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Chip Stock Volatility Puts the AI Rally on Edge · The Financial Exchange Show

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Speaker 2: It's Chuck, Mark and Tucker with you here. Hey, we're
1:22
Speaker 2: gonna kick things off talking about what went wrong in
1:26
Speaker 2: markets yesterday because it's it's something that we've been touching
1:30
Speaker 2: on a little bit over the last several weeks, which
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Speaker 2: is that tech stocks, specifically semiconductor stocks, and I want
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Speaker 2: to focus on them because that's that's really where the
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Speaker 2: meat of this issue is. They've just gone to a
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Speaker 2: place that is dangerous for the broader market for two reasons.
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Speaker 2: The first is that semiconductor stocks have just gone on
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Speaker 2: this parabolic move up that as anyone knows, whenever you
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Speaker 2: see an asset go parabolically to the top side, it
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Speaker 2: doesn't usually correct by just flattening out and plateauing. For
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Speaker 2: evidence of this, look at what happened with precious metals
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Speaker 2: at the end of last year and early this year.
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Speaker 2: If anyone happens to be a silver fan, you know that,
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Speaker 2: you know, silver went through this again like three x
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Speaker 2: move from you know, the end of August through early
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Speaker 2: February and then promptly has lost you know, fifty percent
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Speaker 2: of its value since then. Gold likewise went through a
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Speaker 2: move that saw it almost double from August to the
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Speaker 2: start of February and now has lost like thirty five
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Speaker 2: percent of its value since then. So it's just something.
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Speaker 2: Those are recent examples, but when assets go parabolic, they
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Speaker 2: don't usually just decide to chill. And the reason why
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Speaker 2: this is problematic for the broader market is because of
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Speaker 2: how valuable these semiconductor companies have gotten. Right now when
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Speaker 2: you look at just the names that are out there
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Speaker 2: that are really the problem on this front, and Vidia
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Speaker 2: is actually not the one that's the issue right now.
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Speaker 2: And Vidia has largely been out of this rally that
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Speaker 2: has taken place over the first half of this year.
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Speaker 2: And Vidia entered this year at about one hundred ninety
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Speaker 2: three bucks a share. It's at one ninety nine right now,
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Speaker 2: and Video's up three percent this year. Now, it did
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Speaker 2: have you know, some swings in this and that, but
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Speaker 2: the big moves have really been happening in the memory
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Speaker 2: chip companies Specifically, the big name that everyone's focused on
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Speaker 2: is Micron Technology, which opened the year at about three
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Speaker 2: hundred dollars a share and peaked at around twelve hundred.
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Speaker 2: It went four x in a span of you know,
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Speaker 2: five and a half months. Other ones that are right
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Speaker 2: you know, in the crosshairs of this sand Disk, a
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Speaker 2: company that I don't think most people even knew existed
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Speaker 2: before the last year because again, they were a computer
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Speaker 2: storage company that's been around for you know, twenty five years.
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Speaker 2: They're not like some hot new company that didn't IPO recently.
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Speaker 2: You know, sand Disc is a company that has been
4:18
Speaker 2: publicly traded now actually no, Sandex has only been publicly
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Speaker 2: traded for a few years. But again, like this is
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Speaker 2: a company that I remember back in like the late nineties,
4:27
Speaker 2: early two thousands, is a storage company with like Western
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Speaker 2: Digital and Seagate and all those companies out there. And
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Speaker 2: this is one where you take a look at what's
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Speaker 2: happened to them this year. And they opened the air
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Speaker 2: around two hundred and thirty bucks a share. They get
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Speaker 2: to twenty three hundred on Monday, ten x in a
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Speaker 2: span of you know, five and a half months. That's
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Speaker 2: just not sustainable. So what you have now is this
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Speaker 2: problem where these companies again you talk about Micron, and
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Speaker 2: the issue with Micron isn't just that it's gone parabolic.
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Speaker 2: It's that it's gone parabolic to the point where it
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Speaker 2: is also no longer some tiny little company from a
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Speaker 2: market cap perspective, but at one point two trillion dollar
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Speaker 2: company that can very much move the broader market. They
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Speaker 2: also happen to report earnings after the bell today. And
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Speaker 2: so the issue that you have here is that the
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Speaker 2: movement that we're seeing in these stocks is just getting
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Speaker 2: more and more violent from day to day, and eventually
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Speaker 2: that's going to cause some some broader problems. It hasn't yet,
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Speaker 2: it's been contained. But again you get like a day
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Speaker 2: like yesterday where there's no approximate cause it's just, oh,
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Speaker 2: you wake up in South Korean stocks, which happen to
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Speaker 2: be you know, heavy in you know, the semiconductor space,
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Speaker 2: or down nine percent, and you're like, oh, I guess
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Speaker 2: we're just gonna have a day here at this point.
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Speaker 2: And this volatility is just you know, swirling through markets,
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Speaker 2: and markets are you know, participants are trying to move
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Speaker 2: from one place to another to try to you know,
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Speaker 2: hold on to what they have. But it's getting a
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Speaker 2: little dodgy under the surface, even though indices remain near
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Speaker 2: all time. Heis mark.
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Speaker 3: Yeah, you could describe it backing up as one speculative
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Speaker 3: frenzy after another precious metals, software chips, Excuse me, not software,
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Speaker 3: and you could take your pick other little segments. That's
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Speaker 3: generally indicative of financial conditions that are probably a little
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Speaker 3: bit too loose, and that's generally attributable to monetary policy
6:31
Speaker 3: that's too loose. I know we're going to get into
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Speaker 3: that later in the show, but you brought up a
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Speaker 3: lot of issues. They could They seem disparate, but I
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Speaker 3: think they're connected, and we won't know for a while.
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Speaker 3: And I think this is one of the challenges that
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Speaker 3: the FED probably faces. They're almost certainly aware of it,
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Speaker 3: because asset price crashes can be destabilizing to the real economy.
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Speaker 2: And the other part that we've talked about, particularly with
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Speaker 2: these semiconductor stocks, these are not areas of the market
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Speaker 2: that if historically been able to maintain strong margins. If
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Speaker 2: you look at semiconductors historically, and I'll pull up Intel
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Speaker 2: just as an example, just because again we got a
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Speaker 2: nice long public track record. We'll go through a few
7:16
Speaker 2: of these, but if if you go and look at
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Speaker 2: Intel stock, and let's look at, you know, just operating
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Speaker 2: margins for Intel over time, because I think this is instructive.
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Speaker 2: When they went public back in the nineties, Intel had
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Speaker 2: you know, thirty percent operating margins that blew out in
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Speaker 2: late ninety seven, they ended up with like fifty five
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Speaker 2: percent operating margins. Like just fat, fat margins that blew
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Speaker 2: out top side. By the time the tech bubble was
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Speaker 2: was bursting in Q four of two thousand and one,
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Speaker 2: that fifty five percent margin had gone down to nine again,
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Speaker 2: just not you know, a very you know, stable space
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Speaker 2: that you can play in. Other companies went when we
8:00
Speaker 2: look at you know again just other companies that operate
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Speaker 2: in that semiconductor space and have you know, a decent
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Speaker 2: track record. Let's look at Texas Instruments as another one
8:13
Speaker 2: again company that's been around for a while, long track record. Okay,
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Speaker 2: like show me you know what things look like tech bubble. Hey,
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Speaker 2: the good they've got twenty percent margins tech bubble bursts.
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Speaker 2: Oh those margins go to you know, negative six percent.
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Speaker 2: Like it's just an area that tends to get chewed
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Speaker 2: up from time to time because you need a ton
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Speaker 2: of capital in there. And again it's a very boombust cycle.
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Speaker 2: Uh you talk about Qualcomm another one and I don't
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Speaker 2: know a lot of these are older names, but I
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Speaker 2: want to find ones that have been through multiple cycles
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Speaker 2: that we can discuss here Qualcom again. Tech bubble, Hey,
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Speaker 2: margins you know, move from you know, low single digits
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Speaker 2: up to you know, twenty five percent and then promptly collapse,
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Speaker 2: you know, negatives shortly after the tech bubble. This is
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Speaker 2: just not an area of the market that tends to
9:02
Speaker 2: have solid, sustainable margins. And you see this with you know,
9:07
Speaker 2: how profits move for these businesses over time. Intel, which
9:12
Speaker 2: I'm still on right now, profit peaked in the tech
9:14
Speaker 2: bubble at ten point five billion dollars and went down
9:17
Speaker 2: to basically flat by December of one. It then finally
9:21
Speaker 2: got back up to It didn't get back up to
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Speaker 2: ten billion dollars of annual profit until September of twenty ten.
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Speaker 2: And now Intel, through a series of missteps, hasn't been
9:31
Speaker 2: profitable for you know, a consistent basis since twenty twenty two,
9:36
Speaker 2: just because okay, like they made some bad decisions in
9:38
Speaker 2: this and that. Qualcomm. If we go and pull them
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Speaker 2: up and look at, you know, how things have moved
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Speaker 2: from a profit perspective for then yeah, it's the same thing. Okay,
9:48
Speaker 2: Like you had profits in the tech bubble, then you
9:50
Speaker 2: went unprofitable. Then another period where they were unprofitable in
9:53
Speaker 2: the you know, twenty late twenty tens. Now they've got
9:57
Speaker 2: you know, some profit again. But it very much is
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Speaker 2: boom and bust for these companies. And this is why
10:03
Speaker 2: when you look at the Philadelphia Semiconductor Index, but the
10:07
Speaker 2: moves that you see there historically might be like two
10:10
Speaker 2: to four times the moves that you see in the
10:12
Speaker 2: S and P five hundred as you go through these cycles.
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Speaker 2: And so it's just a dangerous part of the market
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Speaker 2: to have as market leadership. I say this all with
10:24
Speaker 2: you know again, the point we do have to acknowledge is, look,
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Speaker 2: these stocks have absolutely kicked ass for the last you know,
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Speaker 2: six months here in particular. Who's to say that they
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Speaker 2: can't continue to go parabolic for you know, another few months.
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Speaker 2: They are parts that you know, looked very look very
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Speaker 2: stretched here. But I'm not one to say like, oh,
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Speaker 2: these are definitely going to fall apart right now, because
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Speaker 2: I don't know, you know, Greensman gave his irrational exuberant speech,
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Speaker 2: was it nineteen ninety seven, December of not yeat more
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Speaker 2: or less? The exuberance got more irrational for the subsequent
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Speaker 2: three years after that, in.
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Speaker 3: Part because of lax maybe monetary as big a fan
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Speaker 3: as I am a green Span apart because of things
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Speaker 3: monetary policy should have accounted for but didn't.
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Speaker 2: But yeah, So, by the way, I'm sorry that I
11:13
Speaker 2: missed the green Span death show. I wish I had
11:17
Speaker 2: been able to be here for that.
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Speaker 3: That was Paul Lane and Michael Armstrong.
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Speaker 2: Oh we let them cover it.
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Speaker 4: No, it was Monday.
11:25
Speaker 2: Oh well, let's part his thoughts yesterday. No, I know,
11:28
Speaker 2: and it's uh.
11:30
Speaker 3: Did I sure? I love green Span? That's that's my
11:33
Speaker 3: That's the sum total of my thoughts. Flawed, of course, tenure,
11:36
Speaker 3: but great, a great man.
11:38
Speaker 2: I think green Span actually was stronger on monetary policy
11:41
Speaker 2: than I think you would give him credit for. I
11:43
Speaker 2: think the problem that the green Span fed had was
11:46
Speaker 2: on the regulatory policy side, which had a direct line
11:49
Speaker 2: to the causes of the financial crisis, in terms of
11:53
Speaker 2: required capital levels for banks and things on different financial instruments.
11:58
Speaker 2: There's a direct line there.
11:59
Speaker 3: And oh yeah, he's a free market libertarian and one
12:01
Speaker 3: sympathizes in retrospect, the approach wasn't stringent enough in retrospect.
12:07
Speaker 3: It worked for a Larry Summers too, Robert.
12:09
Speaker 2: They trusted banks to do the thing nobody knew.
12:12
Speaker 3: Okay, I shouldn't. I'm sorry, I shouldn't say nobody knew.
12:14
Speaker 3: There were plenty of critics of this approach at the time,
12:16
Speaker 3: but for several years it was it was consistent with
12:20
Speaker 3: the ethos of the time. It was a heady time
12:23
Speaker 3: for free market the eighties, the nineties, Reagan, Thatcher, Clinton
12:28
Speaker 3: was a continuation of it. We can, I know, we
12:30
Speaker 3: got a break.
12:30
Speaker 2: No, I mean, let's continue this after because I know
12:33
Speaker 2: it's kind of a segue, but I think it's a
12:35
Speaker 2: fun one to discuss. So let's take a quick break,
12:38
Speaker 2: and when we return, we're going to talk about, you know,
12:42
Speaker 2: free markets winning out over communism back in the nineteen nineties.
12:45
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13:17
Speaker 2: All right, So we started the last segment talking about
13:21
Speaker 2: semiconductor stocks and somehow ended up talking about the victory
13:24
Speaker 2: of capitalism over communism in the nineteen nineties. That's how
13:28
Speaker 2: you know you've had a great segment and are also
13:31
Speaker 2: approaching the fourth of July. In any case, one of
13:35
Speaker 2: the things that we were touching on was the green
13:37
Speaker 2: Span FED and basically where where the green Span FED
13:44
Speaker 2: had things right and where the green Span FED had
13:48
Speaker 2: things wrong, and how it fits in that broader conversation
13:51
Speaker 2: of you know, free market economics and why they might
13:53
Speaker 2: have made the mistakes that they made. You, I know,
13:57
Speaker 2: had a decent chunk that you wanted to get through
13:59
Speaker 2: before we had to go to breaks. So I'm gonna
14:01
Speaker 2: let you kind of a lecture.
14:03
Speaker 3: I just wanted to point out that it's easy to
14:05
Speaker 3: judge green Span in retrospect intellectual climate. Of course, it
14:09
Speaker 3: always is easy to judge Burns the FED chair during
14:12
Speaker 3: most of the seventies. In retrospect, when we talk about
14:16
Speaker 3: the seventies and the nineties, we use anachronisms. We talk
14:20
Speaker 3: about potential GDP, we talk about non inflationary unemployment. All
14:24
Speaker 3: this word salad of technical terms that monetary policy experts
14:29
Speaker 3: used today but that weren't in use then, that indeed
14:32
Speaker 3: weren't even known then, had we known now this is trite,
14:36
Speaker 3: but had we known now what we knew, excuse me,
14:38
Speaker 3: had we known in the nineties or the seventies what
14:40
Speaker 3: we know today, the seventies of the nineties would not
14:42
Speaker 3: have happened. And it conversely, if they had not happened,
14:46
Speaker 3: we wouldn't know now what we do know now. We
14:49
Speaker 3: know because we made mistakes. Green Span, I think he
14:53
Speaker 3: was a great I say he was a great man,
14:55
Speaker 3: and it's not hyperbole because he had integrity, independence, he
15:00
Speaker 3: had beliefs, but he was flexible. I like him because
15:03
Speaker 3: he was conservative slash libertarian, the philosophy that I eventually
15:07
Speaker 3: I guess adopted and one that we've sadly thrown out
15:10
Speaker 3: the window. No one represents it anymore. Maybe Ran Paul
15:13
Speaker 3: and people like that. But Greenspan was nimble. He didn't
15:17
Speaker 3: follow you. Hear the term and will probably use it today.
15:21
Speaker 3: Reaction function in the literature, that just means a rule.
15:25
Speaker 3: If I see X, I do Y, input X plus one,
15:29
Speaker 3: I do Y plus one or whatever the reaction, whatever
15:32
Speaker 3: the rule is, it's just a function like you learned
15:34
Speaker 3: in algebra. That's all. So Greenspan didn't have a rigid
15:38
Speaker 3: reaction function. He sometimes gets criticized for that, Well, he
15:40
Speaker 3: didn't follow the tailor rule here, he did follow it.
15:43
Speaker 1: There.
15:44
Speaker 3: He gets criticized from a regulatory leniency point of view
15:48
Speaker 3: that may have that almost certainly did exacerbate the housing
15:52
Speaker 3: bubble and contribute to the Great Recession. And there were
15:55
Speaker 3: people at the time who criticized him for being two lax,
15:58
Speaker 3: but it also appeared to be working. And I say again,
16:01
Speaker 3: the intellectual climate at the time was one of sort
16:04
Speaker 3: of permissiveness, set the rules of the game and then
16:07
Speaker 3: let business do what it'll do. Somehow that morphed into
16:09
Speaker 3: bailing everybody out and using so his go ahead, please,
16:14
Speaker 3: I've talked enough.
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Speaker 2: I do wonder No, it's it's interesting. I wonder. You know,
16:21
Speaker 2: green Span left the FED in two thousand and six,
16:24
Speaker 2: two years before everything blew up, and I have wondered
16:29
Speaker 2: how a green Span lead FED would have approached the
16:35
Speaker 2: financial crisis, and whether it would have been different from
16:39
Speaker 2: a Berneki lead FED, because it was I mean, it
16:41
Speaker 2: was Bernanki and Paulson who were basically, you know, controlling
16:44
Speaker 2: things at that point. And we'll never know because he wasn't,
16:49
Speaker 2: you know, Greenspan wasn't there at that point. But I
16:53
Speaker 2: think that you can draw a direct line to, you know,
16:57
Speaker 2: what we saw in the fall of two thousand and eight,
17:00
Speaker 2: and say that many of the problems that plague us
17:02
Speaker 2: today on the corporate side of things, in terms of
17:05
Speaker 2: corporate concentration and you know, government support for companies, You
17:12
Speaker 2: could draw a direct line to the events eighteen years
17:14
Speaker 2: ago and say he could sprang from that, because those
17:17
Speaker 2: were things that were not present during either of the
17:22
Speaker 2: recessions that happened on Greenspan's watch.
17:24
Speaker 3: Bernanke's seminal work in the early eighties was on the
17:28
Speaker 3: transmission of banking, financial and banking crisis to the real economy.
17:34
Speaker 3: So I think Bernanki, my guess is green Span and
17:37
Speaker 3: monetary policy scholars could give you a better opinion on this,
17:40
Speaker 3: but I'm all you've got here. Bernanki probably fought worried
17:46
Speaker 3: about another great depression because he was a great depression
17:48
Speaker 3: and banking crisis scholar. He probably introduced way more tools
17:51
Speaker 3: than Greenspan would have. Would green Span have kept FED
17:54
Speaker 3: funds as low as Bernanki did for as long? Maybe
17:56
Speaker 3: he did do that. In the early two thousands, he
17:58
Speaker 3: lowered fed funds to one and left them there arguably
18:00
Speaker 3: for too long. Would BERNANKI woul would Would Greenspan have
18:04
Speaker 3: introduced an inflation target, an explicit one, almost certainly No,
18:07
Speaker 3: because he was prouded to and he resisted because he
18:09
Speaker 3: wanted the flexibility think you know, like little mysterious.
18:15
Speaker 2: He wanted the opportunity to choose, you know, what to
18:17
Speaker 2: be done at what particular time.
18:19
Speaker 1: Yeah.
18:20
Speaker 3: Would he have introduced forward guidance, something we've now jettisoned.
18:22
Speaker 3: Probably not useful that we'll talk about this. We're going
18:25
Speaker 3: to talk about Bill Dudley's piece, but useful in some circumstances,
18:28
Speaker 3: but it's been abused and warsh is correctly I think
18:33
Speaker 3: tabling it. So my guess is, my guess is we
18:36
Speaker 3: wouldn't have something this is boy, this is really speculative,
18:40
Speaker 3: but I'll say it and it's not not going to
18:42
Speaker 3: offend anybody.
18:43
Speaker 2: Uh.
18:43
Speaker 3: My guess is we wouldn't have some of the problems
18:45
Speaker 3: we have today, the massive balance sheet, the confusion overfed messaging,
18:51
Speaker 3: the incoherent forward guidance which you then commit to and
18:53
Speaker 3: it then prevents you from doing the right thing, like
18:55
Speaker 3: a tied J. Powell's hands. We wouldn't have some of
18:58
Speaker 3: these problems had someone more like As much as I
19:00
Speaker 3: admire Ben Bernanke, by the way, nothing against him, I
19:04
Speaker 3: guess we wouldn't have some of the problems we have
19:06
Speaker 3: today if we had someone more like green Span.
19:08
Speaker 2: So that's I think that's a good green Span. Wrap up. Now,
19:13
Speaker 2: let's take a quick break here, and when we return,
19:19
Speaker 2: let's talk about something a little bit more current. We're
19:20
Speaker 2: going to talk about SpaceX, just because that is five
19:25
Speaker 2: years ago, very current now, and so we're gonna do
19:27
Speaker 2: that when we return.
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Speaker 4: Tech is seeing a modest rebound after its recent sell off.
20:04
Speaker 4: Right now, the Dow is up over four tenths of
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Speaker 4: a percent. SMP five hundred also up over four tenths
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Speaker 4: of a percent. NASDAC up about a half a percent,
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Speaker 4: or one hundred and thirty points higher. RUSS two thousand
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Speaker 4: Treasure fieled, pulling back seven basis points at four point
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Speaker 4: four to one percent, in Oil pulling back four percent.
20:27
Speaker 4: Now trading it's seventy dollars a barrel.
20:30
Speaker 2: In its first.
20:30
Speaker 4: Earnings report since it went public in May, Sarah Bras
20:33
Speaker 4: said it expects its operating margins to remain negative and
20:38
Speaker 4: under pressure through the end of the year. Shares in
20:41
Speaker 4: the chip makers sinking by fifteen percent. Meanwhile, FedEx logged
20:45
Speaker 4: higher revenue in the previous quarter, but shipping the shipping
20:48
Speaker 4: company's profit ticked lower. That stock is down by one percent. Elsewhere,
20:53
Speaker 4: fast food burger chain Wendy's seeing its stock surge nearly
20:57
Speaker 4: thirty percent, driven by memestock retail investors after the company
21:02
Speaker 4: disclosed new management changes. Trading was actually halted on the
21:05
Speaker 4: stock earlier today. Alphabet will replace Verizon and the Dow
21:09
Speaker 4: Jones Industrial average. Ahead of Monday's trading, Alphabet shares are
21:13
Speaker 4: up by one percent. Home Builder kb Home posted mixed
21:16
Speaker 4: quarterly results, but the stock rallying sixteen percent, and after
21:21
Speaker 4: today's close, we'll see more tech earnings when ship maker
21:24
Speaker 4: Micron Technology reports yesterday. The stock plunged thirteen percent ahead
21:29
Speaker 4: of its earnings, but is mostly flat today. I'm Tucker Silvan,
21:34
Speaker 4: that is Wall Street Watch.
21:37
Speaker 2: Got a piece in Bloomberg here Musk's SpaceX adds billions
21:41
Speaker 2: in debt walk cutting interest costs. And I had someone
21:45
Speaker 2: ask me yesterday. They were like, okay, so SpaceX just
21:47
Speaker 2: went public and raised you know, like eighty billion dollars.
21:50
Speaker 2: Why do they need to go and you know, do
21:55
Speaker 2: a debt offering for twenty four question dollars as well?
21:59
Speaker 2: And I had a few thoughts on it. There's three
22:01
Speaker 2: reasons in my mind that SpaceX is doing this. I'm
22:04
Speaker 2: curious to get your thoughts too. Number One, as indicated
22:07
Speaker 2: by this piece, they are retiring some debt from X
22:11
Speaker 2: and XAI that had a higher interest rates. So this
22:14
Speaker 2: is going to save SpaceX about three hundred million dollars
22:17
Speaker 2: a year in interest cost that's number one. Number Two,
22:21
Speaker 2: I think that given the fact that SpaceX is now
22:24
Speaker 2: publicly traded and there's a lot of interest there, it
22:28
Speaker 2: gives SpaceX the ability to go and do this investment
22:31
Speaker 2: grade bond issuance and almost kind of start to like
22:34
Speaker 2: build credit in public markets by being able to say, hey, like,
22:38
Speaker 2: we've done this bond issue previously. Here's how it went off,
22:41
Speaker 2: Here's how the bonds trade such that if they need
22:43
Speaker 2: to tap capital markets in the future, they have a
22:46
Speaker 2: track record that they can point to. Okay, maybe it's there.
22:50
Speaker 2: Point number three kind of related to that. Hey, you
22:53
Speaker 2: just had this huge offering on the equity side. If
22:58
Speaker 2: you have a business that is loose US money on
23:00
Speaker 2: an annual basis, and everyone is still excited about you
23:03
Speaker 2: and willing to throw money at you, hey, why not
23:06
Speaker 2: take time to go and raise more money and strike
23:09
Speaker 2: while the iron's hot. Your thoughts.
23:12
Speaker 3: I was going to say, strike while the iron's hot.
23:13
Speaker 3: That to me explicit. There may be some financial engineering minutia,
23:18
Speaker 3: And by that I mean, like what you said, effectively
23:23
Speaker 3: retirel debt replace it with lower interest rate debt. It's
23:25
Speaker 3: like refinancing your mortgage. I'm not sure I buy that
23:29
Speaker 3: because the savings are a pittance, But maybe what do
23:32
Speaker 3: I know? It's more likely that they are exploiting the
23:37
Speaker 3: favorable capital market conditions and raising as much capital. Look,
23:41
Speaker 3: people don't care how Elon spends money. I think that's proven,
23:44
Speaker 3: so they just trust that he will spend it well. Yes,
23:47
Speaker 3: so yeah, why not we may want to buy another
23:49
Speaker 3: AI company. Why not put another one hundred billion in
23:53
Speaker 3: the kiddy and see what happens while markets are are welcoming.
23:58
Speaker 2: So I think that ultimately this probably is not going up.
24:03
Speaker 2: Probably I would be shocked if this is not the
24:06
Speaker 2: last bond issue that comes from SpaceX, just because again
24:10
Speaker 2: they are losing money, they have a bunch of capex
24:12
Speaker 2: they're gonna need to do the next several years, and
24:16
Speaker 2: very likely that they have to issue another you know,
24:18
Speaker 2: tranche of bonds at some point during that time. But
24:20
Speaker 2: this also ties into, hey, we've seen a bunch of
24:23
Speaker 2: other data center companies issuing both debt and equity in
24:27
Speaker 2: the last few weeks as well. Where they're talking Amazon,
24:30
Speaker 2: Google like you can go down the list, and so
24:32
Speaker 2: this fits in what those other companies that they're trying
24:35
Speaker 2: to compete with in that exact space are doing as well.
24:38
Speaker 2: They're all seeing the same thing right now.
24:40
Speaker 3: Michael Armstrong made the point yesterday that SpaceX is and
24:43
Speaker 3: these are my words not his, effectively too big to fail.
24:45
Speaker 3: So why not give them an investment grade rating? They're
24:48
Speaker 3: they're they're almost systemically important given their market cap and
24:52
Speaker 3: the relationship between capital markets and the real economy that
24:55
Speaker 3: we talked about in the last segment. Uh. And they're
24:58
Speaker 3: the only, virtually the only company that can competently launch Saturllite,
25:02
Speaker 3: So the government is uniquely dependent on them. So Mike's point,
25:07
Speaker 3: and this is the way I interpreted it. He may
25:09
Speaker 3: disagree with the finer. My fine tuning of it is
25:13
Speaker 3: that they're too big to fail. So yes, slap an
25:15
Speaker 3: investment grade rating. There's very little risk there.
25:17
Speaker 2: Well, the other piece is if you're looking to the
25:22
Speaker 2: ratings agencies to tell you when there's a problem, you're
25:26
Speaker 2: looking to the wrong people. The ratings agencies are notoriously
25:30
Speaker 2: slow when things start actually to tear. Like you don't
25:34
Speaker 2: look at a bond's rating to tell you if there's
25:36
Speaker 2: a problem. They'll tell you after the problem has become
25:40
Speaker 2: a parent that oh there's a problem. But ratings, I mean,
25:44
Speaker 2: look at the run up to the financial crisis.
25:45
Speaker 3: Yeah, they had some big misses. On average, they're decent,
25:48
Speaker 3: but they had some big misses.
25:49
Speaker 2: Yeah, they're fine in general. It's not to disparage them,
25:53
Speaker 2: but like they are never going to move in advance
25:57
Speaker 2: of problems showing up. Yeah, and you wouldn't expect that's
26:00
Speaker 2: what they do.
26:00
Speaker 3: You wouldn't expect them to have information by the way
26:02
Speaker 3: that private investors didn't. It's not like they're the only
26:04
Speaker 3: ones out there scrutinizing. No, the ability to pay interest
26:08
Speaker 3: and repay principle.
26:09
Speaker 2: Correct, and so like the first place that you look
26:12
Speaker 2: to see if there are problems is, hey, how have
26:14
Speaker 2: these bonds been trading recently? That will move in advance. Absolutely,
26:20
Speaker 2: let's talk a little bit about a little bit more
26:22
Speaker 2: about the Worsh FED. We got a piece from Bill Dudley,
26:26
Speaker 2: who used to be a FED Reserve Bank president. He
26:29
Speaker 2: ran the New York branch for a number of years,
26:32
Speaker 2: and he's got a piece in Bloomberg Opinion today titled
26:34
Speaker 2: Warsh's pivot risks confusing the market and the FED. What
26:40
Speaker 2: exactly does the outline in terms of how Worsh's pivot?
26:43
Speaker 2: What is Worsh's pivot and how can it be confusing?
26:46
Speaker 3: Well, he's abandoned. Sorry, I read this much earlier today,
26:49
Speaker 3: so this is going to be a little bit out
26:50
Speaker 3: of a order. But I remember my gut reaction, which
26:54
Speaker 3: is Dudley's being too harsh on Warsh, who I thought
26:57
Speaker 3: did a very good job of focusing on price stability, which,
27:00
Speaker 3: despite the dual mandate, is what most people expect the
27:03
Speaker 3: FED to do. Deliver low and stable inflation, whether it's
27:06
Speaker 3: two percent or three percent is almost hair splitting. Just
27:09
Speaker 3: keep it in the background. I don't want to think
27:10
Speaker 3: about it. So I thought, let me first say, I
27:13
Speaker 3: think we should all acknowledge that warsh Didy did a
27:17
Speaker 3: really good job of demonstrating credit. You could tell I
27:20
Speaker 3: like him, sure, and I'm willing to give them the
27:22
Speaker 3: benefit of the doubt. So Dudley is critical of the
27:26
Speaker 3: somewhat critical of the He wasn't really critical, but he
27:29
Speaker 3: pointed out that we abandon forward guidance without a replacement
27:33
Speaker 3: or something to that effect. Dudley also points out that
27:37
Speaker 3: forward guidance is useful at the zero lower bound, meaning
27:39
Speaker 3: you can't lower interest rates anymore, so you start to
27:42
Speaker 3: drawbone longer term rates lower. But we haven't been in
27:45
Speaker 3: an environment like that for a long time, so good
27:47
Speaker 3: riddance for now for forward guidance abandoning. He talks about
27:53
Speaker 3: the reaction function of a fancy academic way of saying,
27:57
Speaker 3: the rule I follow when I see you do something
28:00
Speaker 3: thing I react in this way. That's all a reaction
28:03
Speaker 3: function is. It's my action as a function of your action.
28:06
Speaker 3: If you can picture that as a little sub dimensional plot.
28:09
Speaker 2: That's all it is.
28:11
Speaker 3: Just call it a rule. I have no idea why
28:12
Speaker 3: we have to call it a reaction function. Anyway. He
28:15
Speaker 3: wouldn't tell the media his reaction function a little bit
28:19
Speaker 3: green Span esque. You know, maybe I'll react harshly. It
28:23
Speaker 3: depends on why inflation's going up, and what financial conditions
28:26
Speaker 3: are and where equity prices are. I don't have a
28:29
Speaker 3: fixed reaction function. I warsh didn't put it that way.
28:32
Speaker 3: I wish he had. I think that's how he feels, though.
28:36
Speaker 2: And I think the big thing for markets now, and
28:41
Speaker 2: this is going to take probably twelve to eighteen months
28:43
Speaker 2: for them to sort through, is they're going to need
28:47
Speaker 2: to understand and figure out, Okay, what are the things
28:51
Speaker 2: that we need to care about, what are the things
28:53
Speaker 2: that we don't And I think that it's ultimately going
28:57
Speaker 2: to be something where markets and us like everyone then
29:01
Speaker 2: will will judge Worsh based on if if Worsh is saying, hey,
29:05
Speaker 2: I'm not going to tell you as much, but I'm
29:07
Speaker 2: gonna do what I need to do. Well, then Worsh
29:10
Speaker 2: is going to have to prove to markets that he
29:13
Speaker 2: will do what he needs to do. Yeah, it's Worsh's
29:17
Speaker 2: asking to be judged by his actions, not by well
29:21
Speaker 2: the forward guidance will do it for me, so I
29:22
Speaker 2: don't need to I agree with that.
29:24
Speaker 3: I actually think his his credibility demonstrated by a willingness
29:28
Speaker 3: to squash inflation despite the economic costs. And he's not
29:31
Speaker 3: yet proven he will do that, but I think he's
29:33
Speaker 3: got the metal. I'm being You could tell him in
29:35
Speaker 3: a honeymoon stage with Sir Arsh he came in as
29:38
Speaker 3: Trump's toady, but I don't think he's gonna be Trump's stooge.
29:42
Speaker 3: And I don't know how long Trump's gonna put I'm
29:44
Speaker 3: sorry to bring up the president offend anybody who loves him,
29:47
Speaker 3: but he go ahead.
29:47
Speaker 2: Try No, No, it's it's ultimately going to be Hey. The
29:52
Speaker 2: Worsh's press conference, the only side of the mandate that
29:55
Speaker 2: he mentioned was price stability. He basically didn't mention the
29:59
Speaker 2: employment learning the entire time. Yes, now markets are going
30:03
Speaker 2: to say, okay, show me that you are serious about probability.
30:07
Speaker 2: Because for the last five years, we've had inflation running
30:11
Speaker 2: north of two percent, and not modestly north of two percent, Chuck.
30:15
Speaker 3: We've already had inflation north of two percent in the
30:17
Speaker 3: first five months of this year.
30:18
Speaker 2: Yes, So what what markets are going to do is
30:22
Speaker 2: they're going to say, Okay, you know what, gas prices
30:25
Speaker 2: are coming down over the next couple months. So you've
30:27
Speaker 2: got a pause because you're you're going to see some
30:30
Speaker 2: some good headline inflation numbers the next couple months. But
30:34
Speaker 2: we've got core inflation right now, depending on whether you
30:36
Speaker 2: want to look at, you know, CPI or PCE. H,
30:39
Speaker 2: we've got core inflation on CPI right now coming in
30:43
Speaker 2: at two eight and rising, core pcees at three to
30:47
Speaker 2: three and rising. If we get to September and we've
30:52
Speaker 2: got those you know, three, two and three five, it's
30:55
Speaker 2: going to be a tougher putt then for the Fed
30:58
Speaker 2: to be able to say, you know what, we're not
31:01
Speaker 2: doing anything and maintain the credibility there, because the credibility
31:04
Speaker 2: now is going to be based on action, not based
31:06
Speaker 2: on speech.
31:08
Speaker 3: Yeah, I mean, it depends on what else is going
31:09
Speaker 3: on in the real economy at that point, but.
31:11
Speaker 2: It will look ahead. But like, let's be honest, the
31:17
Speaker 2: two parts of the real economy that we worry about
31:20
Speaker 2: at least over like you know, any reasonable like period
31:23
Speaker 2: of time that recently housing showing signs of life now,
31:30
Speaker 2: labor showing signs of life now Like what else? What
31:35
Speaker 2: what in the next like three to four months, what
31:39
Speaker 2: breaks in the US economy? I don't know.
31:42
Speaker 3: Maybe something does, in which case warsh will react.
31:44
Speaker 2: I assume the only thing, in my opinion that could
31:47
Speaker 2: possibly break in the next few months is if something
31:50
Speaker 2: goes haywire in the Middle East and oil prices move
31:54
Speaker 2: back up again and that's not a cutting scenario.
31:57
Speaker 3: Maybe, or asset prices crash and that translates into a
32:01
Speaker 3: retrenchment in demand like we saw in well earlier periods.
32:04
Speaker 3: I mean, I don't know what could what shocks caun
32:06
Speaker 3: hit the real economy. Dudley also makes the point it
32:08
Speaker 3: just hit me that markets an important monetary transmission channel.
32:14
Speaker 3: The way the FED affects the economy is it's by
32:16
Speaker 3: lower interest rates, of course stimulates the man sure, but
32:20
Speaker 3: also stimulates asset prices. Dudley is of that school. I
32:24
Speaker 3: don't like that school at all. I'm tired of the FED.
32:26
Speaker 3: Trying to manipulate. It is an important transmission channel. I
32:29
Speaker 3: certainly don't deny that empirically, you'd be a fool to
32:31
Speaker 3: deny that it's widely accepted, but constantly catering to markets
32:37
Speaker 3: as Bernanki, as much as I admire Bernanky and Greenspan,
32:39
Speaker 3: was a little bit guilty of this too. They were
32:42
Speaker 3: obsessed with keeping markets aloft.
32:45
Speaker 2: Burneki, I think felt that he had to because understandable,
32:48
Speaker 2: like BERNANKI, I can actually understand, because the post two
32:53
Speaker 2: thousand and nine economy was so putrid rough and there
32:59
Speaker 2: was no help coming on the fiscal side. You know,
33:03
Speaker 2: the fiscal side was moving in the other direction eventually. Yeah,
33:06
Speaker 2: you know, like that's you got a tiny little you know,
33:10
Speaker 2: the uh it.
33:13
Speaker 1: Was.
33:14
Speaker 2: It was relatively small and a slow to what was
33:17
Speaker 2: it called the I'm blanking the ARRA the American Recovery
33:21
Speaker 2: and Reinvestment Reinvestment of Recovery Act or whatever it was.
33:25
Speaker 2: But it was, you know, just a slow program that
33:29
Speaker 2: again you could see it with the economy. I mean,
33:31
Speaker 2: the economy was really bad for you know, basically from
33:35
Speaker 2: two thousand and eight through twenty thirteen, twenty fourteen, like
33:41
Speaker 2: things were bad, and so I think Berneki kind of
33:43
Speaker 2: looked at and it's like, okay, there's no help coming.
33:46
Speaker 2: Like Europe is going through, you know, pretty harsh austerity measures.
33:50
Speaker 2: The US is not like we're not really doing anything
33:54
Speaker 2: fiscally to help and give you know, real boosts there either.
33:57
Speaker 2: The problem that we've ended up in is we've kind
34:00
Speaker 2: of just said, Okay, we didn't do enough then, but
34:02
Speaker 2: now we're just gonna have perpetually higher deficits and you
34:05
Speaker 2: still have monetary policy acting like it's two thousand and nine,
34:08
Speaker 2: twenty ten and a lot of respects. Let's take a
34:10
Speaker 2: quick break when we return, Let's see, let's talk yes,
34:16
Speaker 2: let's talk a little bit about housing when we return.
34:19
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34:26
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34:36
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34:40
Speaker 1: here on the Financial Exchange Radio Network.
34:54
Speaker 2: We got a piece here on the Wall Street Journal.
34:56
Speaker 2: It's titled brief drop in mortgage rates points to another
34:59
Speaker 2: fall start for the housing market. I'll quote here the
35:04
Speaker 2: US mortgage market is locked in a tug of war,
35:07
Speaker 2: leaving home buyers and refinanciers caught between a brief respitting
35:11
Speaker 2: geopolitical tensions and a hawkish federal reserve. In late February,
35:15
Speaker 2: driven by FED cuts in prior months, the thirty year
35:17
Speaker 2: fixed rate mortgage drifted below six percent for the first
35:19
Speaker 2: time since twenty twenty two, But the celebration was short lived.
35:22
Speaker 2: Joint military actions by the US and Israel against Ebron
35:25
Speaker 2: ignited war that spiked oil prices in stoked inflation. With
35:28
Speaker 2: news of a new ceasefire agreement, though, the average mortgage
35:32
Speaker 2: rate trimmed back to six point four to seven percent
35:35
Speaker 2: last week. But that decrease looks fragile, and I get
35:41
Speaker 2: to be honest, I don't I don't have a dog
35:44
Speaker 2: in the fight. I'm not shopping for a house right now.
35:48
Speaker 2: I don't know that that ceasefire that not the ceasefire.
35:51
Speaker 2: I don't know that you know you can definitively say
35:54
Speaker 2: that you know where mortgage rates stand right now. Look fragile.
35:58
Speaker 2: I think that all Ultimately they're a function of where
36:02
Speaker 2: long term interest rates tend to move and being able
36:07
Speaker 2: to predict long term interest rates and how they're going
36:10
Speaker 2: to move over. You know, any short period of time
36:12
Speaker 2: is often a coin flip. It's not something where you
36:14
Speaker 2: can definitively say they're going to do this or that. Heck,
36:18
Speaker 2: just today when I woke up, the ten year treasury
36:20
Speaker 2: was pretty much flat at four point four to eight percent.
36:23
Speaker 2: And for whatever reason, I don't know why, I don't
36:26
Speaker 2: see any news that would move it in this fashion,
36:28
Speaker 2: but the ten year is basically slid nine bases points
36:31
Speaker 2: since eight am. I haven't seen any news that would,
36:35
Speaker 2: you know, move it in that in that fashion.
36:37
Speaker 3: The disinflationary impact of following energy prices obviously, and maybe
36:41
Speaker 3: the well no, but that's been in place for me
36:42
Speaker 3: now again, but sometimes takes things a while to crystallize,
36:45
Speaker 3: though I don't know. I mean, you look at how
36:47
Speaker 3: things have moved the last you know, two three weeks,
36:50
Speaker 3: and you've had energy prices falling in rates of decopying
36:53
Speaker 3: from energy prices during that time. The again, I tried
36:58
Speaker 3: to look for cross asset signals to tell me what's
37:00
Speaker 3: going on. The message this morning is a weird one,
37:04
Speaker 3: like it doesn't make a ton of sense. You've got
37:05
Speaker 3: falling interest rates ten your treasury is seeing it's, you
37:09
Speaker 3: know again, almost a ten basis point decrease on that. Okay,
37:14
Speaker 3: you've got oil prices falling as well. Sure that can
37:16
Speaker 3: make some sense. Tell me why gold's getting whacked by
37:19
Speaker 3: three percent today because real rates are may rise under
37:23
Speaker 3: a more a FED, more committed to fighting inflation than
37:27
Speaker 3: people thought. I know, we knew that last week, and
37:29
Speaker 3: asset prices in real time. Don't all have to move
37:32
Speaker 3: in a macroeconomically consistent manner. There's nothing that says that
37:34
Speaker 3: they do, so you don't. You don't need one explanation
37:37
Speaker 3: for everything. This isn't like a no.
37:39
Speaker 2: But when correlations break down, it's interesting.
37:42
Speaker 3: Yeah, I mean they don't. Over short term periods, they
37:44
Speaker 3: tend to be very unstable. I'm not disagreeing with you.
37:47
Speaker 3: It's curious and it's worth it's notable and worth talking about.
37:51
Speaker 3: But I'm not lou My worldview isn't upended because this
37:57
Speaker 3: zigged when it should zag in response to what something
37:59
Speaker 3: else did a short term I'm not.
38:00
Speaker 2: Saying anything up ended, but it's it's strange to see. Okay,
38:04
Speaker 2: you got dollar down, oil down, I'm sorry. Ten, you're down,
38:08
Speaker 2: oil down, but dollar up and gold down like that's
38:12
Speaker 2: that's different. And I'm just noting that it's different, not
38:15
Speaker 2: that it's the end of the world.
38:16
Speaker 1: It's not.
38:17
Speaker 2: The world still here. It's fine, it's pretty good. You
38:19
Speaker 2: should try it sometime.
38:20
Speaker 1: Everyone.
38:21
Speaker 2: Let's take a break. When we return, uh, let's talk
38:24
Speaker 2: a little bit about some other stuff.