,
28:15
underlying inflation, you know, contributing to the overall growth of
28:20
prices in the future. And you add that on top
28:23
of it of the government suddenly either piling more money
28:26
into people's pockets via tax cuts or piling it into
28:29
people's pockets via stimulus measures of one sort or another,
28:33
then you know, we've seen how that plays out as well.
28:36
And so you know, that's not the Fed's job to
28:40
grade what Congress is going to do in the future,
28:44
But they will have to react to it in the
28:46
event that that's what occurs here, and so I don't know.
28:50
There's a few pieces in my mind, especially after these
28:52
last couple of reports, that I think at least give
28:54
you pause to wonder, will we be seeing these lower
28:58
mortgage rates in the FED cutting rates? I think, you know,
29:01
the Chicago Mercantyle Exchange, I think still has one and
29:03
a half percent of rate cuts priced in by this
29:06
time last year. Let's go ahead and take a quick break.
29:09
When we come back, I want to move on from
29:11
inflation and FED talk a little bit, and I do
29:15
want to just get to a little bit of conversation
29:17
about this bull market that we've been marking the two
29:20
year anniversary of bull markets. A few stats on this,
29:23
on the state of markets that last this long, and
29:25
what might be next for this equity market. That's next
29:28
on the Financial Exchange.
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30:31
Speaker 2: Two stories here, one from MarketWatch, the other from the
30:35
Journal I believe, both arguing I guess other sides of
30:39
where this market is right now. So the first title
30:43
here the market has been fabulous, maybe excessively so. And
30:47
then the other time, I watch The New York Times. Okay,
30:49
the two year old bull market has just done something
30:51
that shows it has further to run. So different perspectives
30:56
obviously on the market. From these two pieces, how would
31:01
you measure before we get into what the market has done,
31:03
How would you measure where we stand today in terms
31:07
of a real metric that actually matters, as opposed to say,
31:12
you know, the dows at forty nearly forty three thousand
31:15
at this point in time, which is just not a
31:17
terribly useful metric when considering the price of equities.
31:20
Speaker 3: Yeah, I guess one way to answer the question is
31:23
to ask a slightly different question and then answer it myself,
31:25
which is how expense I think you were saying this
31:27
basically how expensive it stocks right now? And when we
31:31
say that, we mean are they excessively high relative to earnings?
31:36
Because in the past that's been a bad omen. Sure,
31:39
we all know what happened after the tech bubble. It
31:42
was a decade's worth of negative returns. The two thousands
31:46
were a lost decade for US equities. There were plenty
31:49
of places to make money, sure, which is why it's
31:50
important to be diversified. But Mike, today, let's use the
31:54
so called Shiller pe that's a Guy Shiller, Nobel Prize
31:58
winning economist win it for this. But he developed this
32:01
simple measure of whether or not stocks relative to the
32:05
past ten years of average inflation adjusted earnings are expensive
32:10
or not, And right now, it's about thirty seven. All
32:13
you have to know is that that's the third highest
32:16
after two thousand, after right before or during excuse me,
32:20
the COVID crisis. That's the third highest level it's ever reached.
32:23
Speaker 2: So we're in company with the nine days before the
32:27
tech bubble. Yeah, twenty twenty one, before twenty twenty two
32:30
fell apart a little bit. And now yeah, and grant,
32:33
we've been in this general area for a good year, right,
32:35
it's not like we have I mean.
32:37
Speaker 3: Yeah, we've been here before in this cycle and it
32:40
didn't result in catastrophe. It did this was twenty twenty two.
32:44
It did result in a serious retrent. Now this wasn't
32:46
the cause.
32:47
Speaker 2: But the more.
32:48
Speaker 3: Expensive stocks get relative to past earnings and prospective earnings,
32:53
the more sort of fragile the market becomes. It suggests
32:57
over optimism and if the economic he doesn't cooperate, then.
33:01
Speaker 2: Doesn't tell you anything about timing.
33:02
Speaker 3: No, we think it's as you pointed out, Mike, and
33:05
as many people have pointed out, this measure, I'll call
33:08
it the Shiller pe out of an acknowledgment of the
33:11
guy that created it. Has been higher than it's pre
33:16
nineteen ninety average since nineteen ninety. So if you were
33:20
waiting around for stocks to get as cheap as they
33:22
got by this measure in say the early nineteen eighties,
33:25
you would have been out of equities for the past
33:27
three and a half decades.
33:29
Speaker 2: It's an important distinction. I remember at my former employer
33:32
hearing about this fund manager who actually, in hindsight, spotted
33:37
the mortgage crisis. He spotted it in like I think
33:41
it was something like two thousand and four, and starting
33:43
in that two thousand and four time period, started shorting
33:47
real estate companies and banks and all sorts of institutions
33:50
that were related to mortgages. And he turned out to
33:55
be right. But I think he was fired in like
33:58
two thousand and seven. He was running a fund and
34:02
he was calling for this mortgage crisis to all fall apart,
34:05
and again he was correct. He was right about the
34:10
actual fundamentals, which was there was clearly a bubble going on.
34:14
Speaker 3: Yeah, a lot of guys in the late nineties, so
34:16
called value managers, like Jeremy Grantham here in town, they
34:19
saw the bubble. Yep, they started warning about it in
34:21
ninety six ninety seven.
34:23
Speaker 2: And then they lost their investors lost a lot of.
34:26
Speaker 3: You probably never heard of them because they're mostly on
34:28
pension fund rosters almost went out of business, but they
34:31
were right then they had a spectacular run for the
34:33
next ten years. So there is an argument for being
34:36
a little contrarian favoring seemingly out of favor asset classes.
34:41
And by asset class, I just mean broad investment group
34:44
and Mike we talked about Cherilope. There are other measures
34:46
like ten year annualized returns. So what have the stocks
34:50
done on average annually over the last ten years. The
34:52
number now is a little over thirteen percent. That's quite
34:54
high by historical standards. The average return for stocks over
34:58
the past fie hundred years is closer to eleven and
35:01
the average ten year rolling return is closer to eleven
35:04
as well. So no matter how you slice it, stocks
35:06
will looking pricey. Now, if AI is the miracle productivity
35:10
and economic growth enhancing technology that it's its proponents make
35:14
it out to be, then maybe stocks are reasonably priced.
35:17
Speaker 2: Could be probably not No, no, probably no, History would
35:19
say no. Yeah, history would say no, that's very But
35:23
who's to say another you know, contradictory point here that
35:27
I don't find terribly useful. But the average bull market
35:30
since nineteen fifty, and you know, we're two years into
35:34
this bull market, right if we had a correction in
35:37
twenty twenty two, the bull market started really in October
35:41
of twenty twenty two that we are currently sitting in
35:43
right now. By by that one definition of it, this
35:47
bull market's two years old. The average one since nineteen
35:50
fifty lasts more than five years on average and gains
35:53
more than one hundred and eighty percent. I find that
35:56
a lot less valuable than compared to other historic times.
36:00
How pricey are stocks right now? I don't think you
36:03
can really use anything to say, oh, yeah, well, the
36:06
average bull market lasted five years, so of course this
36:08
one's going to last another three.
36:11
Speaker 3: All measures I think of valuation are a little bit arbitrary.
36:14
That seems really arbitrary and untethered to anything fundamentally.
36:18
Speaker 2: Yeah, just how long the average one lasts went it
36:22
does not again.
36:25
Speaker 3: Of all the flaky measures out there, that's my least favorite.
36:27
Speaker 2: Wall Street pros apparently avoiding election bets with race too
36:31
close to call. Here's my only question about this mark.
36:35
If you knew who was going to win the presidential election,
36:38
and then somehow knew who was going to win the
36:40
House in the Senate.
36:41
Speaker 3: Which I do.
36:42
Speaker 2: You would you have any idea how to invest based
36:45
on that?
36:46
Speaker 3: We talk about this a lot, even if you knew
36:47
the next quarter's GDP, could you guess how markets are
36:50
going to react to it?
36:51
Speaker 1: Now?
36:51
Speaker 2: I would find this. I just find these stories, and
36:55
you know, there's there's many of them. No, But I think,
36:57
but here's the thing. I actually do experience this right
37:01
like people actually feel choice paralysis, and companies are reporting
37:05
on it ahead of election, and it has nothing to
37:07
do with you know, necessarily.
37:08
Speaker 3: A little different though. If I had a business who's
37:12
the success of a certain potential undertaking dependent on the
37:15
regulatory regime, then I would be sweating this.
37:18
Speaker 2: Yeah, I I could. I could see.
37:21
Speaker 3: Trump now loves crypto. You're just gonna put government money
37:23
into it. He's starting a business himself. All a little
37:26
bit weird. That said, maybe it's not a bad thing
37:28
to pile on the crypto train. If the guy wins,
37:30
it's clearly gonna throw government money in favor at it.
37:33
Speaker 2: There's I guess, yeah, I guess there's a few issues
37:36
that I can look at, but generally the choice paralysis
37:39
that I see, like people saying, Hey, I'm just gonna
37:41
put off my vacation until after the election, Like what uh?
37:44
Individual investors that I speak to aren't a ballot like
37:49
but but Delta speaking to this like, yeah, no, we're
37:51
expecting a decrease in flight bookings around the election because
37:54
we always see that. And I just scratched my head saying,
37:57
why would you delay a flight? Why would you use.
38:00
Speaker 3: Your going to DC and you want to avoid the ransack?
38:02
Speaker 2: Why would you not buy a couch because you're worried
38:05
about the election? I just I scratched my head at it.
38:08
It's very strange. Let's take a quick break, but a
38:10
lot more to cover. In the second hour, we'll have
38:12
a full market recap and more. Stay tuned, folks,