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Could Fed rate cuts really ward off a serious recession? · The Financial Exchange Show

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Speaker 1: donation today. This is the Financial Exchange with Chuck Zada
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Speaker 1: and Mark Vandetti.
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Speaker 2: Our two here on the financial exchange, and stock's kind
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Speaker 2: of struggling to get off the mat today. You got
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Speaker 2: the Dow down one hundred and sixty one points, the
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Speaker 2: SMPS down twenty six, the NASDAK down one forty five.
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Speaker 2: But here's the interesting thing. This is actually, and this
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Speaker 2: is gonna sound weird, with the market. You know, the
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Speaker 2: S and P down half a percent, it's actually kind
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Speaker 2: of a constructive day simply because most of that destruction.
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Speaker 2: Again it's not like it's a horrible day down, but
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Speaker 2: most of that is concentrated in a few big names.
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Speaker 2: You got Meta down two and a half percent, Tesla
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Speaker 2: down four, Costco down three percent, home Depot down three,
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Speaker 2: Amazon down one and a half, Google down one and
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Speaker 2: a half, Apple down one. There's actually a decent amount
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Speaker 2: of green on the board. It's almost a fifty to
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Speaker 2: fifty split between stocks that are up in stocks that
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Speaker 2: down today. It's just the ones that are down happen
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Speaker 2: to be bigger. Thus, the you know, with a market
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Speaker 2: cap weighted index, the S and P as a whole
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Speaker 2: down half a percent today. But if you look at
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Speaker 2: the S and P five hundred on an equal weighted
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Speaker 2: basis right now, meaning every constituent weighted the same instead
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Speaker 2: of varying based on market cap. It's down less than
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Speaker 2: a quarter of a percent, and so again I think
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Speaker 2: that there's a case to be made that this is
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Speaker 2: actually a fairly constructive day despite the negative price movement
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Speaker 2: that we're seeing in the short So if you.
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Speaker 3: Own an actively managed product, they're probably smaller and less
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Speaker 3: tech heavy than a broad market index.
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Speaker 2: And a lot of active managers, especially in the large
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Speaker 2: cap space, have just loaded.
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Speaker 3: Up on Like I said, they're probably over exposed.
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Speaker 4: So we think.
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Speaker 3: You're laughing at kitchen. I'm thinking a good active manager, Chuck,
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Speaker 3: the type I hope we would pick for the clients
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Speaker 3: for whom we are fiduciaries. And I think a lot
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Speaker 3: of advisors probably think.
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Speaker 4: The same way.
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Speaker 3: My point is, and it's similar to yours. There are
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Speaker 3: opportunities when dispersion increases.
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Speaker 2: This is a piece that's tough, Like if you are
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Speaker 2: an active manager that plays in that space, it's hey
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Speaker 2: for the last two years, even if like you were
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Speaker 2: sticking to your guns. No, I'm not loading up on Nvidio.
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Speaker 2: I'm not loading up on Tesla B. Yeah too, eventually,
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Speaker 2: like you have a couple of years where you're under
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Speaker 2: performing by a ton, and like the money that's with
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Speaker 2: you is like bye bye, Okay, I gotta go somewhere else.
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Speaker 2: So I think that it's it's hard, uh to stick
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Speaker 2: to your guns for that long. It's it sounds great
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Speaker 2: in principle, but you know, investors are fickle and they're
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Speaker 2: they're you know.
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Speaker 3: Which is why the most successful active managers.
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Speaker 4: Buffett is one of them.
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Speaker 3: Although he's unusually active, he takes roles in the companies
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Speaker 3: that he or most just look at a computer screen
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Speaker 3: and look at financial data that's public, maybe do a
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Speaker 3: couple of phone calls with management and make a decision
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Speaker 3: based on that. Is distinguished from Buffett, who we all
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Speaker 3: think of, who's truly activist in hands on the best
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Speaker 3: active managers with those with the best I should say
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Speaker 3: long term track records because they can lag for a
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Speaker 3: long time. They are contrarian and they're willing to take
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Speaker 3: the slings and arrows of the financial commentators during the
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Speaker 3: inevitable long rough patches.
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Speaker 2: It's also one where they're contraying. But the second piece
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Speaker 2: is you also have to be right. I know, I know,
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Speaker 2: lots of contrarians in markets that lose plenty of money
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Speaker 2: still because they're contrarian at the wrong time, reflexively contrarian,
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Speaker 2: like a lot of times the market's actually right, you know,
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Speaker 2: good qualifier. We've got bonds ten years pretty much flat, Tenure,
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Speaker 2: Treasury up one basis point to four point three to
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Speaker 2: two six percent, Oil West Text Intermediate down fifty four
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Speaker 2: cents a barrel to sixty seven to fourteen. The triple
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Speaker 2: A national average for gas prices down another tenth to
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Speaker 2: percent to three oh seven and nine tenths So still
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Speaker 2: can't get that below three dollars nationally. But in the
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Speaker 2: New England region, New Hampshire is now at two ninety
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Speaker 2: three on average, Massachusetts two ninety seven, and Rhode Island
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Speaker 2: at two ninety So how about that. And we've got
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Speaker 2: gold today breaking out to a new all time high
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Speaker 2: twenty nine eighty and seventy cents is it's up thirty
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Speaker 2: three dollars and ninety cents an ounce. Let's uh, I
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Speaker 2: want to skip ahead to this piece from CNBC on Kramer.
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Speaker 2: Cuz quite honestly, so Jim Kramer, who if I'm being
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Speaker 2: one hundred percent honest about Jim Kramer. He is the
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Speaker 2: person that got me interested in the stock market.
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Speaker 4: I thought you're gonna say beards.
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Speaker 2: No, no, sorry, I'm more a fan of Ben Bernanke's
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Speaker 2: beard than Jim Kramer's beer. It's very luxurious. It's very luxurious,
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Speaker 2: very supple. You think, you know, like it just seems
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Speaker 2: like very nice Kramer. When I was like a twelve
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Speaker 2: thirteen year old kid, I saw his. My seventh grade
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Speaker 2: history teacher actually was like, oh, like, you guys should
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Speaker 2: watch this show on like CNBC called Mad Money. And
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Speaker 2: I was like, okay, Like I didn't even know what
5:57
Speaker 2: CNBC was. I thought it was just like I don't know,
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Speaker 2: like color NBC. I didn't know, like whatever. I didn't
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Speaker 2: know what it was. Cartoon cartoon NBC. Sure, And so
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Speaker 2: I put it on and look for a thirteen year
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Speaker 2: old having Jim Kramer with you know, mooing cows and
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Speaker 2: you know, bears roaring and stuff. I thought it was
6:14
Speaker 2: the coolest thing ever, first Docuy ever owned at the time.
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Speaker 2: It wasn't even at the.
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Speaker 3: Time seventh grade just for contact everybody.
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Speaker 2: No, no, it was way after seventh grade, but the
6:25
Speaker 2: company was before they even merged. It was just Activision
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Speaker 2: before they became Activision Blizzard then eventually got bought by Microsoft.
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Speaker 2: Why he talked about it a lot, and it was
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Speaker 2: a video game company, So I, like I just I
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Speaker 2: thought it was cool to own a video game company or.
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Speaker 3: A video game company when I was a kid. Were
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Speaker 3: they Yes, they made There were a bunch of programmers
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Speaker 3: left Atari Okay started Activision games like Pitfall? Oh sure, yep,
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Speaker 3: what else, Ben, You're probably too young to anyway, A
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Speaker 3: bunch of.
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Speaker 4: Hits there you go.
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Speaker 2: But anyway, So like Jim Kramer, I have an awful
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Speaker 2: lot of love for because he like got me interested
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Speaker 2: in an investing just because as a kid, like I
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Speaker 2: thought his show is like the coolest, and to be honest,
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Speaker 2: like he still puts on like a great show. It's
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Speaker 2: gotten to the point though, where a couple of years ago,
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Speaker 2: because Kramer was kind of a notorious contra signal, there
7:15
Speaker 2: actually is now an inverse Kramer ETF that exists out
7:19
Speaker 2: there because someone decided to, you know, put it into
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Speaker 2: the world. There's also a pro Kramer one. So like
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Speaker 2: you get all these things that pop up there, but
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Speaker 2: you look the headline that's here, and it says fed
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Speaker 2: rate cuts could ward off serious recession, Jim Kramer says,
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Speaker 2: and immediately you're like, oh no, is that the kiss
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Speaker 2: of death?
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Speaker 3: Yeah, right, for anybody, but maybe especially him.
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Speaker 2: So here's the thing. Fed rate cuts, in my opinion,
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Speaker 2: unless you make them significant and well before any signs
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Speaker 2: of recession, cannot ward off a recession entirely.
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Speaker 1: In my opinion.
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Speaker 2: The only examples that we have an evidence of maybe
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Speaker 2: maybe maybe the FED being able to do so ninety
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Speaker 2: four and maybe twenty three, twenty.
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Speaker 4: Four, Okay.
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Speaker 2: Other than that, are there any examples that you can
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Speaker 2: think of where the FED has gone through a cutting
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Speaker 2: cycle to pre empty recession.
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Speaker 3: You wouldn't know because the FED could be going nuts
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Speaker 3: responding to GDP forecasts, and if GDP doesn't move, it
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Speaker 3: would look like they had no effect. So there's a
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Speaker 3: statistical problem there.
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Speaker 2: But we do know how many cutting cycles they've gone through.
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Speaker 3: I'll say this is it's a kind of a subtle point,
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Speaker 3: but you actually can't tell. Is the is the conclusion
8:42
Speaker 3: of economists you run into something called the identification problem.
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Speaker 3: When you're trying to estimate it.
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Speaker 2: You just something that didn't fall.
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Speaker 3: Yeah, basically that's the long and the short of it,
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Speaker 3: what they could have definitely responded averted recession. You wouldn't
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Speaker 3: know because you can't do this sort of COUNTERI history.
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Speaker 2: I'm more looking at it, and again I'm gonna cut.
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Speaker 4: Kind of I'm gonna so soft landings.
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Speaker 2: I'm going to not include trying to think of like
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Speaker 2: the time pier. But let's let's look at this for
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Speaker 2: the last forty five years since nineteen eighty. I'm gonna
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Speaker 2: throw the seventies out just because seventies were kind of
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Speaker 2: a mess from an economic perspective. But let's look at
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Speaker 2: the last forty five years just as an example here,
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Speaker 2: and when we look at cutting cycles that the FED
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Speaker 2: has gone through, and what would you define is like
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Speaker 2: an actual cutting cycle? Mark like what it's more than
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Speaker 2: like one? The Fed basically never cuts once. But here
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Speaker 2: here's where it exists.
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Speaker 3: You have to actually good, well, I'll tell you how
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Speaker 3: researchers have approached it, or we could just sort of
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Speaker 3: wing it.
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Speaker 2: Just I'm gonna literally eyeball this. The Fed in nineteen
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Speaker 2: eighty started cutting interest rates from whatever the peak was
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Speaker 2: twenty percent. Recession happened. Concurrently, they did not avoid it.
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Speaker 2: The Fed in nineteen eighty one started cutting interest rates
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Speaker 2: from a peak of again it looks like north of
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Speaker 2: twenty once again, did not avert recession. You still have
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Speaker 2: that eighty one eighty two recession that happened. Afterwards, they
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Speaker 2: were basically, you know, held stable. There was a I
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Speaker 2: guess you could point to a cutting cycle in the
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Speaker 2: mid eighties. I don't know, you know the specifics there.
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Speaker 2: But then in eighty nine started cutting, did not avert
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Speaker 2: the ninety recession, ninety four went through some cutting, did
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Speaker 2: avert a potential recession there? Tech bubble couldn't avert it.
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Speaker 2: Financial crisis couldn't avert it. So like, there are very
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Speaker 2: few instances that you can look at, but I don't
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Speaker 2: know that there are really there's much. Even if you
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Speaker 2: look at when the Fed's cutting rates, they've only done
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Speaker 2: it a few times in the last forty years, and
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Speaker 2: most of the time they're not able to avert that recession.
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Speaker 3: The question that we are asking trying to respond to
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Speaker 3: here is a tougher one than you think, because the
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Speaker 3: FED is also responding in real time to the economy.
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Speaker 3: People are in turn responding to what the FED is doing,
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Speaker 3: changing the way they react to the larger economic picture.
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Speaker 3: There's a lot of disagreement among researchers on whether the
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Speaker 3: FED has helped to shorten recessions. The famous work, and
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Speaker 3: I'll mention it briefly done by a guy named David Romer.
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Speaker 3: He and his wife Christy, also a famous economist. They've
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Speaker 3: looked at meeting minutes going back to the fifties to
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Speaker 3: try to get a sense for what policy makers were
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Speaker 3: responding to when they took action, and they've concluded the
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Speaker 3: FED has helped to shorten recessions, probably can't do much
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Speaker 3: to prevent them, almost certainly has induced them to squash inflation.
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Speaker 3: But there are plenty of researchers who disagree with their methods,
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Speaker 3: so it's still an area of active research and still
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Speaker 3: plenty of open questions, which makes it interesting. I mean,
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Speaker 3: of course, we'd like the FED to preempt downturns, but
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Speaker 3: that would require superhuman, supernaturally even knowledge of the future
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Speaker 3: that they don't have and we don't have.
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Speaker 2: Right, take a quick break here. When we return, we've
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Speaker 2: got trivia after this.
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Speaker 5: Time down for trivia on the Financial Exchange. Today's trivia
12:34
Speaker 5: question on this day. In two thousand, Bill Gates stepped
12:37
Speaker 5: down from the Micro Excuse me on the day. In
12:39
Speaker 5: twenty twenty, Bill Gates stepped down from the Microsoft board
12:43
Speaker 5: to focus on philanthropic activities. Twenty years earlier, in two thousand,
12:48
Speaker 5: Gates stepped down as CEO of Microsoft and was replaced
12:52
Speaker 5: by the then company president. Today's question, who took over
12:55
Speaker 5: as Microsoft's CEO from Bill Gates in two thousand? Who
13:00
Speaker 5: took over as Microsoft CEO from Bill Gates in two thousand?
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13:19
Speaker 2: Speaking of Microsoft, the FTC yesterday announced a sprawling I'm
13:24
Speaker 2: going to quote here from Bloomberg, a sprawling anti trustprobe
13:27
Speaker 2: of Microsoft, signaling that Donald Trump's new FTC is going
13:32
Speaker 2: to continue to prioritize scrutiny of tech giants. So this
13:37
Speaker 2: is an interesting signal to me because, look, those of
13:41
Speaker 2: you who have listened to our program for quite a
13:43
Speaker 2: while know that I think that the big tech companies
13:45
Speaker 2: are too big and operate rather monopolistically and do some
13:49
Speaker 2: things that are pretty anti competitive. Uh, And so I
13:53
Speaker 2: think it's fantastic that the Trump FTC is looking at
13:58
Speaker 2: broad anti trust action against companies such as Microsoft. Do
14:05
Speaker 2: I have any you know, specifics I could pull up
14:08
Speaker 2: a few things. I don't have as much on Microsoft.
14:10
Speaker 2: I have more stuff that bothers me, in particular about
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Speaker 2: Amazon and how they do business this despite being like
14:17
Speaker 2: an Amazon Prime customer, it's okay, Like they might do
14:19
Speaker 2: business in a way that I don't like, but honestly,
14:23
Speaker 2: it makes it so easy for me. Like when you
14:25
Speaker 2: have two kids and you're you know, having to buy
14:27
Speaker 2: a lot of expensive stuff, It's like, okay, like Amazon
14:29
Speaker 2: makes it pretty easy to do so, and their whole
14:31
Speaker 2: subscribe and save like I get it. Do as I say,
14:34
Speaker 2: not as I do. I'm a hypocrite, but I do
14:37
Speaker 2: like the idea that, hey, big tech is going to
14:40
Speaker 2: be a focus here, and I'll quote again here the
14:44
Speaker 2: agency said and the information demand that it wants to
14:46
Speaker 2: determine whether Microsoft's profit of the business gives it an
14:50
Speaker 2: edge over other AI companies. So specifically here they're looking at,
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Speaker 2: are you underpricing your AI because you have so much
14:57
Speaker 2: profit from elsewhere that it prevents competition in the AI space?
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Speaker 4: Uh? Isn't that?
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Speaker 3: Isn't that the point of going into business. You make
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Speaker 3: a lot of money in one channel and you use
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Speaker 3: that to develop new products at a competitive price.
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Speaker 2: So on one hand, sorry, I'm not.
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Speaker 4: An anti trust lawyer obviously.
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Speaker 2: But on the other hand, like, that's basically what all
15:21
Speaker 2: anti trust law boils down to is the railroads abusing
15:24
Speaker 2: that power to undercut all of their competitors and then
15:27
Speaker 2: once their competitors were gone, jacking the prices up.
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Speaker 3: Well, that's if you buy everybody else out and then
15:32
Speaker 3: you jack the price is up.
15:33
Speaker 2: Not necessarily buy everyone else up. I mean you have
15:36
Speaker 2: different combinations of it. And look, part of it is
15:38
Speaker 2: can you rather than to buy everyone else up, can
15:41
Speaker 2: you just put everyone else out of business? Is it?
15:43
Speaker 2: If you have to spend ten billion dollars to buy
15:45
Speaker 2: up your competition, but you can forego eight billion dollars
15:49
Speaker 2: in profit in order to put them out of business. Anyways,
15:53
Speaker 2: it might be cheaper for you to not buy them.
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Speaker 3: Right, aren't presumably every company developing their own AI capabilities
16:00
Speaker 3: doing the same thing.
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Speaker 2: No, what do you mean.
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Speaker 4: This subsidizing so to speak?
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Speaker 2: Well, I think this is getting at Hey, maybe there's
16:09
Speaker 2: a problem with those also, like maybe there's like a
16:13
Speaker 2: systemic issue with big tech and the fact that the
16:17
Speaker 2: only companies that can compete on their scale because of
16:20
Speaker 2: how they're subsidizing things are the three or four companies
16:23
Speaker 2: that are at the top. I don't know, Like, I
16:27
Speaker 2: don't know where they're going to go with this. I
16:29
Speaker 2: just think it's interesting that they are going after big
16:33
Speaker 2: tech on this stuff because I kind of don't like
16:37
Speaker 2: the idea, especially with how integrated tech is into our
16:39
Speaker 2: lives of not having choice amongst technology and you know,
16:43
Speaker 2: lock into a certain ecosystem and this and that. So
16:46
Speaker 2: I welcome additional intervention because I'm a big believer that
16:51
Speaker 2: you could get rid of a ton of regulation if
16:54
Speaker 2: you foster an environment that allows for way more competition
16:56
Speaker 2: than we currently have. I think most of the problems
16:59
Speaker 2: that we have that we try to solve with regulation
17:02
Speaker 2: are because it's so hard for customers to find and
17:06
Speaker 2: move to new alternatives. And I think if we had
17:08
Speaker 2: more competition in a lot of these markets, you don't
17:11
Speaker 2: need to do as much of the stuff on the
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Speaker 2: one come back? Sorry, Yeah, I would break Microsoft out.
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Speaker 4: How do you know? I was gonna ask that?
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Speaker 2: Yeah?
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Speaker 4: Did I telegraphed?
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Speaker 2: I didn't even you did? You started to say I
17:22
Speaker 2: would you bruh? You said, would you Burrow?
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Speaker 4: And I yeh, Hey, let's let's do this again.
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Speaker 2: Yes, I would break Microsoft?
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Speaker 4: What number?
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Speaker 2: Am I the other place that I would go an?
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Speaker 4: Why would you into?
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Speaker 1: What?
17:31
Speaker 4: Okay? What?
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Speaker 3: What businesses are you going to break Microsoft up into?
17:34
Speaker 5: Well?
17:35
Speaker 2: So can I give you my Can I give you
17:37
Speaker 2: my really interesting one? For Amazon and and for Google?
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Speaker 3: Am?
17:41
Speaker 4: Sure we can come back to micro.
17:42
Speaker 2: I would break Amazon and Google up geographically?
17:45
Speaker 4: Yeah.
17:45
Speaker 2: Amazon people understand because it's like, okay, like you separate
17:48
Speaker 2: the warehouses. People like, how do you break Google up geographically?
17:51
Speaker 2: It's fine. You just segment where the search comes from.
17:53
Speaker 2: You spin all those businesses off, and then you have
17:57
Speaker 2: like Google Midwest can try to move in to the Google,
18:01
Speaker 2: you know, New England market, but they have to compete
18:04
Speaker 2: on quality against a formidable adversary that's starting from the
18:08
Speaker 2: same point. Not bing.
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Speaker 4: You could do that, but.
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Speaker 3: If there are scale economies in that business, and I
18:17
Speaker 3: assume that there are, though they're probably way beyond that
18:19
Speaker 3: point on their so called cost curve, it would mean
18:22
Speaker 3: higher prices. It might also mean more innovation and therefore
18:26
Speaker 3: lower prices.
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Speaker 2: Which is what I like.
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Speaker 4: I don't know.
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Speaker 2: I'm a big believer that competition and scarcity forces innovation,
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Speaker 2: and so the more that you can force companies to
18:39
Speaker 2: need to try to innovate, the better it is for consumers.
18:44
Speaker 2: And the other place that I come back to is
18:45
Speaker 2: like the airlines, like all this stuff about you know,
18:47
Speaker 2: how much do you need to compensate people if they
18:49
Speaker 2: have a six hour delay in this and that. Well,
18:51
Speaker 2: if you had more airlines and instead of just one
18:54
Speaker 2: plane flying, you know, one company flying each root or
18:57
Speaker 2: two companies flying each route that price, there's stuff exactly
19:00
Speaker 2: the same and of the same level of service. If
19:02
Speaker 2: you could actually have real competition there, Hey, if I
19:05
Speaker 2: have a bad experience with someone flying me to Topeka, okay, great,
19:09
Speaker 2: I got competition that I can switch to and the
19:13
Speaker 2: other company will have to adapt because they'll lose their
19:15
Speaker 2: business to the competition instead of not having real competition.
19:18
Speaker 4: I think I'm sold, yet I'm gonna think about it. I'm
19:21
Speaker 4: gonna think about it.
19:22
Speaker 2: You don't have to be sold, you know. That's the
19:24
Speaker 2: nice thing I want to be.
19:25
Speaker 4: I don't want to have to think about this for myself.
19:27
Speaker 2: The nice thing is that I'm not in office and
19:28
Speaker 2: I can't actually do any of this, but it's just
19:31
Speaker 2: a nice exercise for me. Let's take a quick break
19:34
Speaker 2: and when we come back, we get the trivia answer
19:36
Speaker 2: after this.
19:41
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20:09
Speaker 5: Trivia question today was who took over as Microsoft CEO
20:15
Speaker 5: when Bill Gates stepped down in two thousand. Your answer
20:18
Speaker 5: Steve Balmer. Steve Balmer became the new CEO in two
20:23
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20:26
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20:31
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20:33
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20:37
Speaker 2: All right, JP Morgan has analysts that work for them,
20:41
Speaker 2: as most banks do, and a couple of their analysts
20:45
Speaker 2: follow Tesla, and I'll just read the quotes from them
20:50
Speaker 2: on Tesla because they are getting pretty bearish.
20:54
Speaker 5: Quote.
20:54
Speaker 2: We struggle to think of anything analogous in the history
20:58
Speaker 2: of the automotive industry in which a brand has lost
21:01
Speaker 2: so much value so quickly. They wrote that the coastest
21:05
Speaker 2: example was when Japanese and Korean car brands lost sales
21:09
Speaker 2: amid diplomatic disputes with China in twenty twelve and twenty seventeen.
21:16
Speaker 2: The JP Morgan analyst wrote in a note on Wednesday
21:18
Speaker 2: that those historical cases were confined to a single market,
21:21
Speaker 2: whereas the decline in Tesla sales in twenty twenty five
21:23
Speaker 2: is not specific to any one nation or geography. If
21:28
Speaker 2: you've looked at like the monthly data coming out of Europe,
21:31
Speaker 2: out of China, out of the US, they're all showing
21:34
Speaker 2: anywhere between like twenty and sixty percent declines in year
21:39
Speaker 2: over year sales and so it presents a real issue
21:44
Speaker 2: for Tesla in a fundamental way, just because automakers don't
21:51
Speaker 2: make a lot of money for each car they sell,
21:54
Speaker 2: they basically have to make it up in volume. It's
21:58
Speaker 2: strange to think of it this way, but they're there.
22:00
Speaker 2: There's a pretty big similarity between automakers and grocery stores
22:04
Speaker 2: in that respect, and that you often have like load
22:06
Speaker 2: to mid single digit margins and you just need to
22:10
Speaker 2: sell as much volume as you can in order to
22:13
Speaker 2: run your business. The difference is that grocery stores they
22:17
Speaker 2: don't actually produce any of their inventory. They buy it
22:21
Speaker 2: like all the like. They don't grocery stores don't build anything.
22:24
Speaker 2: They just buy stuff and resell it at a higher markup,
22:27
Speaker 2: whereas Tesla and automakers they build something, which is obviously
22:31
Speaker 2: a huge difference. So here's where I'm going with this
22:33
Speaker 2: is Tesla for the trailing twelve months, their revenues ninety
22:36
Speaker 2: seven billion dollars. They had net income of seven billion,
22:38
Speaker 2: which means that they effectively spent ninety billion dollars to
22:43
Speaker 2: make ninety seven That's how the math ends up working out.
22:47
Speaker 2: So here's the problem with this is if you have
22:48
Speaker 2: a twenty to thirty percent decline in revenue. You're now
22:53
Speaker 2: talking about going from almost one hundred billion dollars in
22:55
Speaker 2: revenue down to seventy and your costs do not simply
22:59
Speaker 2: decrease life linearly in the same fashion. The reason being,
23:03
Speaker 2: you still have a ton of overhead, you still have
23:05
Speaker 2: a ton of staffing, you still have a ton of
23:08
Speaker 2: you know, like basically the cost of running the factory.
23:11
Speaker 2: And so what actually ends up happening is a negative
23:14
Speaker 2: feedback loop where if you produce fewer cars, the cost
23:18
Speaker 2: per car goes up, and so it makes your margins
23:21
Speaker 2: even worse, which means you end up taking a bigger
23:23
Speaker 2: loss on a car, which is generally why automakers try
23:27
Speaker 2: to avoid forty percent drops in their auto sales. If
23:32
Speaker 2: you look just as an example at you know, let's
23:38
Speaker 2: look at the Let's let's look at the Great Financial
23:42
Speaker 2: Crisis just as an example, and total vehicle sales in
23:46
Speaker 2: the United States during the Great Financial Crisis dropped from
23:49
Speaker 2: around sixteen million a year down to nine point seven million.
23:55
Speaker 2: Like that's the pace that they drop to over a
23:57
Speaker 2: span of about a year. Mark the big US automakers,
24:01
Speaker 2: what did we have to do to them at the time.
24:03
Speaker 4: Ooh, we bailed them out.
24:05
Speaker 2: We had to bail them out because they all were
24:07
Speaker 2: going to go out of business because they're sales declined
24:09
Speaker 2: by fifty percent. Where I'm getting to on this is
24:14
Speaker 2: if Tesla actually has any kind of sustained twenty thirty
24:19
Speaker 2: forty percent drop in sales, it can't exist as a
24:24
Speaker 2: car company anymore.
24:25
Speaker 3: We don't know, do we know what their variable costs are?
24:27
Speaker 3: It's sort of a maximum in economics that if you
24:30
Speaker 3: can't cover your average variable cost little academic, but it
24:33
Speaker 3: works out, you should shut down, at least temporarily. How
24:37
Speaker 3: much could they cut in such an America don't know.
24:39
Speaker 2: The one advantage that they do have over legacy automakers
24:42
Speaker 2: there's no unions at Tesla, so from that perspective, they
24:46
Speaker 2: have a quicker path to cutting those costs. The rest
24:50
Speaker 2: of it, I'm not sure that there's anything different about
24:54
Speaker 2: them in terms of how they actually make cars from
24:57
Speaker 2: other automakers. Like yeah, like some of the specifics of
24:59
Speaker 2: the process are obviously different, but it is something where
25:04
Speaker 2: it is it is a scale business and there's only
25:07
Speaker 2: so much that you can do there. So this is
25:10
Speaker 2: potentially a huge problem for them. I don't know how
25:13
Speaker 2: long what they are seeing lasts. It's not clear to
25:17
Speaker 2: me that you know, this is a permanent shift. And
25:21
Speaker 2: in the investing world, the entire like business is hey,
25:24
Speaker 2: is what I'm seeing permanent or temporary? That's the That's
25:27
Speaker 2: basically how you end up making money in the investment world.
25:30
Speaker 3: Could if Elon must did a one eighty today, stopped
25:32
Speaker 3: being so polarizing, you don't have to quit the government,
25:35
Speaker 3: just be green eye shade and low key about it. Sure,
25:39
Speaker 3: is it too late to salvage his and his company?
25:42
Speaker 5: I don't know.
25:43
Speaker 2: I don't. So there's a couple of different schools of
25:47
Speaker 2: thought on this. There's the Warren Buffett quote. You know,
25:49
Speaker 2: it takes a lifetime to build a reputation, only a
25:51
Speaker 2: minute to sully it. So you know, part of the
25:53
Speaker 2: question is okay, once once your reputation is you know,
25:56
Speaker 2: kind of in the in the tank, like, can you
25:58
Speaker 2: come back from it? The answer that I think we've
26:01
Speaker 2: seen is is yes, but it takes time. And time
26:04
Speaker 2: in the car business is not something that's your friend.
26:09
Speaker 4: You know, if you can't cover your variable cast.
26:12
Speaker 2: You can't just like wait it out. In the auto business, he.
26:15
Speaker 3: Hasn't done anything irreparable. He hasn't done irreparable harm. He's
26:19
Speaker 3: just been I don't polarizing.
26:21
Speaker 2: I don't know.
26:23
Speaker 3: Yeah, I don't know, but it seems to me if
26:24
Speaker 3: he just sort of took a lower key approach, people
26:27
Speaker 3: would forgive and forget because he hasn't done anything. That's
26:32
Speaker 3: the question, I know.
26:33
Speaker 2: This is the question is how quickly do people And
26:36
Speaker 2: that's the part that's the problem for Tesla potentially is
26:38
Speaker 2: even if you did say okay, look, I'm gonna just
26:41
Speaker 2: you know, chill and you know what, I don't know
26:45
Speaker 2: how quickly people forgive and forget. Is it a week,
26:49
Speaker 2: a month, a year, a decade, Because if it is
26:51
Speaker 2: a decade, then that's a problem. And here's the other thing.
26:55
Speaker 2: Most if you think about like the forgiveness of public figures,
26:57
Speaker 2: doesn't a lot of it often happen when they're out
26:59
Speaker 2: of the limelight for a little while and then they
27:02
Speaker 2: come back.
27:03
Speaker 4: I guess saying like have to apologize.
27:06
Speaker 2: Right Like it's like it's kind of that okay, like
27:09
Speaker 2: I've done my time whatever it is.
27:11
Speaker 4: It's not just yeah, you might have to pay.
27:14
Speaker 2: I'm like I'm okay with it.
27:15
Speaker 4: Tons. Yeah, I don't know. I'm sorry, go ahead, So.
27:19
Speaker 2: I don't know, you know, kind of what the situation
27:21
Speaker 2: is there. The other piece, and this is the one
27:24
Speaker 2: that is not a this is not a like sentiment
27:30
Speaker 2: type of thing based on any actions that Elon's undertaking.
27:34
Speaker 2: The China market is one where they've tried to you know,
27:36
Speaker 2: grow significantly in recent years. They have a factory that
27:39
Speaker 2: they started there. I think in like twenty nineteen is
27:41
Speaker 2: when the Shanghai factory opened. And you've got all these
27:44
Speaker 2: Chinese evy startups that are out at lower prices with
27:47
Speaker 2: more features and this and that, and it's just something
27:52
Speaker 2: again like you've got this New York Times piece talking
27:55
Speaker 2: about how, look, you can buy these Chinese evs in
27:58
Speaker 2: China for you know, half the cost of a Tesla.
28:01
Speaker 2: Why would I buy a Tesla if it's twice the
28:02
Speaker 2: cost and I can buy a domestic brand. That's a
28:06
Speaker 2: battle that I don't think he can win. And I
28:10
Speaker 2: think that when you look at this, it's not one
28:13
Speaker 2: that's again here's the other thing this is, this is
28:17
Speaker 2: not something that's just a US issue. This is happening
28:19
Speaker 2: everywhere that you're seeing these sales declines and.
28:23
Speaker 4: It's more severe where he's.
28:25
Speaker 2: Who do you even apologize to?
28:27
Speaker 3: Well, okay, these are somewhat different problems that the problem
28:29
Speaker 3: he's having in Europe is pretty straightforward. Yes, it's it's
28:33
Speaker 3: perception there, and he could probably fix that. He's got
28:36
Speaker 3: to apologize. I don't know if he's inclined to do that.
28:38
Speaker 3: I don't know if he even recognizes that there's a problem.
28:40
Speaker 3: I think he thinks he's being a great patriot, but
28:42
Speaker 3: he's being a bad fiduciary. At what point is he obligated?
28:46
Speaker 3: Is he compelled by his board? I know the structure
28:49
Speaker 3: is such that he can't be, but they could try
28:51
Speaker 3: moral suasion, personal appeals. At what point do they have
28:55
Speaker 3: an obligation to shareholders to step in and say please
28:58
Speaker 3: stop the self imlay here this is not constructive.
29:01
Speaker 2: I mean, you would think if you have a couple
29:05
Speaker 2: of quarters that are potentially as bad as JP Morgan
29:08
Speaker 2: suggesting they could be, you would think within that couple
29:11
Speaker 2: of quarters.
29:12
Speaker 4: Yeah.
29:12
Speaker 2: But the problem with Tesla and the paradox of it
29:16
Speaker 2: not a paradox, but the catch twenty two of it
29:18
Speaker 2: is you got a situation where how much of that
29:22
Speaker 2: valuation is driven by Elon Musk. Being an Elon Musk,
29:26
Speaker 2: you can make the case that probably like the vast
29:28
Speaker 2: majority of it. Yeah, and so if the board's ever
29:33
Speaker 2: like Elon, you need to either change or leave, and
29:36
Speaker 2: he decides to leave, then I'm not sure there is
29:40
Speaker 2: anything left, Like the people will follow, like the Elon
29:44
Speaker 2: fans are going to follow Elon, not stay with Tesla, right.
29:48
Speaker 3: I don't know that is a perfect catch twenty two.
29:50
Speaker 2: So it's kind of like, what do you do? It's
29:54
Speaker 2: kind of a challenging situation to sort through. Let's take
29:56
Speaker 2: a quick break when we come back stack.
30:00
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30:37
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31:04
Speaker 2: By the way, I will be going for a I'm
31:06
Speaker 2: aiming for a top fifteen finish this year for the
31:10
Speaker 2: DAV five k. I think I was like twenty eighth
31:13
Speaker 2: or something last year out of twenty no, of like
31:17
Speaker 2: fifteen hundred people.
31:18
Speaker 4: Yeah, it was a college athlete for pizza.
31:20
Speaker 2: It was good ish at least, So it's I didn't
31:22
Speaker 2: put up the time that I wanted to. But I'm
31:23
Speaker 2: hoping with a better year of training, I can get
31:25
Speaker 2: there this year. Mark, What do you got for me
31:27
Speaker 2: for stack roulette?
31:28
Speaker 3: Are we tired of talking about eggs? We don't talk
31:30
Speaker 3: about egg prices a lot, But there isn't more interesting angle.
31:33
Speaker 3: And it's not a political angle. This is not about
31:36
Speaker 3: blaming anybody. It's largely outside of most people's control.
31:38
Speaker 2: But what were you gonna say eggs are a giffing good.
31:44
Speaker 2: You think, so, I have giff and good For those
31:46
Speaker 2: who aren't familiar with the term, it's a term for economics,
31:48
Speaker 2: and a giff and good is one that people buy
31:50
Speaker 2: more of when the prices go up. We certainly talk
31:53
Speaker 2: about eggs more when the prices go up, but also
31:56
Speaker 2: when else do you get the signs on? You know,
32:00
Speaker 2: so you walk into any grocery store right now, due
32:03
Speaker 2: to limited supply, we are, you know, capping people at
32:06
Speaker 2: two containers of eggs per person. How many times in
32:11
Speaker 2: either of your lives would you ever buy more than
32:15
Speaker 2: two containers?
32:16
Speaker 4: Shot?
32:17
Speaker 2: It is. But this is what I mean by it
32:19
Speaker 2: being like a gift and good is that, like the
32:20
Speaker 2: price of eggs go up and we want to buy.
32:23
Speaker 3: More of some obscure concept.
32:26
Speaker 2: You know. It would be like if the price of
32:28
Speaker 2: cars went up and we bought two of them, But
32:31
Speaker 2: eggs we do, even though there's kind of a limit
32:33
Speaker 2: as to how many eggs you can eat, just because
32:35
Speaker 2: of you know, the taste of eggs every meal, day
32:39
Speaker 2: after day, and how quickly they go badly. But anyways,
32:43
Speaker 2: what do you have to say about eggs? No?
32:45
Speaker 3: I was gonna point out that it is kind of
32:49
Speaker 3: it's a fringy subject because if they factor into food
32:52
Speaker 3: and energy, the food and energy component of the CPI,
32:55
Speaker 3: and we know.
32:56
Speaker 2: The eggs factor into energy the food.
32:58
Speaker 3: I'm sorry, I'm thinking of food and energy collectively.
33:02
Speaker 5: You don't power your house on yolk?
33:04
Speaker 2: Yeah, we we stripped the yolks out and run purely
33:07
Speaker 2: on the white. You know it's cleaner. You know they
33:11
Speaker 2: burn cleaner than the yolks. I don't know, you know what.
33:15
Speaker 2: You remember the thing where like people wouldn't need the
33:16
Speaker 2: egg yolks because of cholesterol and stuff.
33:19
Speaker 4: Don't Yeah, I'm still on that bandwagon. Is that now
33:21
Speaker 4: pass out?
33:22
Speaker 2: Well, here's my theory because I don't really know anything.
33:25
Speaker 2: I've seen enough like studies and nutrition cycles at this
33:29
Speaker 2: point that I kind of subscribe to the Michael Pollen approach,
33:33
Speaker 2: which is eat food, meaning like not pre produced stuff
33:37
Speaker 2: like real food, you know, things that aren't overly processed.
33:41
Speaker 2: Eat food not too much, and different things all the
33:45
Speaker 2: time because no one really knows like what there's all
33:48
Speaker 2: the stuff like, well, the people that live long in
33:50
Speaker 2: Italy eat lots of pasta and you know, red wine,
33:53
Speaker 2: and the people who live long in Japan eat lots
33:55
Speaker 2: of fish. So if you just and ultimately, I don't
33:58
Speaker 2: think that we can actually replicate what makes longevity for
34:01
Speaker 2: any particular person or even for any particular culture, because
34:06
Speaker 2: we kind of forget that. Maybe it's like imbued in
34:08
Speaker 2: the culture and it's like a fundamental.
34:10
Speaker 4: Part hard to control for other factors, you know, like.
34:12
Speaker 2: All that stuff. And so I basically come back to, Yeah,
34:15
Speaker 2: I don't know what's inherently like good or bad for you,
34:18
Speaker 2: aside from like you probably just shouldn't eat chips, but
34:22
Speaker 2: eat whatever you want, but just don't eat too much
34:24
Speaker 2: of anything, and you know, portion size appropriately and you'll
34:27
Speaker 2: generally be fine because the rest is kind of statistical noise.
34:31
Speaker 4: Everything in moderation, is that what you're saying?
34:33
Speaker 2: Yeah, and mostly like whole foods, real foods, if you
34:36
Speaker 2: can not too much Kraft mac and cheese, which I
34:39
Speaker 2: do have every Friday when I get the opportunity.
34:42
Speaker 3: Expensive to eat Ali though, so low income people are
34:44
Speaker 3: at a slight disadvantage, significant disadvantage. Yeah, well, I was
34:47
Speaker 3: trying not to be hysterical about it, But what was
34:50
Speaker 3: I going to say about eggs?
34:55
Speaker 2: Eggs?
34:55
Speaker 3: The spotlight on eggs is probably driving expectations and making
34:59
Speaker 3: the I'm not blaming the media here, it's a story
35:02
Speaker 3: we have to, I guess talk about it, and when
35:05
Speaker 3: something doubles in a year or more, it's newsworthy and
35:10
Speaker 3: noteworthy for our budgets.
35:12
Speaker 4: I guess depending.
35:13
Speaker 3: But at the same time, the hysteria and I'm not
35:17
Speaker 3: downplaying the increase in the price of eggs, but the
35:21
Speaker 3: excessive attention paid to it, I'm probably not using the
35:25
Speaker 3: best possible phrase there does drive expectations and makes the inflation.
35:29
Speaker 4: Problem overall worse. So I guess only observation.
35:34
Speaker 2: Here's the question, though, why eggs and I'll even like
35:36
Speaker 2: stick with breakfast or even things that are popular. Price
35:40
Speaker 2: of coffee has also doubled over the last fifteen months.
35:44
Speaker 2: Why are there not McDonald's sorry, wholesale coffee. Oh well,
35:50
Speaker 2: I mean, look, not my problem, but I'm sure that
35:52
Speaker 2: coffee prices have actually gone up at retail. I don't
35:55
Speaker 2: drink coffee, so I don't see it, but wholesale prices
35:58
Speaker 2: So if you again, I don't even know what they meant.
36:00
Speaker 2: You're like, what's what are coffee futures measured? They are
36:03
Speaker 2: bushels kilometers feet. I don't know what coffee futures are
36:10
Speaker 2: measured in, but on October second of twenty three, they
36:13
Speaker 2: were trading it one hundred eighty nine dollars on the
36:15
Speaker 2: cash settle. Now it's four hundred and ten. So coffee
36:18
Speaker 2: futures have doubled. So someone's losing money on this if
36:21
Speaker 2: they're Yeah, it's either margins losing money or the margins
36:25
Speaker 2: are being squeezed on what's normally a high market.
36:27
Speaker 4: I would think they've got some room there.
36:29
Speaker 2: So I don't know, like, why are we just hearing
36:32
Speaker 2: about eggs and not the price of coffee doubling?
36:35
Speaker 3: Because because you point out, the producers have absorbed at
36:40
Speaker 3: least in our anecdotal our inudal observations here have absorbed
36:44
Speaker 3: some of that, or a lot of it, or all
36:46
Speaker 3: of it. Starbucks is not doubled. I don't buy stuff there,
36:49
Speaker 3: but to my knowledge, they haven't doubled their prices.
36:52
Speaker 2: No, it looks like okay, for whatever reason. Yeah, so
36:54
Speaker 2: coffee coffee prices are up one point eight percent year
36:58
Speaker 2: over year even though the raw material are more than double.
37:01
Speaker 2: So they're just eating that, I guess through their margins,
37:04
Speaker 2: is the answer, on this. So yeah, I guess okay,
37:06
Speaker 2: I just answered my question. I probably should have looked
37:08
Speaker 2: at the CPI before going down that tangent. What else
37:11
Speaker 2: you got that was the egg piece?
37:14
Speaker 4: Yeah?
37:16
Speaker 3: The oh when he's opening a thousand new restaurants.
37:20
Speaker 2: Good love a good junior bacon cheeseburger.
37:22
Speaker 3: Right, is this bucking a fast food trend? I'm sorry,
37:29
Speaker 3: I think it is bucking a fast food trend. Good
37:31
Speaker 3: for them, I'm sorry. I didn't do a lot of
37:34
Speaker 3: research here. I'll give you my gut reaction. Hey, that's great.
37:38
Speaker 2: So there's that. Sorry, No, it's all good. Taking a
37:42
Speaker 2: look at markets as we head towards the top of
37:44
Speaker 2: the hour, the Dow is off four hundred and seven points,
37:46
Speaker 2: down about one percent, s ANDP down sixty three points,
37:48
Speaker 2: also down one percent, and NASDAG down two hundred and
37:51
Speaker 2: eighty points. So we've got a broad based selloff continuing
37:54
Speaker 2: today and kind of accelerating downward into the end of
37:59
Speaker 2: the morning. We'll have to see where this continues to go. Tomorrow.
38:02
Speaker 2: A little bit more economic data tomorrow, consumer sentiment at
38:05
Speaker 2: ten am from the University of Michigan. We will cover
38:09
Speaker 2: that and a whole lot more on our show tomorrow,