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Private Credit Stress Builds as Markets Ignore Rising Global Risks · The Financial Exchange Show

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Speaker 1: and Mike Armstrong.
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Speaker 2: It is Chuck and Mike and Tucker with you here,
1:19
Speaker 2: and as we kick things off on a ferry day,
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Speaker 2: stocks have given up their early gains unfortunately, and now
1:29
Speaker 2: we've got two out of the three major indices in
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Speaker 2: the red. The Dow is still in the green, very modestly,
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Speaker 2: up thirty nine points, less than a tenth of a percent.
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Speaker 2: S ANDP is down very modestly, no big fall there,
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Speaker 2: but down ten points, though it is about a one
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Speaker 2: percent intra a day reversal. We were up fifty five
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Speaker 2: at one point I saw, and the Nasdaq composite down
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Speaker 2: about a quarter percent I'm sorry, about a third of
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Speaker 2: a percent, eighty two points in the wrong direction there.
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Speaker 2: Ten Your treasury not really moving it all, down four
1:59
Speaker 2: tenths of a basis point. Again, four tenths of a
2:02
Speaker 2: basis point. So that's like take point oh one, move
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Speaker 2: the decimal and multiply by four. That's how little the
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Speaker 2: ten years moving, not really any at all today.
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Speaker 1: Uh.
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Speaker 2: The dollar index continuing to strengthen back over one hundred,
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Speaker 2: up four point four to three percent to one hundred
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Speaker 2: point one eight. We've got gold down eighty three dollars
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Speaker 2: and eighty cents an ounce to five thy forty four one.
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Speaker 2: Just like thing to note on this again, like you
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Speaker 2: think about like what your your safe haven stuff typically
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Speaker 2: has thought of, Like when when you hear war breaks out.
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Speaker 2: The three places that investors typically go, they go to bonds,
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Speaker 2: they go to gold, and they go to consumer staples.
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Speaker 2: All those are down since this started.
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Speaker 3: Yeah, the playbook is not working right now. It's kind
2:50
Speaker 3: of wild, mostly because the inflation scare. But yeah, it
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Speaker 3: is oil fairly shocking.
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Speaker 2: Yeah, and we've got crude oil. Brace yourselves. It's down
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Speaker 2: five cents a barrel. Are we even allowed to move
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Speaker 2: less than a dollar a barrel over the course of
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Speaker 2: the day. Now it's again just it's been so volatile
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Speaker 2: this week that again, this is just kind of interesting
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Speaker 2: to see that there's you know, a four cent move
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Speaker 2: on oil right now.
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Speaker 3: What can we say to summarize as we head into
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Speaker 3: tomorrow will be week three of this conflict.
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Speaker 2: The sooner you get anything going through horror moves, the better.
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Speaker 1: Yeah.
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Speaker 3: I think some of the market lessons are don't react
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Speaker 3: to what you read immediately, because there have been no
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Speaker 3: fewer than four.
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Speaker 2: Or five false starts.
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Speaker 3: Yeah, announcements proclamations, reported news from reliable sources that have
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Speaker 3: been walked back by US government officials. What was the
3:54
Speaker 3: one from the you know, supposed Iranian official that had
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Speaker 3: to be walked back by somebody outside the country.
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Speaker 2: I think you brought that one up. Well, there's the
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Speaker 2: Indian official that said, you know, Ron, let us ship through,
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Speaker 2: and I was like, no, we didn't, right, Yeah, that's
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Speaker 2: I guess what I was thinking.
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Speaker 3: So there have been a number of these false starts
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Speaker 3: where and markets have swung on them. Like Monday, oil
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Speaker 3: markets moved big time, Equity markets moved big time as
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Speaker 3: well on President Trump's press conference about escorting ships. And again,
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Speaker 3: we are basically exactly where we were prior to all
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Speaker 3: of that. And I think that's the other big lesson
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Speaker 3: I have is fog of war stuff like things are
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Speaker 3: moving very quickly, and announcements that are made at two
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Speaker 3: pm on a Tuesday might not hold true by four
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Speaker 3: pm on a Tuesday.
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Speaker 2: I think we also need to talk There's one other
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Speaker 2: thing that we haven't really covered this week that is
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Speaker 2: important in understanding the shape and context of what you're
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Speaker 2: seeing from an information standpoint, and that is the format
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Speaker 2: of Iran's leadership and military apparatus. Explain, it's very different
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Speaker 2: from anything that we're used to. The way that we
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Speaker 2: think about things here in the United States is the
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Speaker 2: president leads the country, commander in chief of the military.
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Speaker 2: Everything flows through that person. And in Iran you have
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Speaker 2: three separate, parallel structures that are actually set up. You
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Speaker 2: have the Iranian government, which operates, you know, as you
5:29
Speaker 2: would expect it to. You have the conventional Iranian military.
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Speaker 2: I forget what this specific name of it is, but
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Speaker 2: it's not the IRGC, which is a separate arm that
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Speaker 2: is basically the So here's the long and short of it.
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Speaker 2: During the Iranian Revolution, the Ayatola's basically realized, hey, we
5:50
Speaker 2: can't trust the standard Iranian military because they might not
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Speaker 2: follow our orders. So they built a parallel military structure,
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Speaker 2: the IRGC, the Iranian in Republican Guard whatever they're called. Ye,
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Speaker 2: and so pretty much that separate structure runs parallel. But
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Speaker 2: the other piece that you have to remember in this
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Speaker 2: is that because the Iranian government has been worried about
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Speaker 2: a strike on its leadership for basically its whole existence. Yeah,
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Speaker 2: the Iranian military is not organized through conventional command and
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Speaker 2: control logistics, where things flow from the top down. It's
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Speaker 2: basically pods that are set up that can operate autonomously.
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Speaker 2: It's it's what's called a mosaic approach where orders can
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Speaker 2: you know, flow from one part to the other and
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Speaker 2: they can operate, operate, you know, with a certain you know,
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Speaker 2: level of their own decision making. And so part of
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Speaker 2: what makes it so challenging to interpret what's going on
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Speaker 2: is that the Iranian government can be saying one thing,
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Speaker 2: but local IRGC commanders can basically their overrule them or
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Speaker 2: like do whatever they want anyways. And so the Iranian government,
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Speaker 2: you know, you see the Iranian president out saying, well,
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Speaker 2: you know, we're trying to de escalate the situation, and
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Speaker 2: then you get like an IRGC spokesperson who comes out
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Speaker 2: is like, we're gonna blow everything up that comes through
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Speaker 2: the street. And so like you if you you can't
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Speaker 2: think of this in terms of how you normally think
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Speaker 2: of messaging coming from a country, because there are parallel
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Speaker 2: structures that have very different incentives, very different goals, and
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Speaker 2: very different outlooks on what they're trying to do. And
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Speaker 2: so even if one part of the Iranian government military
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Speaker 2: you know apparatus is saying something, another part might be
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Speaker 2: saying no, we don't actually think we're gonna go along
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Speaker 2: with that. And so it's it's very challenging to interpret
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Speaker 2: through that lens because you get mixed messages even from
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Speaker 2: the Iranian government, depending on what part of it is
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Speaker 2: speaking right, and so you have to interpret it through
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Speaker 2: that lens as well. In that look, the actually the
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Speaker 2: Iranian government could come out at like at any point
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Speaker 2: and be like we've decided, you know, to stop fighting,
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Speaker 2: like we're done, and the IRGC might just be like, nah,
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Speaker 2: we're not good yet, and so like, these are the
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Speaker 2: things that you have to think of when looking at
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Speaker 2: all of this. Let's take a quick break when we
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Speaker 2: come back. We've got trivia, Yes, that's what we have.
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Speaker 2: And then we're gonna talk about private credit and you know,
8:30
Speaker 2: digging into some of the news this week that may
8:33
Speaker 2: have kind of gone under the radar. With everything going on,
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Speaker 2: the private credit space is not healthy right now, but
8:40
Speaker 2: we'll talk about whether that's gonna have a broader impact
8:42
Speaker 2: on markets. Next.
8:44
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10:11
Speaker 2: Okay, let's talk about private credit. We've been talking about
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Speaker 2: private credit since August of last year. Was that the
10:20
Speaker 2: first blow up? Yeah, that was when what the heck
10:24
Speaker 2: were they called Tricolor blew up? It might have been
10:27
Speaker 2: early September, but we we started talking about it late August,
10:31
Speaker 2: and we've we've been on this before the rest of
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Speaker 2: the world cared about it, and now the rest of
10:37
Speaker 2: the world cares about it quite a bit. To give
10:40
Speaker 2: you a sense of where things are for big alternative
10:44
Speaker 2: asset managers, KKR at one point last year was trading
10:49
Speaker 2: at one hundred and fifty three bucks a share. It's
10:50
Speaker 2: at eighty five right now. Blue Owl, who's right at
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Speaker 2: the center of this, they were at let's see almost
11:00
Speaker 2: we got here, like twenty twenty bucks in change last year.
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Speaker 2: They're at eight ninety one right now, off over fifty
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Speaker 2: five percent. You take a look at Blackstone, who like
11:11
Speaker 2: everyone just you know, loves those guys. They're at we're
11:15
Speaker 2: at one hundred and eighty six last year, they're at
11:17
Speaker 2: one oh six. Now. You talk about Apollo Global, they
11:21
Speaker 2: were north of one fifty five. They're at one oh
11:23
Speaker 2: one right now. So you're talking anywhere from like a
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Speaker 2: thirty five to fifty five percent draw down on these
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Speaker 2: big alternative asset managers. And what's happening now is that
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Speaker 2: the investors that hold a lot of these private credit funds,
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Speaker 2: specifically retail investors, are saying, bro, I want to leave,
11:43
Speaker 2: get me out, and the alternative asset managers are saying,
11:47
Speaker 2: welcome to the Hotel California. So cliff Water runs a
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Speaker 2: big thirty three billion dollar private credit fund. Fourteen percent
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Speaker 2: of that fund was requested for redemptions in the most
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Speaker 2: recent quarter. They normally cap at five percent redemption redemptions
12:04
Speaker 2: that are allowed. They moved it to seven. The perspectus
12:07
Speaker 2: allows them to move it up in certain situations, and
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Speaker 2: so they're going to be redeeming seven percent of that
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Speaker 2: thirty three billion. Now, when we talk about a private
12:17
Speaker 2: credit fund, they don't have like seven percent of thirty
12:20
Speaker 2: three billion dollars. If you like do the mathout, it's
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Speaker 2: about three billion. It's a little bit less than that,
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Speaker 2: like two point eight billion. Cliff Water doesn't have two
12:28
Speaker 2: point eight billion dollars just sitting around, of course, not
12:31
Speaker 2: like they wouldn't earn anything on that. So what do
12:34
Speaker 2: you do in order to disperse two point eight billion dollars,
12:38
Speaker 2: you got to sell two point eight billion dollars worth
12:40
Speaker 2: of stuff. And so the question that every single analyst
12:44
Speaker 2: should be asking all of these private credit people is
12:49
Speaker 2: what is the what was the composition of your portfolio
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Speaker 2: before you made these sales in terms of credit quality
12:59
Speaker 2: and you knowvaluations relative to what the loans were originally
13:02
Speaker 2: underwritten at, and what is it after because most likely,
13:07
Speaker 2: if you're trying to cause like the least damage possible,
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Speaker 2: you're selling off the loans that are the best the best, yeah,
13:13
Speaker 2: because like you can't like the other stuff. You don't
13:16
Speaker 2: know what you're gonna get for.
13:17
Speaker 3: If anyone owned a mutual fund back in two thousand
13:19
Speaker 3: and eight, you experienced this phenomenon. Yes, the stock market
13:22
Speaker 3: went down by thirty seven percent something like that in
13:27
Speaker 3: calendar year twenty twenty, two thousand and eight. And if
13:29
Speaker 3: you owned a mutual fund and actively manage equity mutual fund,
13:32
Speaker 3: a lot of you got hit with capital gains distributions.
13:35
Speaker 3: And you said, what in the name of God, I've
13:37
Speaker 3: lost a third of my portfolio value and yet I'm
13:40
Speaker 3: getting taxed on capital gains. And the answer is the
13:42
Speaker 3: asset managers sold what was still somewhat holding water in
13:47
Speaker 3: their portfolio, and that stuff was still out of profit.
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Speaker 2: So this is kind of where we are right now.
13:53
Speaker 2: You've got other big firms. Blackstone has a big redemption
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Speaker 2: that was put in on their b cred fund. Morgan
14:00
Speaker 2: Stanley is in this situation as well in terms of
14:03
Speaker 2: capping withdrawals. And again, the big banks don't own a
14:07
Speaker 2: lot of this stuff outright now.
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Speaker 3: That's where I wanted to go, Chuck. So I want
14:11
Speaker 3: to get back to the why should I care? Because
14:13
Speaker 3: this whole scenario was created from Dodd Frank from POSTGFC
14:18
Speaker 3: Great Financial Crisis. The reason that this entire niche market
14:22
Speaker 3: exists and it's no longer niche, it's massive, is because
14:25
Speaker 3: we prohibited the banks from doing it because we didn't
14:27
Speaker 3: want spillover contingent like we are perhaps seeing the smoke
14:32
Speaker 3: of right now, spilling into our greatest financial our most
14:35
Speaker 3: important financial institutions.
14:37
Speaker 2: Greatest is a debate.
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Speaker 3: Most important, though, is true we didn't want it spilling
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Speaker 3: into the largest banks that held all the deposits for
14:44
Speaker 3: the entire global financial system. And to that end, it's
14:48
Speaker 3: been relatively successful. If a bunch of private credit funds
14:50
Speaker 3: blow up. JP Morgan won't. But I don't know that
14:55
Speaker 3: it will be I don't know that it will have
14:57
Speaker 3: been enough if it gets to contagion, if it gets
14:59
Speaker 3: to a blow up, if it will truly be enough
15:03
Speaker 3: to protect the you know, greater financial system. And I
15:07
Speaker 3: think that's the question worth answering or worth guessing at
15:10
Speaker 3: for the average American because there are other financial institutions
15:14
Speaker 3: that aren't banks, that are exposed to a ton of this.
15:16
Speaker 2: Stuff, specifically life insurance. And here's the reason why. If
15:22
Speaker 2: you are running a life insurance company, I come to
15:25
Speaker 2: you and say I would like to buy insurance against dying,
15:29
Speaker 2: and they have a bunch of smart actuaries who say, fine,
15:32
Speaker 2: if you want a policy for the next you know,
15:34
Speaker 2: twenty years, it's going to cost you one thousand dollars
15:38
Speaker 2: a year in order to get that coverage. And what
15:41
Speaker 2: they then do is they say, Okay, we're going to
15:43
Speaker 2: take that thousand dollars, and we know, again, we've got
15:47
Speaker 2: like this weighted probability of when Chuck's going to die,
15:49
Speaker 2: and we wait that with you know, hundreds and thousands
15:52
Speaker 2: of other people in our system, and so we go
15:54
Speaker 2: and we buy, you know, a twenty year bond because
15:57
Speaker 2: we think Chuck's going to die twenty years from now.
16:00
Speaker 2: And what's happened is two things. Number One, a lot
16:03
Speaker 2: of these private market companies, uh, these private credit issuers
16:08
Speaker 2: and asset managers, they've bought a lot of insurance companies.
16:12
Speaker 2: And then what they've done so you've got these captive
16:14
Speaker 2: insurance companies underneath. And then they've basically taken the insurance
16:18
Speaker 2: companies and stuff the general fund the general account with
16:22
Speaker 2: a lot of private credit that they've underwritten. Of course,
16:25
Speaker 2: the reason why like it makes sense on two for
16:28
Speaker 2: a couple of reasons. The first is, okay, gives you
16:30
Speaker 2: bigger market to sell to. The second is, if you
16:32
Speaker 2: are one of those insurance companies, Hey, if private credit
16:34
Speaker 2: is saying that you can get nine percent returns and
16:38
Speaker 2: US treasuries are yielding for you're like sure, Like we'll
16:40
Speaker 2: take the risk to get a little more return. Juice it, baby, Yeah,
16:43
Speaker 2: I understand the incentives, Like, I get it. What what
16:47
Speaker 2: what would oh? Anyways, So I think that when you
16:51
Speaker 2: look at this, one of the things that we may
16:53
Speaker 2: see are some problems showing up in the life insurance space,
16:57
Speaker 2: and that's something to watch for.
17:00
Speaker 3: Markets seem to be getting cornered by this trifecta of
17:04
Speaker 3: risks that we talked about. There is the risk of
17:06
Speaker 3: higher inflation due to the war and around there is
17:08
Speaker 3: the risk of private credit blowing up. There is the
17:11
Speaker 3: ultra high valuation risk from the AI sector, and yet
17:15
Speaker 3: investors are not panicking. The markets remain within five percent
17:20
Speaker 3: of all time highs right now. If you are curious
17:24
Speaker 3: about your portfolio currently and how you are exposed to
17:27
Speaker 3: these different potential risks of the market that may or
17:29
Speaker 3: may not develop into real downside to this point arguably
17:34
Speaker 3: has not resulted in any supposed or realized downside.
17:39
Speaker 2: If you have questions.
17:40
Speaker 3: About your exposure, about how your portfolio is set up
17:42
Speaker 3: and established for your future needs, and how it might
17:46
Speaker 3: be able to be set up better, give the folks
17:48
Speaker 3: at arms Strong Advisory Group a called the numbers eight
17:50
Speaker 3: hundred three nine three four zero zero one. You can
17:54
Speaker 3: book a time for us to call you back at
17:56
Speaker 3: Armstrong Advisory dot com. But the number again eight hundred
17:59
Speaker 3: three nine three for zero zero one.
18:01
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
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Speaker 1: registered investment advisor nothing in the ad or in any
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Speaker 1: Armstrong guide a specific financial, legal, or tax advice. Consult
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Speaker 1: advisory services.
18:17
Speaker 2: Wall Street journal piece talking about airfares, where in particular
18:22
Speaker 2: long haul airfares in international you are seeing prices moving
18:25
Speaker 2: up very quickly due to the cost of jet fuel
18:29
Speaker 2: moving up very quickly. I thought, they'll hedge this. So
18:33
Speaker 2: here's the dirty little secret of the airline business. A
18:37
Speaker 2: lot of them have stopped hedging as aggressively in the
18:40
Speaker 2: last decade oops, because it didn't pay off for them,
18:44
Speaker 2: you know, when you had you know, the last fifteen years,
18:47
Speaker 2: oil price volatility to the upside was pretty muted aside
18:51
Speaker 2: from twenty twenty two, and so a lot of the
18:54
Speaker 2: airlines looked at and said, hey, we've got this hedging
18:56
Speaker 2: program in place, it's costing us money to do that.
19:01
Speaker 2: Let's not do as much as we used to. And
19:04
Speaker 2: so they haven't been hedging their fuel costs, and so
19:07
Speaker 2: pretty much what you have some of the stuff that
19:10
Speaker 2: I've seen, I know, like in particular, a lot of
19:13
Speaker 2: the big international carriers out of Southeast Asia, Singapore Air
19:17
Speaker 2: Cathay Pacific. Those guys, they've jacked up fuel search charges
19:21
Speaker 2: on basically every flight if you're looking at you know,
19:24
Speaker 2: transatlantic flights or cross country flights, those are seeing prices
19:28
Speaker 2: moving up quickly. And so this is kind of where
19:31
Speaker 2: we're going to be for the foreseeable future. Let's take
19:33
Speaker 2: a quick break. When we come back, we got Wall
19:35
Speaker 2: Street Watch and the Trivia.
19:36
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20:03
Speaker 4: Well, markets have given up their gains by mid day
20:06
Speaker 4: as Wall Street closely monitors the conflict with Iran. Right now,
20:10
Speaker 4: the Dow is up only thirty one points, SMP five
20:14
Speaker 4: hundred and now down two tenths of one percent. Nasdaq
20:18
Speaker 4: is down about four tenths of one percent, or ninety
20:20
Speaker 4: eight points lower, RUSTED two thousand, dipping into negative territory tenure.
20:24
Speaker 4: Treasure yield is flat at the moment at four point
20:27
Speaker 4: two seventy five percent, and oil up about a quarter percent.
20:30
Speaker 4: Trading right around ninety six dollars a barrel. We saw
20:34
Speaker 4: a flurry of economic data points this morning, including the
20:37
Speaker 4: Fed's preferred inflation measure, the core PC index, which mostly
20:42
Speaker 4: came in line with estimates. Excluding food and energy prices,
20:45
Speaker 4: core PC inflation climbs slightly to three point one percent
20:49
Speaker 4: in January from three percent in December. Meanwhile, the Commerce
20:53
Speaker 4: Department said that GDP grew at just a zero point
20:55
Speaker 4: seven percent rate in the fourth quarter, well short of
20:58
Speaker 4: the one point four percent and pace of reported in
21:01
Speaker 4: its Advanced GDP of report last month. Elsewhere, software provider
21:05
Speaker 4: Adobe announced its longtime CEO, Chantanu Narayan, will step down
21:10
Speaker 4: after serving for the past eighteen years with the company.
21:13
Speaker 4: We'll seek a new leader for the AI era. That
21:17
Speaker 4: stock is down nearly seven percent. Alta Beauty share is
21:20
Speaker 4: now sinking eleven percent after the beauty products of retailer
21:23
Speaker 4: posted week earnings for its fourth quarter, and according to
21:26
Speaker 4: The New York Times, Meta's new AI model has been
21:29
Speaker 4: delayed as its performance has fallen short of rivals from Google,
21:33
Speaker 4: Open Ai and Anthropic. Meta shares are off by three percent.
21:39
Speaker 4: I'm Tucker Silva and that is Wall Street Watch and
21:42
Speaker 4: we have an announcement here on the show. The Money
21:44
Speaker 4: Matters mail Bag is coming next week to the show.
21:48
Speaker 4: That's right, It's your chance to ask the question about
21:51
Speaker 4: business and the economy that you want answers to. So
21:54
Speaker 4: all you have to do to leave us a voicemail
21:57
Speaker 4: for the Money Matters mail bag is call this new number.
22:01
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22:27
Speaker 4: three three to leave a voicemail, or you can shoot
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22:34
Speaker 3: What kind of questions we expect in here? Like any
22:36
Speaker 3: what did my cat for breakfast today?
22:38
Speaker 4: We would welcome life questions. Uh huh, yep, absolutely we would. Okay,
22:43
Speaker 4: what did you have for breakfast today?
22:45
Speaker 3: Banana and A and I pretty much have the same
22:49
Speaker 3: breakfast every single day. Actually it's really boring. So it's
22:53
Speaker 3: a banana not bar. Yeah, So question answered, folks, we
22:57
Speaker 3: can move along agreat actually excit this second.
23:01
Speaker 1: I think.
23:01
Speaker 2: I think it's gonna be fun. I do too.
23:03
Speaker 3: I like you know, we love when we get text
23:05
Speaker 3: the show. This is a whole segment dedicated to your questions.
23:09
Speaker 3: You know, I'm pretty pumped about it.
23:12
Speaker 2: You know what I'm not pumped about? What this proposal
23:16
Speaker 2: from New York City. Why you don't live there? I don't,
23:20
Speaker 2: but I do visit sometimes. Uh huh. So New York
23:23
Speaker 2: City is expensive. It's really expensive these How expensive is it? Sorry?
23:30
Speaker 2: The New York City Council is introducing a bill to
23:34
Speaker 2: make it more expensive by proposing a thirty dollars minimum
23:38
Speaker 2: wage that will go into place for large businesses, phased
23:42
Speaker 2: in by twenty thirty. Remember twenty thirty is only four
23:44
Speaker 2: years away now, very close actually, and for businesses with
23:48
Speaker 2: fewer than five hundred employees would hit the thirty dollars
23:51
Speaker 2: mark by twenty thirty two.
23:53
Speaker 3: It's nearly a doubling of the minimum wage it is
23:55
Speaker 3: right now to seventeen. So here's why this is dumb. Well, frankly,
24:01
Speaker 3: it's the same thing as rent control and every other price.
24:05
Speaker 2: Guys, you're gonna end up doing one of two things.
24:09
Speaker 2: Either a if you raise the minimum wage too fast,
24:12
Speaker 2: what you end up doing is businesses start to see
24:16
Speaker 2: non human replacements become more cost effective. As an example,
24:23
Speaker 2: let's say that right now, someone comes in and pitches me, Hey,
24:27
Speaker 2: you could have a kiosk at your coffee shop. Oh,
24:30
Speaker 2: what's the cost of it. Well, it's equivalent to like
24:33
Speaker 2: twenty dollars an hour. No, I don't think that's gonna work.
24:36
Speaker 2: I pay my guys seventeen. Now that same guy comes
24:40
Speaker 2: back three years from now, I was like, hey, I've
24:42
Speaker 2: actually improved the technology and gotten the cost down. It's
24:45
Speaker 2: now sixteen dollars an hour to use my kiosk. Great,
24:48
Speaker 2: my person's twenty eight dollars an hour. Now that that
24:52
Speaker 2: head is just not going to be there anymore.
24:54
Speaker 3: Man, That Elmo picture and Times Square is gonna cost
24:56
Speaker 3: a fortune now.
24:58
Speaker 2: So this is one piece. The other place is if
25:02
Speaker 2: all you do is pay people more without adjusting things
25:07
Speaker 2: on the supply side, you're just giving people more money
25:11
Speaker 2: to buy the same stuff, which means the costs are
25:13
Speaker 2: just going to go up. We've talked about this with housing.
25:16
Speaker 2: You can talk about it here where. Okay, if I'm
25:18
Speaker 2: a restaurant and I've got, you know, someone that I've
25:20
Speaker 2: got to pay thirty dollars an hour instead of seventeen.
25:23
Speaker 2: I'm just gonna raise the prices on all of my
25:25
Speaker 2: food that I'm selling. My margins are four percent to
25:29
Speaker 2: begin with. I can't just absorb that. And so this
25:34
Speaker 2: is the problem with making minimum wage hikes like a
25:40
Speaker 2: core idea to try to solve an affordability problem.
25:45
Speaker 3: I find it to be both more impactful and less
25:50
Speaker 3: dumb than the California fast food minimum wage law. Well
25:54
Speaker 3: that's because that's a unique style of dumb, which is
25:57
Speaker 3: just a uniquely stupid idea. This one is I think
26:00
Speaker 3: bad idea, and I think pretty provably a bad idea.
26:04
Speaker 3: But you understand how Mum Doney in the City Council
26:07
Speaker 3: is getting there because they're trying to make everything about
26:11
Speaker 3: affordability in twenty twenty six. But like we've talked about,
26:14
Speaker 3: many of the solutions they're going to be proposed on affordability,
26:16
Speaker 3: whether it is this one, whether it is hey, get
26:19
Speaker 3: you get ready massa Chusetts vote on rent control likely
26:22
Speaker 3: coming your way this fall, many of them are going
26:24
Speaker 3: to be designed to pitch affordability and probably have the
26:28
Speaker 3: exact opposite effect.
26:30
Speaker 2: You know how you make New York cheaper? Actually, I
26:35
Speaker 2: don't more New York. You build more New York. Yeah,
26:40
Speaker 2: that's how you make New York cheaper. You build more
26:42
Speaker 2: New York. I'm sorry to reduce it to that, but like,
26:48
Speaker 2: if you have more space for people to live, and
26:51
Speaker 2: more space for people to dine, and more space for
26:54
Speaker 2: people to movie, you will be able to have a
26:57
Speaker 2: better sense. You will be able to improve a afordability.
27:01
Speaker 2: You do not improve affordability by raising the single biggest
27:04
Speaker 2: cost for most businesses, because they will say, great, we're
27:07
Speaker 2: either going to go out of business, cut our labor
27:10
Speaker 2: or raise our cost or pay under the.
27:13
Speaker 3: Table below minimum wage. Yes, just break the law. Oh
27:17
Speaker 3: the labor black markets? Yeah possible.
27:21
Speaker 2: Yeah. So I wish that this were like it were
27:25
Speaker 2: this simple to solve, but it's not. It's just not
27:31
Speaker 2: also talking about like dumb things from California. This piece
27:35
Speaker 2: has this one in it. In Los Angeles, the city
27:37
Speaker 2: Council last year proved raising the minimum wage from twenty
27:41
Speaker 2: dollars and thirty two cents to thirty for hotel and
27:43
Speaker 2: airport workers. So LA in and of itself has a
27:46
Speaker 2: separate minimum wage for hotel and airport workers. So we've
27:50
Speaker 2: got the California fast food minimum wage, the Los Angeles
27:56
Speaker 2: hotel and airport minimum wage, and then the regular California
28:00
Speaker 2: minimum wage. Yeah, that sounds right. How do I arbitrage
28:03
Speaker 2: that if I'm trying to work in California? What do
28:06
Speaker 2: I do? Can I does? Let me? Do they stack? Like,
28:10
Speaker 2: let's say that I'm working at a McDonald's in an airport.
28:14
Speaker 2: If I'm in an airport, McDonald's, is my minimum wage
28:16
Speaker 2: sixty dollars?
28:17
Speaker 3: Yeah?
28:20
Speaker 2: I don't know, Jock, someone should file that lawsuit.
28:23
Speaker 3: By the way, I just I was looking at this recently,
28:26
Speaker 3: just so for some I know a lot of us
28:28
Speaker 3: listening are on the East Coast. The new Millionaire's Tax
28:32
Speaker 3: in Massachusetts brings the marginal rate for taxation up to
28:36
Speaker 3: nine percent for those making over a million dollars. On
28:40
Speaker 3: that income, you hit the nine percent income tax bracket
28:44
Speaker 3: for a married couple in California at one hundred and
28:46
Speaker 3: forty six grand Pikes.
28:51
Speaker 2: I mean, here's the thing about California. The thing that's
28:54
Speaker 2: most wild about California is just how how economically diverse
28:59
Speaker 2: it is. Because you've got you know, everyone's like, oh,
29:02
Speaker 2: California is so expensive. Like, yeah, it's expensive if you're
29:05
Speaker 2: you know, in SF or San Diego or La Yep.
29:08
Speaker 2: But you go to some of these inland like towns
29:11
Speaker 2: in like the Inland Empire Area and stuff like that,
29:14
Speaker 2: ones that get one hundred and thirty degrees in July,
29:15
Speaker 2: and right like, you go through I think it's twenty
29:17
Speaker 2: one Palms or whatever it is, like on the way
29:19
Speaker 2: to Joshua Tree and you're like, oh, like, this is
29:24
Speaker 2: not a like wealthy like part of the country in
29:27
Speaker 2: any way, shape or form. Yeah. I mean it's also
29:29
Speaker 2: one of the biggest agricultural areas of are Do you
29:34
Speaker 2: know that almonds are a fruit? Not until right now,
29:38
Speaker 2: chuck almonds. You're eating the pit. It's basically like a
29:41
Speaker 2: peach and you're eating the pit. It's not a nut.
29:44
Speaker 2: Where did we see, oh, thirty dollars minimum wage?
29:46
Speaker 3: So yeah, good luck New Yorkers and have some almonds.
29:51
Speaker 4: Hey, before we hit the break, I get to payoff trivia.
29:54
Speaker 4: Oh wow, Cohen, was the last time we had three
29:56
Speaker 4: Friday the thirteenth in one year? That would be back
29:59
Speaker 4: in twenty fifteen. And Scott from San Borton New Hampshire
30:05
Speaker 4: is our winner today. I don't know where that is?
30:07
Speaker 2: I do?
30:08
Speaker 4: Okay, cool near the border, taking home a Financial Exchange
30:11
Speaker 4: Show t shirt and we play trivia every day here
30:13
Speaker 4: on the Financial Exchange. See complete contest rules at Financial
30:16
Speaker 4: exchangehow dot com.
30:17
Speaker 2: Okay, let's take a quick break. You know it's it's
30:21
Speaker 2: not that high up, I don't think, is it. I
30:24
Speaker 2: thought it was like white mountains type area. Maybe a little,
30:27
Speaker 2: uh little west of that.
30:28
Speaker 3: We'll tell you where Sanborton is. Yeah, after we talk
30:31
Speaker 3: to Paul Demonica next on the Financially.
30:33
Speaker 2: Paul is going to research where it is. Right after
30:35
Speaker 2: this text us.
30:37
Speaker 1: It's six one seven three six two one three eight
30:39
Speaker 1: five with your comments and questions about today's show and
30:42
Speaker 1: let us know what you think about the stories we
30:44
Speaker 1: are covering. This is the Financial Exchange Radio Network. Follow
30:49
Speaker 1: the Financial Exchange on Instagram for market insight, clips, reels
30:53
Speaker 1: and daily money doc This is the Financial Exchange Radio Network,
30:58
Speaker 1: Ladies and gentlemen the weekend.
31:10
Speaker 2: As promised, we are now joined by the one and
31:12
Speaker 2: only Paul Lamonica from Barons. Paul, how are you doing today?
31:18
Speaker 5: I'm good? Thanks?
31:19
Speaker 2: How are you guys doing doing well. You got any
31:21
Speaker 2: trips to San Borton coming up.
31:23
Speaker 5: No, but I did look it up and it seems
31:25
Speaker 5: like it's a scenic rural town in bell Knappe County,
31:28
Speaker 5: New Hampshire. So if I'm ever looking to head up
31:31
Speaker 5: to New England and want to go to the lakes,
31:34
Speaker 5: I will head up there.
31:35
Speaker 2: Wonderful little area. Paul, Let's talk a little bit about copper,
31:40
Speaker 2: and specifically you've got a piece out this week that
31:44
Speaker 2: is talking about Freeport macmaran. Who is they're still the
31:48
Speaker 2: biggest copper producer in the world.
31:50
Speaker 5: Correct, definitely the biggest in the US and sure about
31:55
Speaker 5: the world. There are a lot of other pretty big
31:57
Speaker 5: miners in Asia, South America, you know, Canada as well.
32:01
Speaker 2: So when we look at Freeport mcmaran, the stock over
32:06
Speaker 2: the last you know a couple of years has had
32:08
Speaker 2: kind of, you know, a mixed run. It's one where
32:11
Speaker 2: much of you know, twenty four was pretty flat, twenty
32:15
Speaker 2: five saw a you know, meaningful run up towards the
32:18
Speaker 2: end of the year and continued into the first part
32:21
Speaker 2: of this year before it's gotten hit pretty hard with
32:24
Speaker 2: about a fifteen percent pullback in the last couple of weeks.
32:26
Speaker 2: What's going on here?
32:28
Speaker 5: Yeah, I think the pullback in the past couple of
32:30
Speaker 5: weeks is mainly the macro concerns surrounding the conflict in Iran.
32:37
Speaker 5: Oil prices going higher. You know, oil energy costs are
32:42
Speaker 5: a high input expense for copper miners, so higher oil
32:47
Speaker 5: prices will not be great news for a company like
32:51
Speaker 5: Freeport mcmran. But I think that the selloff is probably
32:55
Speaker 5: a little bit overdone. And when you look at the stock,
32:59
Speaker 5: even oh, it did have a good year last year,
33:02
Speaker 5: it's still trades at a discount to many of its rivals,
33:07
Speaker 5: some in Canada, some in Latin America, its Fagasta and Chile,
33:12
Speaker 5: for example, And that's primarily because of that, you know,
33:16
Speaker 5: terrible fatal tragedy a mud slide at a copper mine
33:20
Speaker 5: in Indonesia last year that I think really led to
33:24
Speaker 5: concerns about production for Freeport mcmaran and how long it
33:28
Speaker 5: would take to get that mind back online and what
33:32
Speaker 5: the you know, the various costs involved would that be.
33:36
Speaker 5: But a lot of analysts and a fund manager I
33:38
Speaker 5: spoke to think that, you know, those concerns are overdone
33:43
Speaker 5: and that Freeport mcmaran should trade at evaluation closer to
33:47
Speaker 5: its peers, and that should lead to you know, some
33:49
Speaker 5: pretty decent upside for the stock.
33:52
Speaker 2: When we talk about minding, it's impossible for me to
33:55
Speaker 2: not like basically go like discuss the experience of every
34:00
Speaker 2: you know, mining investor for like the last twenty years,
34:03
Speaker 2: which is just that it's been a really hard time
34:05
Speaker 2: to invest in mining in general. It's a hugely expensive business,
34:09
Speaker 2: ton of capital needed. Uh, you know, the margins can
34:13
Speaker 2: be tough. Like what, how does Freeport you know, provide
34:16
Speaker 2: any differentiation. Do they provide any differentiation from what's otherwise
34:20
Speaker 2: a really tough area to actually, you know, operate in.
34:24
Speaker 5: Yeah, it's a great question. I think investors do need
34:27
Speaker 5: to be cognizant of some of the risks involved. They're
34:31
Speaker 5: you know, they're always I think a lot of you know, activists,
34:35
Speaker 5: social activists as well, you know, that have concerns with mining,
34:39
Speaker 5: be it copper, mining, gold, silver, what have you. But
34:42
Speaker 5: at the end of the day, copper is an industrial
34:47
Speaker 5: metal that has tons of uses. It's gotten a new life,
34:52
Speaker 5: if you will, because of the need for copper wiring
34:56
Speaker 5: and all those data centers that are powering the claud
35:00
Speaker 5: and chat GPTs and other AI large language models of
35:04
Speaker 5: the world. So demand for copper is not going away.
35:07
Speaker 5: Electrification is another, you know, key component for for copper
35:12
Speaker 5: as well, So think of you know what Elon Musk,
35:15
Speaker 5: you know, is you know doing with Tesla and all
35:18
Speaker 5: the other ev makers around the world. You know, copper
35:22
Speaker 5: plays into that. So you know, this is a metal
35:26
Speaker 5: that there is going to be a very strong economic
35:30
Speaker 5: need for, which is not necessarily the case with gold,
35:34
Speaker 5: and maybe is a little bit of a lesser extent
35:36
Speaker 5: with silver, which is kind of a hybrid of a
35:39
Speaker 5: precious metal but also an industrial metal. So as long
35:43
Speaker 5: as copper demand is rising, you would have to think
35:47
Speaker 5: that copper miners like Freeport back Gram will benefit from that.
35:53
Speaker 2: Fantastic.
35:53
Speaker 5: I think that copper prices could go a lot higher.
35:55
Speaker 2: Fantastic. Paul, We appreciate you joining us today. I hope
35:58
Speaker 2: you have a great weekend and looking forward to catching
36:02
Speaker 2: up with you next week.
36:04
Speaker 5: Great, Thank you very much, appreciate it.
36:05
Speaker 2: That is Paul Monica from Baron's talking about Freeport, Macmaran, Mike,
36:10
Speaker 2: what do we have that we haven't gotten to yet?
36:12
Speaker 3: An incredibly predictable move Edmunds is reporting that activity on
36:17
Speaker 3: their site over the course of the last two weeks
36:19
Speaker 3: has dramatically increased for interest in electric vehicles, hybrids and
36:24
Speaker 3: plug in hybridh in just the most predictable car shopping
36:28
Speaker 3: behavior that you can possibly imagine. Site activity shows that hybrid's,
36:31
Speaker 3: plug and hybrids and dvs accounted for twenty two point
36:33
Speaker 3: four percent of all vehicle research activity on Edmonds in
36:36
Speaker 3: the week starting March second. That's up twenty percent from
36:40
Speaker 3: the previous week. So yeah, we do tend to react
36:45
Speaker 3: to these things in very predictable ways as Americans. The
36:49
Speaker 3: one thing that I just keep focusing on again, who
36:52
Speaker 3: knows where gas.
36:53
Speaker 2: Prices will be a year ago, but there's obviously you're
36:56
Speaker 2: from now.
36:57
Speaker 3: Yeah, I know where they were a year ago where
37:00
Speaker 3: they will be a year from now, but there's obviously
37:04
Speaker 3: the significant risk that they could be substantially higher. And
37:07
Speaker 3: I will just remind everybody that American auto manufacturers have
37:11
Speaker 3: largely gotten out of the business of fuel efficient vehicles
37:14
Speaker 3: and sedan's. So let's hope we don't go that route.
37:17
Speaker 3: Because for GM, Stilantis not terribly well set up for
37:22
Speaker 3: a much higher gas price scenario.
37:25
Speaker 2: I know it wasn't planned this way obviously, but could
37:28
Speaker 2: there possibly have been a better week for Rivian to
37:33
Speaker 2: roll out there? R two vehicle, right, you know, this
37:37
Speaker 2: is the lower end EV. It's tough to say it's
37:40
Speaker 2: lower end. It's it's cheaper than the expensive one, but
37:42
Speaker 2: it still starts around forty eight K for the cheap one. Yeah,
37:48
Speaker 2: because their other one starts at like ninety and change.
37:51
Speaker 2: So they're going to be priced between I think like
37:53
Speaker 2: forty eight and sixty generally and trying to fit into
37:56
Speaker 2: that you know, two to row SUV market. I personally
38:01
Speaker 2: really like how they look and everything, but again it's
38:05
Speaker 2: a big chunk of chains for a car, So we'll
38:08
Speaker 2: see how they sell, you know, I'm curious see how
38:09
Speaker 2: they do. Here. We're done for the day, done for
38:12
Speaker 2: the week. S and P and Nasdak remain in a
38:14
Speaker 2: negative territory now trying to hang on to some small
38:17
Speaker 2: gains this today and we'll see you on Monday.