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Google Shares Plunge as AI Spending Raises Alarm Bells · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Chuck Zada and Paul Lane.
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  Speaker 2: Chuck, Paul, and Tucker with you here, and we kick
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  Speaker 2: things off today, not with the Fed meeting from yesterday, which,
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  Speaker 2: to be honest, was fairly uneventful and not the most
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  Speaker 2: market-driving event of the day, but instead we start with
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  Speaker 2: what happened after hours with earnings, and specifically talking about Google, which,
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  Speaker 2: as we sit here right now, is down 12% after
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  Speaker 2: reporting earnings and leaving investors wondering, hey.
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  Speaker 3: What's going on, dudes? Oh, Google. What's that from?
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  Speaker 4: Norm MacDonald.
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  Speaker 1: Okay. Okay.
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  Speaker 3: So anyways, what do we have going on here, Paul?
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  Speaker 4: This was probably the most significant reaction on the downside
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  Speaker 4: to a Google earnings report, Chuck, in a really long time.
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  Speaker 4: And there's a lot to unpack here. But from a
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  Speaker 4: broad standpoint, it's just important for listeners to understand kind
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  Speaker 4: of the transformation that Google's business has undergone. over the
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  Speaker 4: course of the last year or so. They have had
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  Speaker 4: probably one of the best businesses ever historically in that
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  Speaker 4: they just print cash like no one's business. If you
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  Speaker 4: look at their free cash flow, basically, which is what
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  Speaker 4: cash you generate net of all your costs in the
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  Speaker 4: course of the last three or four years, it's been
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  Speaker 4: $ 70 billion every single year, and it's slightly grown up
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  Speaker 4: each year in 23, 24, and 25%. 26 is a
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  Speaker 4: different year. And the reason that the market is reacting
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  Speaker 4: so negatively is that they are actually reporting quarter by
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  Speaker 4: quarter negative free cash flow. So basically they're spending more
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  Speaker 4: than they're taking in. So that's one concern is that
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  Speaker 4: Google is spending a lot of money that they're not
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  Speaker 4: bringing in terms of income from operations.
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  Speaker 2: The second one- Can we talk about that more first though?
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  Speaker 2: Because here's the thing that makes no sense in this quarter. Remember,
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  Speaker 2: There's a difference between cash flow and earnings. They are
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  Speaker 2: fundamentally different things. Cash flow is actually cash in, cash
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  Speaker 2: out for the quarter, whereas earnings are smoothed out through
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  Speaker 2: things like depreciation, amortization, things along those lines. So here's
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  Speaker 2: the question that I have. Google was expected to see
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  Speaker 2: negative cash flow of around $ 2 billion and change. They
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  Speaker 2: had around $ 9 billion in negative cash flow. despite their
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  Speaker 2: capex for the quarter coming in lighter than people expected.
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  Speaker 2: So they didn't have as much capex, which hits cash flow.
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  Speaker 2: It hits that side of the ledger. It hits the
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  Speaker 2: cash flow statement. It doesn't yet get to the earnings
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  Speaker 2: statement as depreciation. And so you have less capex, which
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  Speaker 2: in theory should help free cash flow, and yet free
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  Speaker 2: cash flow was worse. And again, I haven't dug into
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  Speaker 2: every little line item to be like, okay, here's why
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  Speaker 2: that happened. But if you're just talking broadly, you're like, okay,
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  Speaker 2: if your cash flow came in lighter, I'm sorry, if
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  Speaker 2: your CapEx came in lighter, then your free cash flow
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  Speaker 2: should be a bit better, and it's not, so what gives,
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  Speaker 2: my guys?
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  Speaker 4: Right, right. And in terms of the factors from the
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  Speaker 4: weakening on the revenue side of things, there have been
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  Speaker 4: some mentions separately from the weakening revenues to foreign currency
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  Speaker 4: exchange impacts, but I'm not sure how that could... really
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  Speaker 4: hit some of the quarterly numbers here. But from a
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  Speaker 4: revenue perspective, I think the other biggest concern here with
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  Speaker 4: this report is the search business for Google in general.
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  Speaker 4: And this isn't a new concern, but it's worth everyone understanding.
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  Speaker 4: And it was brought about really when ChatGPT rose to
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  Speaker 4: prevalence in the first place, where basically Google has made
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  Speaker 4: a significant amount of free cash over the years because
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  Speaker 4: every time Tucker, Chuck, myself search for.
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  Speaker 3: Not me. Not me. I am not a Googler. I'm
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  Speaker 3: a DuckDuckGoer. Yes, I am.
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  Speaker 4: Everyone else in the world, basically, who does search on
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  Speaker 4: Google for a local pizza joint or where do I
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  Speaker 4: find this nearest golf course, whatever the case may be.
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  Speaker 4: They've been able to make a business by other businesses
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  Speaker 4: paying to be at the top of the list for
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  Speaker 4: those 10 blue links that we're all familiar with over
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  Speaker 4: the course of the last 20 plus years.
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  Speaker 3: Of search history.
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  Speaker 4: When AI came about, there was concern that that business
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  Speaker 4: would get eaten away at. They're in this place where
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  Speaker 4: there's this idea of the innovator's dilemma. They had made
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  Speaker 4: this incredible business that they were just printing money on.
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  Speaker 4: Now there's a new competitor out there, whether it's ChatGPT
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  Speaker 4: or these other bots out there that are able to
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  Speaker 4: give you a better answer to your question and not
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  Speaker 4: feed you, I think this is one of your complaints, Chuck,
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  Speaker 4: you've had with Google over the years, feed you just
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  Speaker 4: all these links that really don't get at the crux
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  Speaker 4: of what your question is. That has shifted now where
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  Speaker 4: they have this AI overview that those of us who
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  Speaker 4: do search on Google will be more familiar with recently,
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  Speaker 4: where you kind of get an answer to your question
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  Speaker 4: and you don't have to click through links anymore. like
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  Speaker 4: you once had to. And so as a result of that,
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  Speaker 4: Google reported numbers where their search revenue growth has declined.
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  Speaker 4: Its pace of growth has declined over the course of
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  Speaker 4: the last three quarters. And in particular, it's not because
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  Speaker 4: search volume is down. It's at actually the highest it's
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  Speaker 4: been in five years. So people are still searching on Google,
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  Speaker 4: but they're not clicking on links to monetize as well
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  Speaker 4: as that business used to because they're leaning on this
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  Speaker 4: AI overview. Now, Google is smart. They will find a
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  Speaker 4: way to monetize that AI overview. Their biggest challenge at
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  Speaker 4: first was just making sure their search traffic didn't get cannibalized,
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  Speaker 4: completely eaten away by these other businesses. But that is
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  Speaker 4: something that investors are definitely processing today. Like, hey, here's
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  Speaker 4: real evidence that that business, don't get me wrong, they're
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  Speaker 4: still making $ 64 billion a quarter, but it is slowing
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  Speaker 4: compared to where it had been in prior quarters.
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  Speaker 2: Yeah, if you look at it, and I'll just look
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  Speaker 2: at the calendar year 2026 quarters, Q1 of this year,
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  Speaker 2: they saw a growth in the number of paid search
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  Speaker 2: clicks by 13% year over year, and cost per click
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  Speaker 2: increased by 5%. So you do the math, like rough math,
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  Speaker 2: and you're like, okay, if clicks are up 13% and
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  Speaker 2: cost per click's up 5%, great, search revenue, call it
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  Speaker 2: 18% growth.
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  Speaker 1: Got it.
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  Speaker 5: Q2.
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  Speaker 1: Q2.
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  Speaker 2: Paid search clicks still up 13%, but cost per click
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  Speaker 2: up 3%. Decelerated to 16% growth. Q3, paid search clicks
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  Speaker 2: up 8%, cost per click up 4%, decelerating to around 12%.
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  Speaker 2: So you've gone since Q1 from 18% year-over-year search growth
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  Speaker 2: to 12%. And obviously the implication there is, look, if
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  Speaker 2: that continues for another four quarters of that pace, then
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  Speaker 2: year-over-year search growth is going to be flat. And that's
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  Speaker 2: not Good for Google's revenue. You want that revenue to
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  Speaker 2: be growing. Is it fair to extrapolate that that's what's
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  Speaker 2: going to happen?
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  Speaker 3: No.
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  Speaker 2: Again, this is a couple quarters, and these things do
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  Speaker 2: wiggle from time to time. As an example, Q3 of 2024,
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  Speaker 2: search growth was around 12% overall. By Q1 of 25,
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  Speaker 2: it decreased to 9% growth. And then it rebounded back
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  Speaker 2: to 12% the next quarter. So you can't just draw
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  Speaker 2: too much of a straight line there. But it does
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  Speaker 2: raise some questions, given the proliferation now of large language
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  Speaker 2: models as more of a replacement for a search engine. Hey,
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  Speaker 2: is this something that we need to watch? I do
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  Speaker 2: think we need to, because just as it did bounce
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  Speaker 2: back that time before, And that wasn't evidence of anything. Hey,
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  Speaker 2: this time it could move in the other direction. So
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  Speaker 2: we don't know. And I think this just gets at
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  Speaker 2: how much uncertainty there is about what the next couple
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  Speaker 2: of years look like for AI and those businesses.
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  Speaker 3: Because there are very.
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  Speaker 2: And I've been looking at this for the last couple
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  Speaker 2: of weeks now, like really trying to.
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  Speaker 2: Just really trying to dig into it. And it's basically, okay,
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  Speaker 2: the bull side of it is... hey, we keep seeing
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  Speaker 2: more and more demand for computing power because there's more
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  Speaker 2: stuff being fed through these AI models than ever before.
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  Speaker 1: Mm-hmm.
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  Speaker 2: That's the bull case is, hey, we need to build
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  Speaker 2: this quickly because this is just going to continue to
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  Speaker 2: ramp up faster and faster.
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  Speaker 1: Right.
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  Speaker 2: The bear cases are, hey, at some point in the
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  Speaker 2: next year, it's actually going to stop ramping up in
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  Speaker 2: terms of the demand. And the financing of all this
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  Speaker 2: is getting expensive, and it might not make sense if
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  Speaker 2: the financing rates continue.
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  Speaker 3: To go up the way they are.
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  Speaker 1: Mm-hmm.
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  Speaker 2: So, you know, you look at this, and again, 2027
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  Speaker 2: is the shakeout year for this. Like, 2027 is when
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  Speaker 2: we're going to know which way this goes.
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  Speaker 3: It's binary. It's not, there is no, you know, oh,
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  Speaker 3: we muddle through.
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  Speaker 2: It's either, hey, the chip makers are producing the exact
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  Speaker 2: right amount of chips that are needed, or they've produced
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  Speaker 2: way too many and are going to have to start
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  Speaker 2: selling a bunch at a loss.
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  Speaker 3: Right. Like, that's the deal.
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  Speaker 2: So like the AI business in and of itself, like, yes,
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  Speaker 2: like that will continue no matter what. But when you
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  Speaker 2: talk about what's driven this market, it hasn't been... If
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  Speaker 2: you just look this year as an example at the
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  Speaker 2: big hyperscalers, it's not them that are driving the ship.
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  Speaker 2: Microsoft's up 8% this year. Okay, that's fine. Amazon's up 6%.
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  Speaker 3: Google.
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  Speaker 1: I'm sorry.
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  Speaker 3: Yeah, this is a year to date.
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  Speaker 2: Google is down nine. Meta's down five. Like, the hyperscalers
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  Speaker 2: aren't driving the market. What's driving it? Paul, do you
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  Speaker 2: know how much Micron's up this year? 270%.
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  Speaker 3: 232. Very close. Pretty good.
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  Speaker 2: Dell's up 288. Applied Materials is up 62. AMD's up 164.
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  Speaker 2: Intel's up 151. That's the driver in tech. You know,
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  Speaker 2: it's not Microsoft up 800.
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  Speaker 3: And on their earnings growth too.
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  Speaker 4: I think it was Micron and NVIDIA were responsible for
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  Speaker 4: Q3 earnings growth. A good, I want to say third
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  Speaker 4: of it, they were responsible for in terms of what
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  Speaker 4: the S & P 500 saw. So yeah, it's concentrated
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  Speaker 4: in a lot of pockets. It's not the magnificent sevens
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  Speaker 4: pockets that have been bolstering the market year to date.
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  Speaker 4: And it really speaks to your point. There's a lot
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  Speaker 4: of There's fragility and concern here, particularly when a business
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  Speaker 4: like Google that typically would print $ 25 billion of free
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  Speaker 4: cash flow in a quarter goes negative on cash flow
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  Speaker 4: of $ 9 billion. There becomes a lot of scrutiny on
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  Speaker 4: their revenue growth and what it looks like going forward.
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  Speaker 3: Let's take a quick break.
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  Speaker 2: When we come back, we'll talk about the other big
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  Speaker 2: tech company that reported yesterday. Their name is a familiar one, Microsoft.
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  Speaker 2: And as we sit here right now, despite popping 5%
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  Speaker 2: after hours yesterday, Microsoft's down 1% now in early trading.
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  Speaker 3: We'll discuss after this. Oh, Google.
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  Speaker 2: Paul, Microsoft reported earnings yesterday, and the initial reaction was positive,
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  Speaker 2: with Microsoft's stock up anywhere from 4% to 5.5% after
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  Speaker 2: hours yesterday.
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  Speaker 3: Today, it's now down about.
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  Speaker 2: 1.4%, so falling 0.4% just in the commercial break that
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  Speaker 2: we took. And look, I got to tell you, the
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  Speaker 2: volatility just that we are seeing in a lot of
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  Speaker 2: these names, not just in tech, but the broad market
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  Speaker 2: as a whole, I know that there's been very little
• 13:05
  Speaker 2: volatility in the broad market. The S & P is
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  Speaker 2: down a third of a percent today. It's nothing to
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  Speaker 2: write home about. But you've got like Google's down 12,
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  Speaker 2: Caterpillar's down seven. Microsoft's had a 5% intraday reversal. Eli
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  Speaker 2: Lilly's up seven. Nothing feels stable in this market, even
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  Speaker 2: though the indices are holding steady because everything under the
• 13:28
  Speaker 2: surface is just moving in different directions.
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  Speaker 4: It has seemed like this year in particular there, and
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  Speaker 4: we were talking about it in the segment before in
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  Speaker 4: prior years, it's been all of that magnificent seven. They
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  Speaker 4: just all have risen dramatically and sort of, carried along
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  Speaker 4: the index with it. But this year, it's so much
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  Speaker 4: more of kind of like that stock picker market where
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  Speaker 4: it's the haves and have nots.
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  Speaker 3: Not even for the year, though. It's like day to
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  Speaker 3: day and week to week. Yeah, exactly.
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  Speaker 4: It's just in particular, it is just tremendous single stock
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  Speaker 4: name volatility every single day that you seem like these
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  Speaker 4: companies are just swinging in one direction or another very rapidly.
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  Speaker 1: Yeah.
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  Speaker 3: Yeah. So talk to me a little bit about Microsoft's
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  Speaker 3: quarter here.
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  Speaker 4: So in terms of the initial positive reaction for Microsoft's
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  Speaker 4: quarter overnight, that enthusiasm has waned, it sounds like, looking
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  Speaker 4: at the market this morning, is basically this idea that Microsoft,
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  Speaker 4: of all the hyperscalers, has reined in their spending a bit.
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  Speaker 4: They're still spending a lot in terms of CapEx at
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  Speaker 4: $ 45 billion over the quarter. But compared to their peers,
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  Speaker 4: like Google, who we covered in the previous segment earlier,
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  Speaker 4: they had slowed down the pace of their spending to
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  Speaker 4: a degree. Now, the number of their CapEx came in
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  Speaker 4: a little bit lower this quarter at $ 45 billion rather
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  Speaker 4: than the $ 50 billion projected because of some third-party delays
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  Speaker 4: in cloud services being provided. But the reason that they
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  Speaker 4: were getting a more favorable reaction than Google was, one,
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  Speaker 4: their CapEx came in lower than estimated, and then, two,
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  Speaker 4: they are still free cash flow positive, unlike Google, who
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  Speaker 4: we covered before, that is basically spending more than they make.
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  Speaker 4: They did see a 27% drop in cash flow to
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  Speaker 4: about 18.6 billion, Microsoft did, but that was largely anticipated,
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  Speaker 4: like these other companies, that their cash flow would continue
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  Speaker 4: to decline. it hasn't declined as much as Alphabet or
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  Speaker 4: Meta is another one that is spending a lot of
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  Speaker 4: their free cash flow. And in particular, their cloud services business,
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  Speaker 4: which is at the forefront of servicing all this AI demand,
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  Speaker 4: has seen really good growth numbers. They saw about a
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  Speaker 4: 48% year-over-year growth to $ 33 billion of revenue. That was
• 15:31
  Speaker 4: above analyst expectations of around 44%. So Their cloud business,
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  Speaker 4: I believe it's taken over as one of the more
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  Speaker 4: profitable segments of revenue in Microsoft's business as a whole.
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  Speaker 4: That has really continued to shine. And they're also anticipating
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  Speaker 4: in this current quarter 50% growth for that segment. So
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  Speaker 4: that really was the shining star of this report is
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  Speaker 4: free cash flow generation still holding on as well as
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  Speaker 4: their cloud segment performing pretty well, Chuck.
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  Speaker 2: Yeah, and so, look, on any of this, the question,
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  Speaker 2: we've said this, one of the things that we talked
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  Speaker 2: about back in 2020 when we were going through some
• 16:09
  Speaker 2: seismic shifts in the U.S. economy was the question of, hey,
• 16:13
  Speaker 2: is this temporary or permanent? And do you remember all
• 16:15
  Speaker 2: the people being like, oh, New York City's going to die,
• 16:19
  Speaker 2: and you look at it now, and New York City
• 16:21
  Speaker 2: is like, completely fine like it's it's like the the
• 16:25
  Speaker 2: office space is you know fully leased and like it
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  Speaker 2: still has seven million people in it and it's okay
• 16:30
  Speaker 2: like not much has really changed overall so you got
• 16:34
  Speaker 2: it you know remember everyone was like oh like everyone's
• 16:36
  Speaker 2: gonna be riding pelotons forever and zoom is gonna be
• 16:39
  Speaker 2: the most okay like clearly those were temporary things not
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  Speaker 2: permanent so the question that that everyone is gonna struggle
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  Speaker 2: with and if you if you really like say you
• 16:49
  Speaker 2: know the answer to this You either have, like, way
• 16:53
  Speaker 2: more knowledge than me or just, like, way stronger convictions.
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  Speaker 2: Because I don't know on this question, to be honest.
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  Speaker 2: The question that's out there is, like, is the rate
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  Speaker 2: of demand growth on AI spend sustainable or not?
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  Speaker 1: Mm-hmm.
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  Speaker 2: And, like, again, I can almost get there in some
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  Speaker 2: cases when you look at, like, how some of this
• 17:14
  Speaker 2: stuff models out. And you're like, oh, I can see
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  Speaker 2: how this works, you know?
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  Speaker 3: And, like, I've read.
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  Speaker 2: I try to read everything, like not just one side
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  Speaker 2: of the story, because then you don't understand how you
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  Speaker 2: could potentially be wrong. And so the bear case, we've
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  Speaker 2: talked about it quite a bit, which is, hey, like
• 17:32
  Speaker 2: you're going to need like trillions of dollars in, you know,
• 17:35
  Speaker 2: people actually spending money on using AI, not just building
• 17:39
  Speaker 2: it out.
• 17:39
  Speaker 1: Right.
• 17:40
  Speaker 2: And how do you get there and how do you
• 17:41
  Speaker 2: finance it? Like these are the real questions. But the
• 17:44
  Speaker 2: bull case is, hey, people find AI to be more
• 17:47
  Speaker 2: and more useful and they use more of it in
• 17:49
  Speaker 2: their life. And the spend goes up even though the
• 17:53
  Speaker 2: cost per token goes down. And so that drives, you know,
• 17:58
  Speaker 2: a ton of additional growth. And the cost of serving
• 18:01
  Speaker 2: this stuff gets cheaper because they pick up additional efficiency.
• 18:05
  Speaker 2: And so, yeah, there's there's a case where, you know,
• 18:08
  Speaker 2: I was reading one yesterday where Anthropic could have, you know,
• 18:10
  Speaker 2: 400 billion in revenue by 2030 and have, you know,
• 18:14
  Speaker 2: 95 billion in profit as a result of that. And
• 18:17
  Speaker 2: like you read through it and you read the assumptions
• 18:18
  Speaker 2: and you're like. okay, I can see how that case
• 18:22
  Speaker 2: is made, and it's really just a question of what
• 18:26
  Speaker 2: assumptions do you trust that are going to be right?
• 18:29
  Speaker 3: And I don't know.
• 18:30
  Speaker 4: Yeah, and so much of the supply side, too, is
• 18:33
  Speaker 4: unknown because there are so many variables that go into
• 18:36
  Speaker 4: getting that computing online. I mean, you continue to hear
• 18:40
  Speaker 4: the refrain from these hyperscalers that the demand... is there,
• 18:43
  Speaker 4: but is the supply going to be there to meet
• 18:46
  Speaker 4: the demand? Or is there going to be some delays
• 18:48
  Speaker 4: that you encounter, whether that's regulatory pressure, you know, the
• 18:51
  Speaker 4: local pushback, there's just so many are just sourcing of
• 18:55
  Speaker 4: all of the inputs that go into it, whether that
• 18:57
  Speaker 4: be chips, the energy, all the different parts of the stack,
• 19:01
  Speaker 4: there's a lot of variables that make this a tenuous situation.
• 19:05
  Speaker 4: And you're seeing that being reflected in the market with
• 19:08
  Speaker 4: the volatility that we're looking at here, Chuck, in some
• 19:10
  Speaker 4: of these names.
• 19:12
  Speaker 2: Let's take a quick break here as we head towards
• 19:15
  Speaker 2: the bottom of the hour. But when we return, we've
• 19:20
  Speaker 2: got a little bit of Wall Street Watch that we're
• 19:22
  Speaker 2: going to do. And then we're also going to get
• 19:24
  Speaker 2: to yesterday's Fed meeting next.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:47
  Speaker 1: Financial Exchange Radio Network. Time now for wall street watch
• 19:52
  Speaker 1: tracking the stocks, the data and the headlines driving markets
• 19:56
  Speaker 1: so far today, right here on the financial exchange radio network.
• 19:59
  Speaker 5: Busy day on wall street with tech selling off after
• 20:02
  Speaker 5: Google's alphabet, uh, Their third quarter earnings disappointed while Microsoft impressed.
• 20:08
  Speaker 5: Wall Street's also digesting a flurry of economic data points,
• 20:11
  Speaker 5: including a better than expected third quarter GDP reading. Right now,
• 20:15
  Speaker 5: the Dow is down a quarter percent or 128 points lower.
• 20:18
  Speaker 5: S & P 500 down over a quarter percent, 21
• 20:21
  Speaker 5: points off. Tech-heavy Nasdaq down 1.2 percent or 319 points lower.
• 20:27
  Speaker 5: Russell 2000, however, is up by 1 percent. Ten-year Treasury
• 20:30
  Speaker 5: yield is down six basis points at 4.98 percent. And
• 20:35
  Speaker 5: crude oil down about 2%, trading at $ 100 a barrel,
• 20:39
  Speaker 5: while Brent is at $ 113 a barrel. Alphabet plunging 12%
• 20:44
  Speaker 5: after the Google parent saw its third quarter search advertising
• 20:47
  Speaker 5: revenue growth slow, weighing on the company's free cash flow.
• 20:52
  Speaker 5: Microsoft has turned negative, down about 1% even after the
• 20:56
  Speaker 5: tech giant saw its Azure cloud business climb 48% in
• 20:59
  Speaker 5: the previous quarter. More tech earnings on the way after
• 21:03
  Speaker 5: today's closing bell when Amazon reports. Meanwhile, ServiceNow tanking 24%
• 21:08
  Speaker 5: after the enterprise software company missed third quarter earnings estimates
• 21:12
  Speaker 5: while its fourth quarter guidance disappointed. Caterpillar down over 7%
• 21:17
  Speaker 5: despite beating third quarter earnings and revenue expectations. However, Salesforce
• 21:21
  Speaker 5: construction industries business came up short. And DoorDash officially announced
• 21:26
  Speaker 5: it is acquiring Instacart for $ 65 per share. DoorDash up
• 21:30
  Speaker 5: by 6%, while Instacart shares are down about 1%. I'm
• 21:35
  Speaker 5: Tucker Silva, and that is Wall Street Watch.
• 21:38
  Speaker 2: Paul, it's pretty rare that we have a Fed meeting,
• 21:40
  Speaker 2: and we don't get to it until the second half
• 21:42
  Speaker 2: of the first hour here. What did we see yesterday
• 21:46
  Speaker 2: from Kevin Warsh? I listened to the whole press conference.
• 21:50
  Speaker 2: I went through the whole thing. I'll actually give you
• 21:52
  Speaker 2: my opinion first. I didn't really get much of anything.
• 21:57
  Speaker 2: I basically sat there and it's not that Warsh was
• 22:04
  Speaker 2: good or bad. It's more just like he didn't say anything,
• 22:08
  Speaker 2: which is fine. If that's just what these are going
• 22:10
  Speaker 2: to be exercised in, that's fine. It's what it is.
• 22:14
  Speaker 2: But let's just get rid of the press conference then
• 22:16
  Speaker 2: because it was really hard for me to find anything
• 22:19
  Speaker 2: meaningful to take out of yesterday given the fact that
• 22:25
  Speaker 2: They basically were like, yep, inflation's still high, but we
• 22:28
  Speaker 2: think it's going to come down, and so that's why
• 22:29
  Speaker 2: we didn't do anything.
• 22:31
  Speaker 4: Yeah, it seems very reminiscent of the Belichick press conferences
• 22:35
  Speaker 4: back in the Patriot days where there's just not a
• 22:38
  Speaker 4: lot to glean from it. That's intentional by Warsh here,
• 22:42
  Speaker 4: I think, from everything that he's signaled that he doesn't
• 22:44
  Speaker 4: really want. to provide a lot more commentary. That was
• 22:48
  Speaker 4: the same view that I had. It could have been
• 22:51
  Speaker 4: summarized very quickly and just wait and see, which that's
• 22:54
  Speaker 4: just really the tenor that I got from the whole
• 22:57
  Speaker 4: meeting is that we're going to give it another cycle
• 23:01
  Speaker 4: here before we make any adjustments to interest rate policy
• 23:04
  Speaker 4: and see how this data comes through. And then come
• 23:07
  Speaker 4: December 9th, I believe, which is the next Fed meeting,
• 23:10
  Speaker 4: they'll make a decision. The vote came in at 10
• 23:13
  Speaker 4: to 2 to hold rates steady with only two people
• 23:17
  Speaker 4: opposing keeping interest rates where they are. Ultimately, it is
• 23:23
  Speaker 4: going to be, it seems like, December as to when
• 23:26
  Speaker 4: we get any more sort of update on where interest
• 23:30
  Speaker 4: rates are scheduled to go. Right now, there is an
• 23:34
  Speaker 4: 83% probability, again, ton of time before this next meeting
• 23:37
  Speaker 4: that they would hike perhaps in the next December meeting here.
• 23:40
  Speaker 2: Yeah, I mean, you look at what's coming out in
• 23:43
  Speaker 2: the near future. We're going to get October CPI in
• 23:46
  Speaker 2: a couple weeks here. You know, you look out at
• 23:50
  Speaker 2: the calendar. I believe it's scheduled for November 10th, so
• 23:53
  Speaker 2: I think it's a week from next Tuesday. So you
• 23:56
  Speaker 2: get CPI that's going to be coming out then. Gas
• 23:59
  Speaker 2: prices have come down a little bit over the course
• 24:01
  Speaker 2: of the month, and remember, that feeds into CPI, at
• 24:03
  Speaker 2: least in the headline. So headline, which was 0.6% last month,
• 24:09
  Speaker 2: probably comes down into that 0.1% to 0.2% range, which, again,
• 24:13
  Speaker 2: is fine. This is why you don't overreact to the
• 24:15
  Speaker 2: previously hot headline. The question is going to be what
• 24:18
  Speaker 2: happens on the core number, which gets pushed up because
• 24:21
  Speaker 2: cost of diesel remains really, really high right now. AAA
• 24:25
  Speaker 2: national average there is still at $ 6. 33 a gallon on diesel.
• 24:29
  Speaker 2: So gas prices have come down $ 0. 30 or so. Diesel
• 24:33
  Speaker 2: is only off.
• 24:34
  Speaker 3: About $ 0.
• 24:35
  Speaker 2: 18 from its high and obviously has seen a much
• 24:38
  Speaker 2: bigger gain as well. And diesel seeps more easily into
• 24:42
  Speaker 2: other parts of the economy because it is what is
• 24:44
  Speaker 2: involved in transportation of goods.
• 24:47
  Speaker 3: Not gas.
• 24:49
  Speaker 2: And so I think the question that you get on
• 24:51
  Speaker 2: the October CPI is not, hey, does it give them
• 24:54
  Speaker 2: cover to not hike in December because of the headline?
• 24:58
  Speaker 2: It's more, hey, do we see further evidence of inflation
• 25:02
  Speaker 2: broadening out beyond food and fuel? And if that's the case,
• 25:07
  Speaker 2: then the Fed is going to end up moving in
• 25:09
  Speaker 2: December again. Right now, that December meeting priced at an
• 25:13
  Speaker 2: 81% chance of a hike.
• 25:14
  Speaker 3: So it.
• 25:16
  Speaker 2: It still has quite a bit of data that we're
• 25:18
  Speaker 2: going to see because we're going to get two more
• 25:23
  Speaker 2: jobs reports because the December meeting date is on the 9th,
• 25:27
  Speaker 2: and the jobs report for November will be released on
• 25:32
  Speaker 2: the 4th. So we'll have two jobs reports, but only
• 25:35
  Speaker 2: one CPI, I think, unless they somehow sneak the CPI
• 25:38
  Speaker 2: in on December 8th, but I don't see the CPI
• 25:41
  Speaker 2: release calendar to know if that's possible.
• 25:43
  Speaker 1: So.
• 25:44
  Speaker 2: That's kind of what we're looking at, and we'll just
• 25:48
  Speaker 2: have to see what the environment looks like then after
• 25:51
  Speaker 2: another six weeks or so of data on it.
• 25:54
  Speaker 4: Yeah, we did get some numbers here on GDP for
• 25:57
  Speaker 4: Q3 that came in at 3.4%, so clearly the economy
• 26:02
  Speaker 4: is still showing that it is growing at a good
• 26:04
  Speaker 4: clip here.
• 26:05
  Speaker 2: Yeah, can we dig into that GDP rating for a
• 26:08
  Speaker 2: little bit, or do you have anything else on the
• 26:09
  Speaker 2: Fed that you want to discuss?
• 26:10
  Speaker 3: No, we've covered the Fed.
• 26:12
  Speaker 2: Okay.
• 26:12
  Speaker 3: Okay.
• 26:12
  Speaker 2: So we're good on the Fed. So let's talk a
• 26:14
  Speaker 2: little bit about what we saw with GDP here. So
• 26:18
  Speaker 2: GDP for the quarter came in at 3.4%, which is good.
• 26:24
  Speaker 2: That's an acceleration from the previous one. Previously, I think
• 26:28
  Speaker 2: we were in the low twos.
• 26:29
  Speaker 3: Yeah, 2.2.
• 26:31
  Speaker 2: The four-quarter average for the year, we still had a
• 26:35
  Speaker 2: little bit of a slowdown simply because Q3 last year
• 26:38
  Speaker 2: was hotter.
• 26:38
  Speaker 3: It was, I believe, 3.8 or 3.9%.
• 26:41
  Speaker 2: And so that still slowed the four quarter, the full
• 26:45
  Speaker 2: year GDP growth just because you were replacing a hotter quarter.
• 26:50
  Speaker 3: When you look through.
• 26:51
  Speaker 2: The underlying data and you're like, okay, like what actually
• 26:57
  Speaker 2: is driving this thing? Real personal consumption expenditures were hot
• 27:02
  Speaker 2: for the second quarter in a row. They were hot
• 27:04
  Speaker 2: in Q2, we theorized, because the tail end of that
• 27:07
  Speaker 2: was when the World Cup was happening. The start of
• 27:10
  Speaker 2: Q3 also included that, but that was only part of it.
• 27:13
  Speaker 2: So you've had back-to-back really good quarters of personal consumption expenditures,
• 27:18
  Speaker 2: basically people spending money on stuff. Specifically, the growth is
• 27:24
  Speaker 2: happening in real consumption of services. It's not happening in goods,
• 27:28
  Speaker 2: which slowed a little bit for the quarter. It's happening
• 27:30
  Speaker 2: in services. So the World Cup explanation or travel could potentially...
• 27:35
  Speaker 2: Explain what's going on there. Any thoughts on that item, Paul?
• 27:38
  Speaker 4: No, I think that has been the recurring takeaway is
• 27:41
  Speaker 4: that consumer spending continues to be resilient. And again, leading
• 27:45
  Speaker 4: into that theory of inflation being a consistent pressure because
• 27:50
  Speaker 4: you have people spending.
• 27:52
  Speaker 2: The big thing, the big place that we are seeing
• 27:55
  Speaker 2: very rapid growth right now is on the investment side.
• 27:58
  Speaker 2: And specifically, it's data centers. If you take a look
• 28:02
  Speaker 2: right now, real investment in information processing equipment and software
• 28:07
  Speaker 2: was up 23% on an annualized pace for the quarter.
• 28:11
  Speaker 2: And so you're just seeing monster moves there. Real non-residential
• 28:16
  Speaker 2: fixed investment running 12.7% for the quarter. So it's really
• 28:20
  Speaker 2: just cranking through there. It's not showing up in manufacturing build-out,
• 28:24
  Speaker 2: which has slowed and is actually now running at a
• 28:27
  Speaker 2: 15% year-over-year decline for the quarter. It is very much
• 28:32
  Speaker 2: data center build-out that is driving that fixed investment piece.
• 28:36
  Speaker 2: Real residential fixed investment has now been negative for six
• 28:39
  Speaker 2: out of the last seven quarters.
• 28:41
  Speaker 3: This is why builders will tell you.
• 28:43
  Speaker 2: Builders, like, if you're a home builder, you're sitting there
• 28:46
  Speaker 2: and you're like, My business kind of sucks right now
• 28:49
  Speaker 2: in a lot of markets.
• 28:50
  Speaker 3: You are feeling it.
• 28:52
  Speaker 2: And this is why it's so difficult to get a
• 28:53
  Speaker 2: read on what the economy is. Because even within construction,
• 28:58
  Speaker 2: if you're a home builder in much of the country,
• 29:01
  Speaker 2: you're like, my business is down anywhere from 1% to
• 29:06
  Speaker 2: 7% year over year, depending on where you are. If
• 29:10
  Speaker 2: you are a builder of manufacturing facilities, you're like, things
• 29:16
  Speaker 2: have really slowed down on that side of things. But
• 29:19
  Speaker 2: if you're someone who builds data centers, there's probably a
• 29:24
  Speaker 2: lot of overlap between data centers and manufacturing construction. So
• 29:27
  Speaker 2: it might just be that they've shifted resources.
• 29:29
  Speaker 3: To that unit.
• 29:30
  Speaker 2: But if you're building data centers, you're like, man, I
• 29:33
  Speaker 2: am cooking right now.
• 29:34
  Speaker 3: Breaking it in.
• 29:35
  Speaker 2: Yeah but so even within construction it's it's it's not
• 29:38
  Speaker 2: a unified thing where you're like hey everything's moving in
• 29:41
  Speaker 2: the same direction residential is mediocre to kind of poor
• 29:48
  Speaker 2: manufacturing uh investment is pretty darn poor right now but
• 29:53
  Speaker 2: data center construction is through.
• 29:54
  Speaker 4: The roof And that's what complicates the Fed's position. Just
• 29:57
  Speaker 4: to go back to them for just a moment here,
• 29:59
  Speaker 4: it was outlined in one of the pieces here in
• 30:01
  Speaker 4: the stack where a lot of the inflationary pressure is
• 30:04
  Speaker 4: coming from, we mentioned it, consumer spending has been resilient,
• 30:08
  Speaker 4: but also it's just this tremendous demand for the amount
• 30:12
  Speaker 4: of equipment that goes into data centers. And so as
• 30:15
  Speaker 4: a result of that, these companies that are investing in
• 30:18
  Speaker 4: these data centers, they are anticipating a significant return on
• 30:22
  Speaker 4: investment from all of the AI compute that is going
• 30:25
  Speaker 4: to come online from this. And there's been this theory
• 30:29
  Speaker 4: out there that perhaps these AI companies or hyperscalers will
• 30:32
  Speaker 4: be less resistant increases in interest rates from a borrowing perspective,
• 30:37
  Speaker 4: I tend to kind of push back against that a
• 30:39
  Speaker 4: little bit. But if they just continue to spend even
• 30:42
  Speaker 4: in the face of interest rates increasing, you're going to
• 30:45
  Speaker 4: have to have the small business owner or other areas
• 30:50
  Speaker 4: of the economy suffer, even though they're already not in
• 30:53
  Speaker 4: a great place. Again, I do tend to think that
• 30:57
  Speaker 4: there would be some sensitivity to the data center market
• 31:00
  Speaker 4: if you did see a continued increase in interest rates.
• 31:03
  Speaker 4: We saw that with some of the, you know, neocloud
• 31:06
  Speaker 4: sell-off on the debt side of things and those rates rising.
• 31:09
  Speaker 4: But it's an interesting question that poses for next year.
• 31:13
  Speaker 2: All right, let's take a quick break here. When we
• 31:15
  Speaker 2: come back, a couple housing items to get to next.
• 31:18
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• 31:21
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• 31:25
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• 31:28
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• 31:59
  Speaker 2: Paul, we got a piece in the Wall Street Journal.
• 32:01
  Speaker 2: It's titled, So Your Mortgage Payment Just Spiked. Here's what
• 32:04
  Speaker 2: you can do. And this comes on the back of
• 32:06
  Speaker 2: a conversation we had yesterday about folks who took out
• 32:09
  Speaker 2: adjustable rate mortgages back in the 2020 to 2022 era, mostly,
• 32:15
  Speaker 2: that are now seeing those adjustments starting to kick in.
• 32:20
  Speaker 3: What options are available for folks?
• 32:23
  Speaker 2: Because you can't just refinance out of it in a
• 32:25
  Speaker 2: lot of cases because rates have gone up so much.
• 32:27
  Speaker 4: I don't think that these options are cure-alls. I'm going
• 32:30
  Speaker 4: to reiterate what the options are, Chuck, but I don't
• 32:33
  Speaker 4: think any of these are real saving graces. One that
• 32:36
  Speaker 4: they mentioned here, so there's a couple different ways to
• 32:40
  Speaker 4: attack this. First, on the interest rate side of things,
• 32:42
  Speaker 4: they say you should just prepare for your arm reaching
• 32:46
  Speaker 4: the cliff where you negotiate with other lenders out there
• 32:49
  Speaker 4: to refinance before you get to the point in time
• 32:52
  Speaker 4: where the interest rate resets on your arm, which can
• 32:55
  Speaker 4: be anywhere from five years, seven years, 10 years. That's
• 32:57
  Speaker 4: kind of a no-duh. Yeah, like when you're facing the
• 32:59
  Speaker 4: cliff of it resetting, yeah, you should take the time
• 33:03
  Speaker 4: to explore alternatives and be aware of what that drop
• 33:06
  Speaker 4: date deadline is from a year's perspective. This idea of
• 33:10
  Speaker 4: challenging property tax assessments to try and bring down your
• 33:13
  Speaker 4: mortgage payment, I don't know.
• 33:15
  Speaker 3: Good luck.
• 33:16
  Speaker 4: I don't really put like, oh, that's a great idea.
• 33:19
  Speaker 4: I never thought of that. I'm sure my local town
• 33:22
  Speaker 4: will really help me out there. The next thing here,
• 33:24
  Speaker 4: looking for insurance discounts and roof savings. As we all know,
• 33:28
  Speaker 4: homeowners insurance costs have risen about 47% over the course
• 33:32
  Speaker 4: of the last five or six years or so, according
• 33:34
  Speaker 4: to LendingTree. Again, you can shop around your policy. We
• 33:38
  Speaker 4: all know that that's an available option, and perhaps that
• 33:41
  Speaker 4: could save you a bit of But ultimately, if you're
• 33:44
  Speaker 4: in a flood zone down in Cape Cod, sometimes you're
• 33:47
  Speaker 4: limited in terms of what options there are or, you know,
• 33:51
  Speaker 4: play that out anywhere nationally. Talk to people in Florida
• 33:54
  Speaker 4: or California. again, not the end-all be-all from a curious perspective.
• 33:59
  Speaker 4: This idea of eliminating private mortgage insurance, this would only
• 34:02
  Speaker 4: be applicable to people who are subject to PMI. If
• 34:05
  Speaker 4: you can reach out ahead of time to try and
• 34:08
  Speaker 4: get that added cost that you pay on your mortgage dropped, again,
• 34:14
  Speaker 4: lenders will keep an eye on this to a degree,
• 34:17
  Speaker 4: but if you try and really keep fingers on the
• 34:22
  Speaker 4: pulse is another idea. Again, Chuck, none of these really
• 34:24
  Speaker 4: fix the problem.
• 34:25
  Speaker 3: Keeping the toes on the pulse?
• 34:26
  Speaker 4: Yeah, I was struggling to figure out what your toes
• 34:29
  Speaker 4: are fingers.
• 34:30
  Speaker 2: That's what my doctor does.
• 34:32
  Speaker 3: Is that wrong?
• 34:32
  Speaker 2: I believe if you keep your elbows on the jugular,
• 34:35
  Speaker 2: that will be exactly what's needed.
• 34:38
  Speaker 4: There's no hope here. I don't know. These are not
• 34:41
  Speaker 4: doing it. Am I missing something, Chuck? These aren't moving
• 34:44
  Speaker 4: the needle.
• 34:45
  Speaker 5: No.
• 34:46
  Speaker 4: At least I used that expression appropriately.
• 34:49
  Speaker 3: Correct.
• 34:51
  Speaker 2: Look, in a lot of these cases, just to give
• 34:54
  Speaker 2: you an example of what this looks like, let's say
• 34:58
  Speaker 2: that you have a mortgage out there from... Again, go
• 35:02
  Speaker 2: back to the pandemic period. If you are looking at
• 35:07
  Speaker 2: a rate that is.
• 35:14
  Speaker 2: I don't know, call it 3% to begin with. And
• 35:17
  Speaker 2: let's say that you had bought, let's say it was
• 35:20
  Speaker 2: a home you paid $ 400, 000 for it, put 20% down,
• 35:24
  Speaker 2: and you paid 3% interest.
• 35:26
  Speaker 3: Your payment is.
• 35:28
  Speaker 2: If let's actually exclude this, $ 1, 349 a month is your
• 35:31
  Speaker 2: principal and interest on that $ 320, 000 loan at 3%.
• 35:36
  Speaker 3: Let's say that, and.
• 35:36
  Speaker 2: Again, these adjustments, they don't necessarily go right up to
• 35:40
  Speaker 2: where rates are today. Sometimes they have like a cap
• 35:43
  Speaker 2: of like, hey, the first adjustment can be a maximum
• 35:46
  Speaker 2: of like 2% or something like that. So let's say
• 35:48
  Speaker 2: that 3% mortgage went up to 5%. Your 1349 mortgage
• 35:54
  Speaker 2: is now up to 1718. Where are you going to
• 35:58
  Speaker 2: be able to save $ 5, 000 a year? Your property tax
• 36:01
  Speaker 2: on that whole place is probably $ 5, 000 a year. So
• 36:05
  Speaker 2: I bet your town is not going to just get
• 36:07
  Speaker 2: rid of that for you. Your insurance is probably a
• 36:11
  Speaker 2: couple thousand bucks a year.
• 36:12
  Speaker 3: For a home that.
• 36:14
  Speaker 4: Maybe even lower.
• 36:14
  Speaker 3: Might even be lower, but they're not going to just
• 36:17
  Speaker 3: get rid of your insurance, though. Right.
• 36:19
  Speaker 2: So there really aren't many places that you can just
• 36:22
  Speaker 2: wrangle out an extra $ 5, 000 in savings there. It might
• 36:26
  Speaker 2: be something where, yeah, you could cut $ 30 to $ 40
• 36:31
  Speaker 2: a month off it, maybe $ 50 to $ 60 if you're lucky,
• 36:35
  Speaker 2: but you still have a $ 300 difference in that case
• 36:38
  Speaker 2: that you can't deal with. If you have a larger shift, again, remember,
• 36:42
  Speaker 2: at 3% on a $ 320, 000 mortgage, you're at a $ 1, 349
• 36:47
  Speaker 2: a month payment. If it goes to $ 7, 000, that's $ 2, 129.
• 36:50
  Speaker 2: It's an extra $ 800 a month. There's no way that
• 36:54
  Speaker 2: you can cut that. It has to come out of
• 36:56
  Speaker 2: other budgetary items, unfortunately. Or it's a situation where you say, okay,
• 37:02
  Speaker 2: maybe I have to move. Now, the good news is
• 37:04
  Speaker 2: that in a lot of the country.
• 37:08
  Speaker 2: If you are forced into a sale because you say, okay,
• 37:12
  Speaker 2: I can't afford this, most home prices are still up
• 37:15
  Speaker 2: from if you bought in 2019, 20, or 21.
• 37:18
  Speaker 3: Definitely.
• 37:20
  Speaker 2: If you bought in 22, in parts of it, namely Florida, Texas,
• 37:23
  Speaker 2: some other parts of the Southeast, you might be taking
• 37:26
  Speaker 2: a loss on the sale. But if you had a
• 37:28
  Speaker 2: 20% down payment, you can still absorb that and not
• 37:31
  Speaker 2: have to do a short sale.
• 37:32
  Speaker 3: Right.
• 37:33
  Speaker 5: So.
• 37:34
  Speaker 2: These are some of the considerations that are out there,
• 37:37
  Speaker 2: but there's no easy and clean way on this to
• 37:41
  Speaker 2: make the math work. It's just not clean there. Any
• 37:46
  Speaker 2: other items to add on that, Paul?
• 37:48
  Speaker 4: No, that is something that is a challenge and why
• 37:51
  Speaker 4: you see limited transaction volume on the real estate market.
• 37:55
  Speaker 4: This has been plaguing the real estate market for the
• 37:57
  Speaker 4: last few years here.
• 37:59
  Speaker 2: Let's take a quick break now as we head towards
• 38:01
  Speaker 2: the top of the hour. But don't worry, we've got
• 38:05
  Speaker 2: a whole second hour that's coming up. And it might
• 38:09
  Speaker 2: not be better than the first, but it definitely won't
• 38:11
  Speaker 2: be worse.
• 38:12
  Speaker 3: So tune in.