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Will the Fed cut interest rates in September? · The Financial Exchange Show

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Speaker 1: a donation Today. Face is the Financial Exchange with Mike
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Speaker 1: Armstrong and Mark vandetdy.
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Speaker 2: If Good morning, Happy Tuesday, and welcome to the Financial Exchange.
1:15
Speaker 2: On an inflation Tuesday, we got the CPI measure of
1:19
Speaker 2: inflation from the Bureau Labor Statistics this morning at eight
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Speaker 2: thirty AM. We've got continued news from the semiconductor sector
1:26
Speaker 2: on the chips deal between in VideA, AMD and the
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Speaker 2: White House. But we're gonna start things off here, Mark,
1:33
Speaker 2: with that read on inflation that came out at eight
1:35
Speaker 2: thirty highly anticipated, a lot of eyes on inflation in particular,
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Speaker 2: but inflation generally, but really terrif related inflation specifically, I think,
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Speaker 2: And so we will start by diving in right there
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Speaker 2: on the inflation side of things. So first things first,
1:54
Speaker 2: the headline numbers, just to get those out.
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Speaker 3: Of the way.
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Speaker 2: We're generally in line. We saw headline inflation year over
2:02
Speaker 2: year coming in at what was a two point seven
2:06
Speaker 2: percent year over year for the month of July. When
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Speaker 2: you look at core which would be stripping out the
2:11
Speaker 2: impacts of food and energy, you get up to over
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Speaker 2: three percent, at three point one percent on a year
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Speaker 2: over year basis. But you know, month over month, we
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Speaker 2: came in pretty close to where we were back in June,
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Speaker 2: which is not great, but not an acceleration from where
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Speaker 2: we were, and that's I think where I landed on this.
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Speaker 2: So the headline numbers July we came in at two
2:33
Speaker 2: tenths percent hotter than June when you strip out that
2:36
Speaker 2: food and energy impact, though we did see three tenths
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Speaker 2: hotter than June, and that was an acceleration from the
2:41
Speaker 2: previous month. We were looking at those core prices in particular,
2:44
Speaker 2: and the core prices I think most at least at
2:49
Speaker 2: the FED and core and economists would look at and say, hey,
2:52
Speaker 2: that is more indicative of the underlying or core inflation.
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Speaker 2: The more directional trend on inflation. I know you like
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Speaker 2: to look at different figures that come out later this morning,
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Speaker 2: like trimmed mean but overall assessment here mark for this
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Speaker 2: July CPI report that we got anything in your mind
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Speaker 2: that I guess contradicted where the status quo was.
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Speaker 4: I think the status quo underestimates because they don't pay it.
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Speaker 4: Status quo meaning I guess the consensus of Yeah, financial
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Speaker 4: markets has reflected in some of the futures, reflecting the
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Speaker 4: odds of FED increases that you like to refer to
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Speaker 4: stuff like that. I don't think markets traditionally have paid
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Speaker 4: much attention and most of us have paid much attention
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Speaker 4: to the notion of underlying inflation, what it is, how
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Speaker 4: you estimate it, and what it means for the FED.
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Speaker 4: By underlying we mean the trend and inflation. It's over
3:46
Speaker 4: the long term, inflation will converge to underlying inflation. So
3:50
Speaker 4: if we knew what the next few quarters of headline
3:52
Speaker 4: inflation we're going to be, I could just smooth that out,
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Speaker 4: take a sort of rolling or moving average, and tell
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Speaker 4: you what the trend in inflation was. We don't know
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Speaker 4: that yet, so you try to you infer it from
4:01
Speaker 4: measures like core as calculated by the CPI takeout food
4:05
Speaker 4: and energy. Like you said, why do we take out
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Speaker 4: food and energy, by the way, Well, because they're very
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Speaker 4: vola or they move around a lot. They can distort
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Speaker 4: what's really going on. They make inflation noisy.
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Speaker 3: They do.
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Speaker 2: And I think another reason that maybe I've adopted or
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Speaker 2: I've heard adopted.
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Speaker 3: Is the FED has very little control in the short term.
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Speaker 4: That's true, but in the longer term there's a question
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Speaker 4: of are those exogenists or not? And by that I
4:28
Speaker 4: mean there's this raging debate believe or there was thirty
4:31
Speaker 4: years ago in economics about the oil price shocks of
4:33
Speaker 4: the seventies. They would seem like the ultimate exogenous event, right.
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Speaker 4: The FED can't control when the Yeah, when the Middle
4:40
Speaker 4: East decides to when the Arab countries decide to gang
4:43
Speaker 4: up and make war on Israel, stuff like that, or
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Speaker 4: or boycott US when opecticides to boycott us. Other researchers
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Speaker 4: have pointed out the boy am I getting off on
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Speaker 4: a tangent here, but here we go. Other researchers have
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Speaker 4: pointed out that those shocks may not have been exogenists,
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Speaker 4: may not may have been the result of excess demand
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Speaker 4: building up and for continuing with this example in the
5:01
Speaker 4: laid fifties into the early seventies. So let me just
5:04
Speaker 4: say that, like with many questions in finance and counter debate,
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Speaker 4: it's not a settled one. Sure, So where is underlying
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Speaker 4: inflation today? If you look at core, well, it appears
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Speaker 4: to be accelerating. If you look at ex food and
5:16
Speaker 4: energy core. If you look at measures that do a
5:18
Speaker 4: better job of filtering out outliers no matter where they
5:21
Speaker 4: originate from, Trimming outliers is what the median does. It's
5:26
Speaker 4: why you look at median home price in your neighborhood,
5:28
Speaker 4: or a median. I'm saying median iaan not medium. Sure,
5:32
Speaker 4: as a member of the current administration recently said, I'm
5:37
Speaker 4: saying median the one in the middle. We look at
5:39
Speaker 4: that because it automatically filters out outliers. It's a pretty
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Speaker 4: robust measure of what's going on. In an underlying sense,
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Speaker 4: all these things point to inflation somewhere in the mid
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Speaker 4: threes Mike. Normally that would be a big problem for
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Speaker 4: the FED. But if the economy is slowing, then that
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Speaker 4: could put a brake on inflation. It's always the tricky part.
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Speaker 4: This is the Fed's per perennial problem, balancing the forces
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Speaker 4: of inflation against the forces they drive up unemployment.
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Speaker 2: What has surprised me a bit, and I think has
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Speaker 2: surprised others too, is that we have not seen a
6:10
Speaker 2: ton of inflation on goods. Yes, you can point to
6:12
Speaker 2: some specific categories that are seeing terraf re laid inflation,
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Speaker 2: such as toys, sporting goods, some furnishings, and some clothing items.
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Speaker 2: But by and large, when you take a look at goods,
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Speaker 2: inflation it's been rather subdued. What we are seeing is
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Speaker 2: this services costs not really coming back under control.
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Speaker 3: And I wonder what to make of that.
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Speaker 2: And maybe the FED is willing to look through some
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Speaker 2: of that too, if they see a weakening labor market,
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Speaker 2: and they can assume that, hey, services costs, we're just
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Speaker 2: going to see the store drop for services.
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Speaker 3: So it doesn't matter.
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Speaker 2: But and I hate to nippick these things, but it
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Speaker 2: is surprising to me that, hey, you know, the goods
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Speaker 2: inflation in spite of tariffs are not really reflecting those
6:53
Speaker 2: increased taxes. And instead, what we're talking about now is
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Speaker 2: the cost of all sorts of services that are just
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Speaker 2: not coming back under control in spite of concerns about
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Speaker 2: a weakening labor market.
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Speaker 1: Yeah.
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Speaker 4: And the problem, and you've already alluded to this isn't
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Speaker 4: so much this expenditure category or that expenditure category. It's inflation.
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Speaker 4: Inflation is a process. It's useful to keep this framework
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Speaker 4: in mind. People get caught up in the accounting discussions
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Speaker 4: all the time. Well, if this stay is under control,
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Speaker 4: then you shouldn't have inflation. Wrong way to look at it.
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Speaker 4: No economist thinks about well, no, recently no, noredit. Yeah,
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Speaker 4: I'm sorry, but yeah, you need some training. I'm not
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Speaker 4: talking about somebody who just you know, claims to be
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Speaker 4: this or that. Think about inflation as a process. It's
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Speaker 4: a function of expected inflation because that feeds into wage
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Speaker 4: demands and price demands. It's a function of the gap
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Speaker 4: between what the economy is doing and its potential, and
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Speaker 4: there are different ways to measure that. We'll just call
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Speaker 4: it the output gap. And then there are always shocks.
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Speaker 4: That's the third sort of term in this process that
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Speaker 4: I'm describing. So when viewed in terms of that framework,
7:56
Speaker 4: it doesn't matter whether it's supply or demand driven. It's
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Speaker 4: that something is happening either as shock or then, or
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Speaker 4: monetary policy is too accommodating, or they've dumped too much
8:07
Speaker 4: stimulus money into the federal government has done too much
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Speaker 4: stimulus money into the economy. Something's causing the economy to
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Speaker 4: either operate above its potential or causing inflation expectations to
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Speaker 4: go up. And we know inflation expectations went up when
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Speaker 4: tariffs were imposed, even though their imposition has been sort
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Speaker 4: of fitful and erratic. So it's not surprising to me
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Speaker 4: that underlying inflation remains elevated. The economy seems to be
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Speaker 4: growing above its potential. Still that might change, which is
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Speaker 4: always on the Fed's mind, and inflation expectations went up.
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Speaker 2: The Federal Reserve sets a two percent inflation target, and
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Speaker 2: there's been plenty of debate about this, but I think
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Speaker 2: it'd be safe to say that the Federal Reserve wants
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Speaker 2: inflation at a pace where businesses and individuals aren't worrying
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Speaker 2: about it. Is that the right kind of framework for
8:54
Speaker 2: thinking about how the Fed thinks about inflation is when
8:57
Speaker 2: its background noise. When it's hot enough to they will
9:00
Speaker 2: grease the wheels of the economy, but not so hot
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Speaker 2: that it is causing businesses versus sand.
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Speaker 4: At some point inflation is so high it's disruptive.
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Speaker 3: So are we more grease or more sand today? I don't.
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Speaker 4: At three, it's not to me. Anywhere Under five is
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Speaker 4: fine to me personally. I would rather have high or
9:20
Speaker 4: maximum employment. Yeah, exactly, I'd rather have maximum employment than
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Speaker 4: quibble about three versus five percent inflation. If the labor
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Speaker 4: market is functioning, okay, wages should be indexed, investment products
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Speaker 4: it can be indexed. There are zealous anti inflation economists
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Speaker 4: who think it should be closer to zero. I could
9:42
Speaker 4: sim I'd love zero, but I just don't think it's practical.
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Speaker 4: So zero to five is a reasonable range in which
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Speaker 4: honest people can disagree. The problem with getting to the
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Speaker 4: high end of that range is that five percent inflation
9:54
Speaker 4: can become seven or eight or ten percent inflation, which
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Speaker 4: would be very, very harmful, yeah, very quickly, and it
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Speaker 4: would be disruptive, not just like psychologically difficult to tolerate.
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Speaker 3: Let's take a quick break when we come back.
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Speaker 2: What everyone's going to be discussing today is what does
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Speaker 2: this mean for the FEDS meeting a month from now
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Speaker 2: in September. Let's take a quick break and touch base
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Speaker 2: on where investors are placing their bets on fed raitcuts
10:19
Speaker 2: come September.
10:19
Speaker 3: That's next on the Financial Exchange.
10:22
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10:25
Speaker 1: on what might be next and how long it might last.
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11:10
Speaker 2: So Mark eight thirty am. This morning we had this
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Speaker 2: inflation release. We will get one more before the Fed
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Speaker 2: meets next but I think at this point it's fair
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Speaker 2: to say.
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Speaker 3: One conclusion I've drawn.
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Speaker 2: About the tariffs was that both promises on the left
11:26
Speaker 2: and the right regarding tariffs were way overblown. Unsurprisingly on
11:31
Speaker 2: you know, on the Republican side. On the on the
11:34
Speaker 2: Trump White House side of things, you had these promises of,
11:38
Speaker 2: you know, we're going to get rid of the income tax.
11:40
Speaker 2: Obviously that was, you know, an exaggeration. We're going to
11:44
Speaker 2: dramatically reduce deficits, We're going to bring manufacturing jobs back
11:48
Speaker 2: to the US. Could come to pass during in the future,
11:52
Speaker 2: hasn't happened yet. On the left, you had world creating inflation,
11:59
Speaker 2: you had you know, recession due to tariffs.
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Speaker 4: Well that's not I mean, I'm not on the left.
12:05
Speaker 4: I'm libertarians, so I'm sort of libertarian conservative. Yes, there
12:08
Speaker 4: will be inflation, and I can take a few minutes
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Speaker 4: to explain why tariffs are inflationary, but we don't have
12:14
Speaker 4: to do that now.
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Speaker 2: We don't think there's a lot of confusion about that.
12:18
Speaker 2: I think people think so. I think people there's a
12:20
Speaker 2: heated debate right now in Yeah, the White House is
12:23
Speaker 2: saying they'll never cause inflation. I think consumers generally speaking,
12:26
Speaker 2: are understanding there will be inflation. But my point would be, look,
12:30
Speaker 2: the the worst case scenarios that were predicted on both sides.
12:33
Speaker 3: Were it's too and agreed it is too soon, and
12:38
Speaker 3: are raising some revenue. By the way, so they.
12:41
Speaker 2: Are raising revenue, decreasing deficits, well maybe not decreasing deficits
12:45
Speaker 2: on a net based I would compared to where we
12:47
Speaker 2: were before.
12:48
Speaker 4: Those are two different things. Lowering the trade debt, you're
12:51
Speaker 4: talking about the budget deficit, Raising revenue helps.
12:55
Speaker 2: But my point would be, we have neither seen neither
12:57
Speaker 2: of these extreme reactions yet. Could they later, yes, But
13:01
Speaker 2: I think part of that is because every time we
13:03
Speaker 2: have touched off something that could be a tragic mistake,
13:07
Speaker 2: the White House is backed off that policy. Right, whether
13:09
Speaker 2: it's one hundred and twenty percent tariffs on China, whether
13:12
Speaker 2: it is you know, copper tariffs, they've been intelligent enough
13:16
Speaker 2: to say, oh, yeah, this would be truly disruptive to business.
13:19
Speaker 3: So we're not going well.
13:19
Speaker 4: I would call them, as a friend of mine use
13:23
Speaker 4: said recently, that would call them experiential learners. They need
13:27
Speaker 4: to put their hand on the stove.
13:29
Speaker 3: Yeah, fair enough.
13:30
Speaker 2: So it leads me to this question of what still,
13:34
Speaker 2: what does the Federal Reserve do here? Because that's that's
13:38
Speaker 2: what investors are betting on this morning. We've got markets,
13:40
Speaker 2: you know, broadly in rally mode, all three major indices
13:43
Speaker 2: in the US up more than half percent at this
13:45
Speaker 2: point in time. We'll see where it goes. On the
13:48
Speaker 2: Chicago Mercantile Exchange, you've got the likelihood now of a
13:52
Speaker 2: September rate cut jumping by ten percentage points. It was
13:55
Speaker 2: eighty five percent likelihood yesterday. Now we're sitting at ninety
13:59
Speaker 2: four percent likelihood of a rate cut at that September
14:01
Speaker 2: seventeenth meeting, and so I gotta say, I'm kind of
14:05
Speaker 2: left scratching my head because the unemployment rate is four
14:08
Speaker 2: point two percent, the inflation rate now with core year
14:12
Speaker 2: over year is over three percent, and to me, that's
14:17
Speaker 2: not exactly a formula for a rate cut. I know
14:20
Speaker 2: that you're in the same camp on this.
14:22
Speaker 4: So what if the numbers were Let's suppose and I
14:25
Speaker 4: hate to say this, but now I'm doubting everything that
14:27
Speaker 4: comes out of BLS because it's been so politicized that
14:30
Speaker 4: I'm sorry, they have cast a pall on everything. Everything
14:33
Speaker 4: needs to be viewed through that, at least to me,
14:34
Speaker 4: viewed through that filter. So let's suppose today's inflation numbers
14:38
Speaker 4: weren't fudged, which I think would be hard to do
14:40
Speaker 4: so many hundreds of people work on them. But that's
14:43
Speaker 4: no longer something we could take for granted.
14:44
Speaker 2: Sadly, I think it'll be pretty obvious if they are
14:47
Speaker 2: getting funned.
14:48
Speaker 4: Because everybody will resign. You mean, the career statisticians will
14:50
Speaker 4: just design.
14:51
Speaker 3: Over a thousand people working there. So either they will just.
14:56
Speaker 2: Release the numbers with some sort of statement like, oh,
14:59
Speaker 2: you know, we don't think these are accurate, and that'll
15:02
Speaker 2: be it, or it'll be so obvious that you'll have
15:04
Speaker 2: a bunch of people.
15:05
Speaker 4: Yeah, I think it's probably going to be the latter.
15:07
Speaker 4: You'll have mass resignations, delays and data reporting, and it
15:10
Speaker 4: probably gets worse before it gets better. But that's just
15:12
Speaker 4: me editorializing. We're on this is unfortunate, a fork in
15:16
Speaker 4: the road we've taken here. That said, if the payroll
15:19
Speaker 4: numbers were right, payroll growth is decelerated significance, it's meager,
15:24
Speaker 4: it's virtually nothing, then there is certainly a case for cutting.
15:28
Speaker 4: In fact, there's a strong argument for cutting I don't
15:31
Speaker 4: know if twenty five basis points, especially when you consider
15:33
Speaker 4: the lag with which FED policy monetary policy hits the
15:37
Speaker 4: impacts the real economy. When you consider that lag, if
15:41
Speaker 4: it's going to make much of a difference, But there's
15:42
Speaker 4: a strong argument for lowering interest rates, not to one
15:45
Speaker 4: percent White House wants that's absurd, but for easy monetary
15:49
Speaker 4: policy a bit.
15:51
Speaker 2: And your argument there would be that that job creation number,
15:56
Speaker 2: if holds true, is so.
15:58
Speaker 3: Weak that you will event flow through.
16:01
Speaker 4: One point three or so percent growth in the FERJ
16:04
Speaker 4: real GDP growth. In the first half of the year,
16:06
Speaker 4: we've had payroll growth slow to a trickle. The unemployment
16:10
Speaker 4: rate seems stable. It's gone up over the last eighteen months,
16:13
Speaker 4: it's not going up by a lot. Vacancies have fallen
16:17
Speaker 4: a little bit, and there may be one or two
16:19
Speaker 4: other points of data that I'm missing here. There's some
16:22
Speaker 4: evidence that the Fed's hikes which helped to help to
16:28
Speaker 4: slow demand growth, which probably contributed to bringing inflation down
16:32
Speaker 4: even though it remains elevated. There's there's an argument that
16:35
Speaker 4: the that that the real FED funds rate is moderately restored.
16:41
Speaker 4: I don't know if I buy it, but there's an
16:42
Speaker 4: argument that it's moderately restrictive.
16:45
Speaker 2: People can disagree between now and that job between now.
16:49
Speaker 2: In that FED meeting, we will have one more jobs report,
16:51
Speaker 2: one more CPI report, so we'll have a little bit
16:56
Speaker 2: more data on the state of are cutting the full stop.
17:00
Speaker 4: They've always cut, regardless of inflation, unless it was like
17:04
Speaker 4: seven percent and going even vulgar cut even he backtracked
17:08
Speaker 4: in eighty or eighty one and then again in eighty two.
17:11
Speaker 4: To his credit, by the way, so the Fed is
17:13
Speaker 4: always put more weight on the output gap, i e.
17:17
Speaker 4: On on unemployment and keeping it.
17:18
Speaker 3: Forget about job creation.
17:20
Speaker 2: How low does the unemployment rate need to go in
17:21
Speaker 2: the August jobs report for them to not cut.
17:24
Speaker 4: Well, I have no idea. They may not even be
17:25
Speaker 4: paying attention to that. Some people have pointed out that
17:29
Speaker 4: because of labor market dynamics, and I'll just leave it
17:31
Speaker 4: at that. Because I'm not a labor economist, I don't
17:33
Speaker 4: fully understand their arguments, nor have I spent much time
17:36
Speaker 4: trying to. That may not be the best thing to
17:39
Speaker 4: watch for signs of softening in the labor market. So
17:42
Speaker 4: serious people have made that argument, and I'm inclined to
17:44
Speaker 4: dever to them. I just questioned, where we're not a
17:46
Speaker 4: twenty five a point to a quarter of a percentage
17:49
Speaker 4: point cut in the federal funds rates, say to four
17:52
Speaker 4: from four and a quarter will hire everybody?
17:55
Speaker 3: Put those jobs back on this? Yeah?
17:57
Speaker 4: What message would that send if they cut by fifty
18:00
Speaker 4: Oh crap, the Fed things were about to hit an
18:02
Speaker 4: economic wall. That would be borderline emergency rate cut.
18:05
Speaker 2: Right, Yeah, it would be so unlikely to see that
18:08
Speaker 2: markets reacting positively. As I mentioned, interestingly, what this means
18:12
Speaker 2: for everyday people. Right, Let's assume that the FED is
18:15
Speaker 2: on this path towards interest rate cuts like you mentioned,
18:18
Speaker 2: which I do buy. I think it is very likely
18:20
Speaker 2: in September we see that quarter percentage point cut, you're
18:24
Speaker 2: likely to see things like those savings accounts rates at
18:27
Speaker 2: the bank come down. I was speaking to a client
18:29
Speaker 2: yesterday who already saw their savings rate drop at Citizen's
18:33
Speaker 2: Bank by a quarter point earlier this summer in spite
18:36
Speaker 2: of no FED rate cuts. So you're likely to see
18:38
Speaker 2: that happen. The question about longer term rates though, still
18:42
Speaker 2: to play out today, for example, while you've got the
18:45
Speaker 2: likelihood of a rate cut coming in on that Chicago
18:49
Speaker 2: Mercantoll exchange, like I mentioned, tenyear treasury yield moving up,
18:53
Speaker 2: moving up about four tenths of a percent this morning
18:56
Speaker 2: on this positive news for for investors. And again that's,
19:02
Speaker 2: you know, one day move, so don't make a trend
19:04
Speaker 2: of it, but not necessarily that. Hey, FED cuts rates
19:07
Speaker 2: and you see that mortgage rate come down, not one
19:11
Speaker 2: for one, and in fact, we saw the direct opposite
19:13
Speaker 2: of that second half of last year.
19:15
Speaker 4: We could talk about the expectations theory of interest rates
19:17
Speaker 4: if you want.
19:18
Speaker 3: On the other side, let's take a quick break.
19:20
Speaker 2: We've got Wall Street watch coming up next, and I
19:22
Speaker 2: want to talk a little bit more about these chip
19:25
Speaker 2: deals between Nvidia A and B and the White House
19:27
Speaker 2: in China. That's next on the Financial Exchange.
19:41
Speaker 1: Like us on Facebook and follow us on Twitter at
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19:48
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:53
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19:56
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20:02
Speaker 5: Well, it's ten thirty four and markets are on the rise.
20:04
Speaker 5: The Dow Jones is up nine tenths of a percent,
20:07
Speaker 5: or three hundred and ninety nine points. S and P
20:09
Speaker 5: five hundreds up thirty four points or half a percent,
20:12
Speaker 5: and the NASDAC is also up about a little over
20:14
Speaker 5: half a percent, or one hundred and twenty one points,
20:16
Speaker 5: as markets continue to digest this morning's CPI report that
20:20
Speaker 5: came in a little less than expected. T shirt maker
20:24
Speaker 5: Haynes Brands is up twenty three percent after The Financial
20:27
Speaker 5: Times reported that Haines Brands was nearing a deal to
20:29
Speaker 5: be acquired by Guilden for nearly five billion dollars. Guildenshares
20:33
Speaker 5: are down over six percent. Sinclair shares are shooting up
20:37
Speaker 5: thirteen percent after Sinclair, one of the largest owners of
20:40
Speaker 5: television stations, started a strategic review of its business that
20:43
Speaker 5: could result in a merger or spinoff of its ventures
20:46
Speaker 5: business IT service management company big Bear dot I. Big
20:51
Speaker 5: Bear AI is down twenty seven percent after disappointing second
20:54
Speaker 5: quarter results. Big Bear AI lost seventy one cents per share,
20:58
Speaker 5: more than a loss of six cents per share estimated
21:01
Speaker 5: by analysts. Polled revenue of thirty two point five million
21:05
Speaker 5: trailed the Street's forty point six million forecasts. Stable Cooin
21:09
Speaker 5: Issuer's Circle Internet Group reported strong revenue growth in its
21:13
Speaker 5: first quarterly earnings as a publicly traded company. Stock is
21:16
Speaker 5: up six percent. President Trump called Intel's CEO Lip Boutan
21:21
Speaker 5: a success days after demanding his resignation. Intel shares are
21:25
Speaker 5: up two point four percent. The semiconductor maker has been
21:28
Speaker 5: in Trump's crosshairs, who has gone back and forth in
21:30
Speaker 5: his approach to the CEO. In Nvidia shares are down
21:33
Speaker 5: half percent. President Trump said he's open to allowing Nvidia
21:37
Speaker 5: to sell a downgraded version of its most advanced artificial
21:40
Speaker 5: intelligence chip to China. And finally, Apple shares are up
21:43
Speaker 5: half a percent after Tesla CEO Elon Musk threatened legal
21:47
Speaker 5: action against Apple over alleged anti trust violations on rankings
21:51
Speaker 5: of the grock ai chatbot app that's owned by Musk's
21:54
Speaker 5: artificial intelligence startup Xai. Tesla shares are currently down one percent.
22:00
Speaker 5: I am ben Kitchen and that is Wall Street Watch.
22:03
Speaker 2: So the big story of the day yesterday was in
22:06
Speaker 2: Nvidia and AMD, and if you missed it, over the weekend,
22:10
Speaker 2: the Financial Times reported that Nvidia and AMD, as part
22:15
Speaker 2: of the agreement to be able to export some AI
22:18
Speaker 2: chips to China, struck a deal with the White House
22:21
Speaker 2: to pay the Treasury fifteen percent of gross sales of
22:26
Speaker 2: these types of chips to China. There's now more information
22:30
Speaker 2: being reported. The President started at twenty percent, Jensen Wong
22:33
Speaker 2: negotiated down to fifteen percent. We talked at length yesterday
22:38
Speaker 2: about the questionable legality of such a thing. Congress, for example,
22:42
Speaker 2: has no authority. It is outlawed in the Constitution for
22:45
Speaker 2: Congress to impose an export tax on anything. This is
22:53
Speaker 2: a first of its kind type of deal. It's really
22:56
Speaker 2: unclear to me if it's legal. But if it is illegal,
22:59
Speaker 2: who would have the standing to sue? Since seemingly in
23:03
Speaker 2: Nvidia and AMD have agreed to this and they're not
23:06
Speaker 2: being forced to do it. So a ton of questions outstanding,
23:09
Speaker 2: a ton of precedents setting questions that I have about
23:12
Speaker 2: what the president's the next president's powers would be, for example,
23:15
Speaker 2: to override national security concerns and and you know, do
23:22
Speaker 2: something like this. But nonetheless, I'm going to set those
23:24
Speaker 2: aside for a moment because something that we talked about
23:27
Speaker 2: on the show yesterday occurred today, which is just.
23:32
Speaker 3: Concerning.
23:33
Speaker 2: So first of all, to get some context for this,
23:35
Speaker 2: the semiconductor bands of these AI chips started three years ago.
23:40
Speaker 2: The Biden administration started imposing these bands back in twenty
23:43
Speaker 2: twenty two, basically saying, look, these these high end AI
23:47
Speaker 2: related chips, we have concerns about how they could be
23:51
Speaker 2: used by some of our strategic alla strategic not ad lies,
23:55
Speaker 2: some of our strategic adversaries. Thank you, Yeah, that was
24:00
Speaker 2: that was what I was looking for.
24:01
Speaker 3: They formalized a lot of those.
24:03
Speaker 2: Throughout twenty twenty three and twenty twenty four, and President
24:06
Speaker 2: Trump generally kept them in place as things started heating
24:10
Speaker 2: up with China when it came to things like the
24:14
Speaker 2: export of rare earth materials and magnets into the United States.
24:18
Speaker 2: This seemingly whether it was the negotiating chip to sorry, thanks,
24:28
Speaker 2: whether I was waiting for your laughter, can we just
24:30
Speaker 2: have his laugh on a laugh track form me so
24:32
Speaker 2: next time he misses that, Whether it was part of
24:37
Speaker 2: that overall negotiation, or whether it was just, you know,
24:40
Speaker 2: truly a big push from in Vidia.
24:43
Speaker 3: The restrictions started.
24:45
Speaker 2: Getting lifted under President Trump, and I think a few
24:48
Speaker 2: things there, you know, I think he was genuinely convinced
24:51
Speaker 2: of the business opportunity for American chip makers like in
24:55
Speaker 2: Nvidia and AMD. I think they made a compelling argument
24:59
Speaker 2: to him that looked, if you don't allow us to
25:01
Speaker 2: do this, they're just going to develop their own homegrown industry.
25:05
Speaker 3: Yeah.
25:05
Speaker 2: I mean we've seen it dozens of times before. You know,
25:08
Speaker 2: they'll get access to these things through the black market anyway,
25:11
Speaker 2: and so just let us sell them at a reasonable
25:13
Speaker 2: price so that they don't develop a domestic industry for them.
25:17
Speaker 2: So these lower grade chips were developed to buy in Vidia,
25:21
Speaker 2: the H twenty chips, and that was the chip that
25:24
Speaker 2: was part of this deal to be able to sell
25:26
Speaker 2: to China and made a lot of noise yesterday because
25:30
Speaker 2: again the unique structure of this deal between the White
25:35
Speaker 2: House and a private company for them to pay a
25:38
Speaker 2: seeming tax, but a voluntary tax to the Treasury for
25:42
Speaker 2: the sale of these this morning, as we predicted what happen,
25:48
Speaker 2: just not on this timescale. China is now urging firms
25:52
Speaker 2: to avoid purchasing those H twenty chips that in Nvidia
25:55
Speaker 2: just struck this deal with a rational rational yeah, China's part.
26:02
Speaker 3: I mean, so a few things that they cited.
26:04
Speaker 2: One they they cited concerns about the the H twenty chips,
26:08
Speaker 2: you know, being used to spy on them, all sorts
26:10
Speaker 2: of tracking locations.
26:12
Speaker 4: We're doing that by.
26:13
Speaker 3: I certainly do too.
26:16
Speaker 2: But honestly, this now puts you with a lot of
26:20
Speaker 2: egg on your face. Oh, if you're president, if you're
26:23
Speaker 2: the president, if you're in Vidia, like, all of these
26:25
Speaker 2: things have been negotiated out for months, and now you
26:28
Speaker 2: have the Chinese Communist Party leader saying, don't buy them.
26:32
Speaker 2: We don't want this stuff in our country. We're going
26:34
Speaker 2: to develop it domestically.
26:35
Speaker 3: Anyway.
26:37
Speaker 2: Where this leads is precisely where I thought it would lead,
26:41
Speaker 2: which is now you're going to have in Nvidia CEO
26:44
Speaker 2: Jensen Wong going back to the White House and saying,
26:47
Speaker 2: not good enough. We need to sell our black Well chips.
26:49
Speaker 2: We need to sell our latest and greatest, most powerful
26:53
Speaker 2: AI chips available to China and the rest of the world.
26:57
Speaker 2: National security concerns be damned.
26:59
Speaker 4: No way, he's good president surrounded by China hawks. He's
27:02
Speaker 4: been hawkish pretty consistently himself on on this. There's just
27:07
Speaker 4: that would that would so flagrantly compromise.
27:11
Speaker 3: I mean, I.
27:12
Speaker 2: Would hope so, I mean to me, this is it's
27:17
Speaker 2: the pregnant thing, right, Either you have national security concerns
27:20
Speaker 2: about this or you don't. And there's no dollar amount of.
27:23
Speaker 4: Foreign policy works that should change. Foreign policy is gray.
27:27
Speaker 4: There's a lot of half pregnancies in foreign policy. Yeah,
27:31
Speaker 4: a terrible analogy. But anyway, you don't.
27:36
Speaker 2: I guess my point would be, you don't solve national
27:38
Speaker 2: security concerns by taxing the sales.
27:40
Speaker 3: Of the goods.
27:41
Speaker 2: No, you don't, right, like you you you come up
27:44
Speaker 2: with ways to mitigate it. It's a negotiation. But I
27:47
Speaker 2: don't see how collecting revenue from the sales of the
27:50
Speaker 2: goods mitigates your concern about how China is going to
27:52
Speaker 2: use these latest and greatest chips.
27:54
Speaker 4: And a little out of the president. Oh sorry, Mike.
27:56
Speaker 2: The President is now saying that he's open to letting
27:58
Speaker 2: n VIDEOS sell it downgrade version of their most advanced
28:01
Speaker 2: chips to China, not the H twenties, a downgraded version
28:04
Speaker 2: of the black one.
28:05
Speaker 4: I think this The President has taken some criticism for this.
28:08
Speaker 4: I can understand why, being a free market fanatic myself,
28:11
Speaker 4: But I think this type of thing goes on all
28:12
Speaker 4: the time behind the scenes between administrations, especially since the
28:16
Speaker 4: inception of the Gold War, I mean, the first one.
28:18
Speaker 4: We're in a new one now obviously, and the dynamics
28:20
Speaker 4: will hopefully settle down to something similar. But I think
28:23
Speaker 4: this is totally typical of the give and take that
28:26
Speaker 4: you see when we have a strategic, as you said,
28:28
Speaker 4: adversary that's also economically indispensable to us in some ways.
28:33
Speaker 2: Yeah, and that's my hopeful outlook is, Look, this is
28:37
Speaker 2: necessary because otherwise we can't do anything. If China genuinely
28:42
Speaker 2: cuts off the supply of the rare earth materials that
28:44
Speaker 2: we need to manufacture, then we don't have a defense industry.
28:47
Speaker 2: We don't have a manufacturing industry. We don't have any
28:49
Speaker 2: of the things that we are trying to accomplish here
28:52
Speaker 2: in the United States if we can't get the magnets
28:54
Speaker 2: out of China.
28:55
Speaker 4: I think the sorry no, only it makes it different
28:58
Speaker 4: is Trump put is a little flourish on it by
29:00
Speaker 4: extracting money, which I sort of like. I recognize it's
29:04
Speaker 4: not constitutional, but at least you walk away with a
29:06
Speaker 4: big chugg It's comical.
29:08
Speaker 1: The way comical. I mean.
29:09
Speaker 4: I mean that not as a criticism. It's comical in
29:11
Speaker 4: the sense that it's just him being him. Yeah, okay,
29:13
Speaker 4: I'll give you what you want, but you gotta give
29:15
Speaker 4: me fifteen percent. Everybody's aghast, but it's I suppose better
29:21
Speaker 4: than nothing, though it may not be better than better
29:25
Speaker 4: to shore up to the extent this does, it'll be
29:27
Speaker 4: and drop in the bucket our financial position. Though as
29:30
Speaker 4: you pointed out, it might not be legal. But that's
29:32
Speaker 4: okay too. Test it see if see if it is.
29:35
Speaker 3: Yeah, I don't.
29:35
Speaker 4: I don't like the arbitrariness of it. I think you've
29:37
Speaker 4: got to make the rules somewhat uniform so businesses know
29:40
Speaker 4: what their costs are. But it's a potentially interesting model.
29:43
Speaker 4: These are uncharted waters. I'm willing to give the president
29:45
Speaker 4: some latitude on something like this.
29:47
Speaker 2: Let's take a quick break. When we come back. I
29:52
Speaker 2: want to talk about Intel. You want to talk about
29:53
Speaker 2: the BLS.
29:54
Speaker 4: Why don't we say BLS for all right?
29:57
Speaker 3: I'm talking to Intel when we come back.
30:00
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30:07
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30:18
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30:32
Speaker 3: At least for the time being.
30:34
Speaker 2: President Trump seems to have softened a stance on the
30:38
Speaker 2: Intel CEO and his seeming I guess he's alleged conflicts
30:43
Speaker 2: of interest. This one, to me at least flew under
30:46
Speaker 2: the radar, mainly because Intel is just so unimportant now
30:51
Speaker 2: in the overall semiconductor industry. But the allegations I think
30:56
Speaker 2: started by who first brought them to the ten Tom Cotton,
31:01
Speaker 2: I don't remember. Somebody somebody in the Senate I believe
31:04
Speaker 2: brought this to the attentions on business.
31:07
Speaker 3: Was he okay?
31:07
Speaker 4: And five minutes later, the President called for the.
31:10
Speaker 2: Yeah, so the allegations are looking. You know, he's got
31:12
Speaker 2: a history of investing in China. The company he used
31:15
Speaker 2: to run or work for was found guilty of, you know,
31:19
Speaker 2: breaking some I think some investment violations when it comes
31:24
Speaker 2: to investing in companies that support the Chinese military, and
31:27
Speaker 2: so there's a history there. President Trump sat with Liputen
31:31
Speaker 2: earlier this weekend, I believe it was, and the seeming
31:36
Speaker 2: conclusion there was that is not as big a concern,
31:39
Speaker 2: or at least they seem to have found ways to
31:42
Speaker 2: get around those concerns for the time being. We'll see
31:45
Speaker 2: that this could heat right back up and it doesn't
31:48
Speaker 2: change I think probably the most important thing for Intel,
31:51
Speaker 2: which is this company has been a raging fiasco for
31:57
Speaker 2: the last decade in terms of their a bill to
32:01
Speaker 2: be a modern chip company. I mean, don't get me wrong,
32:04
Speaker 2: their core business is still their core business. And I'm
32:06
Speaker 2: staring at my laptop that has an Intel vpro Evo design.
32:11
Speaker 2: I couldn't tell if that was a seventeen or an
32:14
Speaker 2: I seven. It's an I seven chips sitting in it's
32:16
Speaker 2: so they still do dominate that market, but that's frankly not.
32:19
Speaker 3: Really know your chips.
32:20
Speaker 2: Oh yeah, I know my semiconductors when it comes to
32:23
Speaker 2: Lenovo think pads quite well. But that's not where the
32:29
Speaker 2: margins are being made here, that's not where the growth
32:31
Speaker 2: is coming from. And Intel has failed for quite a
32:35
Speaker 2: few years now to modernize into a semiconductor company that
32:40
Speaker 2: anyone wants to contract.
32:42
Speaker 3: With or invest in.
32:43
Speaker 2: And so we'll see how the shake up and changes
32:49
Speaker 2: go here. But you know, they've tried everything from getting
32:53
Speaker 2: rid of manufacturing to focusing a lot more on manufacturing,
32:56
Speaker 2: to shifting to AI chips and have found themselves so
33:00
Speaker 2: several steps behind at almost every step.
33:02
Speaker 3: Of the way.
33:03
Speaker 2: And regardless of who's leading the company, they've got a big,
33:08
Speaker 2: big series of things to do for this turnaround story.
33:11
Speaker 4: Look, if he's compromised, the board presumably should have known.
33:14
Speaker 3: That, correct. They vet these people pretty thoroughly.
33:18
Speaker 2: You're especially if you're going to run a company that
33:21
Speaker 2: receives or is due to receive hundreds of millions of
33:25
Speaker 2: dollars of government funding via the Chips Act, you would
33:28
Speaker 2: think you would spend a lot of time vetting them
33:31
Speaker 2: to make sure there are no you know, conflicts.
33:34
Speaker 4: Ronald Reagan never cut deals. Economy was pretty damn good.
33:38
Speaker 4: Bill Clinton never cut deals. The economy was pretty damn good.
33:41
Speaker 4: The job respectfully, I would if I can just make
33:44
Speaker 4: a general comment about all of this. The theme of
33:46
Speaker 4: the past two sessions has been segments, excuse me, has
33:50
Speaker 4: been things the White House is doing to affect its
33:53
Speaker 4: economic views. President could try making you little, I say
34:00
Speaker 4: little in the context of the economy. They're big to
34:02
Speaker 4: us as individuals. Obviously, rather than spend time with this
34:06
Speaker 4: tiki tech stuff, berating CEOs, trying to ring an extra
34:11
Speaker 4: whatever million out of Nvidia forlege for export privileges, create
34:18
Speaker 4: the conditions generally that allow for businesses to innovate and
34:23
Speaker 4: invest and grow the economy. If you look at patches
34:27
Speaker 4: of high and stable economic growth historically I cited the
34:31
Speaker 4: eighties and nineties, they weren't brought about by great deal making.
34:34
Speaker 4: And well, you know this frustrates me as a free
34:38
Speaker 4: market fanatic.
34:38
Speaker 2: Yeah, That's what I was going to go back to,
34:40
Speaker 2: is that is the almost the entire thesis of traditional
34:45
Speaker 2: conservative Republican economics is keep your hands off it. Create
34:49
Speaker 2: the conditions for good business and that will come. That
34:52
Speaker 2: is shifted under the president. And to me, what it
34:55
Speaker 2: comes down to is do you have confidence in his
34:58
Speaker 2: decision making process.
35:00
Speaker 4: It might be great, but is that a good use
35:01
Speaker 4: of it. Every one of these deals could be a
35:03
Speaker 4: home run. Is that a good use of the press.
35:05
Speaker 4: Maybe he feels like, well, I got my tax bill passed,
35:07
Speaker 4: mission accomplished, we're cutting regulations elsewhere. I have the time
35:11
Speaker 4: to devote to this. I'm saying it would be strange
35:14
Speaker 4: if his bore and we won't know for years we
35:16
Speaker 4: have to look back on the growth rate. But my
35:18
Speaker 4: guess is it won't bear any more fruit than the
35:21
Speaker 4: general approach is taken by economically successful presidents historically. And
35:25
Speaker 4: I wish someone around him would tell him to resist
35:27
Speaker 4: the urge to deal make on a one off basis
35:31
Speaker 4: and instead focus on creating general conditions necessary for growth.
35:35
Speaker 4: And I know Larry Kudlow, who a lot of you
35:37
Speaker 4: listening love as I do, would agree. In fact, I'm
35:40
Speaker 4: probably repeating something he has said many times over the
35:43
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36:57
Speaker 2: Well, the least pitiable person in business is once again
37:00
Speaker 2: making some noise about the unfairness of business. That would
37:03
Speaker 2: be Elon Musk complaining and threatening a lawsuit over Apple
37:08
Speaker 2: and their App Store rankings. So I can't say I'm
37:12
Speaker 2: an expert on all of this, but if you are unaware,
37:16
Speaker 2: Elon Musk owns the company X formerly Twitter. That company
37:20
Speaker 2: has been developing its own artificial intelligence chat GPT competitor
37:25
Speaker 2: named Grock, and Elon Musk not too happy about the
37:29
Speaker 2: App Store ranking, saying it's basically impossible for any AI
37:32
Speaker 2: company besides the Sam Altman led Open Ai to reach
37:35
Speaker 2: the top rankings in its app store and called it
37:39
Speaker 2: an unequivocal antitrust violation, which he's not the first CEO
37:45
Speaker 2: to allege that that is the case with Apple. But
37:49
Speaker 2: I will just point out that the most downloaded free
37:53
Speaker 2: app on the App Store is Chat GPT, while Grock
37:57
Speaker 2: is ranked six and so so I'm just confused as
38:02
Speaker 2: to why Elon Musk would believe that Apple should be
38:05
Speaker 2: putting Rock as the must have app in their sections.
38:11
Speaker 2: So more to come on that fiasco. Let's take a
38:14
Speaker 2: quick break. When we come back, We're talking wages, and
38:17
Speaker 2: we're talking CPI on the Financial Exchange