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Why America can't shake off inflation · The Financial Exchange Show

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  Speaker 1: Face is the Financial Exchange with Paul Lane and Mark Vandetti.
• 1:10
  Speaker 2: Kicking off the second hour the financial exchange here. Markets
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  Speaker 2: remain very flat today, the S and P five hundred
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  Speaker 2: off two points or point zero three percent, the Dow
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  Speaker 2: Jones up nine points or point zero two percent. Really
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  Speaker 2: markets not moving much at all. As we look forward
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  Speaker 2: to this week, we will get a speech from Jerome
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  Speaker 2: Powell out in Jackson Hole at the fed's annual symposium.
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  Speaker 2: We'll get some major retailers reporting earnings this week, Home Depot, Low's, Target,
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  Speaker 2: and Walmart, so we'll be trying to see any sort
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  Speaker 2: of tariff impact or just see how US consumers are
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  Speaker 2: faring as a whole as we digest those earnings announcements
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  Speaker 2: here and then on the Federal Reserve front, we'll also
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  Speaker 2: get the release of the FED meeting minutes on Wednesday
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  Speaker 2: at two o'clock, which will break down basically what they
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  Speaker 2: discussed in their end of July meeting. We'll start the
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  Speaker 2: second hour of the show with a little bit of
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  Speaker 2: chatter on inflation and the FED. There's a piece in
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  Speaker 2: the Economists here that if you look at just where
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  Speaker 2: countries were back in twenty twenty and sort of the
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  Speaker 2: inflation that we experienced in twenty twenty two. Across the globe,
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  Speaker 2: there are mostly American speed or English speaking countries that
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  Speaker 2: have fared the worst in terms of their impact from
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  Speaker 2: inflation through the end of twenty July twenty twenty five. Here,
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  Speaker 2: And it's an interesting point that we find ourselves in Mark,
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  Speaker 2: where these levels that we saw of inflation in twenty
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  Speaker 2: twenty two were certainly well off the highs that we
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  Speaker 2: saw there, but the impact is still being felt across
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  Speaker 2: all these countries.
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  Speaker 3: Yeah, you saw the same thing in the nineteen seventies.
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  Speaker 3: All the Western democracies experienced elevated inflation, not all the
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  Speaker 3: Western democracies, and by that I mean more or less
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  Speaker 3: US Germany. I'll put Japan in there, though they're technically
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  Speaker 3: non Western. The UK, France, Italy, Spain, and others. Inflation
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  Speaker 3: rose in the early nineteen seventies, Inflation peaked some time
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  Speaker 3: in the mid for some late for others nineteen seventies,
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  Speaker 3: and it came down at different rates throughout the nineteen eighties.
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  Speaker 3: Why is that, If inflation is a function of monetary
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  Speaker 3: policy in the long run, why are the trends so similar.
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  Speaker 3: It's really striking when you look at these various countries
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  Speaker 3: inflation series plotted on the same chart, and the answer is, well,
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  Speaker 3: common factors influenced some of it, the oil price spikes. Also,
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  Speaker 3: monetary policies were similar in some developed countries in the
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  Speaker 3: nineteen seventies and at the beginning of the COVID crisis,
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  Speaker 3: but they didn't all, say, stimulate or equivalently accommodate shocks
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  Speaker 3: to the same degree US Germans in the nineteen seventies.
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  Speaker 3: Germany was in two abs then were perhaps because of
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  Speaker 3: Germany's history with hyperinflation in the early nineteen twenties, very
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  Speaker 3: sensitive to the potential for accelerating inflation to quickly get
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  Speaker 3: out of hand. So you had much lower inflation in
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  Speaker 3: the seventies, elevated relative to the sixties, but lower in
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  Speaker 3: West Germany than elsewhere. Japan also didn't have as much
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  Speaker 3: of a problem for particular reasons. I guess My point
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  Speaker 3: is there are always common factors. These factors are global,
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  Speaker 3: and the factors could be the US exporting inflation through
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  Speaker 3: excess demand, over stimulating. We pass some of that excess
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  Speaker 3: demand abroad through trade flows, and it results in inflation elsewhere.
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  Speaker 3: Very hard to disentangle particular factors from global factors. And
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  Speaker 3: to get a sense for where things emanated from. It's complicated,
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  Speaker 3: as you can probably tell, but it is interesting to
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  Speaker 3: look at commonalities and how countries responded, and how the
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  Speaker 3: more successful countries got inflation under control more quickly and
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  Speaker 3: then get a sense for it. Was it because of
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  Speaker 3: better policy or because of factors specific for example to
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  Speaker 3: the EU that allowed them to experience uh, a quicker
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  Speaker 3: disinflation than than we experienced. It wasn't that marked, but
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  Speaker 3: interesting nevertheless to look at these uh, these these these comparisons.
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  Speaker 2: UH. The FED Reserve, like I mentioned, they have their
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  Speaker 2: annual symposium this week. You wanted to drop some sort
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  Speaker 2: of commentary fall up on the FED or have we
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  Speaker 2: hit most of the high points? Really the focus will
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  Speaker 2: be just any sort of commentary that they're the labor front.
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  Speaker 3: Keep in mind, they don't know any more than we do.
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  Speaker 3: They've got better judgment because they are students of the
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  Speaker 3: inflation process, but they're dealing with imperfect real time information,
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  Speaker 3: information that doesn't actually tell you month to month where
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  Speaker 3: the trend in inflation is, which is what they're most
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  Speaker 3: interested in, and they're using that imperfect information to make
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  Speaker 3: guesses about the future. So think about that. You're compounding
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  Speaker 3: the uncertainty about the present with the necessity of guessing
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  Speaker 3: about the future. Because FED policy, their control of the
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  Speaker 3: money supply and its effects on the real economy, works
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  Speaker 3: with a lag. This is what makes their role, as
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  Speaker 3: to use the analogy again, economic thermostat for the economy,
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  Speaker 3: that's what makes their role. So it's as if your thermostat,
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  Speaker 3: and some thermostats are like this. They allow you to
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  Speaker 3: over they allow you to correct. Right, if your thermostat
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  Speaker 3: is consistently two degrees off, you can recalibrate, You can
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  Speaker 3: effectively set a correction. The FED has to similarly adjust
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  Speaker 3: its own best estimates of where the economy is based
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  Speaker 3: on the uncertainty surrounding the true state of the economy.
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  Speaker 3: My point is that gets a little convoluted. But my
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  Speaker 3: point is they have an incredibly hard job. Meddling with
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  Speaker 3: their job. Meddling interfering rather with their process by politicians
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  Speaker 3: is just not productive. But that's the world we live
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  Speaker 3: in right now.
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  Speaker 2: Retail sales were up in July. That was the second
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  Speaker 2: straight monthly gain, as shoppers were feeling at least upbeat
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  Speaker 2: enough to keep on spending. The CEO of Amazon Andy
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  Speaker 2: Jasse last month said we haven't yet and I quote,
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  Speaker 2: we haven't yet seen diminishing demand nor prices meaningfully appreciating.
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  Speaker 2: As we look ahead to earnings this week, We've got Walmart,
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  Speaker 2: We've got Home Depot, We've got Lows and Target, and
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  Speaker 2: the reason that we'll focus on them is just to
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  Speaker 2: try and get a state health of the US consumer.
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  Speaker 2: To date, we have not seen a tremendous amount of
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  Speaker 2: terror related costs passing through to end consumers. From these
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  Speaker 2: specific retailers out there, Any information that they're able to
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  Speaker 2: give us on trends on pricing or impacts from terrorists
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  Speaker 2: is something that is going to be of tremendous focus.
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  Speaker 2: There's some arguments out there that many of these larger
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  Speaker 2: retailers front loaded a tremendous amount of imports in Q
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  Speaker 2: one and burn through that excess inventory, and as a result,
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  Speaker 2: in Q three and Q four we perhaps may see
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  Speaker 2: prices of our consumer goods go up at Walmart or
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  Speaker 2: Target or wherever you shop. From a large retailer perspective,
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  Speaker 2: there's other arguments out there that the impact is going
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  Speaker 2: to be more modest, that we're not going to see
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  Speaker 2: tremendous upticks on the pricing side of things here, so
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  Speaker 2: that really is going to be important to parse through
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  Speaker 2: this week. Really, if you look at some of the
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  Speaker 2: major ones out there, Walmart does import this pretty significant
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  Speaker 2: sum of its items, but also has some domestic presence
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  Speaker 2: too on the manufacturing side of things. So be interesting
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  Speaker 2: to see what we get the major retailers this week.
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  Speaker 3: Yeah, I know, the New York Fed look not at
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  Speaker 3: retailers but at manufacturers and service businesses, so they might
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  Speaker 3: capture some retailer experience in this. Just a couple of
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  Speaker 3: months ago and they found that ninety percent of men
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  Speaker 3: facturers and three quarters of service firms import some goods.
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  Speaker 3: Average imported input share was about thirty percent, and all
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  Speaker 3: of those most about three quarters. I know there's a
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  Speaker 3: lot of fractions in there, but the point is, no
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  Speaker 3: matter no matter what segment of the economy, manufacturing or services,
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  Speaker 3: tariffs affect the cost of the things that they buy,
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  Speaker 3: which go into in turn the things that you buy.
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  Speaker 3: Some of that had been passed along as of June.
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  Speaker 3: The only alternative to passing those costs along is shrinking margins,
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  Speaker 3: So there is no free lunch for the economy. Or
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  Speaker 3: contrary to what politicians keep saying. Foreign countries don't pay tariffs.
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  Speaker 3: That's ridiculous. Either companies pay them or people pay them.
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  Speaker 3: So either earnings will go down or you're spending real
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  Speaker 3: spending will go down. That's unavoidable.
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  Speaker 2: The US consumer has been incredibly resilient over the last
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  Speaker 2: couple of years, and the reason that the country is
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  Speaker 2: faired as well as as it had is that the
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  Speaker 2: US consumer has continued to spend. And a stat that
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  Speaker 2: always really continues to be of huge focus for me
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  Speaker 2: is that the top ten percent of earning incomes in
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  Speaker 2: the United States account for half the spending, and that
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  Speaker 2: segment of the population has Perhaps you could make the
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  Speaker 2: argument from the US stock market faring as well as
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  Speaker 2: it has, and those top ten percent income households tend
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  Speaker 2: to be more invested in the markets. They have continued
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  Speaker 2: to get out there and spend the market that we've
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  Speaker 2: seen year to date how well it's faired. Part of
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  Speaker 2: that is from some of the resiliency on consumer spending,
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  Speaker 2: but also part of it has been these large tech
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  Speaker 2: companies in the AI tailwind that we've experienced. So it
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  Speaker 2: will be interesting to see what we get out of
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  Speaker 2: the retailers this week. We'll have that for you on
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  Speaker 2: the Financial Exchange later this week as those earnings come out.
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  Speaker 2: We're going to take a quick break here on the
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  Speaker 2: Financial Exchange. But when we come back, talk about a
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  Speaker 2: little bit on Detroit and US automakers, as well as
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  Speaker 2: hands off investing Paying Off. That's right after this break
• 11:09
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  Speaker 2: The average cost of a new vehicle scraped around forty
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  Speaker 2: nine thousand in July. That was twelve thousand dollars higher
• 12:51
  Speaker 2: than six years ago, according to data from Cox Automotive,
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  Speaker 2: and if we look at Detroit, where the majority of
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  Speaker 2: audio manufacturing is done in the United States, companies like
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  Speaker 2: Ford and GM over the past decades so have really
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  Speaker 2: focused on selling higher priced, higher margin trucks and SUVs
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  Speaker 2: and really have not done a lot of innovation around
• 13:15
  Speaker 2: some of those more mid size price vehicles out there.
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  Speaker 2: The average vehicle in Detroit sells for fifty five thousand.
• 13:24
  Speaker 2: That's ten or twenty thousand more than the average for
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  Speaker 2: Japanese competitors. It perhaps they're mentioning in this piece here
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  Speaker 2: out of the was this the New York Times, no Bloomberg,
• 13:36
  Speaker 2: that Ford's recent EV event is pointing to the fact
• 13:41
  Speaker 2: that they may shift strategy a little bit. Where these
• 13:45
  Speaker 2: companies out there, GM and Ford have benefited from selling
• 13:48
  Speaker 2: less vehicles but making more profit on the vehicles that
• 13:51
  Speaker 2: they sold. They saw fourteen point four million vehicles that
• 13:56
  Speaker 2: were sold with a net income of fourteen billion back
• 13:59
  Speaker 2: in twenty eighteen, Ford and GM respectively. Last year they
• 14:03
  Speaker 2: sold ten and a half million vehicles. Profit was over
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  Speaker 2: twenty billion, so a six billion differential in profit and
• 14:10
  Speaker 2: four million cars less sold over that span of a
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  Speaker 2: five or six year period. But now recently, in Ford's
• 14:18
  Speaker 2: EV event, they did announce that perhaps in twenty twenty seven,
• 14:21
  Speaker 2: I say, perhaps because I'm a little skeptical that this
• 14:24
  Speaker 2: would come to fruition, but their first new EV is
• 14:27
  Speaker 2: going to be built with a thirty thousand dollars small
• 14:31
  Speaker 2: truck price tag on it in twenty twenty seven, I
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  Speaker 2: just am a little skeptical. Mark if they're going to
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  Speaker 2: be able to get that low on the pricing side
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  Speaker 2: of thing.
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  Speaker 3: Well, you can get you can get that low, yeah,
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  Speaker 3: question is we make it a lot of money on
• 14:44
  Speaker 3: that right or put somebody to care about in it.
• 14:47
  Speaker 2: Globally, they also battle Chinese rivals are making inroads across
• 14:51
  Speaker 2: the world. Byd is, the biggest electrical vehicle company in China.
• 14:56
  Speaker 2: They also sell a lot in the way of hybrids
• 14:59
  Speaker 2: to they are. They're not available domestically in the United States,
• 15:02
  Speaker 2: but they're making inroads in Europe and other areas of
• 15:05
  Speaker 2: the country because they're just infiltrating them with very low
• 15:08
  Speaker 2: priced vehicles. So it's a difficult spot that Ford and
• 15:12
  Speaker 2: GM find themselves in. I wouldn't cry for them too much.
• 15:15
  Speaker 2: They've they've made some pretty good profit over the last
• 15:18
  Speaker 2: couple of years.
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  Speaker 3: Don't worry about it. We're gonna bail GM out again.
• 15:21
  Speaker 2: And if not, we'll we'll take care.
• 15:23
  Speaker 3: You can't even you can't buy an American car, it's fit.
• 15:26
  Speaker 3: I'm looking at websites of major dealers. I don't want
• 15:29
  Speaker 3: to promote them on air necessarily or be perceived as
• 15:32
  Speaker 3: criticizing them.
• 15:33
  Speaker 2: But go ahead.
• 15:33
  Speaker 3: You were gonna say you've bought a car recently.
• 15:35
  Speaker 2: You know, really expensive.
• 15:36
  Speaker 3: Now can you even get one? I'm sorry, can you
• 15:38
  Speaker 3: get a Sedan? I'm looking at a major Chevrolet dealer
• 15:41
  Speaker 3: in the Metro West area Boston. We're broadcasting out of
• 15:45
  Speaker 3: the Metro West of Boston area here in Massa Housetts
• 15:48
  Speaker 3: can't find a car. I just checked two Chevy websites
• 15:50
  Speaker 3: and do they even Do they make them Alibu anymore?
• 15:52
  Speaker 3: Do they make the Impala anymore?
• 15:55
  Speaker 2: I don't.
• 15:55
  Speaker 3: I'm sorry, I guess something been a little bit rhetorical.
• 15:58
  Speaker 3: Ford forget. Ford said of years ago, I'm sorry, we
• 16:00
  Speaker 3: can't get the focused transmission right. We can't get the
• 16:02
  Speaker 3: fusion transmission right. We're just gonna stop making. They've given
• 16:05
  Speaker 3: up yep and where because of tariffs. They're favorably positioned
• 16:11
  Speaker 3: with pickups and have been for my whole adult life,
• 16:14
  Speaker 3: in the whole adult like probably if anybody listening. So
• 16:17
  Speaker 3: they've got a nice little high margin niche. Why should
• 16:19
  Speaker 3: they change their strategy.
• 16:20
  Speaker 4: Yeah, I'm not seeing any Malibus. It's just trucks and SUVs, evs.
• 16:25
  Speaker 3: And Ford has sworn off making cars, which they and
• 16:28
  Speaker 3: I could say because I own one, they weren't doing
• 16:30
  Speaker 3: a very good job at and anybody who owned a
• 16:32
  Speaker 3: GM car in the last thirty years probably had mixed experiences,
• 16:35
  Speaker 3: some good ones, some always good looking, but some good ones,
• 16:38
  Speaker 3: some bad ones mechanically speaking, So they're focusing on what
• 16:41
  Speaker 3: they're good at, which makes sense.
• 16:42
  Speaker 2: Texas at six one seven three six two one three
• 16:45
  Speaker 2: eight five. If for some reason we've missed uh a
• 16:48
  Speaker 2: Malibu or some sort of a virgin of Americans, I
• 16:54
  Speaker 2: don't think that. I don't think we have. It's with the.
• 16:56
  Speaker 3: Camp that's in the camera accord, you know, affordable for
• 16:59
  Speaker 3: a modest family. I guess because as you add more
• 17:02
  Speaker 3: than a couple of kids, you run up against the kids, right,
• 17:05
  Speaker 3: you had to get something huge ego, but also because
• 17:09
  Speaker 3: of also because you have a lot of kids, that's
• 17:12
  Speaker 3: also part of your big ego. I don't say that,
• 17:16
  Speaker 3: but I've heard some people.
• 17:17
  Speaker 2: There's been some buzz around the water cooler. Yeah, here
• 17:19
  Speaker 2: you go. Almost one fifth of new buyers now pay
• 17:23
  Speaker 2: more than a thousand bucks a month on their loan.
• 17:26
  Speaker 2: You also have aut a loan rates that are up
• 17:28
  Speaker 2: at eight percent from where they were around five percent before.
• 17:33
  Speaker 2: So it's just it's lousy. It's really lousy out there
• 17:36
  Speaker 2: to be in the market for purching a vehicle. And
• 17:39
  Speaker 2: that's why the used market there's still a tremendous amount
• 17:42
  Speaker 2: of demand there for used vehicles to find it a
• 17:45
  Speaker 2: cheaper option. It's just and why cars are staying on
• 17:49
  Speaker 2: the road for longer. I think I've read somewhere that
• 17:52
  Speaker 2: it's ten plus years the average life of vehicles on
• 17:54
  Speaker 2: the road. People just hanging on some longer. For all
• 17:56
  Speaker 2: those factors we talked about, hands off investing it, why
• 18:00
  Speaker 2: does it pay off? This is, according to The New
• 18:03
  Speaker 2: York Times, putting your money into low cost stock and
• 18:05
  Speaker 2: bond funds. But don't forget the other part of the recipe,
• 18:09
  Speaker 2: which is leave your investments alone. Don't touch your investments.
• 18:12
  Speaker 2: That's really the headline of this piece here. And this
• 18:14
  Speaker 2: is something that is easier said than done. But in
• 18:18
  Speaker 2: an analysis that was done by morning Stars Calculations, according
• 18:22
  Speaker 2: to morning Star Research Services, that investors hurt themselves when
• 18:26
  Speaker 2: they are prone to inopportune trading. Basically the same old
• 18:30
  Speaker 2: rhetoric that you'd hear is, you know, buy and hold
• 18:33
  Speaker 2: is typically your best approach. And this study concludes that,
• 18:39
  Speaker 2: And Mark, I'm sure you have you been studying this
• 18:43
  Speaker 2: for years. That often is the case that you hear.
• 18:45
  Speaker 3: At this point, it's proving water runs downhill. I mean,
• 18:48
  Speaker 3: anybody who's ever looked at this. Of course, some of
• 18:50
  Speaker 3: this is biased by the favorable performance of markets over
• 18:54
  Speaker 3: the past couple of certain generations. If you had looked
• 18:56
  Speaker 3: at the same behavior, even though I suspect on average
• 18:59
  Speaker 3: it wasn't constructed, but the same behavior during sideways markets
• 19:02
  Speaker 3: like nineteen sixty six to eighty two, or and you
• 19:06
  Speaker 3: really have to go back a very long time outside
• 19:09
  Speaker 3: of more or less anybody's listening's memory to come up
• 19:12
  Speaker 3: with counterexamples. But in the modern era, it's paid to
• 19:16
  Speaker 3: stay put, rebalance, and reconsider your strategy periodically. Is your
• 19:21
  Speaker 3: goals change?
• 19:22
  Speaker 2: Heading into the break here we have markets still relatively
• 19:25
  Speaker 2: flat at the moment. When we come back from break,
• 19:28
  Speaker 2: we're gonna have the answer to our trivia question and
• 19:30
  Speaker 2: also some major changes potentially to your four on K
• 19:34
  Speaker 2: right after this break.
• 19:41
  Speaker 1: Bringing the latest financial news straight to your radio. Every day,
• 19:46
  Speaker 1: it's the Financial Exchange on the Financial Exchange Radio Network.
• 19:51
  Speaker 1: Time now for Wall Street. Watch a complete look at
• 19:55
  Speaker 1: what's moving markets so far today right here on the
• 19:58
  Speaker 1: Financial Exchange Radio Network.
• 20:01
  Speaker 4: The markets are pretty quiet today. Is Wall Street readies
• 20:04
  Speaker 4: for the final significant batch of second quarter earnings, with
• 20:07
  Speaker 4: retailers including Home Depot, Low's Target, and Walmart set to
• 20:12
  Speaker 4: report to gauge the latest status of the consumer intention.
• 20:16
  Speaker 4: We'll also shift back to the FED this week, with
• 20:19
  Speaker 4: July meeting minutes due out Wednesday afternoon and FED Chairman
• 20:23
  Speaker 4: Jerome poll slated to speak from Jackson Hole on Friday.
• 20:28
  Speaker 4: At the moment, the Dow is off by only fourteen points,
• 20:32
  Speaker 4: SMP five hundred is down a tenth of one percent,
• 20:35
  Speaker 4: and the Nasdaq is off by two tenths of one
• 20:37
  Speaker 4: percent or fifty points lower. Rusted two thousand is up
• 20:41
  Speaker 4: by a quarter of a percent, ten year treasure feled
• 20:44
  Speaker 4: is up two basis points at four point three five
• 20:47
  Speaker 4: one percent, and crude oil up about a third percent higher,
• 20:51
  Speaker 4: trading right at sixty three dollars a barrel. Shares of
• 20:55
  Speaker 4: Novo Nordisk rising nearly five percent after the companies we go.
• 20:59
  Speaker 4: The obese drug was granted accelerated approval from the FDA
• 21:03
  Speaker 4: for the treatment of a serious livered disease. Meanwhile, Bloomberg
• 21:08
  Speaker 4: reporting that Thomas Bravo in talks to acquire human resources
• 21:12
  Speaker 4: management software provider day Force, sending shares in day Force
• 21:16
  Speaker 4: up by twenty six percent elsewhere. According to The Times
• 21:20
  Speaker 4: in London, Tesla is now offering discounts of up to
• 21:24
  Speaker 4: forty percent on leased vehicles in the country as sales slip. However,
• 21:29
  Speaker 4: Tesla shares are up nearly one percent. Terror Wolf jumping
• 21:32
  Speaker 4: twelve percent following news that alphabets Google will lift its
• 21:36
  Speaker 4: investment in the bitcoin minor and AI company to round
• 21:40
  Speaker 4: three point two billion dollars. Soho, how shares are climbing
• 21:44
  Speaker 4: fifteen percent after a group of investors led by MCR
• 21:48
  Speaker 4: Hotels announced that it is planning to take Soho private
• 21:52
  Speaker 4: in a two point seven billion dollar deal. In cybersecurity
• 21:55
  Speaker 4: company Palo Alto Networks will post their quarterly earnings after
• 22:00
  Speaker 4: today's closing bell. I'm Tucker Silva and that is Wall
• 22:03
  Speaker 4: Street Watch. And in the previous segment we asked you
• 22:06
  Speaker 4: the trivia question which country did Germany invade that officially
• 22:11
  Speaker 4: started the World War Two? That would be Poland and
• 22:15
  Speaker 4: our winner today was John from Norton, mass taking home
• 22:17
  Speaker 4: a Financial Exchange Show tea shirt. Congrats to John. We
• 22:21
  Speaker 4: played trivia every day here in the Financial Exchange. See
• 22:24
  Speaker 4: complete contest rules at Financial Exchange Show dot.
• 22:27
  Speaker 2: Com Americans four on k's are more tied to stocks
• 22:32
  Speaker 2: than ever a piece here from the Wall Street Journal.
• 22:36
  Speaker 2: If you take a look historically at the percentage of
• 22:41
  Speaker 2: holdings within four on k's that were tied to stocks.
• 22:44
  Speaker 2: For example, workers in their late thirties had eighty eight
• 22:48
  Speaker 2: percent of their four on k in stocks last year
• 22:51
  Speaker 2: versus eighty two percent a decade earlier, according to Vanguard.
• 22:56
  Speaker 2: And those target date funds that are very prevalent in
• 23:00
  Speaker 2: many four on k's out there, and I'm sure many listeners,
• 23:02
  Speaker 2: probably by default if you haven't made any changes to
• 23:04
  Speaker 2: your four on k are part of those target date plans.
• 23:08
  Speaker 2: The average share of those people who are five years
• 23:12
  Speaker 2: from retirement that have stock exposure in those target date
• 23:16
  Speaker 2: funds is now at fifty five percent. That was forty
• 23:19
  Speaker 2: percent back in twenty fourteen and fifty percent in twenty twenty.
• 23:23
  Speaker 2: The percentage of stocks within those target date funds for
• 23:26
  Speaker 2: those folks five years from retirement. Part of this is
• 23:30
  Speaker 2: a little recency bias. The last ten years have been
• 23:33
  Speaker 2: a really tremendous stock market, So as a result, I'm
• 23:36
  Speaker 2: sure you have fun companies recognizing that they need to
• 23:39
  Speaker 2: keep pace with other target date fund competitors that they're
• 23:43
  Speaker 2: up against, or just their peers in general. So they've
• 23:45
  Speaker 2: increased the stock exposure here. If you had ten years
• 23:48
  Speaker 2: of a very weak market, probably like the two thousand
• 23:52
  Speaker 2: to twenty ten decade in general, which wasn't a great
• 23:55
  Speaker 2: decade for stocks, perhaps this allocation would look different from
• 24:01
  Speaker 2: a longer term perspective. Mark and we were just alluding
• 24:04
  Speaker 2: to in this segment, prior buying and holding and having
• 24:07
  Speaker 2: stock market exposure is ultimately what will be most beneficial
• 24:11
  Speaker 2: for four K participants. I've always been a huge proponent
• 24:16
  Speaker 2: that a flaw in some of these target date funds
• 24:18
  Speaker 2: is for those employees who are just beginning their job.
• 24:22
  Speaker 2: Oftentimes you'll see ninety percent of the portfolios in stock
• 24:26
  Speaker 2: in those target date funds for the new employee, but
• 24:28
  Speaker 2: ten percent is in fixed income. And I think there's
• 24:30
  Speaker 2: a fair argument to make that perhaps that ten percent
• 24:32
  Speaker 2: fixed income for a younger four on K participant just
• 24:36
  Speaker 2: really it isn't necessary from a long term perspective.
• 24:40
  Speaker 3: Big changes came about now nearly twenty years ago, something
• 24:42
  Speaker 3: called a Pension Protection Act. If you were in the
• 24:44
  Speaker 3: workforce then you may remember getting notices about it PPA
• 24:48
  Speaker 3: as Pension Protection Actors abbreviated basically said, if you're an employer,
• 24:50
  Speaker 3: it's okay to default your employees into your four oh
• 24:55
  Speaker 3: one K planets. Why you're automatically enrolled. Now, if you
• 24:57
  Speaker 3: participate in a big corporate plan, you actually have to
• 24:59
  Speaker 3: say I don't want to be in it. You can default,
• 25:03
  Speaker 3: meaning that you don't make a choice. You don't give
• 25:05
  Speaker 3: your employees a choice, so they can opt out. You
• 25:07
  Speaker 3: can default them in at a specific percentage of their salary,
• 25:10
  Speaker 3: and you can default them into a balanced investment fund.
• 25:13
  Speaker 3: That balanced investment fund is usually a target date fund,
• 25:17
  Speaker 3: A meaning a fund that targets a retirement date. So
• 25:20
  Speaker 3: if you are twenty five, it might target sixty five,
• 25:23
  Speaker 3: giving you a forty year horizon, meaning it's going to
• 25:26
  Speaker 3: put you almost entirely in stocks, and if stocks sell off,
• 25:29
  Speaker 3: it's going to rebalance, so is to buy more stocks.
• 25:33
  Speaker 3: In fact, in the example I just gave, it probably
• 25:36
  Speaker 3: always owns one hundred percent or nearly so equities. As
• 25:38
  Speaker 3: you get order, a target date fund gradually reallocates, becomes
• 25:42
  Speaker 3: more conservative. The managers call that a so called glide path.
• 25:46
  Speaker 3: So it's like professional management rebalance. It is professional management.
• 25:50
  Speaker 3: It say it's like it is by a mutual fund company.
• 25:52
  Speaker 3: They're not an advisor to you. It is just a product,
• 25:56
  Speaker 3: but it's a nice one stop. If you will approach
• 26:00
  Speaker 3: coach or a turnkey approach to diversification, you never have
• 26:05
  Speaker 3: to touch it. In theory, it gets more conservative as
• 26:08
  Speaker 3: you get older, and these target ded funds are now
• 26:10
  Speaker 3: nearly half a four to roh one k balance is
• 26:13
  Speaker 3: the fact that these suckers rebalance automatically, say quarterly or semiannually,
• 26:19
  Speaker 3: suggest that they should be leaning against the wind.
• 26:22
  Speaker 2: As markets go up.
• 26:23
  Speaker 3: They'll go up a little bit, but then reset to
• 26:25
  Speaker 3: their target percentages because you don't want to own a
• 26:28
  Speaker 3: steeply overvalued market. In theory, you want to buy low
• 26:31
  Speaker 3: and sell high. That's how contributions to four to one
• 26:34
  Speaker 3: gays work, and that's a key ingredient. Anybody who's ever
• 26:37
  Speaker 3: looked at it would say to investment success. So the
• 26:41
  Speaker 3: rising equity balances could be Paul that people are actively
• 26:46
  Speaker 3: seeking out higher stock exposure target date funds, despite what
• 26:51
  Speaker 3: rules of thumb might suggest in terms of stock exposure
• 26:54
  Speaker 3: given somebody's age. I don't know quite how to read that,
• 26:57
  Speaker 3: because again, these things rebalance and reallocate it as a participant,
• 27:00
  Speaker 3: as they call us in the four one K business automatically.
• 27:04
  Speaker 2: I wonder if it's chasing returns.
• 27:06
  Speaker 4: The holidays are just around the corner, so now's the
• 27:09
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• 27:12
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• 27:15
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• 27:49
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• 27:53
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• 27:58
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• 28:05
  Speaker 2: Another change that was made on the four and K
• 28:07
  Speaker 2: side of things. In the course of the last week
• 28:10
  Speaker 2: or so was President Trump had issued an executive order
• 28:13
  Speaker 2: to allow people to invest their four and ks in
• 28:17
  Speaker 2: private assets. And I've done a lot of talking with
• 28:20
  Speaker 2: people that I happen to know that work in the
• 28:22
  Speaker 2: private equity space about this recent change and how it
• 28:25
  Speaker 2: could impact their business and their opinions on whether or
• 28:29
  Speaker 2: not this is a worthwhile endeavor. So to be clear,
• 28:32
  Speaker 2: when your a participant within your four o K mark,
• 28:34
  Speaker 2: and I just talked about target date funds and other
• 28:37
  Speaker 2: fund selections that you have, those are trading in public markets.
• 28:42
  Speaker 2: So underneath your target date funds, they are buying shares
• 28:46
  Speaker 2: of publicly held companies or they're purchasing they have fund
• 28:49
  Speaker 2: of funds set up where you have exposure to public stocks.
• 28:52
  Speaker 2: And the same thing on the bond side, it is
• 28:54
  Speaker 2: US treasuries, corporate bonds, et cetera. What's being discussed here,
• 28:58
  Speaker 2: or this shift is is these private investments would be
• 29:01
  Speaker 2: examples of private equity funds, private credit funds. These are
• 29:05
  Speaker 2: things that are typically barred off from people who don't
• 29:08
  Speaker 2: have a significant amount of network. They call it what's
• 29:12
  Speaker 2: call it an accredited investor if you don't have over
• 29:14
  Speaker 2: a million dollars of assets, or you don't meet an
• 29:18
  Speaker 2: income threshold of two hundred and fifty thousand, you typically
• 29:21
  Speaker 2: would not be able to invest in these types of
• 29:24
  Speaker 2: private equity deals or private credit deals. Why there's very
• 29:27
  Speaker 2: limited liquidity on these types of deals. It's not like
• 29:30
  Speaker 2: a stock or bond where you could just be one
• 29:32
  Speaker 2: day in and one day out. These are things that
• 29:35
  Speaker 2: you have to commit to for an extended period of time.
• 29:37
  Speaker 2: Why could it potentially be positive for regular retail participant
• 29:43
  Speaker 2: investors to have exposure is that sometimes with these private
• 29:46
  Speaker 2: equity funds, they're able to generate greater returns than that
• 29:50
  Speaker 2: of the S and P five hundred, for example, But
• 29:53
  Speaker 2: with that comes risk. Of course, there is not as
• 29:57
  Speaker 2: much liquidity there, and oftentimes there can be the higher
• 30:00
  Speaker 2: costs within those funds. So I'm very interested to see
• 30:04
  Speaker 2: how this changes the four on K landscape. It's not
• 30:07
  Speaker 2: something that is going to be an overnight change because
• 30:10
  Speaker 2: when you're dealing with these four on K providers or
• 30:13
  Speaker 2: record keepers, there's a lot of regulatory issues that need
• 30:16
  Speaker 2: to be met before you get to have private equities
• 30:20
  Speaker 2: on private equity funds on the platform and a lot
• 30:23
  Speaker 2: of due diligence needs to be conducted, but I'm interested
• 30:25
  Speaker 2: to see how it takes off.
• 30:27
  Speaker 3: Yeah, I'm not opposed to experimentation. The caveat is that
• 30:33
  Speaker 3: private equity investing is very different than public market investing.
• 30:38
  Speaker 3: Companies don't make information available as an investor, and who
• 30:42
  Speaker 3: invest in private equity. Maybe I should just back up
• 30:43
  Speaker 3: and say it's mostly in endowments and it's institutional doowments.
• 30:46
  Speaker 2: Pensions are very wealthy.
• 30:48
  Speaker 3: If you're in Local Union number twelve, you own private
• 30:50
  Speaker 3: equity in your pension. It might be twenty five percent
• 30:53
  Speaker 3: to twenty twenty five percent. Now, these are long term commitments,
• 30:56
  Speaker 3: so you're locked up once you commit to a manager.
• 30:59
  Speaker 3: And some of them, most of them are not. Maybe
• 31:02
  Speaker 3: you know KKR or Blackstone. Yeah, so some of them are,
• 31:07
  Speaker 3: some somewhat familiar, but most are pretty obscure. The best
• 31:11
  Speaker 3: are very obscure. The best don't want your money, they
• 31:14
  Speaker 3: don't need it. They've got commitments from Harvard Endowment and
• 31:17
  Speaker 3: very big sophisticated investors. So there's a problem with this
• 31:24
  Speaker 3: and that most of the i'll just call it excess
• 31:27
  Speaker 3: return over public markets that investors have experienced in private
• 31:29
  Speaker 3: markets have come from the top tier managers and big
• 31:33
  Speaker 3: investment consultants MAKEDA Cambridge, any Cambridge Associates, any PC. Spend
• 31:40
  Speaker 3: a lot of time due diligencing investigating these managers to
• 31:44
  Speaker 3: find the gems among many of those that just aren't
• 31:48
  Speaker 3: worth your time. In capital I having been in that
• 31:53
  Speaker 3: part of the industry for a while, I could tell
• 31:55
  Speaker 3: you the idea that making private equity available to everybody
• 31:59
  Speaker 3: is going to somehow the so called retirement crisis is preposterous.
• 32:03
  Speaker 3: There's not enough capital. There aren't enough investment opportunities that
• 32:10
  Speaker 3: are likely to kick off a higher return than public
• 32:13
  Speaker 3: markets deliver to accommodate the literally trillions and inflows. There's
• 32:19
  Speaker 3: almost ten trillion dollars in four to one K plants,
• 32:21
  Speaker 3: and the vast majority of that seventy percent or something
• 32:24
  Speaker 3: is inequities. So just ten percent of what's in equities
• 32:30
  Speaker 3: would gobble up most of the capacity available in private equity,
• 32:36
  Speaker 3: never mind the small part of private equity that's actually
• 32:39
  Speaker 3: worthwhile investing in. So overhyped promises are going to disappoint people.
• 32:47
  Speaker 3: But again I'm not personally for what it's worth opposed
• 32:50
  Speaker 3: to a little bit of experimentations just to employers want
• 32:53
  Speaker 3: to be on the hook for that is a plan
• 32:55
  Speaker 3: spots or you're in fiduciary. So if you put something
• 32:57
  Speaker 3: in your plan that you didn't understand, somebody invested in it.
• 32:59
  Speaker 3: Now it's going to be through a target date fund.
• 33:01
  Speaker 3: So it's just going to be five percent of the
• 33:03
  Speaker 3: fund at most. Probably you don't think it'll be individual God, no, no,
• 33:06
  Speaker 3: these will not be because the options.
• 33:08
  Speaker 2: Yeah, well it's not because of that.
• 33:10
  Speaker 3: It's because you don't want somebody putting all their money
• 33:11
  Speaker 3: in private Equitly, Oh well.
• 33:13
  Speaker 2: I would thought they were going to put a cap
• 33:14
  Speaker 2: on it. Maybe they say, oh, I doubt it.
• 33:16
  Speaker 3: I don't think if I were advising a plan sponsor,
• 33:19
  Speaker 3: I'd say, no, that's nuts. Put it in your target
• 33:22
  Speaker 3: you're buying off the shelf target date fund. Fidelity will
• 33:24
  Speaker 3: offer another variation on their famous Freedom funds. This one
• 33:28
  Speaker 3: is Freedom plus Privates or something. It'll be a very
• 33:31
  Speaker 3: small slice, which unfortunately or fortunately perhaps means it's not
• 33:36
  Speaker 3: going to be enough to move the needle. I see
• 33:38
  Speaker 3: people looking back in ten years saying, what did we
• 33:40
  Speaker 3: do that for? We spend twenty hours a year monitoring
• 33:43
  Speaker 3: this sucker, and it hasn't moved the needle for us.
• 33:46
  Speaker 2: We'll see. We're going to take a quick break here
• 33:48
  Speaker 2: on the Financial Exchange. When we come back, a little
• 33:50
  Speaker 2: bit of stack Roulette right after this break.
• 33:53
  Speaker 1: Here the Financial Exchange every day from eleven to noon,
• 33:56
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• 34:00
  Speaker 1: it here for the latest business and financial news and
• 34:03
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• 34:06
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• 34:10
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• 34:14
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• 34:18
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• 34:21
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• 34:30
  Speaker 4: That was a great time to register for the DAV
• 34:32
  Speaker 4: five k, taking place Saturday November eighth at Fort Independence
• 34:37
  Speaker 4: on Castle Island. The race has sold out each of
• 34:39
  Speaker 4: the past four years, and slots are continuing to fill
• 34:42
  Speaker 4: up quickly, so don't delay. Visit DAV five k dot
• 34:46
  Speaker 4: Boston and reserve your spot, or join our team here
• 34:49
  Speaker 4: at the Financial Exchange by registering under Team TFE. That's
• 34:55
  Speaker 4: Saturday November eighth for this year's DAV five k sign
• 35:01
  Speaker 4: up now at da V five K dot Boston. We
• 35:05
  Speaker 4: need to issue a quick correction here, gentlemen. Uh Texture
• 35:09
  Speaker 4: from the four to one three said that GM still
• 35:11
  Speaker 4: makes the Chevy Malibu the buick, and they didn't. I
• 35:15
  Speaker 4: have sedans as well.
• 35:16
  Speaker 2: I was pretty adamant they didn't.
• 35:18
  Speaker 3: Well, my point is, you can't find it up here.
• 35:20
  Speaker 3: I mean, okay, I do a lot of things privately.
• 35:22
  Speaker 2: I don't I will.
• 35:24
  Speaker 4: I will say. You go to Chevy's website. It's pretty
• 35:27
  Speaker 4: hard to find. It's a good four scrolls, good four scrolls.
• 35:32
  Speaker 2: I didn't.
• 35:32
  Speaker 3: I didn't claim they didn't. I said I can't find
• 35:35
  Speaker 3: I did.
• 35:35
  Speaker 2: I did?
• 35:36
  Speaker 4: I said they didn't, but they do.
• 35:38
  Speaker 3: Yeah, send your emails, Tucker.
• 35:39
  Speaker 2: That's well. I posted out there just because I just
• 35:42
  Speaker 2: want to see what the with the listeners. If they
• 35:44
  Speaker 2: had any info, that was good, that was smart.
• 35:46
  Speaker 3: I'm glad they do. But apparently nobody wants them because
• 35:49
  Speaker 3: they're like the.
• 35:50
  Speaker 4: Very sad looking at you Sedan.
• 35:52
  Speaker 2: I might say, well, I wouldn't know. I mean, they're
• 35:55
  Speaker 2: clearly buried for a reason, right, Tucker. They don't make
• 35:57
  Speaker 2: nearly as much money off them as they's all right.
• 36:01
  Speaker 2: Time for stock Roulette Mark. We'll let you bat lead
• 36:03
  Speaker 2: off here.
• 36:03
  Speaker 3: Sure from the Financial Times, investors lose billions on meme stocks.
• 36:07
  Speaker 3: Is pump and dump scam?
• 36:09
  Speaker 2: Did you see this? They name the companies. I don't
• 36:11
  Speaker 2: know that.
• 36:12
  Speaker 3: They're nastak listed companies, so presumably not unrespectable, not companies
• 36:19
  Speaker 3: of decent repute. They passed certain regulatory they cleared certain
• 36:23
  Speaker 3: regulatory hurdles. But I guess the bottom line is very
• 36:26
  Speaker 3: cheap stocks that are promoted on online message boards or
• 36:30
  Speaker 3: that you get unsolicited invitations to explore further are almost
• 36:35
  Speaker 3: certainly so called pump and that's the pump part. Somebody
• 36:38
  Speaker 3: induces you to buy them, pretending to give you information
• 36:41
  Speaker 3: that others don't have, or something like that, and then
• 36:44
  Speaker 3: of course the party pumping summarily dumps them and your
• 36:48
  Speaker 3: left or others are left holding them. These pump and
• 36:52
  Speaker 3: dump stock declines amounted, according to the Financial Times too,
• 36:57
  Speaker 3: over what period they say only recent weeks here to
• 37:00
  Speaker 3: four billion dollars, which is not a lot in the
• 37:02
  Speaker 3: scheme of the fifty trillion dollar US equity market, but
• 37:05
  Speaker 3: probably a lot collectively to those who were.
• 37:10
  Speaker 2: Scammed. That's the game.
• 37:13
  Speaker 3: They don't respond to message board prompts to buy a stock,
• 37:16
  Speaker 3: or a message on LinkedIn, or a message on social media.
• 37:20
  Speaker 3: It's almost certainly do.
• 37:21
  Speaker 2: Your throw due diligence there. Story that's taken on a
• 37:25
  Speaker 2: bit of a local feel to it is concession stands
• 37:29
  Speaker 2: and just the way that they've been reshaped. Checkout machines
• 37:33
  Speaker 2: at Fenway Park and TD Garden around the Boston area
• 37:37
  Speaker 2: have utilized our artificial intelligence to boost sales. But as
• 37:42
  Speaker 2: a result of that, you've had workers that have been
• 37:44
  Speaker 2: quite frustrated. Recently here at Fenway. In July, hundreds of
• 37:48
  Speaker 2: Fenway workers represented by the Unite Here Local twenty six union,
• 37:53
  Speaker 2: launched a three day strike over wage and job security.
• 37:56
  Speaker 2: As automation has become more and more prevalent here, you've
• 37:59
  Speaker 2: got a lot, a lot more of these kios where
• 38:01
  Speaker 2: you just kind of walk through and you don't interact
• 38:03
  Speaker 2: with a person at all. So these concession stand workers
• 38:06
  Speaker 2: are worried about the future viability of their gigs. That's
• 38:09
  Speaker 2: all the time that we have for this edition of
• 38:12
  Speaker 2: the Financial Exchange, but we'll be right back here with
• 38:14
  Speaker 2: you tomorrow at ten am. Thanks so much for joining us.