Latest / The Financial Exchange Show / Costs related to AI are getting out of control

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Costs related to AI are getting out of control · The Financial Exchange Show

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  Speaker 2: Good morning, Welcome back to the Financial Exchange. It's Mike,
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  Speaker 2: Mark and Tucker with you on a Tuesday, as we
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  Speaker 2: enter into what's this week two, Week three of the
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  Speaker 2: government shutdown. Week two of the government shutdown. I clearly
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  Speaker 2: have been not exactly counting the days here. Doesn't look
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  Speaker 2: like a ton of progress being made there, but you know,
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  Speaker 2: some a couple I think relevant announcements or statements by
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  Speaker 2: key lawmakers that could indicate where things go in the future.
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  Speaker 2: Dates that we're keeping in mind. I mean, the first
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  Speaker 2: payroll date for military I think is October sixteenth. Federal
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  Speaker 2: employee pay payroll I think is October tenth, that will
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  Speaker 2: be missed. November first would be the first date where
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  Speaker 2: people who are on Obamacare would see the increase in
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  Speaker 2: premiums get affected by the lack of a renewal of
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  Speaker 2: these subsidies. So those are a few of the key
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  Speaker 2: dates that kind of I have in my mind. Obviously,
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  Speaker 2: for financial markets, we've got a October is it a October.
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  Speaker 3: Thirtieth FED meeting.
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  Speaker 2: It's towards the end of this month here, So that's
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  Speaker 2: not going to reopen the government, but it will be
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  Speaker 2: relevant and so far as they may or may not
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  Speaker 2: have data related to inflation and the labor market ahead
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  Speaker 2: of that meeting, So we will see, you know, if
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  Speaker 2: things reopen here. But to me at least, I just
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  Speaker 2: don't see that pressure that would be necessary to get
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  Speaker 2: things restarted at this point in time, and I think
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  Speaker 2: that will continue to mount as time goes on. We'll
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  Speaker 2: we visit the government shutdown throughout the show. I wanted
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  Speaker 2: to start off today though, with a revisit of our
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  Speaker 2: conversation yesterday when it comes to the deals of an
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  Speaker 2: announced regarding open AI and artificial intelligence in general. But
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  Speaker 2: open AI seems to be very much at the center
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  Speaker 2: of all these discussions. If you missed it, yesterday they
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  Speaker 2: announced with AMD a big investment in that company. This
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  Speaker 2: follows a big announced deal within Nvidia, and I realized
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  Speaker 2: at about nine am this morning that I was having
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  Speaker 2: a tough time keeping it all straight, even in my
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  Speaker 2: own head. So I just wrote down some of my
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  Speaker 2: notes on what seems to be going on here and
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  Speaker 2: why people seem to be concerned about all the circular
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  Speaker 2: deals that are getting done here. So starting off with
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  Speaker 2: open ai, the maker of chat GPT, I would say
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  Speaker 2: there is nobody else in my mind that has a
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  Speaker 2: consumer facing product that is quite as known in the
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  Speaker 2: AI space as open AI.
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  Speaker 3: I think that's safe to say between the two of you.
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  Speaker 2: Yeah, like, yeah, Google's Gemini I suppose is up there.
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  Speaker 2: But Chat GPT, Yeah, I think GPT is probably the
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  Speaker 2: most well known. So as of the most recent funding,
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  Speaker 2: that company that owns Chat GPT and may or may
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  Speaker 2: not be trying to transition into a for profit company,
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  Speaker 2: was valued around half a trillion dollars. They generated four
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  Speaker 2: point three billion dollars in sales in the first half
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  Speaker 2: of twenty twenty five, and they burned through two and
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  Speaker 2: a half billion dollars worth of cash. The deals that
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  Speaker 2: they have now inked, which I hesitate to even say
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  Speaker 2: the word inked because they've announced these deals, but the
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  Speaker 2: actual timing of when they all come to pass, who
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  Speaker 2: you know exchanges cash with the other is not terribly
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  Speaker 2: clear at this point. But the deals with AMD and
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  Speaker 2: Video Oracle, Core Weave, they've all promised about twenty gigawatts
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  Speaker 2: of computing power over the next decade. If that means
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  Speaker 2: nothing to you, don't worry. It meant nothing to me either.
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  Speaker 2: I have no idea what a gigawatt really represents. But
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  Speaker 2: according to people who know more about this than I do,
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  Speaker 2: powering twenty gigawatts of computing power takes about.
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  Speaker 3: Twenty nuclear reactors today.
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  Speaker 2: So the power of about twenty nuclear reactors, and the
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  Speaker 2: cost to deploy something like that on an annual basis
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  Speaker 2: would be about a trillion dollars. So again, these are
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  Speaker 2: the promises that are being made. Is hey, a company
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  Speaker 2: that's generating about four billion dollars in sales in the
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  Speaker 2: first half is going to need to spend a trillion
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  Speaker 2: dollars a year in order to you know, finance the
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  Speaker 2: computing power that they want for the future, meaning you know.
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  Speaker 3: Those sales had better grow at a pretty rapid pace. Uh.
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  Speaker 3: The deal that in Nvidia ink.
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  Speaker 4: I'm sorry, could you say that again, Mike.
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  Speaker 2: Yes, So the cost to deploy this computing power, the
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  Speaker 2: twenty gigawatts of.
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  Speaker 3: Not their competitors, not their competitors.
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  Speaker 2: This is the promise of the deals that they have
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  Speaker 2: in so far, which is over the next decade they
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  Speaker 2: want to be able to build out and power twenty
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  Speaker 2: gigawatts of computing power.
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  Speaker 4: Which will cost them a trillion dollars a year.
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  Speaker 2: To power that assuming today's electricity costs, which we can't
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  Speaker 2: hold certain like I would think they would go up
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  Speaker 2: in the short term, maybe down in the long term.
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  Speaker 2: But you know, under today's cost, Financial Times estimates that
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  Speaker 2: cost about a trillion dollars to power.
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  Speaker 4: Okay, So their electricity bill, I'm sorry for putting you
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  Speaker 4: on the stand here. That's their Their electricity bill will
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  Speaker 4: be a trillion dollars a year according to the Financial Time.
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  Speaker 4: I believe it's not read that as well. But is
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  Speaker 4: that your interpretation?
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  Speaker 2: My interpretation was not just electricity, but other costs associated
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  Speaker 2: with running a data center.
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  Speaker 4: Okay, and this is just open AI one company.
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  Speaker 3: One company.
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  Speaker 4: Do we have any sense for what fraction of overall
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  Speaker 4: demand for AI they will provide? Now we're piling assumption
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  Speaker 4: on top of.
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  Speaker 3: Assumption here, no clue?
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  Speaker 4: Maybe half is that?
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  Speaker 3: Maybe? Is that fair? No clue?
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  Speaker 4: Okay, maybe it's well, this is a big I don't
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  Speaker 4: know what I'm trying to get at. Here is the
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  Speaker 4: US economy's GDP today. Let's just talk in today's dollars,
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  Speaker 4: because we don't know what inflation is going to be
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  Speaker 4: GDP of all the goods and all the spending in
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  Speaker 4: the economy consumers, firms, government is about thirty trillion.
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  Speaker 2: So we're saying that the cost annually for one company
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  Speaker 2: for them to power these things is for.
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  Speaker 4: One company, and we're assuming they'll be half they'll have half.
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  Speaker 3: The market maybe, so yeah, sure.
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  Speaker 4: Those two the AI's power needs alone will will constitute
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  Speaker 4: one to fifteenth of the of the spending, or we'll
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  Speaker 4: be equivalent to not constitute Oh, I guess yeah, because
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  Speaker 4: they're spending it, so that should show up in the GDP.
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  Speaker 4: It'll be one fifteenth of the economy just to power AI.
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  Speaker 4: Government today spends about six trillion dollars. Again, we're holding
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  Speaker 4: everything constant, yep, So they'll spend as much. They'll spend
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  Speaker 4: a third twice what we spend on national defense today.
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  Speaker 3: That's that's the third of.
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  Speaker 4: What we spend on government, federal government anyway, on all
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  Speaker 4: expenses just to power AI says nothing of the maintenance replacement.
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  Speaker 4: I'm just trying to put this. These some of these
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  Speaker 4: it's tough to optimistic. I'll call them optimistic instead of
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  Speaker 4: outlandish and reckless and self serving and cynical and scammy,
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  Speaker 4: I'll call them optimistic.
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  Speaker 2: Let's go with that instead. Yeah, uh, the deal with
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  Speaker 2: Nvidian particular. We talked about this yesterday and we kind
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  Speaker 2: of framed did as, Wow, that's pretty interesting because the
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  Speaker 2: announced deal is that in Vidia is investing one hundred
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  Speaker 2: billion dollars into open ai, and weeks later open ai
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  Speaker 2: turned around and said, yeah, we're investing in AMD. And
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  Speaker 2: I wanted to clarify how that deal works, because technically
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  Speaker 2: in Vidia didn't just.
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  Speaker 3: Hand over one hundred billion dollars in cash.
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  Speaker 2: What they did was they promised to provide open ai
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  Speaker 2: with one hundred billion dollars worth of cash or resources,
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  Speaker 2: and that could come in the phase. That could come
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  Speaker 2: in the form of future investment based on the build
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  Speaker 2: out of these data centers. They might provide vendor financing
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  Speaker 2: for the purchase of their own Nvidia chips.
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  Speaker 3: They're not literally.
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  Speaker 2: Handing over one hundred billion dollars in cash, though, and
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  Speaker 2: that part I don't think was made clear enough by
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  Speaker 2: the media, so I'm trying to correct that piece. Open
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  Speaker 2: Ai did not receive one hundred billion dollars in cash
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  Speaker 2: from Nvidia. They received some promises of that value of
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  Speaker 2: investment over the course of the next decade as they
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  Speaker 2: bring these data centers using in video chips online. The
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  Speaker 2: AMD deal that open Ai just put through here or
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  Speaker 2: inked it was open Ai. It was AMD offering open
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  Speaker 2: Ai a warrant that would eventually allow them to maybe
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  Speaker 2: buy up to ten percent of AMD's stock in exchange
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  Speaker 2: for buying chips from AMD. Hypothetically some have put out
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  Speaker 2: there that you know, and then if the value of
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  Speaker 2: that warrant appreciates, they could maybe sell it to get
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  Speaker 2: cash to then buy more AMD chips, And so how
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  Speaker 2: great for that business model. If I've lost you don't
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  Speaker 2: blame yourself. This is immensely complicated. It evokes a lot
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  Speaker 2: of types of deals like vendor financing that we've run
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  Speaker 2: into in the past, and is immensely complicated.
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  Speaker 4: There as a lot of potential for financial so called
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  Speaker 4: financial shenanigans. Here. I'm using the title of a two
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  Speaker 4: thousand and three book written after the collapse of the
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  Speaker 4: dot com era, which outlines many of the dodgy accounting
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  Speaker 4: methods used by Sunbeam and others throughout the eighties and
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  Speaker 4: nineties to inflate their earnings and to move debt off
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  Speaker 4: their balance sheets and to just get investors excited about
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  Speaker 4: something that was just fanciful. If you keep the one
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  Speaker 4: trillion figure for power usage alone in mind, compare that
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  Speaker 4: to the economy or spending on other enormous economy wide enterprises.
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  Speaker 4: I think that alone should tell you that there's some
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  Speaker 4: seriously optimistic estimation going on here. Not to say it
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  Speaker 4: won't come to pass, but it would have to come
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  Speaker 4: to pass quicker than any technology has crystallized and permeated
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  Speaker 4: the whole economy at any time in history since the
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  Speaker 4: beginning of the industrial era. I'm not saying a I
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  Speaker 4: won't be life changing for many people and industries. It
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  Speaker 4: probably will. But if you think it will permeate the
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  Speaker 4: economy faster than electricity or the Internet, you've got some
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  Speaker 4: splaining to do, because history suggests that it takes time.
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  Speaker 4: The way these stocks related to these and Opening Eyes
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  Speaker 4: obviously not public, but they're getting in vidiot of sharp
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  Speaker 4: and A and they're all getting each other to pop
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  Speaker 4: by announcing these these these these discumbrious web of cross
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  Speaker 4: deals that nobody can really get to the bottom of
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  Speaker 4: the price returns that are being realized by these stocks
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  Speaker 4: assume quick gains, and that is unlikely to happen if
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  Speaker 4: history is any guy.
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  Speaker 2: By the way AMD stock moving up an additional five
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  Speaker 2: percent this morning in VideA moving back up one point
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  Speaker 2: six percent. At this stage, AMD much much smaller company
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  Speaker 2: than in video. It's about a three hundred and fifty
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  Speaker 2: billion dollar market cap as opposed to in videos four
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  Speaker 2: and a half trillion dollar market cap, but at this
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  Speaker 2: stage AMD is valued pretty considerably richer than a than
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  Speaker 2: in Vidia is on a forward pe basis. Again, smaller company,
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  Speaker 2: different makeup, but clearly a lot of optimism after this
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  Speaker 2: announced deal with open Ai.
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  Speaker 3: Do you need to take a quick break.
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  Speaker 2: When we come back, we'll switch over to a few
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  Speaker 2: of the people making commentary about this whole trade and
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  Speaker 2: what it might mean for markets. Mary Daily, the San
• 12:12
  Speaker 2: Francisco FED talking about financial stability. Let's say quick break
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  Speaker 2: and cover those stories next on the Financial Exchange.
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  Speaker 3: San Francisco Federal Reserves.
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  Speaker 2: Mary Daily was giving an interview and was asked questions
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  Speaker 2: about concerns over an AI related bubble, and I suspect
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  Speaker 2: that that's not what her interview was supposed to be about.
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  Speaker 2: But I think that every FED president is likely to
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  Speaker 2: get questions about the stock market and how it's affecting
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  Speaker 2: their models on inflation and growth and financial stability, which
• 13:50
  Speaker 2: is it's not one of their two mandates, but they
• 13:54
  Speaker 2: obviously do care about financial stability. That much is that
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  Speaker 2: much is obvious. I did not listen to the interviews,
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  Speaker 2: so I hesitate too much to you know fully digest
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  Speaker 2: all of her views, but in the interview with Axio,
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  Speaker 2: she laid out three reasons she's watching the stock market
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  Speaker 2: quote bubble, the AI cap X boom and what it
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  Speaker 2: could mean, but not worrying about it in a lot
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  Speaker 2: of context. One her point would be that if it
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  Speaker 2: is a bubble, she doesn't see it as a financial bubble.
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  Speaker 2: And I think what she means by that is it's
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  Speaker 2: not being financed in large part by massive debt obligations
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  Speaker 2: that are permeating their way through the banks and through
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  Speaker 2: individual retail investors who are loaning money for the build
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  Speaker 2: out of all this. It's largely being financed by either
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  Speaker 2: IOUs between companies or by very well capitalized tech companies
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  Speaker 2: like Microsoft, Oracle.
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  Speaker 3: Nvidia and others.
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  Speaker 2: Was that you're read on her commentary as well as
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  Speaker 2: you know, compared to eight when they're was all this
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  Speaker 2: stuff being done that nobody knew how to value? This
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  Speaker 2: is just seemingly a big infatuation with them. It's different
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  Speaker 2: than technology.
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  Speaker 4: You may have read it more carefully than I did.
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  Speaker 4: It's certainly different than evaluations were not extreme and eight.
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  Speaker 4: First of all, stock market valuation if there was no
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  Speaker 4: clear stock market bubble valuations if you want to use
• 15:17
  Speaker 4: a smooth ten year inflation adjusted price to earnings ratio,
• 15:20
  Speaker 4: so called cyclically adjusted price ratio. They're in the mid
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  Speaker 4: to high twenties, sitting the closer to forty. So it's
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  Speaker 4: far more likely that stocks are overvalued to their detriment
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  Speaker 4: ie to the point where lower where future returns will
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  Speaker 4: be low. Far more likely today than it was in eight.
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  Speaker 4: What killed stocks and eight was obviously a couple things.
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  Speaker 4: I think the price of oil, which was slowing down
• 15:46
  Speaker 4: economic growth because it got so extreme, as well as
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  Speaker 4: of course the collapse and the insecurity is collateralized by mortgagees,
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  Speaker 4: so very different situation. This is probably more akin to
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  Speaker 4: nineteen ninety nine two thousand, for which the Fed does
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  Speaker 4: deserve some blame, and Mary Daily and other policy she
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  Speaker 4: a voting member right now, I forget or whatever the
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  Speaker 4: Fed is important. This absolutely falls in the lap of
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  Speaker 4: the Fed. They have aided and abedded a bubble through
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  Speaker 4: by keeping financial conditions loose. This runs contrary to the
• 16:15
  Speaker 4: conventional wisdom that rates are restrictive. If you look at
• 16:18
  Speaker 4: every measure of financial conditions, including and maybe above all,
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  Speaker 4: stock prices, financial conditions are quite loose. That's resulting in
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  Speaker 4: in behavior like we're seeing now in AI an AI
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  Speaker 4: adjacent related that is industries and valuations generally. Mike, if
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  Speaker 4: if this is a bubble, and I'll go out on
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  Speaker 4: a little limb here and say, this is absolutely a bubble,
• 16:41
  Speaker 4: it's absolutely going to end badly, and it's also absolutely
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  Speaker 4: the Fed's fault, and they're lowering rates into an exuberant
• 16:48
  Speaker 4: orgy of circular investing, is the Financial Times likes to
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  Speaker 4: call it. This is going to be a head scratcher
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  Speaker 4: for the ages. I suspect I don't have one hundred
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  Speaker 4: percent confidence of this, and your guess is as good
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  Speaker 4: as mine, but I suspect this will result in a
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  Speaker 4: lot of finger pointing, and many of those fingers will
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  Speaker 4: point right at the FED for keeping financial conditions too loose,
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  Speaker 4: just like they did after the bubble burst in two
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  Speaker 4: thousand and two thousand and one.
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  Speaker 3: A few points that I would agree with her on.
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  Speaker 2: I don't see signs that this has permeated so far
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  Speaker 2: into our financial systems that it could bring down a
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  Speaker 2: bunch of banks like it did back in no way,
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  Speaker 2: so I think it is different from that perspective. And
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  Speaker 2: if we did see a big tech sell off due
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  Speaker 2: to a bubble burst. I take her point that the
• 17:27
  Speaker 2: infrastructure that had been built out similar to the infrastructure
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  Speaker 2: that was built out during the dot Com bubble, could
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  Speaker 2: be useful to all sorts of growth for the future,
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  Speaker 2: and so I think those are salient points. What I
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  Speaker 2: am worried that some might be missing, and we don't
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  Speaker 2: really have very strong evidence of this, but there's been
• 17:45
  Speaker 2: more and more studies that have called into question what
• 17:48
  Speaker 2: used to be the normal behavior where spending primarily getting
• 17:52
  Speaker 2: or a lot of spending being driven by wage gains
• 17:55
  Speaker 2: does not really seem to be playing out in the
• 17:57
  Speaker 2: same way. We seem to be getting a lot more
• 17:59
  Speaker 2: spending from very upper wealth demographics, and a lot of
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  Speaker 2: that seems to be in part related to how much
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  Speaker 2: their investment portfolio is growing or how much of their
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  Speaker 2: real estate portfolio is growing. And so if that ends
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  Speaker 2: up being true, that hey, uh, you know, this ends
• 18:16
  Speaker 2: up being a stock market bubble that does end up
• 18:18
  Speaker 2: crashing in some you know, spectacular fashion down the road, which, again,
• 18:23
  Speaker 2: as certain as Mark sounds, I'm sure that if you
• 18:25
  Speaker 2: ask them.
• 18:25
  Speaker 4: No, no, I'm sorry, I don't you know what I
• 18:28
  Speaker 4: feel strongly about it, But I'm not sure, and and
• 18:33
  Speaker 4: I don't mean to sound overly certain.
• 18:34
  Speaker 2: And even if you were sure, I am certain that
• 18:36
  Speaker 2: I wouldn't be able to pin you down on what
• 18:37
  Speaker 2: that all means for timing, and that's part of the
• 18:40
  Speaker 2: most important But my question would be, could a stock
• 18:44
  Speaker 2: market collapse or extreme bout to volatility be destabilizing for
• 18:51
  Speaker 2: the US economy today merely because of what I just
• 18:54
  Speaker 2: talked about. That, Hey, spending these days and people's feelings
• 18:57
  Speaker 2: of wealth are so intricately to the stock market. Our
• 19:02
  Speaker 2: retirement plans are also intricately tied to the stock market,
• 19:05
  Speaker 2: and the concentration of the stock market is among the
• 19:09
  Speaker 2: highest it's ever been. That yeah, even something that is
• 19:13
  Speaker 2: not sucking in all this debt investment from banks could
• 19:16
  Speaker 2: still be destabilized.
• 19:17
  Speaker 4: We talked about why this is different than nineteen eighty
• 19:19
  Speaker 4: seven and two thousand.
• 19:20
  Speaker 2: When we come back, we absolutely can, but we do
• 19:22
  Speaker 2: need to take a break. First, Wall Street Watches next,
• 19:24
  Speaker 2: and then how It's different is next.
• 19:40
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:43
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:47
  Speaker 1: on the Financial Exchange Radio Network. Time Now for Wall
• 19:53
  Speaker 1: Street Watch a complete look at what's moving market so
• 19:56
  Speaker 1: far today? Right here on the Financial Exchange Radio Network.
• 20:00
  Speaker 5: LESMP five hundred is looking to notch its eighth straight
• 20:03
  Speaker 5: day of gains as Wall Street continues to monitor development
• 20:06
  Speaker 5: surrounding the government shutdown, now in its second week. Gold
• 20:11
  Speaker 5: also continues to climb, topping four thousand dollars for the
• 20:14
  Speaker 5: first time. Right now, the Dow is down by two
• 20:18
  Speaker 5: tenths of one percent or eighty eight points lower. SMP
• 20:21
  Speaker 5: five hundred is flat, NASDAC is about a tenth of
• 20:25
  Speaker 5: a percent higher, or seventeen points. RUSS two thousand is
• 20:29
  Speaker 5: down a tenth of one percent. Tenyure Treasury reel down
• 20:31
  Speaker 5: two basis points at four point one four to two percent,
• 20:36
  Speaker 5: and crude oil we're treating about half a percent rating
• 20:38
  Speaker 5: at sixty one dollars in thirty six cents a barrel
• 20:42
  Speaker 5: chairs into Canadian minerals. Explore Trilogy Medals roaring two hundred
• 20:46
  Speaker 5: and sixteen percent after the White House announced it was
• 20:49
  Speaker 5: investing thirty six point five million dollars in the company,
• 20:52
  Speaker 5: giving the US government a ten percent stake. Meanwhile, after
• 20:57
  Speaker 5: its twenty four percent rally yesterday, driven by the massive
• 21:00
  Speaker 5: computing deal with OpenAI, AMD up another five percent today.
• 21:05
  Speaker 5: Jeffries also upgraded AMD stock to buy from hold, Sticking
• 21:09
  Speaker 5: with tech, where Dell said have roughly doubled its targets
• 21:13
  Speaker 5: for long term growth in sales and earnings, pointing to
• 21:16
  Speaker 5: a huge opportunity from rising adoption of AI. Delstock is
• 21:21
  Speaker 5: up nearly three percent. Elsewhere, the Wall Street Journal reported
• 21:24
  Speaker 5: New York Stock exchange owner Intercontinental Exchanges in talks to
• 21:29
  Speaker 5: invest two billion dollars in the crypto based prediction market
• 21:32
  Speaker 5: poly market. That stock is up one percent. Constellation Brands
• 21:37
  Speaker 5: up over two percent after the maker of Modello and
• 21:40
  Speaker 5: Corona Beach Street forecast for revenue and earnings in the
• 21:43
  Speaker 5: previous quarter. The company did, however, reiterate its lower full
• 21:47
  Speaker 5: year guidance due to macro economic headwinds, and spice maker
• 21:52
  Speaker 5: McCormick posted a higher quarterly profit in sales, but noted
• 21:56
  Speaker 5: higher costs have eaten into its bottom line. Shares a
• 21:59
  Speaker 5: currently off by three percent. I'm Tucker Silva and that
• 22:03
  Speaker 5: is Wall Street Watch.
• 22:04
  Speaker 3: So Mark.
• 22:05
  Speaker 2: Prior to the break, we were discussing the comparisons that
• 22:08
  Speaker 2: are continuing to be made between this moment in time
• 22:11
  Speaker 2: and other moments of exuberance, let's say, in stock market history,
• 22:17
  Speaker 2: in relatively recent history, and by relatively I mean since
• 22:21
  Speaker 2: say the nineteen eighties, Can you compare and contrast some
• 22:25
  Speaker 2: of them for us? Because a lot's been written about this,
• 22:27
  Speaker 2: a lot's been said about it. I'm less interested in
• 22:32
  Speaker 2: comparisons between today and twenty twenty because that was a
• 22:35
  Speaker 2: very unique recession. But when you look back at the
• 22:37
  Speaker 2: previous stock market crashes and what we learned from studying
• 22:43
  Speaker 2: those in history, how do you how do you compare
• 22:46
  Speaker 2: where we are now to some of those.
• 22:47
  Speaker 4: Well, the point I was going to make was if
• 22:49
  Speaker 4: there is a crash, the Fed's got way less room
• 22:51
  Speaker 4: to maneuver than it had in previous eergencies because inflation
• 22:55
  Speaker 4: is elevated and its balance sheet is to understate it
• 22:59
  Speaker 4: as much as it is possible to understand anything a
• 23:02
  Speaker 4: little bit stretched. In nineteen eighty seven, when the market crash,
• 23:05
  Speaker 4: FED stepped in. Didn't do it publicly, but Greenspan made
• 23:08
  Speaker 4: phone calls. There's some great books documenting the behind the scenes,
• 23:11
  Speaker 4: the drama that took place, because what he was doing
• 23:14
  Speaker 4: was unprecedented, unprecedented at the time. That staved off failures
• 23:18
  Speaker 4: of trading firms that would have reverberated into banking and
• 23:23
  Speaker 4: into the economy generally. Greenspan arguably saved the market and
• 23:26
  Speaker 4: saved the economy in nineteen eighty seven. In two thousand,
• 23:30
  Speaker 4: the FED similarly had room to ease inflation. Inflation was
• 23:33
  Speaker 4: not low, by the way, in nineteen eighty seven, but
• 23:36
  Speaker 4: the fed's balance sheet was teeny tiny and inflation was
• 23:40
  Speaker 4: inflation expectations were stable. In two thousand, FED had no
• 23:45
  Speaker 4: balance sheet to speak of, none, None of the innovative
• 23:50
  Speaker 4: policies that had been adopted since were practiced. Then inflation
• 23:53
  Speaker 4: was quite low. FED could keep interest rates at one
• 23:56
  Speaker 4: percent for years. They kept interest rates too low for
• 23:58
  Speaker 4: too long, in fact, and that are you will be
• 24:00
  Speaker 4: helped inflate the housing bubble. So my point is, in
• 24:02
  Speaker 4: those two instances, the FED could stimulate aggressively. In this instance,
• 24:07
  Speaker 4: I don't. They will try, probably, but to offset the
• 24:11
  Speaker 4: effect of demand, which you pointed to in the last segment,
• 24:15
  Speaker 4: to offset the contractionary effect on demand, contractionary so called
• 24:19
  Speaker 4: wealth effect, which is what will happen if stocks fall
• 24:22
  Speaker 4: for the same reason that rising stocks are boosting spending
• 24:27
  Speaker 4: among the top ten percent today, top ten percent, making
• 24:29
  Speaker 4: up fifty percent of spending. Well documented, Fed's got less
• 24:33
  Speaker 4: room to stimulate so called aggregate demand, overall demand in
• 24:36
  Speaker 4: the economy from consumers and firms two to an extent
• 24:39
  Speaker 4: than it did in past episodes when stocks crashed. So
• 24:44
  Speaker 4: and I'm not saying daily is dismissing the possibility of
• 24:49
  Speaker 4: adverse effects of a bubble pop on the real economy.
• 24:53
  Speaker 4: But you could argue that the FED doesn't have nearly
• 24:55
  Speaker 4: as much room to cushion the blow as it did
• 25:00
  Speaker 4: past episodes. And I just cited a couple Maybe there
• 25:02
  Speaker 4: are some counter examples that just aren't coming to mind.
• 25:05
  Speaker 2: Yeah, I think that's a fair point that anything they
• 25:09
  Speaker 2: were to do now would bear the risk of shooting
• 25:14
  Speaker 2: inflation a fair bit higher.
• 25:15
  Speaker 4: And it just came off an episode of very which.
• 25:17
  Speaker 3: Which I think they would be willing to do if
• 25:19
  Speaker 3: we theyre going to and I think.
• 25:21
  Speaker 4: They're going to get surprised because prices are there's this
• 25:24
  Speaker 4: debate among economists at any given point in time, how
• 25:26
  Speaker 4: responsive are prices to changes in the money supply? How
• 25:31
  Speaker 4: responsive are how responsive is a different way of putting
• 25:33
  Speaker 4: this is how responsive is inflation to changes in the
• 25:35
  Speaker 4: unemployment rate. Sometimes you'll see an economist quoted as saying,
• 25:38
  Speaker 4: is the Phillip's curve really steep or flat?
• 25:40
  Speaker 3: Right now?
• 25:40
  Speaker 4: What they mean by that is how quickly is what
• 25:42
  Speaker 4: the FED does going to pass into prices versus stimulating
• 25:45
  Speaker 4: real economic activity. We're all on a hair trigger when
• 25:49
  Speaker 4: it comes to inflation because we're all traumatized by the
• 25:52
  Speaker 4: recent inflation episode. I think again, this has implications for
• 25:56
  Speaker 4: what the FED can actually do in terms of stimulating demand.
• 26:00
  Speaker 2: Moving to another area of the economy, which is the
• 26:02
  Speaker 2: auto market. I want to go there because there have
• 26:04
  Speaker 2: been a number of blow up stories in that space
• 26:08
  Speaker 2: over the last several weeks, and blow up was not
• 26:11
  Speaker 2: the right word, because a devastating fire just swept through
• 26:14
  Speaker 2: a major Ford supplier just over the last few days.
• 26:18
  Speaker 2: Novellas plant supplies about forty percent of aluminum sheet used
• 26:22
  Speaker 2: in the auto industry in Oswego, New York. It's been
• 26:26
  Speaker 2: taken offline and will be offline until early next year,
• 26:29
  Speaker 2: and in the meantime, again another hit to the auto
• 26:32
  Speaker 2: industry who relies heavily on this domestically sourced aluminum. Aluminum
• 26:38
  Speaker 2: that is imported into the United States, which Novellas does
• 26:41
  Speaker 2: plenty of They have plants in Brazil and Japan all
• 26:43
  Speaker 2: over the world. They would face about a fifty percent
• 26:46
  Speaker 2: tariff on that imported aluminum should they need to bring
• 26:49
  Speaker 2: it into the country, and so brilliant. What does this
• 26:52
  Speaker 2: mean for the auto sector? Will they get some sort
• 26:55
  Speaker 2: of temporary waiver because this is a pretty unpredictable outcome here.
• 27:00
  Speaker 2: But nonetheless, one other shot across the bow of the
• 27:03
  Speaker 2: auto industry, the other piece that I found really fascinating.
• 27:07
  Speaker 2: We've talked a lot about the Tricolor situation. This was
• 27:11
  Speaker 2: the lender and auto dealer across the country that went
• 27:15
  Speaker 2: through is going through Chapter seven bankruptcy, meaning liquidating everything
• 27:19
  Speaker 2: they have, and there's we're now a few weeks out
• 27:23
  Speaker 2: and are starting to see what was actually going on
• 27:27
  Speaker 2: over at Tricolor.
• 27:28
  Speaker 3: And the risk management and where that's permeated.
• 27:32
  Speaker 2: I found this story interesting one because whenever something goes
• 27:36
  Speaker 2: belly up this quickly, there's all sorts of allegations of
• 27:39
  Speaker 2: fraudulent activity and not quite properly doing things, and so
• 27:45
  Speaker 2: you've got some of that intrigue here. But it also
• 27:49
  Speaker 2: tells you that once again, banks, credit rating agencies, any
• 27:55
  Speaker 2: of these groups who are responsible for assessing risk. When
• 27:58
  Speaker 2: it came to this, Tricolor company did a fairly bad
• 28:02
  Speaker 2: job of doing so.
• 28:04
  Speaker 5: So.
• 28:04
  Speaker 3: For instance, SMP Global Ratings.
• 28:06
  Speaker 2: Gave the biggest slice of these securities that were put
• 28:10
  Speaker 2: out there, which are just a whole bunch of auto loans.
• 28:13
  Speaker 2: They gave it a double A rating, the second highest
• 28:15
  Speaker 2: rating you can have, and again these are auto loans too,
• 28:18
  Speaker 2: largely below credit worthy customers. The US government, the US
• 28:22
  Speaker 2: government awarded Tricolor, especially US Treasury certification in twenty nineteen,
• 28:29
  Speaker 2: that was, you know, for their role as a community
• 28:34
  Speaker 2: development financial institution. Didn't know that that existed, but it's
• 28:39
  Speaker 2: a government seal of approval for social based lenders. Why
• 28:43
  Speaker 2: the Treasury is in the business of giving out social
• 28:46
  Speaker 2: based lending accreditations, I do not know. At the same
• 28:49
  Speaker 2: time that they were given that and we're boasting of it,
• 28:52
  Speaker 2: they were accused of, you know, having delayed title transfers,
• 28:55
  Speaker 2: in proper use of temporary license plates, selling cars that
• 28:57
  Speaker 2: the company didn't even hold title to.
• 28:59
  Speaker 3: So I don't know.
• 29:01
  Speaker 2: The more you look at this, and this is always
• 29:03
  Speaker 2: the case after there's a blow up, right every single
• 29:05
  Speaker 2: time there's a blow up you always look back on
• 29:06
  Speaker 2: and say, Wow, why didn't this bank have a better
• 29:09
  Speaker 2: sense of what was actually going on underneath the hood here?
• 29:13
  Speaker 2: But I just find it so unambiguously repetitive compared to
• 29:18
  Speaker 2: every blow up of a major lending institution that we've
• 29:21
  Speaker 2: ever seen.
• 29:22
  Speaker 4: Yeah, the best predictor of a blow up is the
• 29:26
  Speaker 4: track record of the guy in charge. This guy has
• 29:29
  Speaker 4: been tainted before, similar to first brands shady characters. Yeah,
• 29:34
  Speaker 4: the first Trump administration gave this guy a metal while
• 29:36
  Speaker 4: they were practicing tawdry while they were engaging in tawdry
• 29:41
  Speaker 4: financial machinations. So I mean, I'm not blaming them, nests.
• 29:45
  Speaker 4: They obviously did no due diligence whatsoever on the guy.
• 29:49
  Speaker 4: So the best predictor of whether or not something is
• 29:51
  Speaker 4: going to end in tears is a person's past track record,
• 29:53
  Speaker 4: which is why when you're hired somewhere, your employer does
• 29:56
  Speaker 4: a background check like we do here, right, Mike, You
• 29:57
  Speaker 4: don't hire somebody with a criminal record.
• 29:59
  Speaker 2: Probably, So, like the statement from Fifth Third Bank, who
• 30:02
  Speaker 2: recently disclosed they'd faced up to two hundred million dollars
• 30:05
  Speaker 2: in losses tied to you know what they're calling alleged
• 30:08
  Speaker 2: fraud might be just poor risk management. But you know,
• 30:13
  Speaker 2: they said, quote, we're not in the business of doing
• 30:15
  Speaker 2: business with people who commit fraud. Ironically, one of Tricolor's
• 30:19
  Speaker 2: co founders, Texas businessman Ken Weaver, had served prison time
• 30:22
  Speaker 2: for selling stolen cars and failed to disclose that history
• 30:25
  Speaker 2: when seeking to run a Texas utility that racked up
• 30:27
  Speaker 2: customer complaints under his watch. So again, you say one thing,
• 30:33
  Speaker 2: but clearly you're doing something pretty dramatically different. Where this
• 30:37
  Speaker 2: all rubber hits the road on this stuff. There are
• 30:40
  Speaker 2: a lot of lenders doing business with Tricolor. There were
• 30:43
  Speaker 2: a lot of lenders doing business with auto parts supplier
• 30:46
  Speaker 2: out of the Midwest that just went first brands, thank you.
• 30:50
  Speaker 2: And the question on my mind is is this a
• 30:53
  Speaker 2: wake up call for a lot of private credit lenders
• 30:56
  Speaker 2: out there who are suddenly taking a look at their
• 30:58
  Speaker 2: books and saying, ooh, didn't realize that we were all
• 31:01
  Speaker 2: doing I.
• 31:01
  Speaker 4: Got news for you here. This stuff is happening all
• 31:04
  Speaker 4: over the place right now because financial conditions are too easy,
• 31:07
  Speaker 4: and regulators have been told to back off, right.
• 31:10
  Speaker 3: And the question that I have is will any of
• 31:13
  Speaker 3: these events be the moment that those lenders say, oh tay, yes, yes.
• 31:18
  Speaker 4: One of them will. It will be once a crisis
• 31:20
  Speaker 4: is underway, and then nobody trusts anybody, and that's when
• 31:24
  Speaker 4: you get financial market forgive me collapse.
• 31:26
  Speaker 2: Let's take a quick break. When we come back, mass
• 31:29
  Speaker 2: just's employer confidence dipping in the month of September. We'll
• 31:33
  Speaker 2: talk about that next year on the Financial Exchange.
• 31:35
  Speaker 1: Miss any of the show. Catch up at your convenience
• 31:38
  Speaker 1: by visiting Financial Exchange Show dot com and clicking the
• 31:41
  Speaker 1: on demand icon, where you'll find all of our interviews
• 31:44
  Speaker 1: in full showers. This is your home for the latest
• 31:47
  Speaker 1: business and financial news in New England and around the country.
• 31:51
  Speaker 1: This is the Financial Exchange Radio Network. The Financial Exchange
• 31:55
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• 31:59
  Speaker 1: to date on breaking business news all morning long. Base
• 32:02
  Speaker 1: is the Financial Exchange Radio Network.
• 32:09
  Speaker 2: Mark we covered a story yesterday that we kind of
• 32:12
  Speaker 2: poked a bunch of holes in, but it made the
• 32:14
  Speaker 2: point that there's you know, twenty two states according to
• 32:17
  Speaker 2: do you remember who did the study?
• 32:20
  Speaker 5: I know it's on market, I don't know the actual survey.
• 32:23
  Speaker 2: They made the argument that the hey, twenty two states,
• 32:25
  Speaker 2: that are you know, basically in recession right now when
• 32:27
  Speaker 2: you look at employment trends, growth, et cetera, et cetera.
• 32:31
  Speaker 2: And the counterpoint was, yeah, well, look but none of
• 32:33
  Speaker 2: them are Florida, Texas, California, or New York, so none
• 32:36
  Speaker 2: of that matters. But it is true that, especially around
• 32:40
  Speaker 2: New England right now, the employment has been weak on.
• 32:43
  Speaker 2: Employment rates have been generally trending upwards, and confidence among
• 32:47
  Speaker 2: employers seems to be dipping. So business confidence in Massachusetts
• 32:52
  Speaker 2: remained negative for the seventh straight month in September. That's
• 32:55
  Speaker 2: the longest stretch of bloomy outlooks since twenty twenty. During
• 32:58
  Speaker 2: the pandemic. Business Consumer Business Confidence Index, which is compiled
• 33:03
  Speaker 2: by the Associated Industries of Massachusetts, fell another one and
• 33:07
  Speaker 2: a half points again to its lowest point since April
• 33:11
  Speaker 2: of this year. And here in Massachusetts, I think you
• 33:15
  Speaker 2: can kind of paint a pretty easy picture of why
• 33:17
  Speaker 2: that might be the case. You have a large subset
• 33:21
  Speaker 2: of employers in the biotech pharmaceutical research place, where funding
• 33:28
  Speaker 2: has been getting questioned. You have a pretty hefty employment
• 33:32
  Speaker 2: in the education sector, which has also been under pressure.
• 33:35
  Speaker 2: And with that concentration, I'm not immensely surprised that the
• 33:40
  Speaker 2: hiring market and the state of things has been weaker
• 33:44
  Speaker 2: here in massa Chusetts in other parts of the country.
• 33:46
  Speaker 2: I pointed this out also, the unemployment rate in Massachusetts
• 33:49
  Speaker 2: now sitting at I believe four point eight percent, was
• 33:54
  Speaker 2: right at the national average, which I think was four
• 33:56
  Speaker 2: point two percent back in December of this year. Average
• 34:00
  Speaker 2: is barely budged here mass Chusets. We've climbed nearly We've
• 34:04
  Speaker 2: climbed six tenths of a percent, and so I guess
• 34:07
  Speaker 2: my point would be, if the stories you're reading about
• 34:11
  Speaker 2: the stock market or about the labor market don't feel
• 34:14
  Speaker 2: all that true to folks here in New England, it's
• 34:17
  Speaker 2: because the economy here in New England is not holding
• 34:19
  Speaker 2: up nearly as strong as the rest of the country.
• 34:21
  Speaker 4: Yeah, if you look at our biggest employers, hospitals, universities,
• 34:25
  Speaker 4: you ticked off some of these investment firms like Fidelity,
• 34:28
  Speaker 4: and a lot of smaller management investment managers that you've
• 34:32
  Speaker 4: never heard of. But there's a huge concentration of investment
• 34:35
  Speaker 4: managers in Boston, public market and private market. General electric
• 34:40
  Speaker 4: is A quick Google search just reminded me and many
• 34:44
  Speaker 4: others and you can think of idiosyncratic, know very specific
• 34:49
  Speaker 4: to a sector or even a entity, reasons why some
• 34:53
  Speaker 4: of these might be careful about hiring right now. But
• 34:56
  Speaker 4: keep in mind the hiring pace was absolutely frantic for
• 35:00
  Speaker 4: a few years. Four Yeah, so what do we have
• 35:03
  Speaker 4: four point eight percent on a planet right now? Maybe
• 35:05
  Speaker 4: that's just the nor. Maybe the so called natural rate
• 35:07
  Speaker 4: here in Massachusetts is closer to five than what we
• 35:10
  Speaker 4: experienced in the earlier part of this decade was a
• 35:13
  Speaker 4: little bit of anomally.
• 35:14
  Speaker 5: The US Virgin Islands aren't just stunning, they're thriving and
• 35:18
  Speaker 5: continue to be one of the hottest spots for vacationers
• 35:22
  Speaker 5: in the Caribbean. New cruise port upgrades, better air connections,
• 35:26
  Speaker 5: and a sharper focus on cultural experiences have put the
• 35:29
  Speaker 5: islands back on the map for travelers seeking something special.
• 35:33
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• 35:44
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• 35:53
  Speaker 5: and get plenty of pampering, undisturbed nature, and a vibe
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• 36:15
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• 36:18
  Speaker 3: Book your trip today.
• 36:19
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• 36:23
  Speaker 2: Mark We traveled now from Massachusetts down to Providence, Rhode Island,
• 36:26
  Speaker 2: where the Superman Building. If you're not familiar, just google it.
• 36:30
  Speaker 3: It's it's this.
• 36:32
  Speaker 2: Do you know how old that building is? It's it's
• 36:35
  Speaker 2: quite an old building. It used to be occupied by
• 36:38
  Speaker 2: bank from America.
• 36:39
  Speaker 4: The people natives whould know what is the Industrial Bank building?
• 36:42
  Speaker 2: Yeah, the Industrial Bank Building. It kind of looks like
• 36:44
  Speaker 2: a building from the Superman movies. I don't know if
• 36:46
  Speaker 2: it was actually like part of some of those films
• 36:49
  Speaker 2: in the past, but nonetheless things been sitting the sin.
• 36:53
  Speaker 3: Ghostbusters nineteen twenty eight. By the way, in nineteen.
• 36:55
  Speaker 4: Twenty eight, it was same era as the Empire State Building.
• 36:58
  Speaker 4: You could tell this by looking at it.
• 36:59
  Speaker 3: It's a cool looking building. I mean, I just you know.
• 37:01
  Speaker 2: Setting aside here, it's part of the Providence Sky Alliance
• 37:04
  Speaker 2: twenty six story tower empty now for the last twelve years.
• 37:09
  Speaker 2: The owner of the building, or one of the building's owners,
• 37:12
  Speaker 2: David Sweetzer, had cobbled together a three hundred and eight
• 37:16
  Speaker 2: million dollar financing package for a conversion project to maybe
• 37:20
  Speaker 2: convert at least some of this into high end condos.
• 37:25
  Speaker 2: Bad news, he died, so that deal is now in question,
• 37:29
  Speaker 2: and we might go a fair bit longer with this
• 37:31
  Speaker 2: building being unoccupied. I was actually down in Providence over
• 37:34
  Speaker 2: the weekend. Lovely little trip, but clearly not the only
• 37:39
  Speaker 2: city in the country having trouble attracting big, big tenants
• 37:44
  Speaker 2: to large, older buildings.
• 37:47
  Speaker 3: And this is just a story that has stabilized but.
• 37:51
  Speaker 2: Might continue to have big issues like this one where
• 37:54
  Speaker 2: they cannot attract their right town.
• 37:56
  Speaker 4: It's too big to preserve. Maybe it's got some If
• 37:58
  Speaker 4: you call that art deco that a period, I think
• 38:02
  Speaker 4: you would. It's gorgeous, but it's too expensive to preserve
• 38:07
  Speaker 4: and maybe to convert. You'd hate to think they'd have
• 38:09
  Speaker 4: to demolish it.
• 38:10
  Speaker 3: But markets are slightly down for the day.
• 38:13
  Speaker 2: We'll have a full market and recap and more for
• 38:15
  Speaker 2: it in the next hour the Financial Exchange.
• 38:17
  Speaker 3: Stay tuned, folks,