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Markets Whipsaw as Investors Ask the Only Question That Matters: Temporary or Permanent? · The Financial Exchange Show

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Speaker 2: Mark and Tucker with you here on the Financial Exchange.
1:16
Speaker 2: It is a Wednesday here at the moment, I guess
1:22
Speaker 2: it will be all day. It's not really something that's
1:25
Speaker 2: minutes to minute. And as we continue through the week,
1:29
Speaker 2: obviously there continues to be a conflict in the Middle
1:32
Speaker 2: East that continues to be a key focus of markets,
1:37
Speaker 2: and as we go through the week, we're getting kind
1:39
Speaker 2: of an evolved understanding of exactly what is going on.
1:43
Speaker 2: Certainly the situation does change from day to day there
1:46
Speaker 2: in terms of you know exactly what the lay of
1:49
Speaker 2: the land is, and you know, even within a day,
1:52
Speaker 2: you see significant moves within markets that are trying to
1:57
Speaker 2: assess what is happening with imperfect information. None of us
2:02
Speaker 2: know exactly what's going on for a variety of different reasons,
2:07
Speaker 2: and so markets are trying to basically answer the age
2:11
Speaker 2: old question in investing, the one that matters is this
2:15
Speaker 2: temporary or is this permanent? Now, obviously this is not
2:18
Speaker 2: going to be, you know, something that lasts forever. But
2:21
Speaker 2: by permanent, I guess what I mean is, hey, is
2:23
Speaker 2: this going to be something that disrupts trade throughout the
2:26
Speaker 2: region for a week or is it going to be
2:29
Speaker 2: a month or six months. You know, we don't know
2:32
Speaker 2: right now when markets are trying to sort that out.
2:35
Speaker 2: So we've got a piece here from the Wall Street
2:37
Speaker 2: Journal talking about just what we saw yesterday in markets,
2:41
Speaker 2: and I think it's a good jumping off point mark
2:44
Speaker 2: in terms of, hey, like, what did we actually see
2:49
Speaker 2: yesterday and what are some possible explanations for it? So
2:55
Speaker 2: couple things. The first s and P five hundred opened
2:58
Speaker 2: down a little north of one percent, about eighty points.
3:01
Speaker 2: It then ended up falling another ninety from there to
3:04
Speaker 2: go down one hundred and seventy points at one point,
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Speaker 2: about two and a half percent is where we were
3:08
Speaker 2: down mid morning and kind of looking like it could
3:10
Speaker 2: be a really gnarly day, like one of those where
3:14
Speaker 2: you just kind of bleed, you know, down throughout the
3:16
Speaker 2: day and end up closing down like three or four percent.
3:20
Speaker 2: We got down around two and a half percent, and
3:22
Speaker 2: the market rallied over the course of the afternoon then
3:25
Speaker 2: until around three pm, going from one hundred and seventy
3:28
Speaker 2: points down to only forty So you went from about
3:31
Speaker 2: two and a half percent down down to about two
3:33
Speaker 2: thirds of a percent, So a pretty big intra day
3:35
Speaker 2: rally and then gave up a chunk of that into
3:38
Speaker 2: the close, closing down around sixty points, little less than
3:41
Speaker 2: one percent. And this was kind of the action across
3:44
Speaker 2: the major indices. So a few different potential takeaways that
3:50
Speaker 2: you can have from this number one. Hey, over the
3:53
Speaker 2: course of the day, one of the things that was
3:54
Speaker 2: announced by the Trump administration was a plan to try
3:57
Speaker 2: to get trapped moving through Hormuz again through using a
4:03
Speaker 2: couple of different methods. One the US government through the
4:08
Speaker 2: what is it the DFC, I forget what it stands for,
4:10
Speaker 2: It's the something Finance Corporation, Development Finance Corporation, basically saying, hey,
4:16
Speaker 2: we want to be able to provide maritime insurance for
4:18
Speaker 2: these ships, and also that the US Navy may, if necessary,
4:22
Speaker 2: provide security through convoy escorts and things along those lines.
4:27
Speaker 2: So you know, you've had some things that were announced yesterday,
4:31
Speaker 2: and so I think overall, this is a market that
4:35
Speaker 2: clearly is trading number one, based on the price of oil.
4:38
Speaker 2: That's a huge influence here. But the other thing that
4:40
Speaker 2: was interesting to see yesterday, and this I think gets
4:43
Speaker 2: at the crux of what I believe was going on
4:45
Speaker 2: there are two things that I think are happening. Number One,
4:49
Speaker 2: if you look at where the selling has been like that,
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Speaker 2: the heaviest selling on each of the last two days,
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Speaker 2: it's been the overnight session and then through the morning.
4:58
Speaker 2: And when you see that, generally, it tells you that
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Speaker 2: whatever is going on is more of an overseas phenomenon,
5:07
Speaker 2: because overseas investors when they are accessing their markets, think
5:11
Speaker 2: about European investors, market closes around eleven thirty Eastern time,
5:16
Speaker 2: and so if you start to rally, you know, as
5:18
Speaker 2: you get past that European close, okay, kind of tells
5:22
Speaker 2: you something there. Likewise, the overnight session. A lot of
5:24
Speaker 2: trading from Asia that happens in the overnight session. So
5:28
Speaker 2: if it's you know selling that you're seeing, there's probably
5:31
Speaker 2: a lot of selling pressure from Asia. And this makes
5:33
Speaker 2: sense in the context of a couple of different things.
5:37
Speaker 2: The first is, hey, if you are an investor from
5:44
Speaker 2: just an individual investor from you know, Korea or Japan,
5:47
Speaker 2: or you know somewhere in Asia or even you know
5:49
Speaker 2: in Europe, and you're seeing your markets getting bludgeoned, you
5:51
Speaker 2: might be saying, Okay, I gotta you know, sell further
5:54
Speaker 2: and so it's some additional selling pressure while US markets
5:56
Speaker 2: aren't open. Number Two, if you are there a large
6:01
Speaker 2: institutional investor that you know serves specific needs in any
6:05
Speaker 2: of those areas, you may be saying, okay, we might
6:08
Speaker 2: need to you know, be adjusting our you know, asset
6:12
Speaker 2: mix because of X, Y and Z going on. And
6:15
Speaker 2: you've got you know, someone tapping you on the shoulder saying, hey,
6:17
Speaker 2: take down your risk because there's a problem here. So
6:21
Speaker 2: you can see that happening. The other phenomenon that I
6:23
Speaker 2: think you get, and this specifically, I think is I
6:27
Speaker 2: think this is very specific to the Middle East, is Look,
6:33
Speaker 2: you've got a number of you know, large sovereign wealth
6:35
Speaker 2: funds that exist in the Middle East that buy and
6:38
Speaker 2: large are funded by oil and energy revenue. And if
6:41
Speaker 2: you have a situation like right now where stuff isn't
6:44
Speaker 2: transitting through the straight of hoo moves and that energy
6:47
Speaker 2: revenue is disrupted, you probably have to sell some stuff
6:50
Speaker 2: in order to pay your bills on a daily basis.
6:53
Speaker 2: And that plays into it when you get to what
6:56
Speaker 2: happened once US markets opened yesterday, I think the really
7:01
Speaker 2: interesting thing is looking at what was bought versus what
7:04
Speaker 2: was sold. Software, which has gotten bludgeoned for the last
7:07
Speaker 2: several weeks was moving up. It was like a just
7:11
Speaker 2: like taking off, like absolutely crazy semiconductors, kind of a
7:15
Speaker 2: mixed bag, and it was basically, hey, everything that worked
7:18
Speaker 2: for the last few weeks was getting sold, everything that
7:22
Speaker 2: didn't work was getting bought. And this to me is
7:26
Speaker 2: a telltale sign. And again like none of us know
7:29
Speaker 2: this for certain, but again, you see enough days like
7:32
Speaker 2: this needs to start to get a sense of you
7:33
Speaker 2: know it what you think it might be telltale sign
7:37
Speaker 2: of long short hedge funds doing what's called de grossing. Okay,
7:43
Speaker 2: something was gross out there. No, what we're talking about
7:46
Speaker 2: here is if you are a long short hedge fund,
7:49
Speaker 2: meaning you can buy stocks that you want to own
7:51
Speaker 2: because you think they're gonna go up, or short stocks
7:53
Speaker 2: that you want to sell because you think they're gonna
7:56
Speaker 2: go down. When you see a big day in risks,
8:00
Speaker 2: specifically like how hedge funds measure risk, which is using
8:04
Speaker 2: a method called var value at risk. Generally, when you
8:08
Speaker 2: see these big shocks, hedge fund risk departments come in
8:10
Speaker 2: and they say, hey, you've got to take down your
8:13
Speaker 2: risk on both sides of the ledger. You've got to
8:16
Speaker 2: stop being so long and stop being so short degrossing.
8:20
Speaker 2: You're doing it from both sides. And so what this means.
8:23
Speaker 2: If you're closing out shorts, hey, it tends to produce
8:26
Speaker 2: a little bit of a pop in those stocks. If
8:28
Speaker 2: you closing out lungs, tends to depress them. And that's
8:30
Speaker 2: what I think we were seeing a decent chunk of
8:32
Speaker 2: yesterday because pretty much every metric out there were saying, yeah,
8:36
Speaker 2: there's some stuff that you need to watch out for,
8:39
Speaker 2: and so risk managers in the institutional world we're probably
8:43
Speaker 2: doing some things like that. So this is kind of
8:46
Speaker 2: the lay of the land as far as you know,
8:48
Speaker 2: where things were moving yesterday and where we go from
8:51
Speaker 2: here again anyone's guess. I think as far as how
8:54
Speaker 2: this conflict evolves, how it impacts world shipping lane and
9:00
Speaker 2: you know trade, there's some questions that are going to
9:03
Speaker 2: need to be resolved over the next you know, first
9:06
Speaker 2: in the next few days, I think as far as
9:08
Speaker 2: just getting shipping moving through horror moves again, and then
9:12
Speaker 2: over the next month or so, what pace can you
9:14
Speaker 2: get up to can you maintain it? You know what
9:17
Speaker 2: threat still exists. These are going to be questions that
9:20
Speaker 2: need to be answered successfully if this market is going
9:23
Speaker 2: to be able to make any kind of concerted effort
9:26
Speaker 2: at a rally here. And so we're still very early innings. It's,
9:30
Speaker 2: you know, unknown whether we're going to see things get better, worse,
9:34
Speaker 2: or stay the same. We just don't know, and it's
9:37
Speaker 2: going to take some time to see that play out here.
9:40
Speaker 2: Let's take a quick break. When we come back, I
9:43
Speaker 2: will let Mark speak and we'll talk a little bit
9:47
Speaker 2: about American energy production. Thank you, Ai, Mark. We'll talk
9:53
Speaker 2: a little bit about American energy production after this.
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11:05
Speaker 1: Mark.
11:05
Speaker 2: Let's talk a little bit about this piece from the
11:07
Speaker 2: Wall Street Journal. It's titled why American frackers aren't rushing
11:10
Speaker 2: to pump more oil? And the answer is that when
11:14
Speaker 2: you decide to, you know, do some additional drilling for oil,
11:20
Speaker 2: you're making a decision based on what you expect the
11:22
Speaker 2: price of oil to be over the next five to
11:24
Speaker 2: ten years, not the next five to ten weeks. And specifically,
11:28
Speaker 2: American frackers got absolutely torched in the twenty tens by
11:34
Speaker 2: building up too much capacity and then basically getting you know,
11:39
Speaker 2: forced into a wave of bankruptcies as Russia and OPEC
11:43
Speaker 2: increased production significantly in twenty fifteen and twenty sixteen. And
11:47
Speaker 2: so any energy executives that are in place right now
11:50
Speaker 2: remember that pretty closely, and they don't want to put
11:54
Speaker 2: their companies at risk by rushing to increase production with
11:59
Speaker 2: an un certainty as to where oil prices may be
12:03
Speaker 2: even six months from now, let alone five six years
12:06
Speaker 2: from now.
12:07
Speaker 4: Yeah, I'm wondering how little politicians understand about not just
12:11
Speaker 4: their business model, but any business model to be asking
12:14
Speaker 4: a question like that, like why aren't you responding to.
12:18
Speaker 2: Well, if any politicians asked that.
12:20
Speaker 4: Well, well, who is ever asking? I assume that that.
12:24
Speaker 2: I think this piece is just talking to like us.
12:27
Speaker 4: Yeah, but I assume politicians will be putting political pressure
12:30
Speaker 4: or raising expectations that our domestic production will somehow. I've
12:35
Speaker 4: actually heard the statement, so someone's saying it, you know, well,
12:38
Speaker 4: we got plenty of domestic production. We don't need to
12:40
Speaker 4: worry about that. No, they don't base, as you said,
12:43
Speaker 4: production decisions on short term blips, you know.
12:46
Speaker 2: Look to be fair, the US is in a situation where,
12:49
Speaker 2: because of the domestic production that we do have, the
12:53
Speaker 2: impact on oil prices and gas prices is going to
12:56
Speaker 2: be significantly lower than on countries like Japan, in Korea,
13:00
Speaker 2: in Germany which do not produce their own energy in
13:05
Speaker 2: any significant quantities. So I do think it's fair to
13:09
Speaker 2: say that we have a unique position here. But is
13:13
Speaker 2: it going to be one in which US companies say, hey,
13:16
Speaker 2: we'll make up the gap in production. Well, no, for
13:20
Speaker 2: a couple of reasons. The first is one I outline.
13:22
Speaker 2: The second is the United States basically doesn't get very
13:25
Speaker 2: much of its oil from production that flows through horm moves.
13:30
Speaker 2: It's just not Most of that oil flows east, not west.
13:35
Speaker 2: And what I mean by that, it's typically going to India,
13:39
Speaker 2: it's going to Japan, it's going to China, it's going
13:41
Speaker 2: to South Korea. That is where that oil tends to move.
13:46
Speaker 2: The United States. A lot of our oil that we
13:49
Speaker 2: actually use comes from the United States, Canada, Mexico, South America.
13:54
Speaker 2: A little still does come from the Middle East, but
13:56
Speaker 2: it's typically transitd via the Red Sea through pipelines that
13:59
Speaker 2: have humped it over to oil distribution facilities there. Because gee,
14:04
Speaker 2: if you can make a shorter trip from the Red
14:06
Speaker 2: Sea as opposed to having to you know, loop all
14:09
Speaker 2: around the Arabian Peninsula, it's a lot shorter of a
14:12
Speaker 2: trip with you know, less risk. So I do think
14:16
Speaker 2: there are some things that make the US, you know,
14:18
Speaker 2: position differently from a lot of other countries when it
14:21
Speaker 2: comes to the potential for the impact on oil and
14:25
Speaker 2: gas prices, but it doesn't mean that we're immune from them.
14:29
Speaker 2: In terms of what you're seeing right now, the last
14:32
Speaker 2: two days, depending on the source that you look at,
14:35
Speaker 2: gas prices have gone up anywhere from nineteen to twenty
14:37
Speaker 2: two cents on average. In the United States, we're likely
14:41
Speaker 2: heading if if oil prices remain where they are, which
14:44
Speaker 2: they're they're holding relatively steady today, mid seventies on West
14:48
Speaker 2: Texas Intermediate, low eighties on Brent. If you remain there,
14:52
Speaker 2: you're probably heading up into the high three twenties, maybe
14:55
Speaker 2: low three thirties, and then you start to see this
14:58
Speaker 2: move taper off. If you end up with a situation
15:02
Speaker 2: where hormus remains you know locked, you know, basically not
15:07
Speaker 2: moving for any extended period of time. That's where you
15:11
Speaker 2: start to get the situations where, in particular, Brent crude
15:14
Speaker 2: makes that move from eighty to you know, one hundred
15:16
Speaker 2: in pretty short order. In West Texas Intermediate doesn't, it
15:20
Speaker 2: doesn't have that magnitude of move move most likely, but
15:24
Speaker 2: still probably goes from somewhere in the mid seventies to
15:26
Speaker 2: the mid to high eighties. When you're all said and
15:29
Speaker 2: done and now you're talking about gas prices close to
15:32
Speaker 2: four dollars a gallon in that scenario, does it happen?
15:36
Speaker 1: I don't know.
15:37
Speaker 2: I don't know how the next you know, a couple
15:38
Speaker 2: weeks are going to play out. There are paths where
15:41
Speaker 2: you can start to maybe see things unlocking. But let's
15:45
Speaker 2: let's not all try to be marine transport experts this week.
15:51
Speaker 2: You know, I know probably one percent as much as
15:54
Speaker 2: I need to about, you know, the transportation of oil
15:59
Speaker 2: on giant supertankers. I could probably sound smart to you
16:04
Speaker 2: know a lot of people, but I still don't know
16:06
Speaker 2: enough to be able to actually say anything conclusively. The
16:10
Speaker 2: people that I read online, they have very wildly differing
16:14
Speaker 2: opinions as to exactly how this could play out over
16:17
Speaker 2: the next couple weeks. And these are people that actually
16:20
Speaker 2: understand the industry way better than I do.
16:23
Speaker 1: Well.
16:23
Speaker 4: Luckily, we have data and statistics does allow you to
16:26
Speaker 4: say some things about this. For example, if you look
16:29
Speaker 4: at the elasticity, the sensitivity. If you've ever heard the
16:32
Speaker 4: term beta, that's effectively what a researcher calculates how much
16:35
Speaker 4: does X move in percentage terms? When why moves? And
16:39
Speaker 4: you can look at shifts in oil prices over time
16:41
Speaker 4: and shifts and gas prices over time, which I did
16:43
Speaker 4: this morning. Is a quick kind of back of the envelope,
16:46
Speaker 4: not literally obviously you need computer software to do this,
16:49
Speaker 4: but you get abou zero point five or fifty percent
16:52
Speaker 4: in plain English. Oil prices go up by a dollar.
16:56
Speaker 4: Gas prices go up by half as much. Sure, I
16:59
Speaker 4: use three year rolling window, but you can extend that
17:02
Speaker 4: to five or shorten it to twelve months, and you
17:04
Speaker 4: get something in the ballpark. So that's one thing to
17:08
Speaker 4: keep in your sort of back pocket if you're wondering
17:10
Speaker 4: oil prices are up, what are they up?
17:11
Speaker 2: Like?
17:11
Speaker 4: Fifteen percent since this started, like ten dollars starting at
17:15
Speaker 4: sixty five dollars a barrel? Is that about right?
17:18
Speaker 2: So from what point are we talking about from when
17:20
Speaker 2: this conflict started? Yeah, you've picked up since last Friday
17:24
Speaker 2: about fifteen percent.
17:25
Speaker 4: Cost Okay, So you know you would expect if that persisted,
17:28
Speaker 4: gas prices to go up by about half as much.
17:30
Speaker 4: Now that's actually happened. I'd call that a coincidence because
17:33
Speaker 4: the time frames too short to make any predictions about
17:39
Speaker 4: So it's sort of lucky that that turns out to
17:41
Speaker 4: be exactly half the that the gas price increase that
17:45
Speaker 4: triple A for example, and others are reporting, is about
17:48
Speaker 4: half the percentage is about half the amount in percentage
17:52
Speaker 4: terms that oil has has increased. But there's unquestionably a connection.
17:57
Speaker 4: I would have thought it was higher. I was a
17:58
Speaker 4: little surprised to see it that low. And it does
18:01
Speaker 4: go up during periods of steep rises, quick steep and
18:06
Speaker 4: persistent rises in the price of oil. So that passed
18:10
Speaker 4: through percentage if you want to call it that, or
18:12
Speaker 4: beta if you like the finance jargon, could actually go
18:15
Speaker 4: up if this thing ends up being prolonged.
18:17
Speaker 2: Now, if you do want to talk about the parts
18:19
Speaker 2: of the world that you know have some real issues
18:22
Speaker 2: if this is any kind of prolonged restriction on movement
18:26
Speaker 2: through Hormuz, Europe and Asia are are going to have problems,
18:31
Speaker 2: and Europe more because of the lack of LNG transport
18:36
Speaker 2: that goes there, though again even Asia will have some
18:39
Speaker 2: issues there. But you know, you talk about oil production
18:42
Speaker 2: that flows to again India and Japan, Korea, you know, Thailand, Vietnam,
18:49
Speaker 2: like all those areas you have some real problems in
18:53
Speaker 2: terms of where that pricing can go. If this is
18:56
Speaker 2: you know, the status, if this is the new state
18:58
Speaker 2: of play for any extended period of time, So we'll
19:01
Speaker 2: have to see where things go again. I caution anyone
19:05
Speaker 2: like this. You have paths where this could I don't
19:09
Speaker 2: want to say, you know, see like any kind of
19:11
Speaker 2: complete resolution in the near term. But there are paths
19:14
Speaker 2: where things can get much better over the course of
19:15
Speaker 2: the next five to seven days. For energy markets, there
19:19
Speaker 2: pass where things can get much worse. And I don't
19:22
Speaker 2: know which one you're gonna head down. Like I think
19:24
Speaker 2: that I'm I'm admitting that I don't know exactly how
19:29
Speaker 2: it's going to play out. Let's take a quick break
19:31
Speaker 2: and when we return, We've got Wall Street Watch.
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20:00
Speaker 3: Yesterday's pullback Marcus today are rebounding as Wall Street continues
20:03
Speaker 3: to monitor developments on the conflict between the US and
20:06
Speaker 3: Iran oil prices continue to garner much attention. Right now,
20:10
Speaker 3: the dial is up just over half a percent. SMP
20:13
Speaker 3: five hundred up nearly eight tenths of one percent, or
20:15
Speaker 3: fifty three points higher, Nasdaq up one point three percent
20:19
Speaker 3: or three hundred and seven points higher. Russell two thousand
20:22
Speaker 3: is up about seven tenths of one percent. Tenure Treasure
20:24
Speaker 3: reeled up two basis points at four point zero eighty
20:28
Speaker 3: four percent in crude oil, pulling back slightly today about
20:31
Speaker 3: eight tenths of a percent, rating its seventy three dollars
20:34
Speaker 3: and ninety three cents a barrel. CrowdStrike reported strong quarterly
20:37
Speaker 3: earnings and said clients are increasingly turning to the company
20:41
Speaker 3: due to more complicated AI cyber threats. CrowdStrike also issued
20:45
Speaker 3: strong forward guidance for the first quarter and full year. Shares, however,
20:49
Speaker 3: down about two percent. Meanwhile, software development tools company get
20:53
Speaker 3: Lab said it anticipates slower annual sales growth, raising worries
20:57
Speaker 3: around potential AI disruption for the sector. Get Lab stock
21:01
Speaker 3: is sinking nine percent. Elsewhere, Moderna shares jumping eight percent
21:05
Speaker 3: following news that will pay nine hundred and fifty million
21:08
Speaker 3: dollars to settle a patent litigation with our Beautist Biopharma
21:12
Speaker 3: and a Royviant Sciences subsidiary. Bath and Bodywork shares are
21:16
Speaker 3: pulling back modestly after the retailers set it to refocus
21:19
Speaker 3: on core products such as scent to candles and bodycare
21:22
Speaker 3: was making progress and after today's closing bell, we'll see
21:25
Speaker 3: more tech earnings from Broadcom. I'm Tucker Soolta and that
21:30
Speaker 3: is Wall Street.
21:31
Speaker 2: Watch margreet a piece here from the Wall Street Journal.
21:35
Speaker 2: It's titled Iran conflicts spurs rebound in US borrowing costs.
21:41
Speaker 2: Tenure Treasury has seen a modest sized selloff over a
21:46
Speaker 2: few days here. There's some significant movement on Monday, but
21:49
Speaker 2: is quieted down and just drifted higher the last couple
21:52
Speaker 2: of days. Now it's back up to four point oh
21:54
Speaker 2: eight percent after being in the three to nine range
21:58
Speaker 2: late last week. What are some of the considerations for
22:02
Speaker 2: why the tenure Treasury may be moving in this direction
22:06
Speaker 2: during a time when the conventional wisdom is heay investors
22:10
Speaker 2: flock to bonds during a time when they're.
22:12
Speaker 4: Scared possibly emerging market central banks are selling a debt
22:18
Speaker 4: to help push up their support their currencies. Dollar strengthening.
22:23
Speaker 4: That's bad for.
22:24
Speaker 2: Right, because we have seen the dollar strength.
22:26
Speaker 4: Yeah, so just for context, currencies trade like anything else.
22:31
Speaker 4: I didn't know this. A teacher once made fun of
22:33
Speaker 4: me for not knowing this, so I always say, hey,
22:34
Speaker 4: if you didn't. If you've not heard this and someone
22:36
Speaker 4: makes fun of you, first you should want to punch
22:39
Speaker 4: them in the face. That's a normal reaction because I've
22:41
Speaker 4: had it. But second because nobody in the face. No,
22:44
Speaker 4: it was yeah, different occasions. So, yeah, currencies trade like
22:50
Speaker 4: stocks and you know, bonds. So contra foreign we don't
22:53
Speaker 4: do this anymore as post nineteen seventy one, we haven't
22:56
Speaker 4: had to. The FED doesn't try to manage the value
22:58
Speaker 4: of the dollar, and least it's not one of their goals.
23:01
Speaker 4: But foreign central banks do. They keep a close eye
23:03
Speaker 4: on the value of their currencies. Argentina is a recent
23:07
Speaker 4: case in the news, and they sell dollars and buy
23:12
Speaker 4: their currency when they think their currency is too weak.
23:15
Speaker 4: It makes the news more often likely to make the
23:17
Speaker 4: news when their currency is too strong, and that urts
23:19
Speaker 4: their exports anyway, So you could have what do you
23:24
Speaker 4: do to raise money to buy or to buy, for example,
23:29
Speaker 4: your currency to support it when it's too weak, as
23:32
Speaker 4: happen to many emerging market currencies this week, you sell
23:35
Speaker 4: treasury bonds or whatever your central bank has in terms
23:39
Speaker 4: of reserves, you sell gold or you know, whatever they have.
23:42
Speaker 4: Sure they might have Euro denominated stuff, and so maybe
23:45
Speaker 4: that's a I think you asked, you know what might
23:47
Speaker 4: be behind it? What are some of the considering none
23:49
Speaker 4: of us, that's a possible yeah, yeah, god, sorry, So.
23:52
Speaker 2: You know you've got that as a possible consideration. Do
23:55
Speaker 2: you put any weight into Hey, this obviously has pushed
23:58
Speaker 2: oil prices up in the short term and has the
24:00
Speaker 2: potential to create additional inflation if that last, Do you
24:04
Speaker 2: put any stock into that as being a potential causer
24:08
Speaker 2: part of this?
24:08
Speaker 4: Maybe we can break out the we can decompose, if
24:12
Speaker 4: you will. The rise in the tenure which is about
24:15
Speaker 4: ten so called basis points point one percent, said differently,
24:20
Speaker 4: that's about the rise in the ten year treasury the
24:22
Speaker 4: past week. Because there are such things as inflation protected treasuries,
24:27
Speaker 4: you can actually sort of back out how much and
24:31
Speaker 4: it's just subtraction. It's not complicated how much of that
24:33
Speaker 4: rise is due to real forces like worries about growing
24:38
Speaker 4: government debt or some other typically fiscal fiscally related concern
24:45
Speaker 4: versus a rise in inflation expectations. And to get to
24:47
Speaker 4: the point here, it's about half and half. So half
24:50
Speaker 4: of the rise is due to rising inflation expectations, and
24:52
Speaker 4: maybe it's due to increase commodity prices. I'm sure we'll
24:55
Speaker 4: talk about it oil specifically. I'm so sure we'll talk
24:57
Speaker 4: about it more in the show. How oil makes its
24:59
Speaker 4: way into the general price level, into inflation, and some
25:03
Speaker 4: of it may be due to, you know, the fact
25:07
Speaker 4: that core inflation remains elevated, and this war ties the
25:10
Speaker 4: Fed's hands, you know, something a little bit more complicated.
25:14
Speaker 2: Can we talk about that, because I think that's a
25:15
Speaker 2: great segue into another piece from the Wall Street Journal
25:20
Speaker 2: talking about Neil Kashgari, who is the Minneapolis Fed president,
25:25
Speaker 2: and talking about is he a voting member this year
25:28
Speaker 2: or no?
25:29
Speaker 4: I want to say yes. I don't know.
25:31
Speaker 2: I don't know if he is or not.
25:32
Speaker 4: I'll find out while you intro it.
25:34
Speaker 2: But basically the thinking from him, and there was another
25:36
Speaker 2: quote saying yes, by the way you're seeing yes.
25:39
Speaker 1: Yes.
25:40
Speaker 2: There's another quote from Steve Moran today as well, when
25:43
Speaker 2: asked like, hey, what does this mean for the FED?
25:45
Speaker 2: And basically like the same thing was said by both
25:48
Speaker 2: of them. It's well, we're pretty much in the same
25:50
Speaker 2: spot we were in last week, and we need to
25:52
Speaker 2: see how this all unfolds before we do anything now.
25:56
Speaker 2: I was pretty critical of the FED back in January
26:01
Speaker 2: through March of twenty one. I'm sorry twenty two when
26:06
Speaker 2: remember in February is when the invasion of Ukraine took place,
26:11
Speaker 2: and Jay Powell and the crew got together a few
26:14
Speaker 2: weeks later and we're like, yeah, we're raising interest rates
26:16
Speaker 2: a quarter percent because we don't know how this will
26:18
Speaker 2: impact markets. And it's one thing to say, hey, we're
26:21
Speaker 2: gonna maintain the status quo when you know inflation's running
26:24
Speaker 2: at three. The problem is inflation was already running at
26:26
Speaker 2: like seven then, and when you see a conflict of
26:30
Speaker 2: that nature in that particular part of the world, that
26:33
Speaker 2: basically was no reason why you would think that that
26:36
Speaker 2: would be a positive on the inflation side of things.
26:39
Speaker 2: It would, you know, very likely be a huge negative
26:41
Speaker 2: through commodity price spikes and things like what we actually
26:45
Speaker 2: saw in this case, where you have inflation again not
26:48
Speaker 2: at target, but running you know, somewhere two and three
26:52
Speaker 2: quarters to three and a quarter percent. You know, it's
26:54
Speaker 2: kind of where I think we are, somewhere in that range,
26:58
Speaker 2: and questions about the labor market. I do think the FED,
27:01
Speaker 2: at least in this case, can be like, yeah, we
27:03
Speaker 2: just need to sit where we are and see how
27:05
Speaker 2: things go. And so I think it's different because of
27:07
Speaker 2: the context surrounding it than in March of twenty two.
27:12
Speaker 4: Yeah, and different from the mid to late nineteen seventies too.
27:17
Speaker 4: In seventy nine, for example.
27:18
Speaker 2: Everyone wants to make thee everyone wants to make. Like
27:21
Speaker 2: the seventy eight to seventy nine comparison.
27:23
Speaker 4: Core inflation was a lot higher than there are parallels.
27:26
Speaker 4: I wouldn't dismiss it entirely. The point is it's very
27:29
Speaker 4: hard to read the structure of the economy under normal circumstances.
27:33
Speaker 4: It's particularly hard in circumstances like this. All else equal,
27:38
Speaker 4: if the price of oil stays where it is or
27:41
Speaker 4: continues to creep up, the FED has to consider the
27:45
Speaker 4: FED can do a couple things. It can not do anything,
27:48
Speaker 4: in which case it's effectively accommodating, not doing anything, or
27:52
Speaker 4: loosening to absorb any demand shock would effectively accommodate the
27:56
Speaker 4: shock and push the price level up. That's a technical way,
27:59
Speaker 4: that's an over technical way of saying the inflation is
28:01
Speaker 4: gonna go up, and the Fed's okay with that because
28:03
Speaker 4: they don't want to risk rising unemployment. If more money
28:07
Speaker 4: spent on oil does in the longer term mean less
28:10
Speaker 4: spent on everything else, and all else equal, demand shrinks
28:13
Speaker 4: and you get recessions. So the Fed, the Fed's job
28:16
Speaker 4: becomes even more challenging. Now, had they had they been
28:22
Speaker 4: quicker to squelch inflation and start the and and continue
28:26
Speaker 4: the balance sheet shrinkage process and all that, their job
28:30
Speaker 4: would be a little bit easier today. So part of
28:31
Speaker 4: this is a predicament of their own making. Now, look
28:35
Speaker 4: that's just you know, look, we'd be we don't have
28:38
Speaker 4: a lot of We don't have a lot of room
28:40
Speaker 4: today because inflation room is way above their not way
28:43
Speaker 4: up well in percentage terms, not not percentage point terms,
28:45
Speaker 4: but percentage terms, well above their target. I know, but
28:47
Speaker 4: it makes makes it sound more dramatic. So I'm gonna
28:49
Speaker 4: say it. We're fifty percent above the Fed's target. For
28:53
Speaker 4: God's sake. No, it's not that dramatic obviously, you know
28:55
Speaker 4: what I mean. The balance sheet is hopeless. We're never
28:58
Speaker 4: gonna shrink that sucker, no matter what says. So the
29:02
Speaker 4: FED has way less maneuvering room than it used to
29:06
Speaker 4: because inflation is elevated. Growth slowed in the fourth quarter,
29:10
Speaker 4: which made me sort of change my tune about things
29:12
Speaker 4: running a little too hot. I mean, I don't know, Chuck,
29:14
Speaker 4: There's just too many darn variables. And you hope these
29:17
Speaker 4: guys and women have good judgment at the end of
29:19
Speaker 4: the day.
29:20
Speaker 2: Let's take a quick break and when we return. I
29:25
Speaker 2: don't really have much more to say about the FED
29:28
Speaker 2: right now, so let's just take a quick break and
29:31
Speaker 2: when we come back, we'll talk about something really fun.
29:35
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Speaker 2: All right, so let's talk. We've got a couple things
30:45
Speaker 2: that I want to get through. The first is this
30:47
Speaker 2: piece from the Bloomberg editorial Board titled Chaotic Prediction Markets
30:53
Speaker 2: need Reining In, And we were talking about prediction markets.
30:57
Speaker 2: We're largely talking about Calshi and poly market, which are
31:01
Speaker 2: the dominant ones that have emerged over the last couple
31:06
Speaker 2: of years, and they allow you to gamble on pretty
31:09
Speaker 2: much anything, but they're not called gambling. Some of their
31:12
Speaker 2: called prediction markets, but you can bet on sports, you
31:14
Speaker 2: can bet on politics, you can bet on you know,
31:17
Speaker 2: world events, you can bet on just about anything that
31:22
Speaker 2: you can think of. There is a contract for and
31:26
Speaker 2: these are regulated by the CFTC, the Commodity Futures Trading Commission,
31:31
Speaker 2: and they're pretty much trying to now like legalize their
31:36
Speaker 2: full fledged gambling operations beyond just these futures contracts that
31:40
Speaker 2: they trade. And look, here's the thing. We can talk
31:46
Speaker 2: about this in a few different ways. When sports gambling was,
31:50
Speaker 2: you know, first being legalized throughout the country several years ago,
31:53
Speaker 2: I had a view, look like you might as well
31:55
Speaker 2: legalize the stuff, like otherwise you're just running it underground
31:58
Speaker 2: and YadA YadA.
31:59
Speaker 1: Right.
32:00
Speaker 2: I have since amended that based on what I've seen
32:02
Speaker 2: from the general population too, I think you should have
32:05
Speaker 2: it be legal, but you should have to actually go
32:08
Speaker 2: into a sports book because having this stuff available on
32:10
Speaker 2: your phone is horribly destructive for large swaths, largely of
32:15
Speaker 2: young men, who are making very bad financial decisions. And again,
32:21
Speaker 2: like trust me, I've gone to sports books in Vegas.
32:24
Speaker 2: I've gone to sports books in Boston. And it's not
32:27
Speaker 2: like I like place tons of bets, but I'll do
32:29
Speaker 2: something fun there. But I popped open FanDuel when they
32:33
Speaker 2: first you know, registered in Boston and promptly lost every
32:36
Speaker 2: dollar I put into it in the first few days
32:38
Speaker 2: and was like, Man, I kind of suck at this.
32:40
Speaker 2: I need to delete this because it's not healthy for
32:42
Speaker 2: me to have. I was able to make that, you know, recognition.
32:45
Speaker 2: When we're talking about these prediction markets, the sheer, just
32:52
Speaker 2: the breadth of what you can bet on a in
32:54
Speaker 2: some cases is just kind of troubling. Like you actually
32:57
Speaker 2: have prediction markets that are allowing you to bet on
32:59
Speaker 2: whether or not there will be a nuclear strike somewhere
33:02
Speaker 2: in the world by the end of this year.
33:04
Speaker 3: I mean, there's the Aliens one that's out there too, right,
33:07
Speaker 3: There's there's White yeah.
33:09
Speaker 2: Tucker, There's ones like will will christ return by the
33:12
Speaker 2: end of this year? There's contracts for that. I mean, like,
33:15
Speaker 2: you have all kinds of stuff that is out there,
33:18
Speaker 2: and so it's pretty.
33:21
Speaker 4: Clear to me, I better guess that he's gonna know.
33:24
Speaker 2: It's pretty clear to me that I don't think we're
33:29
Speaker 2: really capable of handling this based on everything that I've seen,
33:36
Speaker 2: and I guess, like technically it could be legal. But
33:40
Speaker 2: I'm not sure that really a lot of this should
33:43
Speaker 2: be when you get into some of this stuff, because ultimately,
33:48
Speaker 2: remember the house always wins, they take their viig and
33:51
Speaker 2: that's kind of how it goes. And I just don't
33:55
Speaker 2: know that you want us to be taking like that.
33:57
Speaker 2: You want to be legalized institutions that are taking a
34:02
Speaker 2: vig on whether or not there's going to be a
34:03
Speaker 2: nuclear strike this year? What are we doing here? Aside
34:08
Speaker 2: from like all the corruption possibilities with this stuff, with
34:11
Speaker 2: all kinds.
34:12
Speaker 4: Of shait, is just really unseemly. You've already said this,
34:16
Speaker 4: that these people are betting on. It just seems wrong
34:20
Speaker 4: betting on outcomes that involve fatalities and stuff like that.
34:24
Speaker 4: So there's a little bit morally repugnant.
34:26
Speaker 2: I guess one thing to bet on a ball going
34:28
Speaker 2: through a hoop. It's another to bet on a bullet
34:30
Speaker 2: going through a destruction.
34:31
Speaker 4: Yeah. Yeah, Now it just seems unseemly. So that makes
34:34
Speaker 4: some people uncomfortable. Is that a reason to make it illegal? Well,
34:37
Speaker 4: of course not. There are a lot of things that
34:39
Speaker 4: are legal that are distasteful, sure, but there are also
34:42
Speaker 4: things that are so distasteful that the majority of people,
34:45
Speaker 4: maybe an overwhelming majority, have decided it needs to be.
34:48
Speaker 1: Real, just allow everything.
34:50
Speaker 4: We don't. And this is where people like me with
34:52
Speaker 4: libertarian kind of leanings have to yield to some of
34:54
Speaker 4: the things you pointed out.
34:55
Speaker 2: There's a balance in all of them.
34:56
Speaker 4: Yeah, and I don't know what it is. Mario Cuomo
34:58
Speaker 4: once said something like, unfortunately, when it comes to banning
35:03
Speaker 4: offensive material, they won't let me decide. Therefore, you know,
35:06
Speaker 4: I take a I approach that with a light touch,
35:09
Speaker 4: and I think there's a lot of wisdom in a comment, like,
35:11
Speaker 4: most of.
35:11
Speaker 2: The time that's the right thing. It's the places where
35:14
Speaker 2: you need any kind of regulation are where. It's the
35:17
Speaker 2: places where without it, you get into the bad outcomes
35:20
Speaker 2: that affect large groups of people with minimal consequences to
35:23
Speaker 2: an individual.
35:24
Speaker 4: I think we need to quantify those. It would help. Yes,
35:26
Speaker 4: some people have made early attempts at it. They don't
35:28
Speaker 4: appear to be particularly reliable, but you have to identify. Yeah,
35:33
Speaker 4: we should be able to quantify it.
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36:38
Speaker 2: We've got some more one more, you know, kind of
36:40
Speaker 2: major earnings report this week. It's gonna be Broadcom this afternoon.
36:45
Speaker 2: Broadcom again might not as be as much of a
36:47
Speaker 2: household name as in Vidia, but they're one point six
36:50
Speaker 2: trillion dollar company, which is kind of wild, especially that
36:55
Speaker 2: if you look at again their overall revenue, you're talking,
37:00
Speaker 2: you know, tens of billions of dollars. I think the
37:02
Speaker 2: revenue for the last twelve months is, yeah, about sixty
37:05
Speaker 2: three billion dollars. Companies trading at one point six trillions.
37:08
Speaker 2: So this is something that can move markets. And the
37:11
Speaker 2: interesting thing to me is pay and Video reported good
37:14
Speaker 2: earnings last week with good guidance and still sold off
37:17
Speaker 2: after the fact. What do we see from Broadcom? Because
37:20
Speaker 2: the trend that we've seen from anything AI related in
37:25
Speaker 2: earnings this quarter has been the earnings this quarter have
37:28
Speaker 2: been fined, the guidance has been mostly good, and most
37:30
Speaker 2: of them have still gotten punished. So is that still
37:33
Speaker 2: the case given what markets are focused on right now,
37:37
Speaker 2: or do we maybe start to see a change with
37:39
Speaker 2: this and hey, good earnings, good guidance and they go
37:43
Speaker 2: or the other one, which I don't think you'll see
37:45
Speaker 2: just based on everyone else who's reported in the area,
37:48
Speaker 2: do you see bad earnings and bad guidance? But that
37:50
Speaker 2: would be kind of out of character given what everyone
37:53
Speaker 2: else who's already reported for the quarter has told us,
37:55
Speaker 2: which is yeah, the uh, the Q four numbers where
38:00
Speaker 2: the AI space are pretty breathtaking, even if they're still
38:03
Speaker 2: uncertainty about where it goes in the future. Quick break
38:06
Speaker 2: here we got more to come on our number two
38:10
Speaker 2: right after this