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Fed Inflation Strategy Faces a Credibility Test · The Financial Exchange Show

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Speaker 2: Chuck Mark been with you here and kind of a
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Speaker 2: nice little Uh well, it's it's a mixed market. Actually.
1:19
Speaker 2: I was looking at, you know, a couple of things earlier,
1:22
Speaker 2: but things have changed since market's open. The S and
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Speaker 2: P is still up twenty points about a quarter percent,
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Speaker 2: which is nice. Downs up five and eighty nine points
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Speaker 2: one percent, which is great. Now's that composite currently up
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Speaker 2: twenty two points, has been flirting with going into negative territory.
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Speaker 2: The Rust two thousand, slightly negative tenure treasury is flat
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Speaker 2: on the day. Gold is absolutely ripping, though, now up
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Speaker 2: one hundred and forty eight bucks an ounce to forty
1:47
Speaker 2: three oh one. So gold catching a bid the last
1:50
Speaker 2: couple of days after searching for one for the last
1:52
Speaker 2: couple months. You've got crude oil down sixty nine cents
1:56
Speaker 2: a barrel to seventy five oh eight. The Triple A
1:57
Speaker 2: national average for gas prices one point one sense I'm sorry,
2:02
Speaker 2: no point wow. TRIPLEA now goes out in additional decimal point.
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Speaker 2: This is gonna totally confuse me. Gas prices are now
2:12
Speaker 2: down point nine one cents exactly. I don't know what
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Speaker 2: that means. I don't know why they wanted to go
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Speaker 2: out another decimal point, why they like, we don't need
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Speaker 2: four decimal points on gas. That's that's that's.
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Speaker 3: Too many on the pump, isn't it.
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Speaker 2: No, it's well, not on the pump, actually on the sign.
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Speaker 2: But you know, I just I can't do an additional
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Speaker 2: decimal point on gas. Gas prices are down almost one
2:43
Speaker 2: cent overnight, so good what we are seeing. Wholesale gas
2:47
Speaker 2: prices are coming down meaningfully, particularly in the Midwest, so
2:50
Speaker 2: there's likely to be some relief there. It's gonna be
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Speaker 2: muted in a few cases by gas taxes that are
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Speaker 2: set to gas tax holidays that are set to sunset,
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Speaker 2: and so that's going to be offset somewhat on that
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Speaker 2: side of things. But we should be seeing its movement
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Speaker 2: back down below four dollars a gallon nationally in the
3:10
Speaker 2: next few days if everything holds the way it's currently
3:14
Speaker 2: being priced in the caveat being. We don't know what's
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Speaker 2: gonna happen in the release. It could get better, it
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Speaker 2: could get worse, it could stay the same. But if
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Speaker 2: things hold in terms of pricing the way it looks
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Speaker 2: right now, we should see some improvement heading into mid August,
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Speaker 2: which would be nice. It dovetails nicely into this piece
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Speaker 2: from market Watch. So what's the plan to bring down inflation?
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Speaker 2: The new FED chair and his White House allies say
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Speaker 2: you shouldn't ask. Do you think that's an accurate characterization
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Speaker 2: of Kevin Worsh's tenured thus far and his approach to
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Speaker 2: communicating on inflation.
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Speaker 3: I think he could do a better. I'm a fan
3:51
Speaker 3: of his philosophy, his obsessive almost focus on price stability
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Speaker 3: at the expense of the other prong of the Fed's mandate.
4:02
Speaker 3: In other words, he seems to me like he really
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Speaker 3: in this. I'm inferring this not just from his recent remarks,
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Speaker 3: but from his long history in the public eye. Sure,
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Speaker 3: he really hates inflation, and he really hates the way
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Speaker 3: that the FED has expanded its remit over the past
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Speaker 3: couple of decades to include things like unemployment among specific
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Speaker 3: groups of people and stuff like that, things that monetary
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Speaker 3: policy probably can't influence. So I agree with him totally
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Speaker 3: in an ideological sense. Just again in terms of his
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Speaker 3: general view of what a central bank canon can't do.
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Speaker 3: I think he escuws forward guidance, which I otherways he
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Speaker 3: doesn't want the FED talking down the long end of
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Speaker 3: the current, and this isn't the only way they do it.
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Speaker 3: But he doesn't like the fact that the FED, outside
4:53
Speaker 3: of extreme instances like the GFC two thousand and eight
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Speaker 3: Great Recession, talking too much about what it's going to
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Speaker 3: do in the future. Arguably that has a distortionary effect
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Speaker 3: on long duration assets like long term fixed income and
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Speaker 3: equities too, So I agree with him there. He could
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Speaker 3: do a better job, though, of articulating why he doesn't
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Speaker 3: think the FED has a role that expands to those areas.
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Speaker 3: And that's upsetting people in the media who've been used
5:25
Speaker 3: to sort of excessively chatty FED chairs and other officials
5:30
Speaker 3: because they aren't a living based on that, it's less
5:34
Speaker 3: for them to write about. It's upsetting bond traders who
5:37
Speaker 3: have less to go on now, I mean, God forbid.
5:41
Speaker 3: They have to actually do some work to engage in
5:43
Speaker 3: price discovery. That's what markets are for. But for the
5:46
Speaker 3: past few decades their job has been made I won't
5:49
Speaker 3: say easier. They work very hard, but their job has
5:52
Speaker 3: been made simpler because the FED has provided the SEP
5:57
Speaker 3: well since twenty twelve anyway, for example, and is employing
6:01
Speaker 3: forward guidance. Liberally, it makes the job of a long
6:05
Speaker 3: term bond trader. I won't say easier, I'll say a
6:07
Speaker 3: little bit simpler. So there's a little hue and cry
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Speaker 3: from that pocket.
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Speaker 2: I've seen some commentary to the effect of, hey, there's
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Speaker 2: a difference between forward guidance and understanding the fed's reaction function,
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Speaker 2: and Warsh is missing the boat because rather than just
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Speaker 2: getting rid of forward guidance, which is, hey, we're going
6:30
Speaker 2: to continue to execute this policy in the future, he
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Speaker 2: doesn't even want to answer questions about the fed's reaction function, meaning, hey,
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Speaker 2: if you see this happen, how would you yeah behave?
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Speaker 2: Do you think that's a fair criticism or no?
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Speaker 3: Well, I do think it's fair. It's fair because observers
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Speaker 3: have become spoiled and conditioned, and journalists maybe are a
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Speaker 3: little bit. Journalists don't have the economic, the quantitative tools
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Speaker 3: to do that work themselves, so they expect the FED
6:59
Speaker 3: to laid out for them. A researcher can do that.
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Speaker 3: This idea of a reaction function fancy way of saying.
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Speaker 3: Rule by the way, reaction function is what I do
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Speaker 3: is a function of what you do. So you move
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Speaker 3: one unit to the right. My reaction function says, I
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Speaker 3: move one point five units to the right. The Fed's
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Speaker 3: reaction function says, if inflation is an excess of its target,
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Speaker 3: you raise more than one for one with inflation. If
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Speaker 3: GDP is coming up short of economic growth, that is
7:23
Speaker 3: coming up short of potential GDP, you ease one for
7:28
Speaker 3: one with the difference. I'm oversimplifying the so called tailor
7:31
Speaker 3: rule here, but that's an example. You can estimate that.
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Speaker 3: So they exist in theory, and they exist, they come
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Speaker 3: out of the data if you estimate them. Worsh, I
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Speaker 3: wouldn't expect the FED chair to say, here's my rule.
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Speaker 3: I would expect the FED Worsh could do a better job.
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Speaker 3: So as big of a fan as I am of his,
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Speaker 3: and I know I'm laying it on a little bit
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Speaker 3: thick here, but Worsh could do a better job of
7:54
Speaker 3: saying I believe there is a short term trade off
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Speaker 3: between inflation and unemployment, because everybody does the FED can
8:00
Speaker 3: always goose demand. Does anybody think the FED can't print money,
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Speaker 3: lower interest rates and stimulate the it's any serious, per okay,
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Speaker 3: other than a couple of.
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Speaker 2: If you can move in one direction, you can move
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Speaker 2: in the other is the logical inference.
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Speaker 3: I think most economs would agree with that statement, not everybody.
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Speaker 3: I don't want to paint with too broad a brush.
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Speaker 2: Here's let me ask another question. Yeah. Uh. The Atlanta
8:20
Speaker 2: Fed is one of the FED branches. Obviously, they have
8:26
Speaker 2: on their website, as they've had for a number of years,
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Speaker 2: a tailor rule utility that allows you to be basically specify, Hey,
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Speaker 2: if I want inflation to be X using this measure,
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Speaker 2: and you know a few other parameters that you can
8:42
Speaker 2: put in, what would what should the effective FED funds
8:47
Speaker 2: rate be in order to generate said policy. You've played
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Speaker 2: around with this a couple times, I think, yeah, yeah,
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Speaker 2: if you put it in just with its default settings
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Speaker 2: two percent tar for inflation using the latest quarter of data,
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Speaker 2: you get a prescription for FED funds to be anywhere
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Speaker 2: between four and a half and six and a half,
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Speaker 2: and today it's it's three and a half effectively. So
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Speaker 2: this gets to I think the next question that a
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Speaker 2: lot of people are asking, which is, hey, if if
9:17
Speaker 2: worsh is someone who claims to be serious about inflation,
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Speaker 2: which he does, and he's talking about wanting to restore
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Speaker 2: price stability, then in a period of elevated inflation, with
9:29
Speaker 2: inflation above target for basically the last five years. Now
9:34
Speaker 2: at this point, how come during both of his first
9:38
Speaker 2: two meetings he has not voted to raise the Fed funds.
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Speaker 3: Because the the the tailor rule named after a guy
9:44
Speaker 3: named John Taylor, Yes, economist Stanford whatever, it's more descriptive
9:49
Speaker 3: than prescriptive. I don't I don't know that you can
9:54
Speaker 3: use it to set And this is the way I
9:55
Speaker 3: think most economist feel about it, or are many from
9:59
Speaker 3: my reading the literature on this.
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Speaker 2: Sure, And I'm not saying that interest rates should be
10:03
Speaker 2: five and a half percent. I'm just saying, for a
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Speaker 2: self described inflation hawk entering into the FED at a
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Speaker 2: period where inflation has been elevated for five years, let's
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Speaker 2: let's move past the tailor rule. Yeah, what's his justification
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Speaker 2: for voting against interest rates?
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Speaker 1: Look?
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Speaker 3: Interest rates? The real Fed Funds rate, which is the
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Speaker 3: observed Fed Funds rate three and a half ish minus
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Speaker 3: technically expected inflation. But I'm just gonna use actual inflation
10:32
Speaker 3: over the past year. Sure, a little bit more well,
10:34
Speaker 3: I guess aggresive. I was gonna say conervative, but it's
10:36
Speaker 3: a little bit more aggressive A little bit more forgiving
10:41
Speaker 3: is the word I was looking for. You get a
10:43
Speaker 3: zero percent real FED funds rate right now if you
10:46
Speaker 3: just take inflation off the observed FED funds rate, that's
10:49
Speaker 3: definitely not restrictive. Sure, that's probably not neutral. Neutral the
10:54
Speaker 3: rate which keeps inflation steady. If the economy is firing
10:58
Speaker 3: on all cylinders but not running too hot, that you
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Speaker 3: call that neutral or natural if you want to think
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Speaker 3: about it that way is probably closer to one. So
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Speaker 3: FED funds rates probably accommodative right now. It's probably stimulating
11:09
Speaker 3: the economy. And that's evident, by the way, in the
11:11
Speaker 3: price of every asset you want to look at, and
11:13
Speaker 3: the FED does pay close attention to asset churs. It's
11:16
Speaker 3: also evident in financial conditions indicies, which include asset prices.
11:19
Speaker 3: So look, if I were, if I could, you know,
11:22
Speaker 3: be FED chair for a day, I would have raised rates.
11:25
Speaker 3: I think. I think because you don't want to just
11:28
Speaker 3: do a quarter basis point. No, I would do a
11:30
Speaker 3: quarter percentage point. Excuse me, no, I.
11:32
Speaker 2: Would do the same not the same thing. But in
11:34
Speaker 2: twenty twenty two, beginning of the year, I said, look,
11:37
Speaker 2: the FED just should hike five percent and get it
11:39
Speaker 2: over with, and eventually they needed to hike five percent,
11:42
Speaker 2: Like that's where they finally got to after like a
11:44
Speaker 2: year and a half. At this point, right now, if
11:48
Speaker 2: if you made me fed chair for a day and
11:49
Speaker 2: then said, but you never have to like be fed
11:51
Speaker 2: chair ever again, because I would want to be hate
11:54
Speaker 2: the job. You know, Fine, I'm taking FED funds back
11:58
Speaker 2: to five percent, and it's probably fine. It's not going
12:01
Speaker 2: to kill the economy. It probably brings the long end
12:05
Speaker 2: in a little bit because people realize I'm serious about inflation.
12:10
Speaker 2: It brings inflation expectations in, and the economy can survive
12:14
Speaker 2: on that. It would be totally fine.
12:16
Speaker 3: There's an argument for cold turkey, Chuck. I just you
12:19
Speaker 3: just I just don't know. Things are pretty fragile right now.
12:21
Speaker 3: Stocks are.
12:23
Speaker 2: Are they like, look at what's driving away? No, No,
12:28
Speaker 2: let's take a quick break. No, this is a great segue. Actually,
12:31
Speaker 2: let's take a quick break, and when we come back,
12:33
Speaker 2: we're gonna talk about whether the economy today is fragile
12:36
Speaker 2: or not.
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13:20
Speaker 2: All right, So, last segments, we were talking about the
13:24
Speaker 2: economy and I said, look like, just hike interest rates
13:28
Speaker 2: one and a half percent and it'll be fine. Like
13:30
Speaker 2: the economy will survive, It'll bring the long end down,
13:32
Speaker 2: which will actually make mortgages cheaper, and like things will
13:36
Speaker 2: be just fine. And Mark made a comment to the
13:39
Speaker 2: tune of, well, the economy is what was the term
13:42
Speaker 2: that you I said, It might be a little fragile, right, fragile.
13:47
Speaker 2: Explain to me the fragility.
13:49
Speaker 3: Well, valuations, So starting with asset markets, stocks are expensive,
13:53
Speaker 3: bields have been sort of jumpy. So that's one, I
13:58
Speaker 3: guess way to conclude. That's one metric by which you
14:04
Speaker 3: might conclude that things are fragile. Historically, when valuations have
14:08
Speaker 3: gotten to where they are, stocks have been susceptible to
14:13
Speaker 3: big declines. Air pockets would you see something interesting?
14:16
Speaker 2: No, I'm just a a stock moving a lot. I
14:19
Speaker 2: listened while.
14:19
Speaker 3: I'm okay, no, no, no, And I'm not saying hey, listen
14:22
Speaker 3: to me. I no, no, for you do something else
14:24
Speaker 3: and not push back. So do you want to take
14:26
Speaker 3: a break? Oh and the other thing chuck, you know.
14:28
Speaker 3: Can I just make one more point about fragil Yeah?
14:30
Speaker 3: So economic growth is okay, but it slowed a lot
14:34
Speaker 3: last year. We went from in twenty twenty three, the
14:37
Speaker 3: economy I didn't have to do this, but it grew
14:39
Speaker 3: at two point nine percent. In twenty twenty four, it
14:41
Speaker 3: grew two point eight percent. In twenty twenty the economy
14:44
Speaker 3: grew two point twenty twenty five. Excuse me, two point
14:47
Speaker 3: one percent. The economy slowed a lot in Trump's first year.
14:51
Speaker 3: Just that's my reference point. I'm not from. I'm not
14:57
Speaker 3: begin we were growing more than trend to to at
15:00
Speaker 3: or maybe a little bit below trend. Job growth fell
15:03
Speaker 3: off a cliff in twenty twenty five.
15:05
Speaker 1: We know this.
15:05
Speaker 2: It's picked up, yep.
15:07
Speaker 3: So I'm not sure in a fundamental sense the economy
15:11
Speaker 3: is like as strong as it it's some perceive it
15:16
Speaker 3: to be because AI is the a. The frenzy of
15:19
Speaker 3: AI spending and the nuts behavior of stocks over the
15:23
Speaker 3: past couple of weeks might be masking some of that
15:25
Speaker 3: underlying weakness. I don't know that we could afford a
15:28
Speaker 3: big rate hike is another way of saying what I'm
15:30
Speaker 3: trying to say.
15:31
Speaker 2: No, no, no fair. So here's how I look at it,
15:34
Speaker 2: and I'm I don't look at asset price. It's just
15:37
Speaker 2: you and I look at different things, which is great
15:39
Speaker 2: because you don't want to be around people that are
15:41
Speaker 2: just looking at the same things the same way. Like,
15:43
Speaker 2: that's not doing anyone any good.
15:45
Speaker 3: I like conformists, but yeah, you like what I like
15:48
Speaker 3: people who conformed in my way of thinking. But yeah,
15:49
Speaker 3: some people might.
15:50
Speaker 2: Like I'm I'm sorry to hear it. No, I'm so.
15:54
Speaker 2: When I look at the drivers of this economy right now,
15:58
Speaker 2: there's one AI spending is that is that a fing
16:02
Speaker 2: like it's.
16:03
Speaker 3: Been a big contributor to say GDP growth, Yeah, investment.
16:06
Speaker 2: From a margin investment when you're talking about things that
16:09
Speaker 2: are marginally pushing up on GDP growth. AI is is
16:14
Speaker 2: the dominant.
16:15
Speaker 3: Past two quarters investment gross private domestic investment. Specifically, if
16:19
Speaker 3: you look at the line items has been a big
16:20
Speaker 3: contributor yet.
16:21
Speaker 1: So.
16:23
Speaker 2: I'm working under the assumption that, based on what companies
16:27
Speaker 2: have told us for the next six to twelve months,
16:31
Speaker 2: that's not gonna change. Okay, gotcha, given what we have
16:38
Speaker 2: in the pipeline for that kind of construction. If you
16:42
Speaker 2: hiked interest rates right now, it's not affecting that. And
16:46
Speaker 2: hiking interest rates does.
16:47
Speaker 3: It does hike killed risk appetite?
16:50
Speaker 2: Sorry?
16:50
Speaker 3: But what if it all this debt that they're gonna
16:52
Speaker 3: sell Pimco or somebody that we talked about in the
16:54
Speaker 3: last hour. Sure, I'm using Pimco as an example of
16:56
Speaker 3: a Yeah, somebody finds a bank loan fund that might
16:58
Speaker 3: fo scrap. Sorry, it's not crap, it's st I haven't
17:02
Speaker 3: seen the perspectives these securities that will be offered to somebody.
17:07
Speaker 3: If risk appetite is changed by the Fed hiking raids,
17:10
Speaker 3: if it suddenly makes people think these guys might induce
17:13
Speaker 3: a recession to get inflation down, that could dramatically reduce
17:16
Speaker 3: appetite for risk assets like these bonds.
17:19
Speaker 2: Totally understand that, I know you do, but it's also
17:22
Speaker 2: not going to impact the actual stuff that's already moving forward,
17:26
Speaker 2: like the data centers that are being constructed in the
17:29
Speaker 2: next sixty twelve months, Like, yeah, they're in progress, they're
17:33
Speaker 2: going And when we look at areas that have been
17:38
Speaker 2: neutral for the economy in the last year or two,
17:41
Speaker 2: consumer spending generally been not really a huge driver in
17:45
Speaker 2: any of the direction. This year in the summer, maybe
17:47
Speaker 2: it's the World Cup, maybe it's something else, we actually
17:49
Speaker 2: have seen an uptick in consumer spending, so we'll have
17:52
Speaker 2: to see if that continues. And housing has basically been
17:56
Speaker 2: neutral to slightly negative, that's right. Yeah, the markets that
18:01
Speaker 2: matter for housing are all in the South. Like, no
18:05
Speaker 2: one cares about housing construction in the Northeast because a
18:07
Speaker 2: big development in New England, Hey we built two hundred units.
18:11
Speaker 2: A big development in Florida. We're building one hundred thousand
18:14
Speaker 2: units over the next decade. Like it's just the scale
18:18
Speaker 2: is massively different. So the markets that have been hit
18:22
Speaker 2: hard for housing in the South, they're showing signs of recovery.
18:25
Speaker 2: Now when you look at Florida, you look at Georgia,
18:27
Speaker 2: you look at Texas. The places that are kind of
18:30
Speaker 2: getting hurt now the Midwest and up through kind of
18:32
Speaker 2: the West Coast and things like that, those are areas
18:35
Speaker 2: that are struggling a little bit, but they're not the
18:38
Speaker 2: ones that matter for construction. So I guess the way
18:41
Speaker 2: I look at it is I see the data center
18:44
Speaker 2: stuff going on, which I think is just this classic,
18:48
Speaker 2: you know, unstoppable object that's just moving right now at
18:51
Speaker 2: least for the next six to twelve months. And I
18:54
Speaker 2: see housing being able to start becoming a net positive
18:57
Speaker 2: for the economy next year even if the FED hikes,
19:00
Speaker 2: because these Southern markets are recovering to the point where
19:02
Speaker 2: builders are going to be able to build on them again.
19:05
Speaker 2: And so I'm in a place where I don't think
19:09
Speaker 2: there's a ton of upside for the economy the next
19:13
Speaker 2: like six months or so, but I think the data
19:17
Speaker 2: center thing is going to bridge us the next six
19:19
Speaker 2: to twelve and then housing can take over as a
19:21
Speaker 2: driver in twenty seven and twenty eight. I'm not convinced
19:25
Speaker 2: there's a ton of fragility unless some random event comes
19:30
Speaker 2: it hits things quick Break, Wall Street Watches.
19:32
Speaker 1: Next, bringing the latest financial news straight to your radio.
19:39
Speaker 1: Every day. It's the Financial Exchange on the Financial Exchange
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Speaker 1: Radio Network till now full whoa Street Watch, treking the stocks,
19:49
Speaker 1: the data and the headlines driving markets so far today
19:53
Speaker 1: right here on the Financial Exchange Radio network.
19:56
Speaker 4: So there's been some movement over the last hour. Markets
19:58
Speaker 4: are now mixed. The Dow Jones is still up, just
20:02
Speaker 4: up nine tens of percent right now, SMP five hundred
20:05
Speaker 4: is up a little over a tenth of percent. NASDAK
20:08
Speaker 4: is not as flat as you can get right now.
20:11
Speaker 4: Gold is up over four percent and silver just a
20:15
Speaker 4: little higher than that four point one two percent right now.
20:19
Speaker 4: SpaceX has fallen nine percent after releasing its first quarterly
20:22
Speaker 4: report since going public in June. SpaceX reported capital expenditures
20:26
Speaker 4: of eighteen point three seven billion in the second quarter,
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Speaker 4: largely driven by artificial intelligence, and up five hundred and
20:32
Speaker 4: fifty percent from a year ago. Second quarter revenue came
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Speaker 4: in at seven point eight one billion dollars, topping the
20:38
Speaker 4: consensus of six point nine to three billion. Disneystock is
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Speaker 4: up more than two percent despite the media giant reporting
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Speaker 4: a mixed fiscal third quarter. While earnings per share came
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Speaker 4: in above expectations, revenue missed slightly. Revenue from the company's
20:51
Speaker 4: experiences business, which includes its theme park, was up ten
20:54
Speaker 4: percent annually. AMD plunged six percent in early trading on
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Speaker 4: the back of second quarter results that failed to impress investors.
21:01
Speaker 4: The company earned an adjusted a dollar sixty six per
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Speaker 4: share on revenue of eleven point five to four billion dollars,
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Speaker 4: and finally, Eli Lilly jumped more than two and a
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Speaker 4: half percent after it reported in earnings and revenue, beating
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Speaker 4: its second quarter financial report. Eli Lily also raised its
21:16
Speaker 4: full year revenue guidance for twenty twenty six as demand
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Speaker 4: for its weight loss drug zet Bound and diabetes treatment
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Speaker 4: Munjaro continues to surge. I am ben Kitchen And that
21:26
Speaker 4: was Wall Street watch.
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Speaker 2: Mark. We got a piece here. It's titled stocks face
21:31
Speaker 2: their weakest seasonal stretch Why extreme investor pessimism could limit
21:36
Speaker 2: any selling. I always get interested when people start trying
21:40
Speaker 2: to talk about seasonality because it's one of those things
21:44
Speaker 2: that everyone knows about who's spent, you know, a few
21:48
Speaker 2: years in markets, and it doesn't work all the time,
21:54
Speaker 2: but when it works, it really works. It's a it's
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Speaker 2: a fancy way of saying like, you can't use seasonality
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Speaker 2: to predict what's going to happen in any particular year,
22:04
Speaker 2: but when seasonality shows up, you know, it is kind
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Speaker 2: of the way that I look at it. Yeah, it
22:09
Speaker 2: appears to be a real thing, and it's we've looked
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Speaker 2: at different statistically. Well, you can see, you can look
22:16
Speaker 2: at samples of various sizes. September is usually a bad
22:19
Speaker 2: month in all samples long term, of course, and then
22:23
Speaker 2: in sub samples too. The phrase cell and may and
22:27
Speaker 2: go away comes from the fifties, sixties and seventies, when
22:31
Speaker 2: that indeed was a seasonal pattern. It has since gone away.
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Speaker 2: So if you look so, selling may and go away
22:36
Speaker 2: has gone away also.
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Speaker 3: Took a hike because I assume because it was discovered
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Speaker 3: and people acted on it and.
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Speaker 2: Effectively eventually alpha turns in debata.
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Speaker 3: Something like that, or they just yeah, well I would
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Speaker 3: say they the fact that people expected it to happen
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Speaker 3: caused it to go away, and it just.
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Speaker 2: Alpha turns into beata alpha.
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Speaker 3: I'm not sure i'd use that express. I'm not gonna whatever.
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Speaker 2: I'm not gonna say. Once everyone in the market knows
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Speaker 2: about it, it's no longer a reliable source of alpha.
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Speaker 3: Yeah, oh, you think people are using that for excess return?
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Speaker 3: I don't know, but if I'm sure, Okay.
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Speaker 2: I'll give you another example of it. Brent Donnelly, who
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Speaker 2: I already talked about. He has a well known phenomenon
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Speaker 2: called turnaround Tuesday, which the premise is, hey, if the
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Speaker 2: market is down Thursday, Friday, Monday, and he did big,
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Speaker 2: long study on this. Basically, what you see is that
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Speaker 2: Tuesday produces outsize returns. Okay, there's all kinds of different
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Speaker 2: theories as to why it is, most of them in
23:34
Speaker 2: a different psychological ones, like, hey, investors sell on Thursday
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Speaker 2: because something bad starts happening. Then they don't want to
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Speaker 2: hold into the weekend. Then you gap down on Monday
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Speaker 2: and that washes everything out and then you know, people
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Speaker 2: pick up the pieces on Tuesday. Well, the interesting thing is,
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Speaker 2: since Brent published his book five years ago, turnaround Tuesday
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Speaker 2: doesn't exist anymore because enough people in the investment world
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Speaker 2: read it that turnaround Tuesday got moved to my and
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Speaker 2: then Friday, and so everyone tried to frontrun it. It's
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Speaker 2: no longer a functional thing in markets at this point.
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Speaker 3: Yeah, okay, yeah, because once enough.
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Speaker 2: People understand it, it goes away because people try to
24:12
Speaker 2: front run it and off it goes away.
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Speaker 3: Which is a good sign. By the way, correct investors
24:17
Speaker 3: are adapting and corporating this new information into their approaches
24:21
Speaker 3: and things get arbitraged or whatever you want to call
24:23
Speaker 3: it away. But yeah, seasonality is still a real thing.
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Speaker 3: December end of the year tends to be strong. January
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Speaker 3: not so much. It'd be very hard to make money though,
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Speaker 3: based on those patterns.
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Speaker 2: Again, it's something where the trend can be in one direction,
24:38
Speaker 2: but the distribution can still be wide enough that it
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Speaker 2: doesn't work every year, and so one does not simply
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26:10
Speaker 2: Great inclusion by Ben here. Michael Burry, who remember Michael
26:14
Speaker 2: Burry is the guy from the Big Short that went
26:18
Speaker 2: Big Short on What was the was it? Was he
26:22
Speaker 2: using mortgage backed securities? Was he using credit default swaps?
26:25
Speaker 2: I can't remember.
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Speaker 3: I think it was the latter. I think he got
26:27
Speaker 3: Goldman to write cds's on sure on instruments that they
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Speaker 3: packaged and sold to other people. This was a big
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Speaker 3: controversy at the time, Right he was one of those
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Speaker 3: Paulson did. I think the same thing he did. No,
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Speaker 3: I think I'm confusing him with Paulsen. Did Burry do
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Speaker 3: anything with God, I don't think who cares what?
26:44
Speaker 1: Am I?
26:45
Speaker 2: Bury? Bury, Paulsen, and Eisman were the three bigs that.
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Speaker 3: Ok, I know Paulson got Goldman to effectively bet against.
26:54
Speaker 2: Their against their own banks against at the time. So, oh,
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Speaker 2: Michael Burry, everyone knows him because of that. And now
27:04
Speaker 2: he's uh, he's got a substack, just like everyone has
27:07
Speaker 2: a substack that you know, you can read. And his
27:11
Speaker 2: quote from his Tuesday substack post is I continue to
27:14
Speaker 2: believe it's possible we're near a major top and possibly
27:17
Speaker 2: a nineteen eighty seven type fall, but the S and
27:19
Speaker 2: P five hundred making new highs likely will bring new
27:22
Speaker 2: money into the market. Uh So here here's the thing.
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Speaker 2: It's uh, it's just something where whenever famous investors say anything,
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Speaker 2: the best thing that you can do is generally to
27:42
Speaker 2: ignore them, because if you're relying on famous investors to
27:48
Speaker 2: tell you when to do things, they're not they're not.
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Speaker 2: They're they're either talking their book, or they're not going
27:56
Speaker 2: to tell you the other side of the trade, or
27:59
Speaker 2: they're not going to allow to think for yourself because
28:01
Speaker 2: you just say, oh, this guy's smart, I'm gonna do
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Speaker 2: what he does, and that just is a way to
28:08
Speaker 2: take low conviction positions that you exit as soon as
28:11
Speaker 2: something goes against you, which means that you might actually
28:14
Speaker 2: miss it when it works out, or if it does
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Speaker 2: work out once then you follow them for everything, and
28:18
Speaker 2: maybe they're not actually grat at investing. They've just had
28:20
Speaker 2: one or two big bets that have worked. And so
28:24
Speaker 2: my general rule of thumb is if you've got a
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Speaker 2: publication quoting a famous investor on you know what to
28:29
Speaker 2: do right now or what's coming, you should generally do
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Speaker 2: nothing with it.
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Speaker 3: And that's basically what he says. Shorting is not for everyone.
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Speaker 3: Burry wrote, I must short for some reason. I guess
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Speaker 3: he feels compelled to. And then he goes on to
28:43
Speaker 3: say most should not. And it's true most people don't
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Speaker 3: and shouldn't. So he yeah, pretty much says that, which
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Speaker 3: is good.
28:51
Speaker 2: Let's take a quick break. When we come back, we'll
28:53
Speaker 2: do a little bit of stack roulette.
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29:41
Speaker 2: Mark what do you got for Me? For stock Roulet.
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Speaker 3: Bloomberg reporting that a new study from the Institute for
29:47
Speaker 3: Family Studies found that surging retail trading is correlated with
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Speaker 3: demoralization in young men, with sixty four percent of men
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Speaker 3: aged eighteen to twenty nine who tradestocks daily report feeling
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Speaker 3: like failures. Study also found that daily fantasy sports and
30:04
Speaker 3: adult material use were similarly correlated to feelings of failure,
30:09
Speaker 3: with young men who engaged in these activities less than
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Speaker 3: daily being about half as likely to regret reporting feelings
30:16
Speaker 3: to report feelings, excuse me of demoralization. So I don't
30:21
Speaker 3: know if which way the causal arrow goes. Here are
30:23
Speaker 3: people who aren't feeling good about their, say, financial situation
30:27
Speaker 3: and thus about their larger sense of self worth more
30:31
Speaker 3: likely to do day trading or our day trading losses
30:33
Speaker 3: contributing to people's sense of self failure. Does the arrow
30:37
Speaker 3: go in both directions, one feeding the other. I don't know,
30:41
Speaker 3: but generally day trading we view as something very distinct
30:43
Speaker 3: from say, what we do on a day to day basis,
30:46
Speaker 3: which would be long term investing.
30:49
Speaker 2: Yeah, I don't know which direction the causality goes. What
30:54
Speaker 2: I would assume in today's day and age. If you
30:58
Speaker 2: are day trading, you're probably spending a much time on
31:00
Speaker 2: internet message boards about day trading. Yeah, and those generally
31:05
Speaker 2: have one of two styles of posts. Either Hey, I
31:09
Speaker 2: made millions of dollars, which makes you feel like crap
31:11
Speaker 2: because you didn't, or hey, I lost millions of dollars,
31:16
Speaker 2: which makes you feel like crap because you see someone
31:18
Speaker 2: else losing like their life savings like you. You never
31:22
Speaker 2: see on you know, internet investing boards. Hey, I made
31:27
Speaker 2: like three percent this year and I'm really happy because
31:30
Speaker 2: my net worth grew, you know like that. Yeah, it's
31:34
Speaker 2: kind of like how you know on Facebook. You know,
31:37
Speaker 2: you either have the person be like I'm in Thailand,
31:40
Speaker 2: this is great, or this is the worst day of
31:43
Speaker 2: my life. My dog died in YadA YadA. You don't
31:45
Speaker 2: get the person who just says, well, I got up
31:49
Speaker 2: and went to work and it was fine, and I'm
31:51
Speaker 2: happy that I have a job. And now I'm at
31:53
Speaker 2: home and I'm gonna make dinner like no one.
31:57
Speaker 3: Yeah, they're not controlling for message board.
32:00
Speaker 2: So I just what I do know is based on
32:04
Speaker 2: what I saw from the tech bubble, and you know,
32:07
Speaker 2: subsequent to that, you know, and the rest of my life.
32:13
Speaker 2: Day tradings generally not a way to make money long term.
32:17
Speaker 2: For this says like sixty four percent of people are
32:21
Speaker 2: discouraged or whatever. I would say like ninety nine percent
32:24
Speaker 2: of people are not cut out to be day traders,
32:27
Speaker 2: maybe even ninety nine point nine. It's uh, you have
32:31
Speaker 2: to have tremendous discipline, emotional management, and other skills beyond that.
32:38
Speaker 2: And it's just it's it's it's really hard.
32:40
Speaker 3: But like a lot of risky activities, you have to
32:42
Speaker 3: learn that many people, not everybody.
32:44
Speaker 2: You gotta learn the hard way. Yeah, you gotta learn
32:46
Speaker 2: for yourself, Yeah you do. It's uh just kind of
32:49
Speaker 2: how it is. Uh. I want to talk about two
32:51
Speaker 2: companies that reported earnings today just to catch up on
32:55
Speaker 2: one of my favorite things that still is just kind
33:00
Speaker 2: of wild when you think about what it says about
33:04
Speaker 2: where we've where we've come as a country. Now, McDonald's
33:12
Speaker 2: is a company that sells food. It's what they do.
33:19
Speaker 2: It's it's it's great. I enjoy them. Mark. Do you
33:21
Speaker 2: know what McDonald's revenue was last quarter? No? Sorry, I
33:25
Speaker 2: do not, seven billion?
33:27
Speaker 1: Thank you.
33:28
Speaker 2: Uber is a company that takes stuff from point A
33:32
Speaker 2: to point B. Sometimes it's people, sometimes it's food, sometimes
33:35
Speaker 2: it's tape measures. Do you know what Uber's revenue was?
33:38
Speaker 3: You gonna ask, and I wasn't motivated enough to google it.
33:41
Speaker 2: Why don't you just fourteen billion dollars?
33:44
Speaker 3: Kidding?
33:45
Speaker 2: I know that everyone likes to use McDonald's and be like, Oh,
33:48
Speaker 2: McDonald's earning says this. Here's what it says about, like
33:51
Speaker 2: the American consumer. Uber is twice the size. It gives
33:57
Speaker 2: you far more signal about what is actually driving the
34:02
Speaker 2: US economy because there's just more activity that's.
34:04
Speaker 3: Happening because delivering some McDonalds.
34:06
Speaker 2: That they are also probably delivering McDonald's. So yeah, you
34:11
Speaker 2: very well might be. But I just think that this
34:16
Speaker 2: is important to understand that, yes, McDonald's can still tell
34:19
Speaker 2: us a certain signal about the economy, but it's somewhat
34:23
Speaker 2: limited in its both size and scope of what it captures.
34:28
Speaker 2: Uber is now twice the size from a revenue perspective
34:30
Speaker 2: and growing way faster. And so if you're talking about
34:33
Speaker 2: consumer spending trends, I would rather spend my time understanding, Hey,
34:37
Speaker 2: what's Uber telling me, then what's McDonald's telling me? Because
34:40
Speaker 2: the other thing about McDonald's got to remember, most of
34:43
Speaker 2: their revenue now it's all like franchise fees and stuff
34:46
Speaker 2: like that, Like they're not the ones actually taking most
34:48
Speaker 2: of the risk for operating the restaurants. It's just franchise
34:52
Speaker 2: revenue that comes in. You're not going to expect a
34:55
Speaker 2: ton of surprises there necessarily. So I just think that
34:59
Speaker 2: it's interesting that both these companies tend to report within
35:02
Speaker 2: a day or two of each other, and the one
35:04
Speaker 2: that I think is more interesting to me at this
35:06
Speaker 2: point is Uber because you get a better look at
35:11
Speaker 2: a wider variety of businesses with more scale dealing with consumers.
35:17
Speaker 2: So I find that, uh, it's fun.
35:20
Speaker 3: Hey, Iran and Oman have apparently reached an agreement to
35:24
Speaker 3: open the straight Did you see the headline?
35:26
Speaker 2: I saw a headline.
35:28
Speaker 3: Yeah, Well, Bloomberg's reporting it, and they have several paragraphs.
35:32
Speaker 3: So it sounds like there's some substance there market.
35:36
Speaker 2: No, no, mark, you're misconstruing this. It's not that they've
35:41
Speaker 2: agreed to open the straight up hormones. They've reached an
35:45
Speaker 2: agreement on the route through hor MoES.
35:48
Speaker 3: A potential step toward real Oh I should have kept reading.
35:52
Speaker 2: So this is why. But the headline, No, no, the
35:55
Speaker 2: headline doesn't say it. They've reached an agreement to open it.
35:58
Speaker 3: Iran says agreement on horny Move shipping.
36:01
Speaker 2: Right, an agreement on shipping not well, you know, the
36:05
Speaker 2: the chiro not ki, but the flash that I saw
36:09
Speaker 2: come through. Iran's Foreign Ministry spokesperson says, geographic characteristics of
36:13
Speaker 2: the route agreed to by Iran and Oman. They've agreed
36:17
Speaker 2: that the straight of Horror Moves exists and there's a
36:20
Speaker 2: route through it.
36:21
Speaker 3: I get the sense these people are toying with us.
36:23
Speaker 2: That's that's where we are. So it's again, this is
36:27
Speaker 2: not the reason.
36:28
Speaker 3: Sorry, everybody, I retract that announcement.
36:34
Speaker 2: Yes, so it sounds like they're making progress.
36:38
Speaker 3: Iran's messing with my head too. Now again it's now
36:41
Speaker 3: now the president feels poor guy.
36:43
Speaker 2: Again, Iran's Foreign Ministry spokesperson says, geographic characteristics of the
36:47
Speaker 2: route in Straight of hor moves agreed to by Iran
36:50
Speaker 2: and Oman.
36:51
Speaker 3: These people are geographic characteristic. Yeah that does that even mean.
36:55
Speaker 2: The Straight of horor moves exists and there is a
36:58
Speaker 2: route through it.
37:00
Speaker 3: You're right, that's where.
37:01
Speaker 2: We are, like and and again the stuff that's being
37:05
Speaker 2: discussed is Okay, ships are going to go in through
37:08
Speaker 2: the Iran side and out through the.
37:10
Speaker 3: Oman potentially, Sorry everybody.
37:12
Speaker 2: We'll see and and then again this agreement appears to
37:15
Speaker 2: potentially just be between Oman and Iran, Like there's no
37:19
Speaker 2: mention of the US as being a party to this,
37:22
Speaker 2: and so we'll have to see what the US thinks
37:24
Speaker 2: of this if and when it's finally done. Yeah, this
37:27
Speaker 2: is going well, thanks, so we'll see again. Maybe this
37:31
Speaker 2: ends up pushing things across the finish line. But with
37:35
Speaker 2: these negotiations you really do have to parse every word.
37:38
Speaker 3: Thank you be a good point. I was a little
37:40
Speaker 3: careless there.
37:41
Speaker 2: No, it's uh, I've been fooled before. Yeah.
37:44
Speaker 3: I don't want to be accused of being a mouthpiece
37:46
Speaker 3: for the Iranian government, so thank you.
37:48
Speaker 2: Fool me once. Shame on me forool me twice. Won't
37:51
Speaker 2: get fooled again?
37:54
Speaker 3: You know, something like that?
37:56
Speaker 2: Is that?
37:56
Speaker 3: Is that the express I.
37:57
Speaker 2: Think I think that was the George W. Bush quote.
37:59
Speaker 2: Did you say that it was I'm pretty sure it
38:02
Speaker 2: was him twice? Was that him?
38:05
Speaker 3: Ben?
38:06
Speaker 2: It was someone from.
38:07
Speaker 5: That, But it wasn't quite what you said. It's very
38:11
Speaker 5: very close to that. Okay, we'll get the right quote tomorrow.
38:14
Speaker 5: Let's take a quick break for the rest of the day.
38:16
Speaker 5: We'll see you tomorrow on the Financial Exchange, hopefully with
38:19
Speaker 5: some good horror moves.
38:20
Speaker 2: News