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Oil Buffers Run Thin as Inflation Risks Build · The Financial Exchange Show

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Speaker 2: It's Chuck and it's Mark, and it's Tucker with you here,
1:16
Speaker 2: and as we kick things off today again kind of
1:18
Speaker 2: the same story as the last couple months, where on
1:21
Speaker 2: the surface, not much movement for the major indices. The
1:24
Speaker 2: S and P five hundred is up about point two percent,
1:27
Speaker 2: DAW is up about half a percent, and as that
1:29
Speaker 2: can posit up a quarter percent. But under the surface
1:32
Speaker 2: it's it's honestly just a mess, and it's it's getting
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Speaker 2: a little bit dangerous in terms of what we're seeing.
1:38
Speaker 2: We'll discuss as we go, but I do like to
1:41
Speaker 2: point out the S and P five hundred pretty much
1:44
Speaker 2: hasn't moved in two months now. Back in mid May
1:47
Speaker 2: it hits seventy five seventeen. This morning we're at seventy
1:51
Speaker 2: five to fifty eight, so up half a percent in
1:53
Speaker 2: two months. It's just not a lot of movement for
1:56
Speaker 2: the index as a whole. Now we have had these
1:59
Speaker 2: ups and downs. We got high as seventy six twenty,
2:01
Speaker 2: we got as low as seventy two thirty seven, So
2:03
Speaker 2: there's been you know, kind of this you know, six
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Speaker 2: seven percent range that we've traded within. But It's very
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Speaker 2: reminiscent of what we saw from kind of like late
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Speaker 2: October through late February. You know that that five month
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Speaker 2: period where October twenty five we hit sixty nine to twenty.
2:22
Speaker 2: We're at sixty nine twenty at the end of February
2:24
Speaker 2: of this year. So just like five months where the
2:27
Speaker 2: SMP just chopped around, it didn't do anything. The thing
2:30
Speaker 2: that we're seeing here, though, is under the surface. There
2:34
Speaker 2: are just these rotations between sectors on a daily basis
2:38
Speaker 2: that are getting more and more violent, and they're just,
2:41
Speaker 2: you know, fundamentally unstable. The thing that's keeping the index
2:44
Speaker 2: where it is right now correlations between stocks. How much
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Speaker 2: one movement impacts the other are not necessarily impacts, but
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Speaker 2: how much you know, one stock correlates with you know,
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Speaker 2: another's movement. Those are pretty much at all time lows,
2:58
Speaker 2: and that's what's suppressing volatility for were the index. But
3:02
Speaker 2: I gotta be honest. You see stuff like this where
3:05
Speaker 2: you know, Micron Technology is down another seven percent today,
3:07
Speaker 2: like it's up eight one day, it's down seven. Intel's
3:10
Speaker 2: doing the same thing. Like it's just not healthy behavior.
3:16
Speaker 2: And eventually it gets to a point where, uh, markets
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Speaker 2: just like you can't maintain that dispersion that's kept things
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Speaker 2: intact at the index level. So we'll see how this resolves.
3:28
Speaker 2: But again, under the surface, even though the index as
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Speaker 2: a whole not too choppy, individual stocks are just seeing
3:35
Speaker 2: the kind of movement that is not indicative of a
3:39
Speaker 2: healthy market to me. Bond's catching a little bit of
3:42
Speaker 2: a bit after a cooler than anticipated PPI Producer Price
3:45
Speaker 2: index data this morning better than expected, so you got
3:48
Speaker 2: bonds ten year treasury down two point eight basis points
3:51
Speaker 2: to four point five five seven percent. Dollar index following
3:55
Speaker 2: suit down point one eight percent to one hundred point
3:57
Speaker 2: five two five Gold can catch a bid with that
4:00
Speaker 2: weeker dollar, though, down three dollars and ten cents an ounce.
4:04
Speaker 2: Crude oil West Text Intermediate off yesterday's his by about
4:08
Speaker 2: sixty nine cents at a seventy eight sixty seven triple
4:10
Speaker 2: a national average. For gas prices up three cents overnight
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Speaker 2: to three eighty nine. Based on what we're seeing in
4:16
Speaker 2: terms of price cycling and where crude prices are and
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Speaker 2: crack spreads are, you're probably heading to four h five
4:23
Speaker 2: a gallon in the next week or so, so up
4:27
Speaker 2: another fifteen sixteen cents, So again we'll see where things
4:32
Speaker 2: go on that front. This does bring us to a
4:35
Speaker 2: piece from New York Times titled what Trump's new Iran
4:40
Speaker 2: blockade could mean for oil prices, And the answer is this,
4:44
Speaker 2: we have no idea because we don't know how long
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Speaker 2: the blockade's going to be in place. We don't know
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Speaker 2: exactly what the Iranian response is going to be. And
4:54
Speaker 2: until we know either of those two things, you can't
4:57
Speaker 2: accurately get a sense of what's gonna happen with oil prices.
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Speaker 3: What's your sense of based on how far inventories were
5:04
Speaker 3: drawn down to this point, how long can we hold
5:06
Speaker 3: out without something breaking?
5:09
Speaker 2: It depends how shut the flow of oil through Hormuz
5:12
Speaker 2: becomes here. So again, there's been a decent chunk of oil.
5:16
Speaker 2: I guess it. Oil is not a chunk, it's a liquid,
5:18
Speaker 2: So a decent pool of oil that has escaped Hormus
5:22
Speaker 2: over the last three to five weeks, and that gives
5:25
Speaker 2: you a nice little cushion of oil on water that
5:27
Speaker 2: can find a home to replenish it, not replenish inventories,
5:31
Speaker 2: but basically offset any inventory draws and mitigate things. So
5:35
Speaker 2: I don't think there's a ton of risk in the
5:38
Speaker 2: next three to four weeks. In my opinion, the risk
5:42
Speaker 2: comes after that, where look, if you get back to
5:46
Speaker 2: the draws that we were seeing previously, especially remember the
5:49
Speaker 2: strategic reserve has been depleted pretty significantly over the course
5:53
Speaker 2: of the summer. We're just not able to pump as
5:56
Speaker 2: rapidly as we were before. Other things that I think
5:59
Speaker 2: play into this, hey to China, you know, continue to
6:02
Speaker 2: see its crude oil imports, you know, reduced by five
6:06
Speaker 2: million barrels a day. That's an open question. Other things
6:10
Speaker 2: that are worth paying attention to. What happens between Ukraine
6:13
Speaker 2: and Russia. It's kind of snuck up on a lot
6:17
Speaker 2: of people, but Ukraine is conducting these nightly drone raids
6:20
Speaker 2: into Russia to the tune of like two hundred to
6:23
Speaker 2: four hundred drones a night that are largely hitting Russian
6:29
Speaker 2: energy infrastructure, oil refineries, pipelines, things like that. You've got
6:34
Speaker 2: a little bit of a surplus of crude that's happening
6:36
Speaker 2: now because Russia can't refine the crude it's producing, and
6:40
Speaker 2: so they're sending more out. But you also don't have
6:42
Speaker 2: any spare refinery capacity worldwide because all these Middle Eastern
6:46
Speaker 2: refineries are offline because they don't know if they can
6:49
Speaker 2: transport the stuff through hormves. And so this is why
6:52
Speaker 2: what you're seeing in crack spreads, which is the difference
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Speaker 2: between the cost of refined product and crude, they're not
6:58
Speaker 2: at all time highs. There's a spread called the three
7:01
Speaker 2: two one crack spread, which is okay, pay for three
7:05
Speaker 2: barrels of crude, produce two barrels of gasoline and one
7:07
Speaker 2: barrel of diesel out of it. What's the difference in
7:11
Speaker 2: price that you would see on a per barrel basis.
7:14
Speaker 2: Normally for the last ten to fifteen years, that's hovered
7:16
Speaker 2: between like fifteen and thirty dollars a barrel. It's sixty
7:20
Speaker 2: eight right now. And the reason why is again, it's
7:23
Speaker 2: not because oil refiners woke up and were like, hey,
7:28
Speaker 2: let's be greedy this month. No, it's because companies are
7:33
Speaker 2: needing to buy refined product. Remember, like you, as a human,
7:37
Speaker 2: you don't buy crude oil. Like Mark, if you ever
7:41
Speaker 2: bought a barrel of crude.
7:44
Speaker 3: I can't say I wouldn't if I could, but I
7:47
Speaker 3: don't know where.
7:47
Speaker 2: But you haven't. But you just like keep my guesses.
7:50
Speaker 3: At the EPA would have something to say about that, But.
7:52
Speaker 2: It depends what you do with it. Yeah, it depends
7:54
Speaker 2: what you do. But in any case, like we don't
7:57
Speaker 2: buy crude, we buy refined product. The reason the crack
8:00
Speaker 2: spreads have blown out is because there's enough oil, enough
8:04
Speaker 2: crude to go around right now. But because all this
8:07
Speaker 2: Russian refinery capacity is offline, and because all of this
8:09
Speaker 2: Middle Eastern refinery capacity is offline, if you need to
8:13
Speaker 2: buy product, there's not enough to go around, and so
8:15
Speaker 2: everyone is bidding up the refined product. That is what
8:18
Speaker 2: is happening. So I think on the crude side, as
8:25
Speaker 2: long as this blockade and whatever slow down we have
8:29
Speaker 2: doesn't go past mid August, I think we're okay ish.
8:34
Speaker 2: Beyond that, there's like maybe three to five weeks of
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Speaker 2: cushion at most.
8:39
Speaker 3: The Financial Times quotes a trader as saying, quote, we've
8:42
Speaker 3: burned through all the buffers we had period, everything all
8:46
Speaker 3: of that's now gone. Is that hysterical?
8:49
Speaker 2: It's not too close to hysterical. I mean, remember we
8:52
Speaker 2: saw we saw basically these buffers were being eaten into
8:56
Speaker 2: from the start of March through mid June, so it
8:59
Speaker 2: was three and a half months. You know, call it
9:01
Speaker 2: like sixteen seventeen, fifteen sixteen weeks that we went through again.
9:07
Speaker 2: The present President Trump himself said in mid June, look,
9:10
Speaker 2: we were about four weeks away from you know, running
9:13
Speaker 2: out of any excess you know, crude oil that we had,
9:15
Speaker 2: like we were gonna be out of you know, additional reserves.
9:19
Speaker 2: He wasn't making that up. He wasn't saying that. Just
9:21
Speaker 2: to say it. I look at the numbers, and depending
9:24
Speaker 2: on the pace of draws, once you get through mid August,
9:27
Speaker 2: if the blockade's still in place, you probably have like
9:31
Speaker 2: three to five months, three to five weeks. I'm sorry
9:34
Speaker 2: that you can get through without running into problems that
9:37
Speaker 2: there's not much cushion that's left. And this is if
9:41
Speaker 2: everything goes like smoothly.
9:43
Speaker 1: By the way, what.
9:45
Speaker 2: If China starts buying five million barrels of crew today again,
9:48
Speaker 2: you know, they went from importing ten to five. What
9:51
Speaker 2: if they decide, Okay, we're gonna spool up our domestic
9:54
Speaker 2: refinery production to take advantage of these high spreads, and
9:58
Speaker 2: now we need another five million barrels of crewe to day.
10:02
Speaker 2: There's no spare capacity to fill that. So it's it's
10:07
Speaker 2: a pretty dangerous spot. It doesn't mean that you're going
10:10
Speaker 2: to you know, definitively run into those problems. But yeah,
10:14
Speaker 2: we've basically worked through the cushion that we have. I mean,
10:16
Speaker 2: we've you look at the numbers. We've taken the strategic
10:19
Speaker 2: reserve down. I mean, at this point, the strategic reserve
10:25
Speaker 2: in the US. I'm just I want to get the
10:28
Speaker 2: accurate numbers here, just to make sure that I have
10:32
Speaker 2: it right. Okay, Yeah, so this is as of today.
10:35
Speaker 2: Now we're down around like three hundred and twenty million barrels.
10:40
Speaker 2: Before this started, we were at four hundred and fifteen. Remember,
10:43
Speaker 2: you can't draw the strategic reserve down to zero. It's
10:45
Speaker 2: a bunch of caverns in the southeast. A. They'll collapse. B.
10:50
Speaker 2: You've got concerns about degradation just from the process used
10:53
Speaker 2: to get the crewed out, which is you pump a
10:54
Speaker 2: bunch of water in oils lighter than water. The oil
10:57
Speaker 2: floats to the top and that's how you get the
10:59
Speaker 2: oil out of the things. So you've got concerns there,
11:02
Speaker 2: and we don't even know how far down you can
11:06
Speaker 2: draw these because the bottom ends up being a bunch
11:08
Speaker 2: of sludge that might not be usable as crude anyways,
11:12
Speaker 2: so you're not even really sure where the absolute bottom is.
11:15
Speaker 2: Plus there's a requirement I've seen differing opinions on this
11:19
Speaker 2: that at least a portion of that needs to be
11:21
Speaker 2: kept in storage for potential military use, and so you
11:25
Speaker 2: can't use all of it anyways, But we're pretty much
11:29
Speaker 2: the limit of the presidential authorization goes down to around
11:32
Speaker 2: two hundred and forty million barrels, where at three hundred
11:35
Speaker 2: and twenty Now, so you got like eighty million barrels
11:38
Speaker 2: left there. Your commercial stocks. You've gone from you know,
11:42
Speaker 2: maybe an eighty million barrel cushion as well to somewhere
11:45
Speaker 2: between like twenty and forty million barrels of cushion. There's
11:48
Speaker 2: not much left, Like there's there's not much cushion left
11:53
Speaker 2: at this point. If this blockade goes for a while,
11:56
Speaker 2: if China starts buying crewed again, if it wra decides
12:00
Speaker 2: to target exports through the Red Sea using the Houthies,
12:04
Speaker 2: who are now kind of upset with the Saudis who
12:07
Speaker 2: just launched at tax at them a couple of days ago,
12:08
Speaker 2: and so the Houthis might say, fine, no more oil
12:12
Speaker 2: tankers going through the Red Sea, which is another seven
12:14
Speaker 2: million barrels a day that we've been able to bypass. Like,
12:17
Speaker 2: I don't know, Like the bad scenarios get very bad,
12:21
Speaker 2: very quickly. There's also a path where Hey, usually once
12:24
Speaker 2: we start talking about these kinds of escalations, okay, they
12:27
Speaker 2: try to work something out. I don't know if that's
12:29
Speaker 2: feasible now, I don't know if the two sides trust
12:31
Speaker 2: each other enough to work something out. Now, the memorandum
12:35
Speaker 2: of understanding didn't even last a month before it broke down.
12:39
Speaker 2: You're signed on what June seventeenth or whatever mark it's
12:42
Speaker 2: July fifteenth. Didn't even last a month? Sorry, what'd you do?
12:49
Speaker 2: What'd you just say? Is it your fault?
12:52
Speaker 3: So you can't draw that below one hundred million barrels
12:56
Speaker 3: and you draw what the SPR.
12:59
Speaker 2: The SPR leave that without congressional approval, you can't go
13:02
Speaker 2: below two forty okay, and even beyond that, it's unclear
13:07
Speaker 2: that you can get more than one down to more
13:09
Speaker 2: than one fifty then.
13:10
Speaker 3: So there's always one hundred and fifty million barrels that
13:12
Speaker 3: we can't get access to.
13:13
Speaker 2: Well, it's kind of like how in US commercial stocks
13:15
Speaker 2: about three hundred and fifty million barrels is included in stocks,
13:19
Speaker 2: but it's either in pipeline or tank bottoms that you
13:20
Speaker 2: can't access, but it's still included there because it has
13:23
Speaker 2: to exist in order for the system to work. So yeah,
13:26
Speaker 2: there's probably I.
13:27
Speaker 3: Mean, the engineers knew what they were doing. It's silly
13:29
Speaker 3: for me to question it.
13:30
Speaker 2: But there's probably somewhere in the ballpark of five hundred
13:33
Speaker 2: million barrels of oil in the US system that you
13:36
Speaker 2: just can't access because if you try to, the whole
13:40
Speaker 2: thing breaks down. It's no different from Hey, within the
13:43
Speaker 2: plumbing of your house, there's probably a couple hundred gallons
13:47
Speaker 2: of water, but you can't access it unless you have
13:51
Speaker 2: more water to push through. Like, you can't. You're not
13:54
Speaker 2: just gonna empty your pipes. That's not good for your pipes.
13:56
Speaker 3: You can do they go to the lowest.
13:57
Speaker 2: I'm not gonna do but again, like it's like, you
14:00
Speaker 2: don't do that on you, I wouldn't do that because
14:02
Speaker 2: it's stupid. Exactly.
14:04
Speaker 3: Tucker's like, please break.
14:05
Speaker 2: We're gonna take a break, please, guys, let's do it
14:08
Speaker 2: right now. We'll go to break and when we come back,
14:10
Speaker 2: we'll Talker's longest Tucker lets us.
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15:19
Speaker 2: I want to talk about a piece from Bloomberg Opinions
15:22
Speaker 2: titled labor force participation is high if you measure it right.
15:26
Speaker 2: And basically what we're seeing is that the labor force
15:28
Speaker 2: participation rate, to no one's surprise, has been declining for
15:34
Speaker 2: quite a while now. And the reason that I say
15:37
Speaker 2: to no one's surprise is that the broad labor force
15:41
Speaker 2: participation rate includes people of all ages, and so you've
15:48
Speaker 2: been seeing as we've gotten older as a society, a
15:51
Speaker 2: greater proportion of those people are not people that you
15:55
Speaker 2: would want to see working because you'd say, hey, you
15:58
Speaker 2: should be retired right now. What gives why are you not?
16:02
Speaker 2: And so the labor force participation rate peaked in the
16:05
Speaker 2: late nineties at around sixty seven percent, and it has
16:08
Speaker 2: been on a pretty steady decline since, basically since the
16:13
Speaker 2: financial crisis, where it's gone from around sixty six percent
16:16
Speaker 2: down to around sixty one. Most of that is just
16:19
Speaker 2: because of aging. There's a few other things here and there,
16:22
Speaker 2: but it's mostly aging. If we look at the prime
16:26
Speaker 2: age participation rate that includes people age twenty five to
16:32
Speaker 2: fifty four, and that peaked back in again the late nineties, which, again,
16:38
Speaker 2: for better or worse, I think probably the best economy
16:41
Speaker 2: outside of the nineteen fifties that we've ever seen in
16:43
Speaker 2: the United States, and that peaked at eighty four point
16:47
Speaker 2: six percent. It's now at eighty three point three, within
16:50
Speaker 2: sniffing distance of that all time high. So I don't
16:54
Speaker 2: think this piece is particularly revolutionary. What I do think
16:58
Speaker 2: it suggests is there's not much more room in that
17:00
Speaker 2: age twenty five to fifty four to have people, you know,
17:03
Speaker 2: come into the labor force to fill jobs. And what
17:06
Speaker 2: this does mean, in my opinion, is, hey, if there
17:10
Speaker 2: is ever any you know, meaningful uptick in demand for labor,
17:16
Speaker 2: there just aren't people that are sitting there ready to
17:19
Speaker 2: pick up that slack, which potentially means higher wages, which
17:22
Speaker 2: means potentially higher inflation.
17:23
Speaker 3: I think that is the key point. There are some
17:25
Speaker 3: interesting points made in the article about how you can
17:29
Speaker 3: adjust participation to account for changes in demographics, so you
17:33
Speaker 3: don't get fooled by a low number suggesting that there's
17:37
Speaker 3: slack in the economy because it may not. And that's
17:40
Speaker 3: precisely justin Fox's point in this article, and he's right
17:45
Speaker 3: that twenty five to fifty four is typically used by
17:47
Speaker 3: researchers as a quick and dirty way to get a
17:50
Speaker 3: sense for whether there is underemployment in the economy. If
17:54
Speaker 3: the answer is yes, the FED can afford potentially all
17:57
Speaker 3: else equal i e. Depends on what's going on with
18:00
Speaker 3: say oil and elsewhere. FED can afford to ease stimulate demand,
18:04
Speaker 3: get those people to work. But if there's not underemployment
18:07
Speaker 3: in the economy, say using that twenty five to sixty
18:10
Speaker 3: four metric as your measure of the extent to which
18:15
Speaker 3: there are people looking for work who don't have it
18:18
Speaker 3: or who would enter the labor force if it were
18:21
Speaker 3: more inviting, the FED can't push without risking inflation. So
18:27
Speaker 3: I think you made the key point. That's what this is.
18:30
Speaker 3: You may be interested in this is like a researcher,
18:33
Speaker 3: but for us, for generalists, you're interested in this because
18:36
Speaker 3: it points it's one of several measures that you could
18:39
Speaker 3: use to get a sense for whether or not there's
18:41
Speaker 3: any slack in the economy.
18:44
Speaker 2: We've talked about this before, but it sure feels like
18:48
Speaker 2: if you had to, if you had to time travel
18:51
Speaker 2: to twenty fifty, you go twenty five years ahead from
18:53
Speaker 2: where we are right now. You look at the last
18:57
Speaker 2: twenty five years just as an example, and if we
19:01
Speaker 2: look at the actually look we got we gotta go
19:04
Speaker 2: to break. I want to do a little comparison just
19:07
Speaker 2: of inflation rates and kind of what we've seen historically
19:11
Speaker 2: versus you know, realistic thoughts about the future. So let's
19:14
Speaker 2: take a quick break and when we return, let's talk
19:17
Speaker 2: about that kind of Hey, what do we think inflation
19:20
Speaker 2: may be over the longer term, you know, for the
19:23
Speaker 2: next generation.
19:24
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Speaker 1: driving markets. So far today right here on the Financial
19:56
Speaker 1: Exchange Radio Network.
19:58
Speaker 4: Markets are modestly higher, with tech build laying upon yesterday's gains.
20:01
Speaker 4: Wall Street's also continuing to monitor oil the new attacks
20:06
Speaker 4: from the US on Iran. Right now, the dows up
20:09
Speaker 4: about a third of a percent, S and P five
20:12
Speaker 4: underd is up a quarter of a percent, nasdak up
20:14
Speaker 4: nearly half a percent higher. RUSS two thousand is up
20:18
Speaker 4: nearly two thirds of one percent. Tenure treasure reeled is
20:21
Speaker 4: down three basis points at four point five to five percent.
20:24
Speaker 4: In oil down about one percent trading Its seventy eight
20:29
Speaker 4: dollars barrel shares an ASML are dipping slightly after beating
20:32
Speaker 4: second quarter expectations and lifting its angle sales guidance for
20:36
Speaker 4: the second time. The company also said it would increase
20:39
Speaker 4: output of its chip making machines in the coming years. Meanwhile,
20:44
Speaker 4: PayPal stock is surging nearly seventeen percent and is on
20:48
Speaker 4: pace for its best day ever after Reuters reported that
20:51
Speaker 4: payments processors Stripe in private equity firm Advent would offer
20:55
Speaker 4: to buy PayPal It's sixty dollars and fifty cents a share,
20:59
Speaker 4: which would value PayPal of more than fifty three billion dollars.
21:04
Speaker 3: More.
21:05
Speaker 4: Bank earnings were posted earlier this morning. Black Rock shares
21:08
Speaker 4: are up seven percent after the firm's asset serge to
21:11
Speaker 4: a record fifteen point three trillion dollars in the previous quarter.
21:14
Speaker 4: Morgan Stanley has now turned slightly negative after it posted
21:18
Speaker 4: record quarterly revenues and profits in after its twenty five
21:22
Speaker 4: percent plunge yesterday, IBM shares are down one percent at
21:26
Speaker 4: the moment. Tuesday session marked IBM's worst trading day on
21:30
Speaker 4: record after its preliminary second quarter results disappointed I'm Tucker Silva.
21:36
Speaker 1: That is Wall Street Watch.
21:38
Speaker 2: So we've got a piece in Bloomberg. It's titled Boomer
21:43
Speaker 2: wealth transfer set to favor America's richest families. And I'm
21:49
Speaker 2: not really sure if this is something that I should
21:51
Speaker 2: be upset about or happy about or in between. I
21:55
Speaker 2: just I don't know. I'll quote here. Unprecedented transfer of
22:01
Speaker 2: wealth in the coming decades is likely to disproportionately benefit
22:05
Speaker 2: America's most affluent families, boosting their fortunes by trillions of dollars.
22:10
Speaker 2: According to a July report from Visa, almost three quarters
22:14
Speaker 2: of those expected to inherit from baby boomers are already
22:17
Speaker 2: in the top ten percent by household net worth. The
22:21
Speaker 2: report found, so basically, what it's saying is that the
22:25
Speaker 2: ones who are who are expecting large inheritance from baby
22:28
Speaker 2: boomers are already relatively high in terms of net worth, which,
22:34
Speaker 2: if I'm being honest, tracks one of the best predictors.
22:38
Speaker 2: And again it's a little different in the United States,
22:41
Speaker 2: where there historically has been more income and class mobility,
22:45
Speaker 2: but generally in just about any society, one of the
22:48
Speaker 2: biggest predictors of the affluence of a generation of people
22:54
Speaker 2: is Hey, what was the previous generation's wealth level? Like,
22:58
Speaker 2: that's just kind of how it is for any number
23:00
Speaker 2: of different reasons, either being able to, you know, avoid
23:03
Speaker 2: going into debt because of you know, parents, being able
23:05
Speaker 2: to provide certain things growing up, or being able to
23:08
Speaker 2: get gifts receive gifts from parents while you know an adult. Like,
23:13
Speaker 2: there's all kinds of different reasons for that. So I'm
23:17
Speaker 2: just not sure if this is something that like really
23:21
Speaker 2: is worthy of being upset about. I generally think, look,
23:27
Speaker 2: there's a there's a federal estate tax that's in place.
23:31
Speaker 2: We can have conversations about, hey, like what level of
23:35
Speaker 2: you know, wealth should that federal estate tax be applied at.
23:39
Speaker 2: But I'm not really sure what you would expect. Generally,
23:44
Speaker 2: the money that is coming from a family is going
23:46
Speaker 2: to go to other members of that family, and they
23:50
Speaker 2: probably have a pretty similar level of wealth relative to
23:54
Speaker 2: their peers at a similar age. I'm just not sure
23:58
Speaker 2: what anyone else would expect. Correct.
24:01
Speaker 3: Yeah, I the headline states the obvious, right, like, wealthier
24:07
Speaker 3: families will transfer larger.
24:09
Speaker 2: Amounts to their kids.
24:11
Speaker 3: Yeah, really it's not the poorest.
24:13
Speaker 2: Now, if if you do want to have an interesting conversation,
24:18
Speaker 2: I do think the interesting conversation have is about the
24:20
Speaker 2: step up in cost bass that a child receives when
24:24
Speaker 2: inheriting assets and whether or not that is something that
24:27
Speaker 2: should be in the tax code. I think there's a
24:31
Speaker 2: real case to be made that, no, it shouldn't be.
24:34
Speaker 3: It's not like it's the argument for it. Have you
24:35
Speaker 3: ever heard of moral or economic argument for it.
24:38
Speaker 2: No, not one that I buy. Here's the thing. Here's
24:43
Speaker 2: the thing. So if just for people who aren't familiar,
24:46
Speaker 2: if let's say that you have a parent who has
24:49
Speaker 2: an asset that they purchased for one hundred dollars and
24:52
Speaker 2: it's now worth a thousand. If you inherit that asset
24:55
Speaker 2: from them, you inherit it at a cost basis of
24:57
Speaker 2: one thousand dollars, meaning that you can sell it or
25:00
Speaker 2: a thousand dollars with no capital gains tax being due.
25:03
Speaker 2: This despite the fact that there was a big capital
25:05
Speaker 2: gain that accrued during the parents' life span. The case
25:09
Speaker 2: that you do here made is well, you don't want to,
25:11
Speaker 2: you know, punish kids for inheriting the assets, which I say, well,
25:15
Speaker 2: they don't have to sell it. You know, if it's
25:17
Speaker 2: whether it's you know, Microsoft stock that the parents had,
25:20
Speaker 2: whether it is a property. If you don't want to
25:23
Speaker 2: realize the capital gain, don't realize the capital gain. If
25:28
Speaker 2: you do, why should the tax from that capital gain
25:31
Speaker 2: be wiped out simply because the parent died. Because this
25:34
Speaker 2: leads to the you know, often publicized strategy of hey,
25:38
Speaker 2: do you have highly appreciated stock, Great, hold on to
25:41
Speaker 2: it until you die, and then your kids don't pay.
25:43
Speaker 3: Tax law precedent something to the effect of the basis
25:47
Speaker 3: follows the person, not the asset.
25:50
Speaker 2: But why should it I'm not, you know, like against it.
25:55
Speaker 2: It's just because you die doesn't mean the gain didn't happen.
25:59
Speaker 3: Don't disagree. I'm just trying.
26:00
Speaker 2: Oh yeah, no, actually, and there must.
26:02
Speaker 3: Be some principle that I'm not, which is not surprising
26:05
Speaker 3: because it's not what I do that I'm not aware of.
26:08
Speaker 2: So, like, I understand the idea behind Hey, for you know,
26:12
Speaker 2: smaller inheritances, we don't want someone to have to sell,
26:15
Speaker 2: you know, this property or this asset in order to
26:17
Speaker 2: pay an inheritance tax. I understand that, But this is okay.
26:22
Speaker 2: Let's say that your dad bought ten thousand dollars in
26:24
Speaker 2: Microsoft stock back in nineteen eighty two and it's now
26:27
Speaker 2: ten million dollars. Why do you get to sell that
26:30
Speaker 2: for no taxes just because your parent died Texas at
26:37
Speaker 2: six point seven three six two thirteen eighty five. If
26:39
Speaker 2: you have any thoughts on that. While we're talking about
26:42
Speaker 2: the topic of inheritances, good reminder. The Armstrong Advisory Group
26:46
Speaker 2: this month does have a guide. It's titled talking to
26:50
Speaker 2: your Kids about inheritance and whether it is something where
26:54
Speaker 2: you say, hey, I've got a huge estate to pass on,
26:56
Speaker 2: or hey, I don't have much to pass on. Having
26:59
Speaker 2: these conversations before the stress of a parent or spouse passing.
27:06
Speaker 2: These are conversations that you need to have without all
27:08
Speaker 2: of that additional emotional baggage. So you can request the
27:12
Speaker 2: guide by calling eight hundred three nine three for zero
27:16
Speaker 2: zero one. You can also go online to Armstrong Advisory
27:19
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27:22
Speaker 2: request it there. Again, it's titled talking to your Kids
27:25
Speaker 2: about Inheritance and you can request it by calling eight
27:28
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27:32
Speaker 2: to Armstrong Advisory dot com.
27:34
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
27:37
Speaker 1: registered investment advisor. Nothing in the ad or in any
27:39
Speaker 1: Armstrong guide a specific financial, legal, or tax advice. Consult
27:42
Speaker 1: your own financial, tax into state planning advisors before making
27:45
Speaker 1: any investment decisions. Armstrong may contact you to offer investment
27:48
Speaker 1: advisory services.
27:50
Speaker 2: Last segment, we were talking about inflation as it relates
27:54
Speaker 2: to the labor force and basically made the case that, hey,
27:58
Speaker 2: if you have a tighter labor force right now now
28:00
Speaker 2: for any particular reason, it could put upward pressure on
28:03
Speaker 2: wages and potentially upward pressure on inflation as a result.
28:07
Speaker 2: Other factors that are out there globalization, Whether you like it,
28:11
Speaker 2: hate it, or indifferent to it, I think it's pretty
28:14
Speaker 2: impossible to deny that the reason companies globalized in the
28:17
Speaker 2: last forty five years is to reduce their cost of
28:22
Speaker 2: either labor, manufacture, or both of those things. And so
28:25
Speaker 2: globalization most likely has been another positive force towards reducing inflation,
28:32
Speaker 2: not over the long term.
28:33
Speaker 3: Long term. Inflation's monetary. This isn't me, this is the thinking. Sure,
28:37
Speaker 3: inflation's monetary. So globalization will affect a relative price imports
28:42
Speaker 3: relative to stuff hamburger or whatever, but not the general
28:47
Speaker 3: price level in the short term. Sure, if we suddenly
28:50
Speaker 3: fluttered auto markets with Chinese cars that would bring inflation down.
28:54
Speaker 3: But as Kevin Warsh pointed out this morning, correctly, he
28:59
Speaker 3: was trying about AI. Somebody asked him, is hey, I'm
29:02
Speaker 3: going to push inflation up? And he hit the He
29:04
Speaker 3: nailed the answer. He said, it's a He didn't say that,
29:07
Speaker 3: he didn't say it this way, But what he meant was,
29:09
Speaker 3: it's now I like him so much, I'm putting favorable
29:12
Speaker 3: words in his mouth. He said, that's a change in
29:14
Speaker 3: relative prices. He says, I'm responsible for long term inflation.
29:18
Speaker 3: He's absolutely right, and that's the reason why in the
29:21
Speaker 3: long run globally many people did cite globalization in the
29:26
Speaker 3: early two thousands.
29:27
Speaker 2: How do we define long versus short run? First ten
29:29
Speaker 2: years or more?
29:30
Speaker 3: Is when you see measures of the money stock highly
29:34
Speaker 3: correlated like zero point nine or above correlation. That that
29:37
Speaker 3: measure of co movement that you talked about earlier, measures
29:41
Speaker 3: of the money stock growth correlated with measures of price
29:45
Speaker 3: level increase IE inflation. And it's that is true no
29:48
Speaker 3: matter what country you look at.
29:50
Speaker 2: So let me ask you this previous twenty five years,
29:54
Speaker 2: actually since since the start of two thousand and one,
29:56
Speaker 2: so little more than twenty five years or maybe a
29:59
Speaker 2: little less. I always forget if you need to carry conclude.
30:02
Speaker 3: Yeah, right, it's very annoying. Yeah, we have somebody settle that.
30:05
Speaker 1: Please.
30:06
Speaker 2: In any case, since the start of two thousand and one,
30:09
Speaker 2: headline CPI in the United States has averaged two point
30:12
Speaker 2: five to seven percent. Do we think that between now
30:16
Speaker 2: and the start of twenty fifty inflation is going to
30:20
Speaker 2: average higher or lower than that?
30:23
Speaker 3: That also depends on what you think. What Okay, So
30:26
Speaker 3: we talked about the money supply being the not just
30:29
Speaker 3: the main, but like the only determinant of long run inflation.
30:32
Speaker 3: I know that sounds like a really stringent, strong statement,
30:35
Speaker 3: but most researchers would agree with that. What pressures are
30:40
Speaker 3: going to exist that could cause the money supply? The
30:43
Speaker 3: Fed I gesture toward TV here because WARS is testifying
30:47
Speaker 3: to print more money than is warranted by the growth
30:51
Speaker 3: in the economy's productive capacity. Sure, you know, fiscal pressures.
30:55
Speaker 3: There's this fiscal theory of the price level. That's an
30:58
Speaker 3: actual school of thought about how inflation gets about why
31:04
Speaker 3: inflation is what it is. Over different I'll just say
31:07
Speaker 3: eras fiscal pressures will be greater. We've got six percent
31:11
Speaker 3: of GDP deficits now and no end in sight to
31:15
Speaker 3: that trend.
31:15
Speaker 2: We don't seem to have any appetite for closing that
31:17
Speaker 2: gap nor.
31:18
Speaker 3: Yeah, very well. But so if you subscribe to the
31:21
Speaker 3: fiscal theory, the price level, you'd say higher how much?
31:26
Speaker 2: I don't know. I tend to lean towards higher as well, absolutely,
31:30
Speaker 2: but I think it's important to note like when I
31:33
Speaker 2: say higher. First of all, I love when people are like, oh,
31:37
Speaker 2: We're gonna have hyper inflation. It's like, no, like idiots,
31:40
Speaker 2: We're not gonna have hyper inflation. Probably again, like the
31:45
Speaker 2: very nature of the US economy and its place in
31:47
Speaker 2: the world makes it really hard for us to have hyperinflation.
31:50
Speaker 1: Yeah.
31:51
Speaker 2: I tend to agree, But could it be a case where, hey,
31:54
Speaker 2: over the next twenty five years, instead of averaging two
31:57
Speaker 2: and a half percent inflation, do we average three? Do
32:01
Speaker 2: we average three and a half In.
32:03
Speaker 3: The seventies we had seven point three ish.
32:07
Speaker 2: To be fair, there were significant changes to the monetary
32:10
Speaker 2: system that took place then that also contributed to that,
32:13
Speaker 2: as well as multiple energy shocks that were happening.
32:16
Speaker 3: Well, the shocks even out though, and those changes yes,
32:20
Speaker 3: but they just they allowed the FED to say we're
32:22
Speaker 3: not worried about the dollar anymore and to print too
32:24
Speaker 3: much money basically, So I would of course put the
32:27
Speaker 3: blame on the monetary authorities, on the FED.
32:30
Speaker 2: Is there a case to be made that we see
32:32
Speaker 2: something similar over the next twenty five years. I have
32:35
Speaker 2: a tough time getting to like that level. But here's
32:38
Speaker 2: the other thing is when it comes to, you know,
32:41
Speaker 2: the high levels of debt that we see throughout the
32:44
Speaker 2: federal government right now, Historically, the way that governments tend
32:48
Speaker 2: to deal with that is by inflating that debt away
32:53
Speaker 2: so that they don't default. In nominal terms, they don't
32:57
Speaker 2: like stop paying it, but they might say, okay, we're
32:59
Speaker 2: just not going to pay you back. Really with one
33:02
Speaker 2: hundred cents on the dollar, in real terms, holders get
33:05
Speaker 2: cream correct. And that's how we tend to deal with
33:08
Speaker 2: these things. Historically, we saw this after World War Two,
33:11
Speaker 2: like this was the case then. So I think this
33:14
Speaker 2: will be something where again, if you, I don't think
33:19
Speaker 2: we can put this on the board right right, Tucker,
33:22
Speaker 2: twenty five year bet? No, No, twenty five year BET's
33:27
Speaker 2: kind of a little little tough. Yeah, But if you
33:32
Speaker 2: had to pin me down. Yeah, I probably think inflation
33:34
Speaker 2: over the next twenty five is going to be higher
33:36
Speaker 2: than two five seven in my opinion. Let's take a
33:39
Speaker 2: quick break. When we return. We got stack Roulette coming
33:42
Speaker 2: up next.
33:43
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33:46
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34:01
Speaker 1: He's the Financial Exchange.
34:14
Speaker 2: All right, Mark, what do you got for me? For staff?
34:16
Speaker 3: But I was gonna continue on that point about how
34:20
Speaker 3: the deficit after World War Two came down. It's just
34:22
Speaker 3: a little too dry for stack Roulette because we know
34:25
Speaker 3: what happened. Everything worked out, Okay, I gotta say, because
34:29
Speaker 3: we haven't talked about Kevin Warsh, But he's just hitting
34:32
Speaker 3: all the right notes in his I think, in his
34:33
Speaker 3: congrecial testimony, and he is talking to us. He's trying
34:36
Speaker 3: to convince us, you, me, everybody listening, even Tucker, that
34:41
Speaker 3: he will do whatever's necessary to get inflation under control,
34:44
Speaker 3: even if it means economic sacrifice. He didn't quite put
34:46
Speaker 3: it that way, but he's conveying I think steely like
34:51
Speaker 3: determination and laser focus on inflation. The FED has other jobs.
34:56
Speaker 1: He is.
34:59
Speaker 3: He clearly views the inflation mandate is paramount, even though
35:02
Speaker 3: the law is not written that way. We'll see what
35:04
Speaker 3: happens when the economy needs employment help and inflation remains high.
35:07
Speaker 3: We'll see where he down.
35:09
Speaker 2: You know, it's going to happen. In Worsh's well, inflation
35:14
Speaker 2: might not remain high while if there's a.
35:17
Speaker 3: That's true, if it's a demand contraction, it could you know.
35:20
Speaker 2: So, I think in Worsh's perfect world, hey, he's able
35:24
Speaker 2: to talk, you know, toughly now and inflation never becomes
35:28
Speaker 2: a bigger problem. Correct, This is what we said he
35:30
Speaker 2: should do, like coming out. Yes, Look, if you want
35:33
Speaker 2: to build credibility, you need to come in and say
35:35
Speaker 2: I'm going to deal with inflation, which is exactly what
35:38
Speaker 2: he's done. The test will be if inflation does not
35:41
Speaker 2: go away based on you know, just the passage of
35:45
Speaker 2: time from this spring. If inflation does not go away
35:49
Speaker 2: and in fact becomes a bigger issue, then are they
35:53
Speaker 2: actually going to take appropriate action. I'm not going to prejudge.
35:55
Speaker 2: I don't know what they're gonna do, and I don't
35:57
Speaker 2: know if inflation will go up. But in a perfect world,
35:59
Speaker 2: it's hey, inflation goes from being you know, in the
36:02
Speaker 2: mid threes now back down into the mid twos, and
36:05
Speaker 2: worst can come out, you know, six months from now
36:07
Speaker 2: and say yep, we've waited, we've seen you know, the
36:10
Speaker 2: cycle move, and now we can you know, move to
36:12
Speaker 2: reduce interest rates. That would be his person is not
36:15
Speaker 2: needing to do anything.
36:16
Speaker 3: A strong disciplinarian, I guess, like a parent doesn't actually
36:19
Speaker 3: have to follow through because you believe them and you
36:22
Speaker 3: change behavior. That's exactly what he's trying to do. So
36:27
Speaker 3: there's a lot of like stagecraft and optics in being
36:31
Speaker 3: a fedhair and I put too much emphasis. I think
36:34
Speaker 3: when he was first nominated on his his his his
36:38
Speaker 3: non mastery because he hasn't been trained as an economist
36:41
Speaker 3: of like the technical part of the job. But I
36:43
Speaker 3: realize now even though Vulkar was a trained economist, what
36:48
Speaker 3: he had was that sort of stagecraft down and Wars
36:52
Speaker 3: seems to have that. It's it's like an indescribable quality.
36:55
Speaker 3: I don't think Powell had it.
36:56
Speaker 2: Worst to see, it's been a month.
36:59
Speaker 3: I'm really really and I'll do a one eighty if
37:02
Speaker 3: they failed to contain inflation. But so far, I think
37:05
Speaker 3: he's hitting all the right.
37:06
Speaker 2: Yes, I think he's been good so far. But it's
37:08
Speaker 2: been a month and nothing's happened yet. So it's you know,
37:12
Speaker 2: remember Powell was tested through you know, several different things.
37:16
Speaker 2: Worsh hasn't faced a single test yet, Like it's it's
37:19
Speaker 2: been thirty days.
37:20
Speaker 3: Yeah, but he's But what Powell never established his credibility
37:25
Speaker 3: as an inflation fighter. He did, right.
37:27
Speaker 2: The problem is, here's the thing Powell did. He never
37:30
Speaker 2: had to to begin with, but he like he he
37:32
Speaker 2: talked like one. And then the issue was in twenty eighteen,
37:36
Speaker 2: equity markets started breaking down and Powell was on this,
37:39
Speaker 2: you know, reduced the balance sheet, raise interest rates gradually. Yeah,
37:42
Speaker 2: and he basically got spooked by it and was like
37:44
Speaker 2: I'm not doing this again. And pretty much since then
37:47
Speaker 2: that was the playbook. So I think we need to
37:49
Speaker 2: see how wors responds when pushed by markets in either direction,
37:54
Speaker 2: because it's anyone can talk nicely for a month.
37:57
Speaker 3: Yeah, well he's made some substantive changes, I agree, Nothing
38:01
Speaker 3: really to me, is I appear to be.
38:03
Speaker 2: It's I'm not saying he's good or bad. I'm saying
38:06
Speaker 2: let's see how he does when when pushed. Quick break
38:10
Speaker 2: here for the entire rest of the day. But don't worry.
38:13
Speaker 2: We're gonna be back tomorrow and uh more financial exchange.
38:16
Speaker 2: Then hi