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Has the Fed ever really been independent of congress? · The Financial Exchange Show

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Speaker 1: This is the Financial Exchange with Chuck Zada and Mark Vandetti, Chuck.
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Speaker 2: Mark and Tucker with you. And after a little bit
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Speaker 2: of early weakness and markets, we've got all three major
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Speaker 2: US indices back in the green. Here. The Dow is
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Speaker 2: very modestly thirty points about zero point one percent, the
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Speaker 2: S and P five hundred is up twenty one points,
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Speaker 2: about a third of a percent, and the Nasdaq up
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Speaker 2: sixty eight points, also about a third of a percent,
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Speaker 2: So again some modest upward movement after some weakness this morning.
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Speaker 2: We've got the Tenure Treasury down another three basis points
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Speaker 2: to four point three eight three percent. Oil West Texas
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Speaker 2: Intermediate giving back some of its gains from yesterday where
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Speaker 2: it was up several percentage points on concerns about tensions
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Speaker 2: rising in the Middle East. So it is down fifty
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Speaker 2: two cents a barrel to sixty seven sixty three. Those
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Speaker 2: higher prices and if they are maintained in the next
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Speaker 2: week or two, likely to put some upward pressure on
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Speaker 2: US gas prices as we head towards the second half
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Speaker 2: of the month. And we've got gold up sixty two
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Speaker 2: dollars and fifty cents about two percent, and so that
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Speaker 2: is at thirty four oh six and twenty cents. Mike
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Speaker 2: piece from CMBC, not Mike Mark, whatever person whose name
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Speaker 2: starts with M. The piece is titled A shadow fed
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Speaker 2: Chair could be coming? Who could it be? And how
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Speaker 2: might markets react? Is this? Is this spooky? Who a
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Speaker 2: shadow fed chair is? Do you know they wear black robes?
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Speaker 3: There is a shadow FOMC. It's a bunch of academics Carnegie,
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Speaker 3: Mellon and elsewhere. They're they're monitorists who believe mainly in
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Speaker 3: controlling the growth and the money supply, and they routinely
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Speaker 3: comment on FED policy the fact that, well, has.
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Speaker 2: Nobody's ever heard of it?
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Speaker 3: Yeah, well, it was a bigger deal to be part
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Speaker 3: of the shadow FOMC in the seventies, in early when
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Speaker 3: the real FOMC was doing an evidently self evidently terrible job.
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Speaker 3: But these guys are a fringe groups as macro monetary
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Speaker 3: policy researchers go again, they're focused only on the growth
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Speaker 3: in the supply of money, So most of their calls
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Speaker 3: over the past thirty years, when the growth in the
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Speaker 3: supply of money has not been a great predictor of inflation,
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Speaker 3: have been way off. I'm sorry, I'm off on a
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Speaker 3: little bit of a tangent but no, FYI to those
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Speaker 3: who think this is novel, No, there is an There
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Speaker 3: is a shadow FMC. They are quite active and quite visible.
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Speaker 3: They would love to get a tenth of the publicity
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Speaker 3: that this proposal is getting, which, by the way, is
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Speaker 3: a horrible idea.
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Speaker 2: Can we start our own shadow FOMC? I don't see why.
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Speaker 3: And apparently there's no monopoly on it because they're cropping
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Speaker 3: up all over the place.
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Speaker 2: We just did, as far as i'm we just did.
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Speaker 2: Who's the chair? Do we have to vote? Do we
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Speaker 2: get a gavel, purple ties roads, things like that?
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Speaker 1: Yeah?
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Speaker 3: Yeah, vicuous comments.
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Speaker 2: In any case. So what are we talking about here
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Speaker 2: with the idea of a shadow FED chair? Who would
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Speaker 2: it be? Who's naming this person? And why?
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Speaker 3: Well, we know that the administration is unhappy with the
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Speaker 3: conduct of the current Federal Open Market Committee. That's what
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Speaker 3: FOMC stands for. It's the policy making group that decides
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Speaker 3: on what the Fed's short term interest rate target and
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Speaker 3: therefore how fast the supply of money, which is what
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Speaker 3: the FED ultimately controls growth in the money supply. The
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Speaker 3: real FOMC has that job, and they're required to balance inflation,
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Speaker 3: keeping it low and stable and unemployment. If you do one,
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Speaker 3: arguably you do the other. That's the prevalent thinking. The
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Speaker 3: idea behind a shadow FOMC is that the administration doesn't
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Speaker 3: think the current fed's doing a good job, so this
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Speaker 3: shadow FOMC is going to tell them the way it
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Speaker 3: should be done after if they work like the existing
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Speaker 3: shadow FOMC, the Carnegie, Mellon and other academics comprised FOMC
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Speaker 3: shadow FOMC, their job is basically to be a gadfly
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Speaker 3: that nags the real FOMC and tells them all the
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Speaker 3: things they're doing wrong. Hard to imagine how this could
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Speaker 3: be productive when you think about the job of the
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Speaker 3: public comments of the FOMC members is to set inflation
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Speaker 3: expectations and keeping them anchored. Imagine now you've got dueling authorities,
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Speaker 3: one saying in monetary policy is too tight, we can
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Speaker 3: let inflation run a little bit hot. That's presumably the
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Speaker 3: view of the administration supporting the shadow FMC, whereas the
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Speaker 3: real FOMC is giving the exact opposite message. It would
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Speaker 3: it would be greatly counterproductive for an authoritative body to
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Speaker 3: appoint a shadow FOMC.
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Speaker 2: When is the expectation that this because this is not
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Speaker 2: talking about a full board that's shadowing. This is like
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Speaker 2: a shadow FED chair that they're talking about is the
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Speaker 2: idea that this would be the person who would be
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Speaker 2: nominated to be the FED Chad or.
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Speaker 3: A prison Think of what Kevin Walsh does now. He
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Speaker 3: writes little op ed's and the Wall Street They're not little.
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Speaker 3: They're substantive every six weeks or so, or roughly coinciding
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Speaker 3: with FED meetings. Maybe not quite that often. He you know,
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Speaker 3: takes takes takes a meeting off here there. Sure, but
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Speaker 3: he's been quite critical, not in the direction by the
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Speaker 3: way that the administration wants. Warsh is a tight money guy,
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Speaker 3: and by that I mean puts more weight on controlling
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Speaker 3: inflation than on getting unemployment historically.
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Speaker 2: Yes, it seems like he's kind of changed his tune
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Speaker 2: in the last couple of years.
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Speaker 3: Oh, he's for easier money than the FED has been.
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Speaker 2: It seems like he is very much taught just talking
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Speaker 2: about lowering rates now.
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Speaker 3: Oh he's angling for the job now with FED.
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Speaker 2: Correct But it's good, sir, I think I guess My
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Speaker 2: question is, so let's say that the President were to say, okay,
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Speaker 2: this is like, you know, the person who is going
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Speaker 2: to be my shadow fed chair. Jeez, does it actually
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Speaker 2: change anything? Like, let's say it's worsh just as an example,
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Speaker 2: as you noted wort putting like stuff out there, does
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Speaker 2: it change anything?
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Speaker 3: I think it does. Chuck it changed. Keep in mind
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Speaker 3: inflation expectations. The topics a little bit esoteric, but there
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Speaker 3: are critic part of the inflation process. If you believe
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Speaker 3: inflation is going to go up, if we believe it
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Speaker 3: to some extent, the prophecy becomes self fulfilling. I'll just
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Speaker 3: kind of leave it at that. I'm oversimplifying a bit.
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Speaker 3: But if you've got a shadow FOMC chair clamoring for
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Speaker 3: lower rates, and he or she is going to become
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Speaker 3: actual FOMC chair because the curve, expectation should go up.
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Speaker 3: And to your point, because expectations feed into actual inflation,
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Speaker 3: so should longer term so should expectations of future short
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Speaker 3: term rates. And if you think about how longer term
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Speaker 3: rates are just just a weighted average boot strapped future
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Speaker 3: short term rates, it should push up rates all else equal.
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Speaker 3: I don't think that's what they want, but there's it's
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Speaker 3: not hard to draw a line between those two things,
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Speaker 3: which is why this is such a spectacularly bad idea.
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Speaker 3: Imagine doing this to the chief Justice of the Supreme Court.
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Speaker 3: I don't like their rulings. I'm going to appoint a
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Speaker 3: shadow justice to opine as I would prefer. By the way,
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Speaker 3: this person's going to be the chief Justice in a year.
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Speaker 3: Can you imagine how confusing that would be?
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Speaker 2: Think about it?
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Speaker 3: Yeah, yeah, I don't know if that's the right analogy.
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Speaker 2: No, it's it's think about it. Let's say that you
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Speaker 2: are the board of a company. Yes, better analogy, and
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Speaker 2: you've got a CEO that you don't like for whatever reason,
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Speaker 2: maybe you can't fire them, so you say, hey, this
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Speaker 2: this person's gonna take over in a year, but they're
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Speaker 2: gonna be our shadow chair, right or a shadow CEO? Like, yes,
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Speaker 2: they're good. There are times when okay, CEO says they're
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Speaker 2: stepping down and they're gonna stay on board for a
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Speaker 2: year to help with the transition. But this is not that.
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Speaker 2: This is you know, potentially someone saying, well, I would
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Speaker 2: not have done what Bob Eiger did. I would have
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Speaker 2: done it differently. And how does that influence you know,
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Speaker 2: morale at the company and the execution and all those things,
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Speaker 2: that's what you're trying to get.
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Speaker 3: Yes, much better analogy than mine and a stock price.
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Speaker 3: If this shadow person is going to become the actually
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Speaker 3: the actual chair in say a year, how do I
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Speaker 3: value this stock? Their vision is totally different?
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Speaker 2: Ahead, Yeah, Or it's kind of like having like a
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Speaker 2: lame duck head coach on a sports team. Okay, if
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Speaker 2: they're in the last year of their contract and you
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Speaker 2: know someone else's up, is the team gonna listen to them?
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Speaker 4: You know?
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Speaker 1: Like?
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Speaker 2: Or are you just like waiting to see what comes next?
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Speaker 3: Anyways, we have enough voices speaking from monetary policy right now.
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Speaker 2: We don't need more.
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Speaker 3: We don't need No, we really don't. They should tone
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Speaker 3: it down by ninety percent as it is. I can't
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Speaker 3: imagine an administration sanctioned shadow FOMC chair clamoring for lower
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Speaker 3: interest rates all the time. Hugely destructive.
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Speaker 2: I gotta say, I know that Worris is kind of
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Speaker 2: the pick that everyone thinks is going to be the guy.
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Speaker 2: But I'm big on Christopher Waller these days.
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Speaker 3: He's far too independent.
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Speaker 2: I think I think he's been fantastic the last couple
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Speaker 2: of years.
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Speaker 3: He's an accomplished researcher with he's a respected academic. I
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Speaker 3: think he's probably far too independent. I don't know how
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Speaker 3: head strong he is or ambitious he is. I can't
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Speaker 3: speak to those things. But he's got too much, i hope,
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Speaker 3: too much credibility to give in to the whims of
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Speaker 3: political pressures.
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Speaker 2: Let's take a quick break. When we return, we're gonna
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Speaker 2: be joined by Mark Spindell. Mark is the founder of
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Speaker 2: Potomac River Capital and author of the Myth of Independence,
10:03
Speaker 2: How Congress Governs the Fed, and Mark is going to
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Speaker 2: be joining other Mark right after this.
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Speaker 3: We are joined here on the Financial Exchange by Mark Spindell.
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Speaker 3: Mark's an investor, He's a fiduciary to some of America's
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Speaker 3: largest pension funds, and, maybe most importantly for our purposes
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Speaker 3: this morning, he is co author of the Myth of Independence,
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Speaker 3: How Congress Governs the Federal Reserve. Mark, good morning, Thanks
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Speaker 3: for being.
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Speaker 4: With us, my pleasure, Thanks for having me on board.
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Speaker 2: You bet.
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Speaker 3: Why don't we start with the subject of your book,
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Speaker 3: Fed independence, If that's okay? Most researchers would say that
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Speaker 3: insulating the FED from political pressure, that is, having a
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Speaker 3: FED chaer who can act independently and moreover, who cares
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Speaker 3: maybe a little bit more about low inflation than the
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Speaker 3: average person or politician. These criteria are pretty essential for
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Speaker 3: price stability. I don't think that's a controversial proposition. The
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Speaker 3: current administration, however, possibly doesn't agree. So what does the
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Speaker 3: apparent stance based on fragments of public comments that the
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Speaker 3: President and others have made. What does the stance of
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Speaker 3: this administration possibly mean for the FED as an institution
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Speaker 3: and for one of its two primary objectives, that is
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Speaker 3: keeping inflation low and stable.
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Speaker 4: I think it complicates all of the objectives, and I
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Speaker 4: don't think we need to even go to the fragments.
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Speaker 4: I can sort of look at all of the clear
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Speaker 4: statements that the President has made in season one and
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Speaker 4: in season two in terms of, as you said, his displeasure,
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Speaker 4: his frustration with his hands selected FED chair. It's safe
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Speaker 4: to say that a risk premium has already been priced
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Speaker 4: in to the US treasury market and all sort of
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Speaker 4: rates that are derived from treasuries, so that damage has
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Speaker 4: already been done. The sort of previous conversation about a
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Speaker 4: potential shadow chair, you know, I would draw a big
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Speaker 4: distinction between the shadow FOMC, which I think you rightly
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Speaker 4: characterized as a group of monitorists slightly fringy FED watchers
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Speaker 4: from the seventies. This would be an individual who would
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Speaker 4: have the sort of clear choice from the President a
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Speaker 4: nominee to be you know, the Senate, which would have
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Speaker 4: to confirm the president's selection, would weigh in. But a
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Speaker 4: big difference between season one and season two is that
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Speaker 4: we have a much more Trump friendly Republican conference in Congress.
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Speaker 4: They have a three seat majority, so you know, he
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Speaker 4: may not face some of the frustrations he faced with
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Speaker 4: his previous nominees in his first term. As such, this
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Speaker 4: individual would all of a sudden take the spotlight from
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Speaker 4: Chair Powell and be afforded all of the cidential benefits.
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Speaker 4: So back to your question, whoever the president selects this president,
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Speaker 4: I think arrives with a sort of real challenge to
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Speaker 4: sort of overcome that independence and the sort of essential
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Speaker 4: broadsides if they don't wind up sort of bending the
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Speaker 4: knee or doing the bidding. The bidding in this case
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Speaker 4: is presumably to put the pedal to the metal, get
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Speaker 4: the economy going, at the risk, of course, of a
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Speaker 4: sort of more inflationary environment.
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Speaker 3: No, no, please, Is there anything the Fed can do
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Speaker 3: to preempt this? Is it? The worst idea in the
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Speaker 3: world to let elected policymakers have a say in the
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Speaker 3: Fed's inflation target, not the operational part, not how they implement.
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Speaker 3: That's up to policy day to day is up to.
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Speaker 4: You've got, I know exactly what you've got, what you're
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Speaker 4: getting towards, and I think it's important for people to realize.
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Speaker 4: And the thesis of the book with Professor Binder was
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Speaker 4: that the politicians are very much sort of intertwined with
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Speaker 4: the operational aspects and the targets and the goals of
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Speaker 4: the Federal Reserve. When Janet Yellen was to be installed
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Speaker 4: as the subsequent FED chair to Ben bernanke Bernanky was
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Speaker 4: asked if he had any advice for the incoming chair woman,
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Speaker 4: and he said, remember, Congress is our boss. And you know,
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Speaker 4: whether it's the president who's putting that pressure. Trump in
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Speaker 4: his own inimitable way, but LBJ put a lot of
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Speaker 4: pressure on mc chesney Martin back in the day. Nixon,
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Speaker 4: of course, enormous pressure on Arthur Burns. You know, both
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Speaker 4: of those two devastating effects. Right. We talked about the
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Speaker 4: seventies sort of inflation debacle. That was a lot of
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Speaker 4: presidential pressure. But Congress can do the same. Just for example, Mark,
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Speaker 4: we had ted Cruz last week. Float The idea of
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Speaker 4: ending the ability of the FED to pay interest on
15:57
Speaker 4: reserves a torpedo at the banking system, a real would
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Speaker 4: really complicate the Fed's ability to conduct open market operations,
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Speaker 4: lose control of the front end. That's a sitting senator,
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Speaker 4: an important senator, as they all are, particularly in the majority.
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Speaker 4: But there are lots of ways that a politician and
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Speaker 4: elected officials in Congress and certainly in the Oval Office,
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Speaker 4: can mess around with or change the operating agreement of
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Speaker 4: the Federal Reserve.
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Speaker 3: Why aren't markets acting more conspicuously to the threat of
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Speaker 3: easy all all over, simplifying call it easy, putting less
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Speaker 3: weight on inflation than a strict inflation targeter central banker would.
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Speaker 3: Are you surprised at long term rates, for example, maybe
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Speaker 3: because of the so called term premium, that risk premium
16:44
Speaker 3: associated with holding a bond that you have to hold
16:48
Speaker 3: for many years. Are you surprised that's not up more?
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Speaker 3: Our market's underestimating the riskiness of compromising the current structure
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Speaker 3: of the FED.
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Speaker 4: I think markets are trying to digest a lot of
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Speaker 4: complicated dynamics, of which this particular torpedo to FED independence
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Speaker 4: or risk to independent decision making is one. Now, you know,
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Speaker 4: I wrote a book and believe that there's never been
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Speaker 4: the real independence that sort of academics or theoreticians imagine.
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Speaker 4: There's always been a lot of interdependence. So Trump is
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Speaker 4: new in his rhetoric and his sort of challenge or
17:27
Speaker 4: threat to fire J. Powell. But as I said, previous presidents,
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Speaker 4: even ones that we haven't mentioned, Clinton, Obama, Reagan, you know,
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Speaker 4: they all try to in one way or another sort
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Speaker 4: of put some pressure on there on their FED chairs,
17:41
Speaker 4: as does Congress. So you know, I think the market
17:44
Speaker 4: has a lot to digest. You know, we haven't mentioned
17:47
Speaker 4: fiscal policy, but I think you know, we've seen some
17:52
Speaker 4: backup in interest rates since the one big beautiful bill
17:57
Speaker 4: is winding its way from the House now to the Senate.
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Speaker 4: It you know, I'm not sure kind of who wants
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Speaker 4: to look at, you know, the kind of specific policy baseline,
18:06
Speaker 4: but I think we all agree that, you know, the
18:09
Speaker 4: additional tax cuts, you know, even some of the moderate
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Speaker 4: spending cuts will add to the deficit we're going to
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Speaker 4: run I think for the fourth consecutive year, maybe third
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Speaker 4: or fourth consecutive year, a budget deficit of six to
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Speaker 4: seven percent. Our debt to GDP level is high and rising.
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Speaker 4: That's a big risk. But you know, to the macro
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Speaker 4: economy's credit, we've had four now four consecutive months of
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Speaker 4: sort of lower than expected inflation. Joblessness as measured even
18:38
Speaker 4: this morning by weekly claims is rising slightly. So that's
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Speaker 4: a break or a check. I think the place where
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Speaker 4: you see it and I'll stop on this is the dollar,
18:48
Speaker 4: you know. I think if you listen to Treasury Secretary Besent,
18:51
Speaker 4: you know a potential replacement to Jay Powell, he talked
18:54
Speaker 4: at his confirmation hearing about a strengthening dollar offsetting the
18:57
Speaker 4: tarift policy.
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Speaker 3: Mark, thank you, you're going to have to leave it
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Speaker 3: there for now. We hope you'll go back and continue
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Speaker 3: the discussion. Thanks so much for being with us today.
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Speaker 3: That's Mark Spindel, author of the Myth of Independence.
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Speaker 2: We're gonna take a quick break here, but when we
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Speaker 2: come back, we've got a little bit of trivia for you,
19:16
Speaker 2: and then we're also going to be talking a little
19:20
Speaker 2: bit about the bond market when we return.
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19:53
Speaker 5: Well, markets are relatively muted as traders digest as zero
19:57
Speaker 5: point one percent increase for the producer price in X
20:00
Speaker 5: posted earlier this morning. And on the trade front, President
20:03
Speaker 5: Trump said he intended to send letters to trading partners
20:06
Speaker 5: in the next two weeks setting lateral tariff rates ahead
20:12
Speaker 5: of a July ninth deadline. Right now, the Dow is
20:16
Speaker 5: off by only thirty six points, SMP five hundred is
20:20
Speaker 5: edging eight points higher, in the Nasdaq up by only
20:24
Speaker 5: thirteen points, RUSTLED two thousand is off by four tenths
20:26
Speaker 5: of one percent, Tenure treas reeled down by four basis points,
20:30
Speaker 5: now at four point three seven percent, and crude oil
20:34
Speaker 5: flat now trading just above sixty eight dollars. A barrel
20:38
Speaker 5: tragic news this morning after an Air India Boeing seven
20:41
Speaker 5: eighty seven Dreamliner plane crashed shortly after takeoff bound for London.
20:47
Speaker 2: ALTI.
20:47
Speaker 5: Two hundred and forty two people on board were killed
20:51
Speaker 5: and the cause of the crash is not immediately known.
20:54
Speaker 5: Boeing shares are retreating above five percent Meanwhile, Oraclestock is
20:58
Speaker 5: jumping nearly thirteen percent after the cloud computing company beat
21:03
Speaker 5: earnings and revenue expectations. Oracle said it expected dramatically higher
21:08
Speaker 5: revenue growth in the financial year that began recently. Elsewhere,
21:13
Speaker 5: Game Stops sinking nineteen percent after the video game retailer
21:17
Speaker 5: announced it will sell one point seventy five billion dollars
21:20
Speaker 5: of convertible senior notes. And after today's closing bell, we'll
21:25
Speaker 5: see earnings from Adobe. I'm Tucker Silva and that is
21:29
Speaker 5: Wall Street. Watch time for trivia here on the Financial Exchange,
21:33
Speaker 5: and on this day. Back in nineteen eighty one, Raiders
21:35
Speaker 5: of the Lost Arc premiered at theaters across the country.
21:39
Speaker 5: Harrison Ford was not the original choice to play Indiana Jones. Thankfully,
21:44
Speaker 5: a contract dispute led forward to his rightful place as
21:48
Speaker 5: the fame fictional archaeologist. So trivia question today, which actor
21:53
Speaker 5: was originally signed up to play Indiana Jones? Once again?
21:57
Speaker 5: Which actor was originally signed up up to play Indiana Jones?
22:02
Speaker 5: Be the sixth person to text us at six one seven,
22:05
Speaker 5: three six two thirteen eighty five with the correct answer,
22:09
Speaker 5: and you win a Financial Exchange show t shirt once again.
22:12
Speaker 5: The six correct response to text us at six one, seven, three, six, two,
22:16
Speaker 5: thirteen eighty five will win that T shirt. See complete
22:19
Speaker 5: contest rules at Financial Exchange Show dot com.
22:23
Speaker 2: We got a piece in Bloomberg. It's titled the bond
22:27
Speaker 2: Vigilantes are taking a nap, and I gotta say, I'm
22:33
Speaker 2: starting to get a little fed up with trying to,
22:37
Speaker 2: you know, make every point one percent wiggle in the
22:42
Speaker 2: ten year treasury into Oh the world's ending, no one's
22:46
Speaker 2: gonna buy the US debt again, or well there's so
22:51
Speaker 2: much demand. See you were wrong. Like, sometimes it's just
22:56
Speaker 2: the market trading on any given day, and it doesn't
23:01
Speaker 2: have to be something bigger. It can just be noise,
23:07
Speaker 2: which is what it is most of the time.
23:10
Speaker 3: Yeah, maybe rates would be a lot lower if it
23:13
Speaker 3: weren't for the prospect of growing deficits and debts. So
23:16
Speaker 3: maybe they're not taking a nap. It's really hard to
23:20
Speaker 3: say what part of the difference between short and long
23:25
Speaker 3: term rates is attributable to the risk of holding a
23:27
Speaker 3: bond over the long term, as we talked about in
23:29
Speaker 3: the last segment, due to inflation. Due to the increased
23:32
Speaker 3: uncertainty of the US government making good on its payments,
23:35
Speaker 3: though that has always struck me as a little bit ridiculous.
23:37
Speaker 3: Inflation's obviously the bigger threat.
23:39
Speaker 2: We just don't know.
23:40
Speaker 3: But I think the main point is the one, and
23:42
Speaker 3: main invest point is the one you made, which is
23:45
Speaker 3: a little twitches and wiggles and stocks or bonds day
23:48
Speaker 3: to day are just a matter of investors pushing them
23:51
Speaker 3: up or down, attempting to find the right price based
23:53
Speaker 3: on what we know in the moment.
23:55
Speaker 2: And not even day to day. I remember, let's go, Tucker,
24:01
Speaker 2: Can you cue up the time machine for us? All right?
24:06
Speaker 2: We gotta get yeah, get the Fox capacitor up. All right.
24:12
Speaker 2: I want to take you all back in time with me. Unfortunately,
24:15
Speaker 2: a time machine is big enough to do. So we're
24:18
Speaker 2: going back to the fantastic fall of twenty twenty three,
24:24
Speaker 2: so less than two years ago. We didn't have to
24:27
Speaker 2: use too much energy to get there. But it's October
24:30
Speaker 2: of twenty twenty three and over the previous three months. No,
24:36
Speaker 2: it's it's October, Tucker, It's it's not summer. I need
24:40
Speaker 2: an October song that was the summer.
24:43
Speaker 5: I feel like a back in time song. But whatever,
24:45
Speaker 5: keep going.
24:46
Speaker 2: Okay, put it back on. It's October of twenty twenty three.
24:52
Speaker 2: You can't fry an egg on the sidewalk because it's
24:55
Speaker 2: raining in forty degrees. The ten year treasury has gone
24:58
Speaker 2: from three point eight one on July seventeenth all the
25:02
Speaker 2: way up to four point nine eight percent on October twentieth,
25:06
Speaker 2: and everyone in their grandmother is sitting there saying it's
25:10
Speaker 2: because there's too much debt. There's too much debt. There's
25:14
Speaker 2: too much debt. And forget whether or not you think
25:19
Speaker 2: there's too much debt, but that's what everyone was saying.
25:22
Speaker 2: Over the subsequent two months, not even a long period
25:26
Speaker 2: of time, two months, two months. On December twenty eighth
25:32
Speaker 2: of twenty twenty three, the tenure treasury is back to
25:35
Speaker 2: three point eight four, right where it was in July.
25:37
Speaker 2: Did Mark, I I have a question for you. Was
25:40
Speaker 2: there landmark legislation passed in November or December of twenty
25:47
Speaker 2: twenty three that dramatically altered the trajectory for the US
25:51
Speaker 2: fiscal situation for the future, Not to my recollection, No, No,
25:56
Speaker 2: there was nothing. There was nothing. And so this is
26:00
Speaker 2: why when we talk about these random not even random,
26:05
Speaker 2: but moves that might even be justified at the time
26:10
Speaker 2: that are happening in the bond market. They are not
26:13
Speaker 2: evidence for what you think they are.
26:16
Speaker 3: Well, you can look at the spread between the US
26:19
Speaker 3: ten year and say the German equivalent, which I pulled
26:21
Speaker 3: up because it was easy, and I suspect what I'm
26:24
Speaker 3: seeing here of all of both rates rising simultaneously. This
26:28
Speaker 3: is representative of the experience of US versus any developed
26:34
Speaker 3: country sovereign that is government debt, so something globally. And
26:38
Speaker 3: maybe it was just investor preference for riskier assets over
26:43
Speaker 3: less risky assets, government bonds being less risky assets, so
26:46
Speaker 3: a rotation if you like, out of them, Or maybe
26:48
Speaker 3: it was concerns about the persistence of inflation. It wasn't
26:52
Speaker 3: at all obvious in this period, the one you're using
26:55
Speaker 3: as an example, that we were going to get a
26:56
Speaker 3: handle on inflation without substantial economic pain. That ended up
26:59
Speaker 3: happening something of a miracle, very unusual historically speaking. So
27:03
Speaker 3: it was a worldwide phenomenon, for what that's worth.
27:08
Speaker 2: But it was not the US government suddenly, thank you.
27:13
Speaker 3: Yes, What I should have said is it wasn't unique
27:15
Speaker 3: to US, and direct could not have been. Although you know,
27:17
Speaker 3: maybe our yield, because our yield is the world's benchmark
27:20
Speaker 3: Arizon yields here should pull other yields up. But it's
27:24
Speaker 3: it's very telling the magnitude of the rizon of the
27:27
Speaker 3: developed bond other government bond market yields during that period.
27:31
Speaker 2: So in this piece it talks about, hey, yesterday there
27:33
Speaker 2: was a ten year auction that had again a good
27:37
Speaker 2: result in terms of some of the supplemental stuff that
27:39
Speaker 2: that's around it, and it says, well, if if the
27:42
Speaker 2: bond vigilantes, you know, we're serious, like this would have
27:45
Speaker 2: been a failed auction. Okay, Well, there are plenty of auctions.
27:49
Speaker 2: There's another thirty year that's coming up today. If it's
27:53
Speaker 2: better than this, does that mean that they're even like
27:55
Speaker 2: fewer bond vigilantes. If it's worse, does it mean that,
27:58
Speaker 2: like this, the US fiscal situation deteriorate it overnight. There
28:02
Speaker 2: was a bad thirty year auction back in May. It
28:05
Speaker 2: didn't have any influence on the one that we just
28:07
Speaker 2: on the tenure that we just saw in June. So
28:10
Speaker 2: I just I really cautioned people to not read too
28:15
Speaker 2: much into any one particular thing that happens. And you
28:19
Speaker 2: know any one auction or even you know, moves and
28:22
Speaker 2: interest rates over a two, three four month period of time,
28:25
Speaker 2: because they may be because of what you think you're seeing,
28:30
Speaker 2: but they could very easily be something completely unrelated, and
28:34
Speaker 2: you're just telling yourself a story that's not actually accurate.
28:37
Speaker 3: And we don't know who the buyers were yesterday, why
28:39
Speaker 3: they were so willing to mop up treasury debt. Maybe
28:42
Speaker 3: there were sort of forced buyers, insurance companies and others
28:45
Speaker 3: who have to hold it. Moreover, just because you bought
28:48
Speaker 3: treasury debt doesn't mean you can turn around. Doesn't mean
28:50
Speaker 3: you can't turn around and sell it. They're not making
28:53
Speaker 3: a political statement about their conviction of the long term
28:56
Speaker 3: prospects for the fiscal solvency US fiscal stability and solvency.
29:01
Speaker 3: They're just saying we needed to buy these bonds of
29:04
Speaker 3: these duration. That is interest rate sensitivity today. It doesn't
29:08
Speaker 3: really say much more than that.
29:10
Speaker 2: Let's take a quick break here. When we come back,
29:12
Speaker 2: we're gonna be joined by Paul Almonica from Barons right
29:15
Speaker 2: after this.
29:16
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30:23
Speaker 2: As promised, We're now joined by paul A Monica from Barons.
30:27
Speaker 2: Paul How you doing today? Good?
30:29
Speaker 6: Thanks? Hey, guys, don't.
30:30
Speaker 2: We're doing great and we're talking with you about Chime
30:34
Speaker 2: who is scheduled to IPO today. They are not yet
30:38
Speaker 2: trading correct, that.
30:40
Speaker 6: Is correct, keeping an eye on it. You know, it
30:43
Speaker 6: looks like it's indicated to open around forty three twenty
30:47
Speaker 6: at last check, so that would be sixty percent above
30:50
Speaker 6: the offering price of twenty seven.
30:53
Speaker 2: Who is Chime? What do they do? How do they
30:55
Speaker 2: make money? Do they make money?
30:57
Speaker 6: So that's a great question to Chime is a digital bank.
31:01
Speaker 6: They're very popular with millennials and younger consumers. I believe
31:05
Speaker 6: the average age of their customer, according to their IPIL perspectives,
31:09
Speaker 6: is thirty six years old. And they offer banking services
31:16
Speaker 6: through a partnership with two banks that are actually backed
31:20
Speaker 6: by the FDIC, So they're really more the tech company
31:24
Speaker 6: offering these banking services, but they are not actually a
31:28
Speaker 6: bank themselves. But they promise that deposits are protected because
31:34
Speaker 6: they partner with these two FDIC backed banks. But they
31:38
Speaker 6: have some products where, you know, they're really kind of
31:43
Speaker 6: making a play for people that they think are underserved
31:47
Speaker 6: by traditional banks. So they have something called my Pay
31:50
Speaker 6: which lets customers get up to five hundred dollars of
31:53
Speaker 6: their paycheck early with no fees that they're not like
31:57
Speaker 6: those usurious payday lenders of the p that got into
32:01
Speaker 6: a lot of regulatory trouble. They have something also also
32:04
Speaker 6: called Spotney, an overdraft protection service. So they're really trying
32:09
Speaker 6: to build themselves as a bank for younger consumers who
32:14
Speaker 6: are trying to you know, build wealth, build build credit
32:18
Speaker 6: and how to your point of profitability, They did post
32:22
Speaker 6: a profit in the first quarter of this year, but
32:25
Speaker 6: they did lose money all of last year, although it
32:29
Speaker 6: was a smaller loss than in twenty twenty three.
32:32
Speaker 2: So obviously if they had a profit at some point,
32:34
Speaker 2: it does mean that they have revenue. They're not just
32:36
Speaker 2: you know, giving people money out of the goodness of
32:38
Speaker 2: their hearts. Where does their revenue come from? I mean
32:42
Speaker 2: is it from. They're not a bank themselves, so they're
32:44
Speaker 2: not lending, Like how does how do they make money?
32:48
Speaker 4: But that's a good question.
32:50
Speaker 6: So their revenue, at about one point six billion last year,
32:54
Speaker 6: comes primarily from the interchange fees paid by the card networks.
33:00
Speaker 6: Think of companies like Visa when a company when a
33:02
Speaker 6: consumer uses a trime branded debit or credit cards.
33:07
Speaker 2: So that's a big.
33:08
Speaker 6: Chunk of their revenues coming from those fees paid by
33:12
Speaker 6: other financial services giants.
33:14
Speaker 2: When you look at what they do again, you said
33:18
Speaker 2: they're not a bank. They just have these agreements with
33:20
Speaker 2: you know, a couple of banks that operate under them.
33:23
Speaker 2: Do they have designs on ever being a bank and
33:26
Speaker 2: being able to really get into lending on their own
33:28
Speaker 2: or is it hey, they just want to have these
33:30
Speaker 2: relationships and handle the tech and call to day. Yeah.
33:35
Speaker 6: I have not gotten any indication that they are looking
33:39
Speaker 6: to ever have a bank charter of their own. I
33:43
Speaker 6: think they really do see themselves more in the fintech
33:47
Speaker 6: kind of neo bank world, if you will, I am
33:50
Speaker 6: going to be talking to the CFO in a little
33:52
Speaker 6: while about the stock market debut, so I will definitely
33:56
Speaker 6: ask whether they have any designs on becoming an official
33:59
Speaker 6: bank with a you know, an actual federal charter at
34:02
Speaker 6: some point, or if they feel that partnerships are the
34:05
Speaker 6: way to go.
34:07
Speaker 2: One of the things. And I'm not you know, a
34:09
Speaker 2: banking analyst or expert in you know, valuing banks, but
34:12
Speaker 2: one of the things I've heard in general is that
34:15
Speaker 2: it's really hard to start a bank these days, and
34:18
Speaker 2: the growth opportunities aren't great. It's it's it's a tough business,
34:23
Speaker 2: not almost you can, you know, running a utility in
34:25
Speaker 2: some respects. Why is there so much excitement about in
34:29
Speaker 2: IPO in this space given the headwinds in the banking
34:34
Speaker 2: sector overall.
34:35
Speaker 6: Yeah, it's a great question. I think probably what you
34:38
Speaker 6: need to do is separate between maybe some of the
34:40
Speaker 6: headwinds for banking companies, particularly those that have physical branch locations.
34:49
Speaker 6: That's I think an area where you know, a lot
34:51
Speaker 6: of people are waiting for more consolidation. We are as
34:54
Speaker 6: a nation probably over banked with regards to the number
34:59
Speaker 6: of physical banks that have tellers and ATM machines where
35:04
Speaker 6: chime you know, they're you know, as they call themselves,
35:08
Speaker 6: asset light. They don't have any offices that you can
35:11
Speaker 6: go into and see a loan officer or someone, you know.
35:17
Speaker 6: These are all digital services done online mobile. Like I said,
35:22
Speaker 6: I mean, it's a younger consumer base. You know, people
35:25
Speaker 6: that maybe even if they do trust banks, they may
35:29
Speaker 6: be just you know, wary of taking the time to
35:32
Speaker 6: actually physically go to a bank when it's a lot
35:34
Speaker 6: easier to do everything.
35:35
Speaker 1: On your phone.
35:37
Speaker 2: Very good, Paul, appreciate you joining us today, and I
35:40
Speaker 2: hope you have a great rest of the week. We
35:42
Speaker 2: will talk to you soon.
35:43
Speaker 6: Perfect. Thanks a lot of guys.
35:44
Speaker 2: I'm going That is paul A Monica from Baron's talking
35:48
Speaker 2: about time well.
35:50
Speaker 5: On the previous segment, we asked the trivia question which
35:53
Speaker 5: actor was originally signed up to play Indiana Jones. That
35:57
Speaker 5: would be Tom Selik, the first choice to play the role,
36:01
Speaker 5: but he had to turn it down due to his
36:04
Speaker 5: commitment to Magnum p I. Stephen from Quincy, Mass is
36:08
Speaker 5: our winner today, taking home a Financial Exchange Show t shirt.
36:12
Speaker 5: Congrats to Stephen and we play trivia every day here
36:15
Speaker 5: on the Financial Exchange See complete contest rules at Financial
36:19
Speaker 5: Exchange Show dot com.
36:21
Speaker 2: Mark what else you got for me?
36:23
Speaker 3: These Trump accounts, Chuck. This proposal is part of the
36:27
Speaker 3: tax bill. It's making its way through the Senate right now.
36:30
Speaker 3: I guess the administration wants to create a tax free
36:33
Speaker 3: savings of compresumably just tax free growth, not contributions for
36:37
Speaker 3: everybody born in the United States legally, legally a residented
36:43
Speaker 3: it's not a word, but you know what I mean. Parents,
36:44
Speaker 3: I assume, and the government's going to deposit one thousand
36:47
Speaker 3: dollars in them. There are about I call it four
36:50
Speaker 3: million children a year born in the United States, So
36:53
Speaker 3: a billion is a thousand million. It's not gonna cost
36:55
Speaker 3: a lot. Several billion dollars maybe, but is it worth
36:59
Speaker 3: it if you have to borrow to put the money
37:02
Speaker 3: in there, which is what we're doing. We're running huge deficits,
37:05
Speaker 3: so you got to borrow. We're paying four percent on
37:07
Speaker 3: that money.
37:08
Speaker 2: Yep.
37:08
Speaker 3: Who's going to be paying that back someday? The holder
37:12
Speaker 3: that presumably the beneficiaries of these accounts. So I'm going
37:14
Speaker 3: to argue that you can create another tax savings vehicle.
37:17
Speaker 3: That's fine, might increase the savings rate, takes care of
37:19
Speaker 3: part of the trade deficit problem, as we talked about
37:21
Speaker 3: in the first hour. But it's foolish to borrow money
37:24
Speaker 3: to put money into them.
37:26
Speaker 2: Because effectively all that you are betting on there actually
37:34
Speaker 2: so I'm just trying to think of this from two perspectives.
37:36
Speaker 2: So in terms of overall dollars, basically what you're betting
37:40
Speaker 2: on there is that the growth rate of earnings is
37:44
Speaker 2: going to be higher than what you are paying on
37:46
Speaker 2: the debt that you are borrowing to do.
37:48
Speaker 3: So I guess one way to think about it is
37:49
Speaker 3: you're borrowing in treasuries at four or so percent the
37:52
Speaker 3: average interest rate that the government pays on debt, to
37:54
Speaker 3: buy the stock market, and then hoping that the stock
37:55
Speaker 3: market does over the next thirty to forty years what
37:57
Speaker 3: it's done over the last several decades, which would be awesome.
38:01
Speaker 2: Yeah, I got it. I haven't looked into the whole
38:03
Speaker 2: thing very much. I gotta do a little bit more
38:06
Speaker 2: work kind of mentally sorting through it. Let's take a
38:10
Speaker 2: quick break for the entire rest of the day. Stocks
38:13
Speaker 2: are mixed as we close the hour. We'll see you
38:15
Speaker 2: tomorrow to wrap up the week on the Financial Exchange,