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AI Is Eating Software Margins — And Markets Are Finally Noticing · The Financial Exchange Show

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Speaker 1: Zada and Mike Armstraw.
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Speaker 2: Chuck, Mike and Tucker with you here on a busy Thursday.
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Speaker 2: We've got some earnings to discuss from yesterday, some more
1:18
Speaker 2: earnings to preview from today. We've also got weekly jobless
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Speaker 2: claims that we're gonna talk about. We got a Joltz
1:25
Speaker 2: report that was released two days late after a very
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Speaker 2: brief government shutdown, and so we're not gonna waste any time.
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Speaker 2: We're gonna get right into it talking about what is
1:35
Speaker 2: going on in the tech related area of markets. Basically
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Speaker 2: anything tech adjacent getting kind of budgeted, and that continues today.
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Speaker 2: I know that, you know, we have, you know, some
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Speaker 2: Google earnings that we're gonna get into, but we have
1:49
Speaker 2: to start there, I think, just because it's moving today.
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Speaker 2: Google reported earnings are alphabet rather reported earnings yesterday after
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Speaker 2: the bell. They're down about four and a half percent
2:00
Speaker 2: right now. They were down as much as seven. They
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Speaker 2: trim their losses to down too at one point this morning.
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Speaker 2: But Google stock falling after earnings, and Mike, what's interesting
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Speaker 2: here to me, It's emblematic of what we're seeing in
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Speaker 2: tech for the last four months or so, now maybe
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Speaker 2: five months even which is Google reports their earnings. The
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Speaker 2: earnings are fine, they're good. Their capex guidance for this
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Speaker 2: year is insane.
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Speaker 3: So here's the deal.
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Speaker 2: The expectations were that they were going to have about
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Speaker 2: one hundred and twenty billion dollars in capex. The high
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Speaker 2: estimate on the street was a one hundred and thirty
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Speaker 2: three billion. They came in at one hundred and seventy
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Speaker 2: five to one hundred and eighty five billion. That's insane,
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Speaker 2: Like it's basically a doubling of last year's capex. Yes,
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Speaker 2: we are now at the point where your big four Meta, Microsoft, Alphabet,
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Speaker 2: and Amazon are going to do somewhere in the ballpark
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Speaker 2: of six hundred to seven hundred billion dollars in CAPEX
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Speaker 2: this year, which I do think the market is finally
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Speaker 2: waking up to and being like, eh, guys, I'm not
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Speaker 2: sure this is a good idea because the whole premise
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Speaker 2: of why tech has been a great investment for the
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Speaker 2: last seven eight years, in particular, Hey, there's not much
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Speaker 2: CAPEX that's needed. It's a high margin business. Who wouldn't
3:27
Speaker 2: want that? And now it's well, we're gonna put seven
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Speaker 2: hundred billion dollars into data centers. Do you need it,
3:34
Speaker 2: don't know, but it might pay off. And it worked
3:38
Speaker 2: in twenty three and twenty four and even the first
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Speaker 2: half of twenty five since October and and I forget
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Speaker 2: what it was at the time, but there was something
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Speaker 2: that happened where I was like, guys, I think that
3:48
Speaker 2: we might be like kind of starting to see the
3:51
Speaker 2: peak of this since literally that point. And I do
3:54
Speaker 2: like to toot my own horn when I'm occasionally right.
3:57
Speaker 2: I'm not always, in fact, a lot of the time
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Speaker 2: I'm wrong. Occasionally it seems like, you know, I might
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Speaker 2: get one right, And this one seems like it really
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Speaker 2: is turning, because the trend for the last three years
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Speaker 2: has been, hey, just tell people you're gonna build more
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Speaker 2: data centers and your stock will go up, And that
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Speaker 2: has completely reversed.
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Speaker 3: In the last three to four months. Now.
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Speaker 4: Yeah, for evidence in video, stock peaked on October twenty
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Speaker 4: ninth that two hundred and seven dollars a share. There's
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Speaker 4: a bunch of pieces of this that I find fascinating, though,
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Speaker 4: one of which is the Kapax piece that you just mentioned.
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Speaker 4: Chuck so meta, you know, dramatically expanding their capax. Everyone
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Speaker 4: looked at that what was it, one hundred and thirty
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Speaker 4: five billion was their plan somewhere in that range, and
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Speaker 4: then you know Google comes behind them and just blows
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Speaker 4: it out of the water. Here in spite of all that,
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Speaker 4: right in spite of these companies telling you, hey, we're
4:47
Speaker 4: going to try and spend this much money, you have
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Speaker 4: Nvidia down today, you have Micron Technology, all the companies
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Speaker 4: that supply what these guys are going to attempt to
4:57
Speaker 4: buy also following falling in sympathy with the overall market.
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Speaker 4: And so there is some logical pieces to this. I'm
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Speaker 4: sure we're gonna get to the software side of things
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Speaker 4: where you mentioned all the tech adjacent stuff getting hammered.
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Speaker 4: But the simultaneously investors seem to be saying, hey, we
5:15
Speaker 4: kind of doubt whether or not this CAPEX is going
5:18
Speaker 4: to pay off, while also stating that all the companies
5:21
Speaker 4: that operate in sectors that you're trying to disrupt are
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Speaker 4: dead in the water and getting slaughtered right now. And
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Speaker 4: I have a tough time making sense of those two
5:30
Speaker 4: statements together, and they don't, Okay, hit me.
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Speaker 2: It's the commoditization of AI, which is bad if you're
5:39
Speaker 2: building a data center because it means, hey, if there
5:42
Speaker 2: are a bunch of different models that are effectively commoditized
5:45
Speaker 2: and not much difference between them, why do I need
5:48
Speaker 2: to pay you premium pricing for that?
5:51
Speaker 3: I don't.
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Speaker 2: I can hop between them and whatever they're like, there's
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Speaker 2: no stickiness. I can go and ask Caught a question
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Speaker 2: today and Chat GPT and Gemini a question, and I
6:03
Speaker 2: don't need to have had anything loaded into them before
6:06
Speaker 2: in order to get an answer. I'm not one of
6:09
Speaker 2: the people who's like talking to it trying to make
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Speaker 2: a friend. So like, I get if you've like you know,
6:12
Speaker 2: built a relationship with the thing and everything, Okay, Like
6:15
Speaker 2: that's that's different, but that's not what we're talking about
6:17
Speaker 2: for work. Like, no one pays chat GPT extra to
6:22
Speaker 2: be able to talk to it more, at least not
6:24
Speaker 2: many people do.
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Speaker 3: I think.
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Speaker 2: I think that when we look at it, it is.
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Speaker 2: The answer that's starting to come out of here is, hey,
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Speaker 2: we're not all going to be winners. The guys that
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Speaker 2: are building the models are going to be commoditized. And
6:39
Speaker 2: we see this with how frequently they're all rolling out
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Speaker 2: updates and competing. That's what commoditization looks like. The other
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Speaker 2: piece is, hey, the stuff that's going to be produced
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Speaker 2: by these models is going to be disruptive to the
6:56
Speaker 2: software stack as it currently exists.
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Speaker 4: And by the way, that software stack is maybe not
7:01
Speaker 4: what you initially think of, right, Like, we can all
7:04
Speaker 4: paint the picture of why a data aggregator that charges
7:08
Speaker 4: a whole bunch of money. If you ever heard of
7:09
Speaker 4: a Bloomberg terminal or Thompson Reuter's, you know these data aggregators.
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Speaker 4: Oh yeah, if chat you know Chat GPT can better
7:17
Speaker 4: synthesize that data customized to my business, I can see
7:20
Speaker 4: how that gets affected. But you had this week were
7:24
Speaker 4: travel companies Expedia getting hammered, salesforce business software, customer relationship
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Speaker 4: management software getting absolutely demolished this week, And that was
7:34
Speaker 4: the piece that I think was alarming to something.
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Speaker 3: Wow, it was another one.
7:38
Speaker 4: Right, No, like companies in seemingly unrelated industries that are
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Speaker 4: only loosely tied to the software piece of it getting
7:45
Speaker 4: absolutely demolished on this, I think, yeah, you're right dueling
7:50
Speaker 4: assumptions of hey, this is a commoditized business and the
7:52
Speaker 4: models themselves are going to get cheaper and easier to run.
7:55
Speaker 4: And by the way, they are also tremendously disruptive.
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Speaker 2: Well, and here's the other piece is that what's being
8:01
Speaker 2: priced in is that software commoditization as well. And there
8:07
Speaker 2: are two ways that this happens, one of which I
8:08
Speaker 2: think is more likely than the other. The one that
8:10
Speaker 2: I think is unlikely is let's say that I am
8:14
Speaker 2: Chuck big stretch, I know, and I have to do
8:19
Speaker 2: my taxes every year because I'm an American, and I
8:22
Speaker 2: have to do my taxes every year. Right now, I
8:24
Speaker 2: pay turbo tax I don't. I forget. I don't know
8:26
Speaker 2: exactly how much. It's a few hundred bucks a year. Yeah,
8:28
Speaker 2: whatever it ends up being. And I say, you know what,
8:32
Speaker 2: I'm sick of that. Instead, what I'm gonna do. I'm
8:34
Speaker 2: gonna go to claud Code and I'm gonna say, hey, coud,
8:38
Speaker 2: here is the IRS code for twenty twenty five. Build
8:41
Speaker 2: me an app that lets me file my taxes.
8:45
Speaker 3: Now.
8:45
Speaker 2: The reason I'm not actually gonna do that is because
8:47
Speaker 2: I have no way to check if it's actually doing
8:49
Speaker 2: it right, Like that's that's kind of a big one
8:52
Speaker 2: to be, like, hey, am I personally going to do
8:55
Speaker 2: this and risk you know, the IRS looking at my taxes?
8:59
Speaker 2: But because it was filed with you know, Chuck, you
9:02
Speaker 2: know tax Chuck dot Ai. Yeah, right, Like that's not
9:07
Speaker 2: what I feel is reasonable for me. Likewise, if you're
9:10
Speaker 2: a company that uses any you know, CRM service, Redtail Salesforce, HubSpot,
9:17
Speaker 2: whoever it might be, you're not likely going to have
9:21
Speaker 2: someone on your team is just like, hey, I'm gonna
9:23
Speaker 2: vibe code a new CRM.
9:25
Speaker 3: You might have someone that talented, but probably you don't.
9:28
Speaker 2: And it's a pretty big risk from a data security
9:30
Speaker 2: perspective to have that, like something completely untested that goes
9:34
Speaker 2: in there. So I do think, and there are some
9:36
Speaker 2: people that said this yesterday, Look, it's not that these
9:40
Speaker 2: companies are going to be replaced by just single people,
9:44
Speaker 2: you know, vibe coding solutions for themselves. What I do
9:47
Speaker 2: think is more likely is, let's say that you're one
9:50
Speaker 2: of the people that got laid off from any of
9:53
Speaker 2: these companies that have been laying people off. You're you're
9:55
Speaker 2: a coder in the tech space that's gotten.
9:57
Speaker 3: Laid off recently.
9:59
Speaker 2: What you might say is, hey, I can go and
10:04
Speaker 2: I can build something that does what TurboTax does, and
10:09
Speaker 2: I can do it cheaper because I can vibe code
10:11
Speaker 2: the whole thing, and I know what to look for
10:12
Speaker 2: to make it secure, and YadA, YadA, YadA, I.
10:15
Speaker 3: Can build that.
10:16
Speaker 2: And then because my, my, you know, my number of
10:19
Speaker 2: humans needed to build that, you know, into it might
10:22
Speaker 2: have you know, thousands of people working for it, but I.
10:24
Speaker 3: Only needed eight people in order to build it.
10:27
Speaker 2: Instead of needing to charge you, chuck, you know, X
10:30
Speaker 2: hundred dollars per year for you know, your tax filing,
10:34
Speaker 2: I can charge you fifty and I can completely eat
10:38
Speaker 2: into into its margins. And that's where I think the
10:41
Speaker 2: real threat is. It's not from everyone trying to vibe
10:44
Speaker 2: code their own solution. It's from a new generation of
10:48
Speaker 2: competitors that can build stuff more quickly and more cheaply
10:52
Speaker 2: than existing ones. And so what you end up with
10:55
Speaker 2: is not that into it necessarily goes away. But if
10:59
Speaker 2: their previous growth rate, like let's look it into it
11:01
Speaker 2: just as an example, just because they've gotten Bludgeon this
11:04
Speaker 2: week into its five year trailing five year revenue growth
11:08
Speaker 2: rate is nineteen percent, and they're trailing five year EPs
11:12
Speaker 2: growth rate is fourteen point six percent. If I make
11:16
Speaker 2: it so that they're only growing their revenue at five
11:18
Speaker 2: to ten percent and EPs at five to ten percent.
11:22
Speaker 2: That means that the whole stock does need to be
11:24
Speaker 2: rerated down in this way, not because they're going out
11:26
Speaker 2: of business, but just because their earnings are not gonna
11:29
Speaker 2: double every five years. They're gonna double every ten now.
11:33
Speaker 2: And I'm not gonna stick as much of a multiple
11:35
Speaker 2: on that either. And so instead of trading at you know,
11:39
Speaker 2: forty x forward earnings, you're gonna trade at twenty x,
11:43
Speaker 2: and your forward earnings projections are gonna be lower as well.
11:46
Speaker 2: And that's the rerating that's happening. It's not that these
11:48
Speaker 2: companies are gonna go out of business. It's just that
11:51
Speaker 2: the fat margins, when I look it into it right now,
11:54
Speaker 2: into it is sitting on twenty six percent margins. You
11:58
Speaker 2: think someone like someone who got laid off from one
12:00
Speaker 2: of these tech companies can't build a better mouse trap
12:02
Speaker 2: more cheaply with all these tools. That's what's being priced in.
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Speaker 2: It's the commoditization of software and models. But the winner,
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Speaker 2: in my opinion, it's the people who can actually build
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Speaker 2: the stuff to sell using the models.
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Speaker 3: That's my that's my speech.
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Speaker 4: Let's uh, we gotta take a break, but let's take
12:21
Speaker 4: a break. I think there's more to this. The tech
12:24
Speaker 4: sector as a whole, as you mentioned, has been just
12:26
Speaker 4: bludgeoned this week, and I want to dive a little
12:29
Speaker 4: bit deeper here. We've talked about the software companies, We've
12:31
Speaker 4: talked about the commoditization, but what does it mean for
12:34
Speaker 4: the industry, the tremendous growth of data centers and all
12:37
Speaker 4: these different pieces to it, if this is actually a
12:40
Speaker 4: new normal shaping markets.
12:42
Speaker 3: Let's take a quick break. We'll be right back.
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13:40
Speaker 2: Mike, what else do we want to talk about with
13:43
Speaker 2: tech and software that is just getting popped on the
13:48
Speaker 2: head by a little bunny foofool all year.
13:50
Speaker 4: I guess my question is, so, let's assume that we
13:54
Speaker 4: buy this theory that, hey, the models themselves, which again
13:59
Speaker 4: we're speaking in AI speak these days, So the models
14:02
Speaker 4: being Chat GPT, the model being Google, Gemini or Claude
14:06
Speaker 4: from Anthropic, Let's assume for a moment that those just
14:09
Speaker 4: aren't They're just not that important, right, which what the
14:13
Speaker 4: difference is between them don't seem all that important, and
14:16
Speaker 4: it's becoming easier to create those. Is that is that
14:19
Speaker 4: the thesis that's dominating markets right now in your mind?
14:22
Speaker 3: I think so.
14:23
Speaker 2: I think it's the commoditization and also the fact that
14:26
Speaker 2: it's happening with the backdrop of increased capex, which means
14:30
Speaker 2: markets I think again, no one actually knows what that's
14:34
Speaker 2: been going on, like, none of us know for certain,
14:36
Speaker 2: But my theory is, hey, they're becoming commoditized the very
14:40
Speaker 2: same time that this capex is ramping through the roof,
14:43
Speaker 2: and so market participants are like, you're gonna do what
14:48
Speaker 2: now when this is happening. And that's that's kind of
14:52
Speaker 2: my read on it.
14:53
Speaker 4: Which makes you know, things like the IPO of chat
14:55
Speaker 4: gpt are of open Ai.
14:58
Speaker 1: Uh, the the.
14:59
Speaker 4: IPO of space x which is now tied to xai.
15:04
Speaker 4: Very interesting given that property to it, Yeah, right, very
15:08
Speaker 4: very interesting. It does then call into question, you know,
15:12
Speaker 4: any of those software companies, specifically those that are charging
15:16
Speaker 4: consumers directly or businesses directly. I see that as a
15:20
Speaker 4: very interesting question that runs from Microsoft to Bloomberg to
15:24
Speaker 4: Salesforce to into it. I think it might be a
15:27
Speaker 4: little bit of a different story if, like the Expedia
15:31
Speaker 4: one to me is interesting, right, nobody directly pays Expedia
15:34
Speaker 4: for anything. They get commissions from hotels and airlines. Now,
15:39
Speaker 4: if you know X y Z coder is able to
15:41
Speaker 4: develop a new Expedia at a cheaper cost and therefore
15:44
Speaker 4: lower the fees to those platforms, then maybe there's something there.
15:49
Speaker 4: The other area I'm trying to think through, like all
15:52
Speaker 4: the major areas in tech, social media is another big one.
15:56
Speaker 4: I don't know how disruptive any of this is to
15:58
Speaker 4: Google's dominance on you Tube or metas dominance with Facebook
16:02
Speaker 4: and Instagram.
16:02
Speaker 3: Can you draw a line there? No, I can't.
16:08
Speaker 2: I think some of what you're seeing on those Quite honestly,
16:12
Speaker 2: in the last couple of weeks, you've seen a number
16:15
Speaker 2: of foreign governments start to impose regulations on the age
16:18
Speaker 2: of social media users, and I think that you might
16:22
Speaker 2: be seeing a little bit of that impact there. It's
16:24
Speaker 2: on the margins because, like, quite honestly, I can't remember
16:28
Speaker 2: which ones have done it to this point. I think
16:30
Speaker 2: Australia was one of them.
16:33
Speaker 3: I can't remember.
16:33
Speaker 2: There's been like three or four that have done this
16:35
Speaker 2: now with I think sixteen is minimum age for social
16:39
Speaker 2: media use, and so I think some of this might be, hey,
16:43
Speaker 2: like a response to regulatory pressure that's building around social
16:47
Speaker 2: media as well.
16:49
Speaker 4: One thing though, that's dominated all the talk has been
16:52
Speaker 4: data centers, energy, memory, semiconductors, and nothing about this changing
16:59
Speaker 4: your shift narrative to me, indicates that the pace of.
17:02
Speaker 3: Buildout is going to slow.
17:03
Speaker 4: Now, maybe you know, maybe investors pressure Google metage so
17:06
Speaker 4: much that they have to eventually do so. But for
17:10
Speaker 4: the time being, it seems to me like all of
17:12
Speaker 4: these models, which may be commoditized, still need the compute
17:16
Speaker 4: to be able to run.
17:18
Speaker 2: To a point. But remember, CEOs are corporate lemmings. They
17:24
Speaker 2: look around and see what everyone else is doing, and
17:26
Speaker 2: they say, oh, we should do that if it's been
17:28
Speaker 2: either working or not. The best example that I have
17:31
Speaker 2: of this is in twenty twenty one, there was a
17:35
Speaker 2: little car company by the name of.
17:36
Speaker 3: Tesla, and the car company made evs, and Tesla.
17:39
Speaker 2: Stock went through the roof, and everyone in their grandmother
17:42
Speaker 2: was like, my goodness, we need our stock to do that.
17:45
Speaker 2: Let's start building evs. You had companies that were committing
17:47
Speaker 2: to like have no more internal combustion engine vehicles by
17:50
Speaker 2: twenty thirty, and like three years later after it didn't
17:56
Speaker 2: do anything for their stocks, and they're spending a bunch
17:58
Speaker 2: of money, and they're like, oh, gee, the demand that
17:59
Speaker 2: we thought was gonna be there isn't there. They're like, hey,
18:03
Speaker 2: are bad, We're gonna not actually do that because it's
18:07
Speaker 2: it's bad. This is the same thing in that right now,
18:11
Speaker 2: what you're seeing is the first quarter or two of Hey,
18:15
Speaker 2: we raised our CAPEX guidance, and you didn't boost our stock.
18:17
Speaker 3: What gives?
18:18
Speaker 2: At some point, what's going to happen? Because someone always
18:22
Speaker 2: has to be the first through the wall, whether it's
18:24
Speaker 2: Sun Debracai, whether it's sat niy Nadella, whether it is
18:27
Speaker 2: Andy Jassey, whether it's Mark Zuckerberg.
18:30
Speaker 3: It's probably not gonna be Zuck because he.
18:32
Speaker 2: Just loves spending money, like the guy like lives to
18:35
Speaker 2: spend money on things that don't return any value. One
18:40
Speaker 2: of them is gonna say, hey, you know what, let's
18:43
Speaker 2: see what happens if we guide our capex for the
18:46
Speaker 2: next twelve months and instead of you know, a forty
18:49
Speaker 2: percent increase, let's do a five percent decrease in our
18:52
Speaker 2: CAPEX projections, and the street's.
18:56
Speaker 3: Gonna reward it.
18:57
Speaker 2: The stock's gonna pop like eight percent on the news,
19:00
Speaker 2: and every other big CEO is going to say, oh,
19:05
Speaker 2: that's what we're doing now, and that's how the cycle ends,
19:08
Speaker 2: like it's how it always happens.
19:10
Speaker 3: Now.
19:11
Speaker 2: I can't tell you when that's going to happen. I
19:12
Speaker 2: can't tell you who's gonna be first, because I don't know.
19:14
Speaker 2: I'm not in their heads. But this is how it
19:17
Speaker 2: goes because they all follow each other like, it's just
19:21
Speaker 2: how it works. No one wants to be out on
19:22
Speaker 2: the limb, you know, for too long by themselves. Corporate
19:26
Speaker 2: America is very risk averse generally. Let's take a quick break.
19:30
Speaker 2: When we come back, we've got Wall Street Watch, and
19:32
Speaker 2: then let's talk labor market after this.
19:39
Speaker 1: Like us on Facebook and follow us on Twitter at
19:42
Speaker 1: TFE show. Breaking business news is always first right here
19:46
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:51
Speaker 1: Street Watch. A complete look at what's moving market so
19:54
Speaker 1: far today right here on the Financial Exchange Radio Network.
20:03
Speaker 5: Well, the tech selloff has extended for a third consecutive
20:07
Speaker 5: day as investors continue to show uneasiness around tech stocks.
20:11
Speaker 5: Wall Street's also reacting to slightly higher than expected jobless
20:15
Speaker 5: claims data and software than expected job openings data for
20:19
Speaker 5: the month of December. Right now, the Dow is down
20:22
Speaker 5: one to in a third percent, or six hundred and
20:25
Speaker 5: forty nine points lower. SMP five hundred selling off one
20:28
Speaker 5: and a half percent, Nasdaq, the tech heavy Nasdaq selling
20:33
Speaker 5: off nearly two percent today just below that, down four
20:37
Speaker 5: hundred and thirty two points. RUSTED two thousands, down over
20:39
Speaker 5: eight tenths of a percent. Tenure treas reeled down six
20:43
Speaker 5: basis points at four point two to one percent, and
20:46
Speaker 5: crude oil down three percent today trading at sixty three dollars.
20:51
Speaker 5: Google pair of company Alphabet reported a jump in quarterly
20:54
Speaker 5: profit where sales rose eighteen percent to nearly one hundred
20:58
Speaker 5: and fourteen billion dollars in the fourth order. The tech
21:01
Speaker 5: giant also said it plans to roughly double capital spending
21:04
Speaker 5: this year to develop AI models and build data centers.
21:08
Speaker 5: Alphabet stock falling five percent. Meanwhile, Qualcom shares a plunging
21:12
Speaker 5: nearly ten percent after the semiconductor company provided disappointing earnings guidance,
21:18
Speaker 5: where blamed an industry wide shortage of memory supply and
21:21
Speaker 5: price increases. Stay Lauder lifted its adjusted earnings outlook for
21:27
Speaker 5: the year. However, the beauty company said it still expects
21:29
Speaker 5: a roughly one hundred billion dollars hit from tariffs. Stay
21:33
Speaker 5: Latter shares are tanking twenty one percent. According to Bloomberg,
21:38
Speaker 5: Rio Tinto and Glencore appoys to walk away from a merger.
21:42
Speaker 5: The mining companies are likely to announce the decision today.
21:45
Speaker 5: Rio shares a flat, while glen Core stock is down
21:48
Speaker 5: nearly two percent and more tech earnings after the bell today,
21:52
Speaker 5: where Amazon will report their anticipated fourth quarter results. I'm
21:58
Speaker 5: Tucker Silva and that is Wall Street Wall Mike.
22:01
Speaker 2: I have a couple of last tech thoughts I'd like
22:03
Speaker 2: to clean up before we move on to some bad
22:08
Speaker 2: discussion about the labor market.
22:10
Speaker 3: Sounds good. First.
22:12
Speaker 2: One other thing that's been going on over the last
22:14
Speaker 2: week or so with software getting hit is financials have
22:18
Speaker 2: been getting hit as well. And specifically, if you look
22:23
Speaker 2: at the part of the financial sector that's been getting hit,
22:29
Speaker 2: it's not JP Morgan, it's not Bank of America, it's
22:31
Speaker 2: not your big money center banks.
22:33
Speaker 3: It's not Berkshire Hathaway.
22:35
Speaker 2: It's Blackstone, it's KKR, it's black Rock, it is Apollo Global.
22:43
Speaker 2: Those are the ones that are getting hit, all of
22:46
Speaker 2: your big asset managers that are heavy in the private
22:49
Speaker 2: equity private credit space, and the theory behind this as
22:55
Speaker 2: it goes, and again I think I believe this is
22:59
Speaker 2: a lot of the private It's not a private credit
23:01
Speaker 2: issue here, it's more of a private equity one, which
23:02
Speaker 2: is a lot of the businesses that have been bought
23:06
Speaker 2: up by those companies in the private equity space are
23:09
Speaker 2: technology and software businesses. Because you say, great, I can
23:13
Speaker 2: you know, clean this up, strip it down, improve the margins,
23:17
Speaker 2: and sell it off. You know seven years later. That's
23:19
Speaker 2: like the whole premise behind private equity. If you've bought
23:22
Speaker 2: a software business and now software is under threat, you
23:26
Speaker 2: now have a company that you're holding where you're like, oh,
23:28
Speaker 2: who's gonna buy this from me? And what's my exit?
23:31
Speaker 2: And so that I think is what you're seeing on
23:34
Speaker 2: that side of things there. So I think that's what's
23:37
Speaker 2: going on with those big asset managers in the financial space.
23:41
Speaker 2: The other thing that I woke up to that I
23:44
Speaker 2: found remarkable is that on a total return basis capital
23:49
Speaker 2: appreciation plus dividends, do you know that Microsoft is now
23:52
Speaker 2: trailing the S and P five hundred over the last
23:54
Speaker 2: five years?
23:57
Speaker 3: Really? Yeah? Wow, didn't expect to see that.
24:02
Speaker 2: No, So just something that that caught my eye where
24:05
Speaker 2: I said, uh, that's interesting and noteworthy and file that
24:10
Speaker 2: away for future discussion. Let's talk about the labor market
24:14
Speaker 2: and bad labor takes. It's that time of the month
24:17
Speaker 2: where the Challenger, Gray and Christmas firm reports they're a
24:21
Speaker 2: number of layoffs announced by US employees. And I'll quote
24:25
Speaker 2: from CNBC US employers announced one hundred and eighty four
24:31
Speaker 2: hundred and thirty five layoffs for the month, up one
24:33
Speaker 2: hundred and eighteen percent from the same period a year
24:36
Speaker 2: ago and up two two hundred and five percent from
24:39
Speaker 2: December twenty twenty five. The total marked the highest for
24:43
Speaker 2: any January since two thousand and nine, when the economy
24:46
Speaker 2: was in the final months of its steepest downturn since
24:49
Speaker 2: the Great Depression. So like, naturally the world's ending, Yes, okay,
24:53
Speaker 2: but here's the actual deal. We get the jolt support
24:55
Speaker 2: every month. We got one this morning.
24:57
Speaker 3: Too, and catastrophic. Here's what it showed.
25:01
Speaker 2: It showed that for the month of December there were
25:04
Speaker 2: one point seven to six to two million layoffs that
25:07
Speaker 2: happened because the adult support.
25:09
Speaker 3: It doesn't just look at like announcements. It's no.
25:11
Speaker 2: Like again, it's still a survey. But it's okay, here's
25:13
Speaker 2: how many there were last December. By the way, there
25:16
Speaker 2: were one point sixty sixty nine million, So it is saying, yeah,
25:19
Speaker 2: there was an increase from about one point sixty five
25:22
Speaker 2: to one point seventy five million. Was there a doubling, No,
25:25
Speaker 2: layoffs did not double, because that's not how any of
25:28
Speaker 2: this works. I beg of anyone out there. If you
25:32
Speaker 2: hear the words Challenger Gray and Christmas, or Challenger layoffs
25:36
Speaker 2: or Challenger job cuts, please please please stop listening immediately.
25:42
Speaker 2: It's not that their report is untrue. It's just that
25:45
Speaker 2: it's not looking at the total picture and as a result,
25:49
Speaker 2: can have significantly outsized moves relative to what's actually happening
25:53
Speaker 2: in the labor market. I'm not saying all is well
25:56
Speaker 2: in the labor market. There's still a lot of questions
25:58
Speaker 2: that need to be answered. But the Challenger report is
26:01
Speaker 2: just pure bait for people trying to say, oh, look
26:04
Speaker 2: at how bad things are, and that's not what we
26:07
Speaker 2: do here.
26:07
Speaker 4: The only people it's relevant to are those who are
26:09
Speaker 4: working for companies that have announced the layoffs. And if
26:12
Speaker 4: you are only hearing about it through Challenger Gray and
26:16
Speaker 4: Christmas months later, then quite honestly, you might be deserved
26:20
Speaker 4: to be laid off.
26:22
Speaker 3: Well, no, you haven't been laid off.
26:23
Speaker 2: True, you haven't been laid off. You're hearing about it
26:26
Speaker 2: months after the announcement. Like, no, you're still there.
26:30
Speaker 4: So let's talk about the data that actually does matter.
26:32
Speaker 4: Because there were two releases this morning. Neither of which
26:34
Speaker 4: were great. So let's talk about the Joltz report. The
26:38
Speaker 4: piece that you mentioned about layoffs interesting to me. The
26:41
Speaker 4: continuing decline of job openings is also pretty interesting to me.
26:45
Speaker 4: So the number of job openings has been trending down
26:47
Speaker 4: where it now hits six point five million in the
26:50
Speaker 4: month of December. One statistic that we bring up all
26:52
Speaker 4: the time regarding this survey is that ratio of unemployed
26:56
Speaker 4: people two jobs open, and back in April of two
27:00
Speaker 4: twenty two, we were highlighting this there were two jobs
27:03
Speaker 4: that you could apply to for every person that was
27:05
Speaker 4: actually looking for work, arguably led to a bunch of inflation.
27:09
Speaker 4: As of this reading now there are zero point eighty
27:13
Speaker 4: five jobs for every person looking for work. That is
27:17
Speaker 4: a level of labor market tightness that we haven't really
27:19
Speaker 4: seen since the mid twenty tens. Twenty seventeen is around
27:23
Speaker 4: the timeframe you need to return to to see that
27:27
Speaker 4: degree of slack in the labor market by this one measure,
27:30
Speaker 4: and I think that's worth noting. It's not new, It's
27:33
Speaker 4: been trending this way for quite some time, but the
27:36
Speaker 4: trend has been towards a more slack in the labor
27:39
Speaker 4: market and I think you're seeing that in you know,
27:42
Speaker 4: new applications for you know, the word of college graduates
27:46
Speaker 4: and difficulty finding work, as well as all sorts of
27:49
Speaker 4: things on the hiring side, just you know, employers generally
27:52
Speaker 4: finding it easier to find employees.
27:54
Speaker 2: I'm gonna throw a little bit of cold water on
27:56
Speaker 2: this ke just because this number was a big miss
27:59
Speaker 2: to the downside on the openings. Yeah, and there's some
28:01
Speaker 2: other stuff that looks a little bit funky in here.
28:04
Speaker 2: And the reason that I also do this is, indeed,
28:07
Speaker 2: their hiring lab tracks job openings that are out there
28:11
Speaker 2: on indeed and generally not every month, but the Indeed
28:16
Speaker 2: numbers and the a JOLTS numbers tend to correlate pretty well.
28:21
Speaker 2: In this case, indeed has basically been flat month over
28:24
Speaker 2: month as far as job openings, and this was like
28:27
Speaker 2: a nine percent decline month over month. Something doesn't like
28:32
Speaker 2: pass the sniff test on this, and so I'm gonna
28:36
Speaker 2: kind of say, hey, for whatever reason, you know, whether
28:40
Speaker 2: it was government shutdown or something else, something in this
28:43
Speaker 2: JOLT support doesn't quite feel right relative to the other
28:48
Speaker 2: data that we've been getting. And so I'm just gonna
28:52
Speaker 2: need to see a couple more of these to see
28:54
Speaker 2: if this is continued or if this is an aberration,
28:57
Speaker 2: because it doesn't quite click with what we've been seeing
29:00
Speaker 2: elsewhere in the labor market, which is not like everything
29:04
Speaker 2: like going gangbusters, but no meaningful shift in the trend
29:09
Speaker 2: from before, whereas this Joltz report is a meaningful shift,
29:12
Speaker 2: suggests like a meaningful downshift in hiring intentions, which doesn't
29:16
Speaker 2: really click with everything else that's been going on in labor,
29:20
Speaker 2: which is just kind of holding steady, slow degradation.
29:24
Speaker 3: This feels a little unusual to me, fair.
29:26
Speaker 2: So I'll I'll take it and I'll put it aside,
29:30
Speaker 2: and a month from now we'll say, hey, is there
29:33
Speaker 2: actually any meat on this bone? Or was this just
29:36
Speaker 2: you know, one weird data collection in December that you know,
29:40
Speaker 2: something happened.
29:41
Speaker 3: And we'll we'll we'll see you later. Let's take a
29:44
Speaker 3: quick break.
29:45
Speaker 2: When we come back, we're going to talk housing affordability
29:47
Speaker 2: right after this.
29:49
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30:18
Speaker 3: All right, we got some some housing market chatter here.
30:27
Speaker 2: Let's talk a little bit about this piece from Bloomberg Opinions.
30:30
Speaker 2: How the affordable housing starts in the labor markets.
30:35
Speaker 3: How does that work, Michael?
30:36
Speaker 4: It doesn't, Chuck, You don't improve housing affordability by giving
30:44
Speaker 4: by redistributing income.
30:46
Speaker 3: Like, everyone gets this wrong.
30:48
Speaker 2: Everyone's like, Hey, if we give people more money, it'll
30:50
Speaker 2: make housing more affordable.
30:52
Speaker 3: No.
30:52
Speaker 2: If if there were three houses on the planet and
30:56
Speaker 2: we gave and everyone started with one hundred dollars, then
30:59
Speaker 2: those three houses would go for one hundred dollars. If
31:02
Speaker 2: we said, oh, well that's that's too expensive. Let's give
31:04
Speaker 2: everyone fifty dollars to cover half of it, the houses
31:07
Speaker 2: would go for one hundred and fifty dollars. This is
31:09
Speaker 2: basic math. And everyone's just like, Oh, give people the
31:13
Speaker 2: money and that'll make housing more affordable. No, if you
31:16
Speaker 2: don't build more houses, it'll just make it more expensive.
31:19
Speaker 4: All right, So let's let's let's make this simpler. Let's
31:21
Speaker 4: say we're playing musical chairs. Ooh good, Okay, ten kids
31:25
Speaker 4: is nine chairs.
31:26
Speaker 3: Love it.
31:26
Speaker 4: And Jenny has been She's a little bit wealthier, she's
31:32
Speaker 4: been training, she's got, you know, really good sprinting shoes,
31:36
Speaker 4: whereas Johnny came in his flip flops because that's all
31:39
Speaker 4: he's got. If there's nine chairs and ten students out
31:42
Speaker 4: there and now you give them all brand new Nikes,
31:46
Speaker 4: you might create.
31:47
Speaker 3: A faster game of musical chairs, but there's still gonna
31:49
Speaker 3: be a kid without a chair.
31:51
Speaker 4: He doesn't fix the problem to give everybody or redistribute income.
31:56
Speaker 4: I think the point that she is attempting the author
31:58
Speaker 4: is attempting to make here is that if incomes increased,
32:01
Speaker 4: then more people will be able to afford homes, and
32:03
Speaker 4: therefore someday home builders will build more of them. But
32:06
Speaker 4: that's just a roundabout way of attempting to fix the
32:10
Speaker 4: problem with no guarantee that the problem actually gets fixed,
32:12
Speaker 4: Because if I'm the home builder, I'll gladly take the
32:14
Speaker 4: fatter profit margin rather than building more homes.
32:17
Speaker 3: Which is what they're doing right now.
32:18
Speaker 4: So if you want to make houses more affordable, get
32:23
Speaker 4: the conditions under which you can build more houses, and
32:28
Speaker 4: I will recognize that we are seeing very small steps
32:31
Speaker 4: towards this in some parts of the country. I like
32:35
Speaker 4: the small moves that you've seen here and there to
32:38
Speaker 4: allow for ADU accessory dewelling units in certain parts. I'm
32:44
Speaker 4: encouraged here in the town that we're broadcasting from and
32:47
Speaker 4: need them that they are building one hundred and eighty
32:50
Speaker 4: nine unit apartment building that used to be a well
32:54
Speaker 4: closed senior living facility. The MBTA zoning actors is I
32:58
Speaker 4: think on the margins starting to improve things a little bit,
33:02
Speaker 4: but we keep coming up with these dumb solutions like
33:05
Speaker 4: discounting mortgage rates or giving a bear tax deduction, And
33:09
Speaker 4: I just want to make really clear to everybody the
33:12
Speaker 4: only thing that's going to do is make homes more expensive.
33:17
Speaker 4: Oh man, we talk about this every day and it
33:19
Speaker 4: just does not seem to change anything.
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34:32
Speaker 2: So continue to talk about the housing market piece of
34:35
Speaker 2: New York Times. Voters say housing prices are too high.
34:38
Speaker 2: Trump wants them higher. And this gets at a question
34:42
Speaker 2: that he got on housing affordability yesterday, and his quote was,
34:47
Speaker 2: I don't want to drive housing prices down. I want
34:49
Speaker 2: to drive housing prices up for people that own their homes.
34:52
Speaker 4: This is the exact conundrum that every politician yes refuses
34:57
Speaker 4: to acknowledge, which is that two cannot be possible at
35:00
Speaker 4: the same time.
35:01
Speaker 2: No, you can't improve housing affordability at the same time
35:05
Speaker 2: home prices are rising.
35:06
Speaker 4: Generally, I get why politicians are scared of this issue
35:10
Speaker 4: because you cannot have both. You cannot improve housing affordability
35:14
Speaker 4: and also not hurt some people in terms of their
35:16
Speaker 4: wealth well.
35:17
Speaker 2: And also, if you're talking about local politicians, the tax
35:20
Speaker 2: base is also based on home prices to go up,
35:23
Speaker 2: and so they don't want to see home prices go
35:25
Speaker 2: down because the revenue in most towns comes from property
35:29
Speaker 2: taxes with the value hopefully going up over time. So
35:33
Speaker 2: it's kind of a problem that we have here in
35:35
Speaker 2: that we don't want home prices to go down, but
35:39
Speaker 2: we want them to go cheaper. I don't know how
35:44
Speaker 2: we square this circle, because like, this is not a
35:47
Speaker 2: President Trump issue, This isn't every politician issue like that.
35:52
Speaker 2: Find me one politician who legitimately like goes out and
35:55
Speaker 2: is like, yep, I'm cool with home prices falling in
35:58
Speaker 2: my district, my counting, my city, my state.
36:01
Speaker 3: You won't find them.
36:03
Speaker 2: They'll all talk about we want to improve housing affordability,
36:06
Speaker 2: but none of them say that they're willing to let
36:08
Speaker 2: it happen with home prices falling. And the problem is
36:12
Speaker 2: that the place is where affordability actually improves, it's.
36:16
Speaker 3: Where home prices fall. Yeah, like that's that's the deal.
36:22
Speaker 2: If you look at what's going on in the Florida
36:24
Speaker 2: housing market right now, activity is starting to pick up.
36:28
Speaker 2: New listings are picking up. They're being scooped up more
36:31
Speaker 2: quickly than last year. So net listings like out there
36:34
Speaker 2: are actually down a little bit year over year now.
36:37
Speaker 2: But it's because in Fort Myers home prices fell fifteen
36:41
Speaker 2: sixteen percent and now people are looking at them going, oh,
36:44
Speaker 2: this isn't as bad as I thought it was gonna be.
36:47
Speaker 2: In Austin, Texas, you still have rising inventories because there
36:51
Speaker 2: was just so much in the way of you know,
36:53
Speaker 2: overbuying from a price perspective there, But prices are now
36:57
Speaker 2: down about twenty percent from the peak, and you're starting
36:59
Speaker 2: to see signs that you may start to see a
37:02
Speaker 2: bottom there because people are saying, hey, this isn't as
37:04
Speaker 2: expensive as I thought it would be. And it's because
37:08
Speaker 2: those areas built a ton and affordability improved through prices
37:13
Speaker 2: falling a lot. I know that's not what everyone wants
37:18
Speaker 2: to hear, but that's why those areas are now set
37:21
Speaker 2: to be ready to grow their housing markets in a
37:24
Speaker 2: creative fashion for the next couple of years, whereas other
37:27
Speaker 2: parts of the country are not there yet. If you
37:30
Speaker 2: want to improve housing affordability, it has to be through
37:34
Speaker 2: falling home prices, and that can come in different forms.
37:38
Speaker 2: By the way it can come through, hey, we're you know,
37:42
Speaker 2: reducing the permitting cost and time spent in that process,
37:46
Speaker 2: and so builders can build more because their margins can
37:49
Speaker 2: be maintained like that. There are ways to do this,
37:52
Speaker 2: we just don't really want it because hey, give people
37:54
Speaker 2: money to buy houses.
37:56
Speaker 4: Yeah, And I can tell you from a living in
37:59
Speaker 4: a community that has voted down this stuff. People don't
38:02
Speaker 4: want the idea of following home prices like they're just
38:05
Speaker 4: plain and simple. They don't like the traffic, they don't
38:07
Speaker 4: like the other things that come with it, but they
38:09
Speaker 4: don't want to see their home prices fall.
38:11
Speaker 3: Let's take a quick break.
38:12
Speaker 2: When we come back, we got our two coming up
38:14
Speaker 2: in just a little bit.