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Do you feel better or worse now that the jobs data is back? · The Financial Exchange Show

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Speaker 2: Good morning, Happy Tuesday, and welcome back to the Financial Exchange.
1:14
Speaker 2: We've got two main themes to discuss on today's program.
1:18
Speaker 2: One is jobs, because we just got the first jobs
1:20
Speaker 2: report in a few months, released at eight thirty am
1:23
Speaker 2: this morning. The second has to do with AI, the
1:29
Speaker 2: market and whether or not it is different this time.
1:32
Speaker 2: That's the main thing when it comes to all these
1:34
Speaker 2: articles that I'm hearing about AI. Is is it really
1:37
Speaker 2: different this time? Or are we in for a repeat
1:40
Speaker 2: of the same types of market booms and busts that
1:43
Speaker 2: we have experienced before. Because I like talking about it,
1:46
Speaker 2: We're gonna sneak a rent control discussion in here too.
1:49
Speaker 2: I email Tucker this morning at like seven am focusing
1:51
Speaker 2: on that one piece. But let's start with the eight
1:54
Speaker 2: thirty am jobs report that failed to turn around markets
1:57
Speaker 2: in any meaningful way. This one is messy for a
2:02
Speaker 2: number of different reasons. First things first, the monthly jobs
2:07
Speaker 2: report usually is just a month worth of data. This
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Speaker 2: time around, we've got data on both October and November.
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Speaker 2: If you've listened to this program enough or like following
2:18
Speaker 2: government statistics enough, then you may have already been aware
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Speaker 2: that the monthly Jobs report is actually two separate surveys,
2:27
Speaker 2: one done of households, another done of businesses, and due
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Speaker 2: to the government shutdown, all of this stuff was delayed,
2:34
Speaker 2: and in fact, the survey of households in October just
2:37
Speaker 2: didn't occur because there wasn't anyone working to do the surveys.
2:41
Speaker 2: So what do we get from these two different surveys.
2:44
Speaker 2: One from the business surveys, they mainly ask, in addition
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Speaker 2: to what industry the employer operates in, how many people
2:53
Speaker 2: did you hire, how many did you fire, and a
2:56
Speaker 2: bunch of information about wages and other information. When they
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Speaker 2: talk to households, they basically ask a similar set of questions,
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Speaker 2: but they're asking where you're working, where you're working as
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Speaker 2: many hours as you wanted to, how many hours were those?
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Speaker 2: And you get two different numbers here. One is did
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Speaker 2: the economy create or lose jobs in the prior month
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Speaker 2: and to what extent? And then from the households you
3:17
Speaker 2: get to what extent did unemployment rate? Did the unemployment
3:22
Speaker 2: rate rise or fall? And for this report and for
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Speaker 2: the last years worth of reports, I think the number
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Speaker 2: that has mattered has been the unemployment rate rather than
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Speaker 2: the pace of job creation. We talked about why, but
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Speaker 2: certainly this time around that seems to be what's in focus.
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Speaker 3: Well, yeah, matters for what is the question if you're
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Speaker 3: going an inflation forecast. Both are kind of dubious in
3:44
Speaker 3: terms of the usefulness. The more useful metric over the
3:47
Speaker 3: past several years for slack in the labor market, for
3:50
Speaker 3: whether or not the economy is overheating, it has been
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Speaker 3: the vacancy rate. It's been a better forecast or if
3:55
Speaker 3: you're into that type of thing. The unemployment rate now
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Speaker 3: four point six percent, up from it's been creeping up
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Speaker 3: for two years. It's been subtle, but it's been pretty
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Speaker 3: with a couple of interruptions. It's more or less moved
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Speaker 3: in one direction, but it's been a slow creep. Usually
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Speaker 3: when the unemployment rate goes up, you get a little
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Speaker 3: worried because there's persistence, so to speak, positive changes and
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Speaker 3: I don't mean positive is in good, I mean positive
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Speaker 3: is in greater than zero tend to be followed by
4:24
Speaker 3: positive changes.
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Speaker 4: So it tends to creep up on that unemployment rate discussion.
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Speaker 2: Just so we have a frame of reference here, back
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Speaker 2: in April of twenty twenty three, that was the low
4:31
Speaker 2: that we have seen for over a decade. We had
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Speaker 2: three point four percent on that unemployment rate. Okay, so
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Speaker 2: it's creeping up right, steady creep, steady.
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Speaker 3: Creep, right, a couple of retreats, but mostly one direction.
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Speaker 3: Is this just the big question for me? Because to
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Speaker 3: me this leads to is the FED doing the right thing?
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Speaker 3: Or is the FED goosing and economy that's already growing
4:55
Speaker 3: it around trend with elevated inflation, which means they're gonna
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Speaker 3: have to back try at some point. This matters for
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Speaker 3: equity prices, it matters for a cost of living, for
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Speaker 3: real wages. Employers are about to make decisions for the
5:08
Speaker 3: next twelve months. You're gonna get a two, three, five
5:12
Speaker 3: or zero percent increase in What does that mean in
5:16
Speaker 3: real terms? We're all kind of flying blind here, whether
5:18
Speaker 3: you're investing or setting wages or asking for wages. If
5:23
Speaker 3: I get a two point five percent increase this year,
5:26
Speaker 3: is that just a cola or am I falling behind
5:28
Speaker 3: in real terms?
5:29
Speaker 1: Right?
5:29
Speaker 3: I don't know, Mike, And this ties into this morning's report,
5:33
Speaker 3: I think, because I don't know whether this creep up
5:36
Speaker 3: in the unemployment rate to four point six percent, which
5:38
Speaker 3: is still very low in historical terms. By the way,
5:41
Speaker 3: if you chart out a smooth unemployment rate series for
5:45
Speaker 3: those people who are into that kind of thing, you
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Speaker 3: see that four point six percent is very very rare
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Speaker 3: outside of the late sixties, late nineties, and late twenty tens.
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Speaker 3: Is this just a normalization, Mike.
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Speaker 2: For some context. We did not get below or to
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Speaker 2: that four point six percent rate until to your point
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Speaker 2: twenty seventeen, very rare the entire twenty tens decade after
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Speaker 2: the Great Recession. We were well, if.
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Speaker 3: You're looking at the actual series, which is choppy, if
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Speaker 3: you smooth that to try to get at the trend
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Speaker 3: in the series, which is what people mean when they
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Speaker 3: say they took a moving average or looked at a
6:16
Speaker 3: moving window of some piece of some data that changes
6:20
Speaker 3: over time, you see how rare unemployment below five percent
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Speaker 3: is the question that's nagged a lot of people. I'm
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Speaker 3: not a labor economist, but I think about it over
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Speaker 3: the past really couple decades. Is is unemployment in the
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Speaker 3: fours unnaturally low and bi unnaturally low? I mean, will
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Speaker 3: it push up inflation? Is that more than the productive
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Speaker 3: capacity of the economy can handle? So it is where
6:44
Speaker 3: we are now just the normalization after the overheated labor
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Speaker 3: market that all that COVID stimulus and other factors created.
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Speaker 2: I want to talk about something we haven't discussed since
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Speaker 2: last fall, but that's the some unemployment recession.
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Speaker 4: Indicator that's dead. What this is, it's just because it
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Speaker 4: didn't work the most recent time.
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Speaker 3: I mean, empirical regularity doesn't work. You can put it,
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Speaker 3: you could put it in the drawer. Okay, well say,
7:09
Speaker 3: well you got a PhD. Congratulations, but nobody's gonna use it.
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Speaker 4: Well, I'm still going to talk about it.
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Speaker 2: So last fall, what happened was the three month rolling
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Speaker 2: average of unemployment increased by more than half percent in
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Speaker 2: a twelve month period. We are knocking on that Psalm
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Speaker 2: rule recession indicator once again. Mark says it doesn't matter.
7:27
Speaker 2: I'm not sure it doesn't. I think why did it.
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Speaker 3: Matter in the first place? What was the theoretical motivation
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Speaker 3: for it, other than that unemployment was.
7:33
Speaker 4: Going empirical regularity, which is.
7:36
Speaker 3: A fancy way of saying. It has happened, So keep
7:39
Speaker 3: an eye on it. If it happens again, the same
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Speaker 3: thing that happened after it happened, could happen again, and
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Speaker 3: I'm being nonsensical like mad hat or nonsensical for a reason,
7:48
Speaker 3: because it's just a regularity. It's like when the NFC wins,
7:50
Speaker 3: stocks go out, whatever the hell.
7:51
Speaker 4: The rule is.
7:52
Speaker 2: Yeah, So in either case we are knocking on the
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Speaker 2: door of that empirical regularity. It does not mean we
7:57
Speaker 2: will hit a recession. We didn't the last time we
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Speaker 2: had a But I think one thing holds, which is,
8:03
Speaker 2: when unemployment starts to climb very rarely does it just
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Speaker 2: pause and not keep climbing.
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Speaker 3: And that's true, there's persistence in that, in that variable.
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Speaker 3: But I'm one every Chuck says this a lot trucks out,
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Speaker 3: and he's right, the COVID recession recovery MIC. We're so
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Speaker 3: unusual that we're going to break a lot of rules,
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Speaker 3: starting with the Psalm rule, which we can consign to
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Speaker 3: the dustbin of economic history. We're going to break a
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Speaker 3: lot of rules. And this could be another. It could
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Speaker 3: be an instance of unemployment just creeping up to something
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Speaker 3: more I don't know, normal sustainable. What does your gut
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Speaker 3: tell you is that?
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Speaker 2: Is that my gut tells me is that when unemployment
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Speaker 2: starts climbing rarely does it just reach a certain threshold.
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Speaker 3: That's true. Empirically, that's true, and by empirically that's fancy
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Speaker 3: way of a researcher saying, look at the data, that's
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Speaker 3: what it says.
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Speaker 2: So whether you cross as a smile threshold or not,
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Speaker 2: my concern would be you have now climbed from four
8:54
Speaker 2: percent unemployment back in January to four point six percent.
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Speaker 2: By the way, I don't think we even read the number,
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Speaker 2: but four point six percent was the number from this
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Speaker 2: morning's the jobs report. And so show me the instances
9:05
Speaker 2: where you've seen the unemployment rate climb like that and
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Speaker 2: then just drop back down or plateau, and they're pretty rare.
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Speaker 4: And so that I think is outside of learning.
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Speaker 3: Yeah, but just keep in mind where I'm not arguing
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Speaker 3: with you. I agree it is. It is. I was
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Speaker 3: gonna say alarming. It's concerning that unemployment has been creeping
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Speaker 3: up for two years but it never got save once
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Speaker 3: as low as it got post COVID it was, i'll say,
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Speaker 3: gonna naturally low. Now, that doesn't mean that there aren't
9:32
Speaker 3: momentum effects that where and I'm not using like a
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Speaker 3: technical term, that's that's just what the phrase that came
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Speaker 3: to mind at work here like, it doesn't matter that
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Speaker 3: it was a naturally low. Once it starts going up,
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Speaker 3: people get laid off, they freak out, employers freak out,
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Speaker 3: and recession becomes a self fulfilling prophecy.
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Speaker 2: So unemployment rate jumped four four to four six. We
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Speaker 2: don't know what the reading was for October. We will
9:53
Speaker 2: not know what the reading was for October because it
9:55
Speaker 2: didn't get collected. The other side of the survey, they
9:58
Speaker 2: talked to businesses and government employers. What did they find
10:01
Speaker 2: in October? The labor the workforce, the number of people
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Speaker 2: working in the month of October dropped by one hundred
10:07
Speaker 2: and five thousand employers. In November it bounced back up
10:12
Speaker 2: sixty four thousand, for a net loss over the course
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Speaker 2: of the last two months of around fifty thousand total people.
10:20
Speaker 2: But there was some tricky stuff in the month of
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Speaker 2: October that we need to account for. Let's take a
10:26
Speaker 2: quick break. I want to talk about what did the
10:29
Speaker 2: establishment data, Why do we see that hiccup in October,
10:33
Speaker 2: if we want to call it a hiccup, and what
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Speaker 2: does all of this mean for the Fed and monetary
10:37
Speaker 2: policy in twenty twenty six.
10:38
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11:19
Speaker 2: Okay, so we were talking about the jobs report that
11:21
Speaker 2: was released at eight thirty am this morning. As a reminder,
11:24
Speaker 2: this one covered October as well as November and October.
11:28
Speaker 2: We saw something interesting, which was employment dropped by one
11:31
Speaker 2: hundred five thousand people according to the Establishment Survey, which
11:34
Speaker 2: again surveys businesses, governments, et cetera. Digging in here, you
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Speaker 2: saw a job loss on the government side of one
11:44
Speaker 2: hundred and fifty seven thousand. My immediate mind went to
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Speaker 2: government shutdown. Hey, did they count a bunch of people
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Speaker 2: who were furloughed? But we're still going to collect paychecks
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Speaker 2: as unemployed here? If so, that seems inaccurate. They put
11:58
Speaker 2: a note right in there for us to make our
11:59
Speaker 2: lives easier.
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Speaker 4: No, we didn't do that. So what actually happened in here? Mark?
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Speaker 4: Do you want to do?
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Speaker 2: You want to take exactly what happened in here with
12:08
Speaker 2: the October data for the government workers just falling off
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Speaker 2: a cliff, not.
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Speaker 3: Looking right at it, but one hundred and sixty five
12:15
Speaker 3: thousand took the took the payout right or one hundred
12:17
Speaker 3: and sixty thousand, which.
12:18
Speaker 2: Is so yeah, going back to this spring when the
12:21
Speaker 2: Trump administration offered buyouts to you know, pretty much all
12:25
Speaker 2: government employees. The last paycheck was September, so October came in.
12:31
Speaker 2: One hundred and fifty seven thousand people fell off of
12:33
Speaker 2: the payroll. So if we just take that out for
12:35
Speaker 2: a moment and assume that that's not going to continue
12:37
Speaker 2: to repeat itself, because it can't. The actual job creation
12:43
Speaker 2: for the month of October was more like, I mean,
12:48
Speaker 2: if we subtract that out, where do we land fifty
12:50
Speaker 2: thousands to the no, one hundred thousand to the upside, right, yep. So,
12:56
Speaker 2: so we saw a number that in October the job
12:59
Speaker 2: creation was just fine. In November, we came in at
13:03
Speaker 2: sixty four thousand. Again, no big drop offs or increases
13:07
Speaker 2: in any area that I think are worth mentioning. But
13:11
Speaker 2: ultimately where I land with all of this is we
13:16
Speaker 2: are now at a pretty low pace of job creation.
13:19
Speaker 2: The last three months have probably averaged somewhere in the
13:21
Speaker 2: sixty thousand range, and that does not seem to be Again,
13:27
Speaker 2: I know, these are different surveys, so we shouldn't be
13:30
Speaker 2: connecting them together, but that pace of job creation is
13:34
Speaker 2: not likely fast enough to keep all the new entrants
13:38
Speaker 2: into the labor market employed, and we're seeing maybe signs
13:42
Speaker 2: of that through the unemployment rate rising. Again, these are
13:44
Speaker 2: different surveys, don't connect them too thoroughly, but if you
13:48
Speaker 2: look at it, you know if we're only creating sixty
13:50
Speaker 2: thousand jobs per month. Also, the Federal Reserve has expressed
13:54
Speaker 2: skepticism about that number and whether or not it's going
13:57
Speaker 2: to get revised further downward like it has for the
13:59
Speaker 2: last two years. Nothing about that indicates either free fall
14:04
Speaker 2: or strong pace of job creation, I guess is where
14:07
Speaker 2: I would land with the Establishment survey.
14:09
Speaker 4: Anything to add on that front from the last two months.
14:12
Speaker 4: A day that we got this.
14:12
Speaker 3: Morning, other than the usual caveat, which is what we're
14:15
Speaker 3: really interested in is the trend. And in order you
14:18
Speaker 3: can estimate the trend like statistically, if you have the
14:21
Speaker 3: tools in the time to do that. Most people they
14:24
Speaker 3: just look at the last few months, and the last
14:27
Speaker 3: few months suggest, last several months suggest well, let's just
14:31
Speaker 3: go eat to date a dramatic slow down in job
14:32
Speaker 3: creation relative to last year. By dramatic, I mean like
14:35
Speaker 3: half as much. And the same multiple applies to the
14:39
Speaker 3: year before. So from twenty twenty three, which was a
14:41
Speaker 3: red hot, unsustainably hot, arguably labor market, we create about
14:45
Speaker 3: half as many jobs a little bit more than that
14:46
Speaker 3: in twenty twenty four, and we're on pace to be
14:50
Speaker 3: haved again, if that's not too awkward in twenty twenty five.
14:54
Speaker 3: Is this something to war? I'm asking rhetorically. I don't
14:57
Speaker 3: really know. Does this foretel or is it merely normalization?
15:02
Speaker 3: I know I asked that question in the last segment,
15:04
Speaker 3: but I think it is the key question, especially when
15:06
Speaker 3: you think about it. The FED doing the right thing.
15:07
Speaker 4: Here, Yeah, so let's go to that.
15:11
Speaker 2: The FED has pretty much publicly said that they don't
15:13
Speaker 2: really care about the establishment.
15:15
Speaker 4: Survey data that they're not sure what it's going to indicate.
15:18
Speaker 2: They do care quite a bit about the unemployment rate
15:20
Speaker 2: and what that is telling us. So FED seemed to
15:24
Speaker 2: indicate a pause was possible come twenty twenty six. If
15:29
Speaker 2: we are seeing the unemployment rate up over four point
15:31
Speaker 2: six percent. Now, if we're seeing the unemployment rate having
15:34
Speaker 2: climbed from four percent in January, what is the policy
15:37
Speaker 2: prognosis from Jay Powell and the FED.
15:42
Speaker 4: I don't care what it should be. I want to
15:44
Speaker 4: know what it will be.
15:45
Speaker 3: Well, I don't know what the heck it will be.
15:46
Speaker 3: If you're asking me what these.
15:48
Speaker 4: Guys, I want you to read Jay Powell's mind.
15:50
Speaker 3: I mean you could do the second best thing. I mean,
15:53
Speaker 3: everybody knows what type of models they're using, their standard
15:56
Speaker 3: modern macroso to speak up models of the whole economy.
16:02
Speaker 3: If unemployment continues to trend up, and if you assume
16:07
Speaker 3: that the so called natural rate is lower than where
16:10
Speaker 3: we are today, and that's the natural rate doesn't exist.
16:12
Speaker 3: It's theoretical. You have to infer it, and it's a
16:15
Speaker 3: moving target. On top of all that, depending on the
16:17
Speaker 3: assumptions you make, Mike, you can get any FED. You
16:19
Speaker 3: can get any quote right quote FED policy out of
16:24
Speaker 3: the out of the apparatus that they use that you
16:27
Speaker 3: want just assume the natural rate should be lower. Just
16:30
Speaker 3: assume the natural rate of interest. Different concepts, same idea,
16:33
Speaker 3: though theoretical, you have to infer it. It balances the
16:36
Speaker 3: economy in theory so that nothing so that there's non
16:38
Speaker 3: inflationary but not recessionary either. You make the right assumption
16:42
Speaker 3: about the natural rate, which the media often calls our star,
16:45
Speaker 3: because that's what you solve for when you do the
16:47
Speaker 3: little model. You can get any FED fud's rate you want.
16:50
Speaker 4: Mike, It's not helpful.
16:52
Speaker 3: I know I'm trying to not be helpful. I'm not
16:55
Speaker 3: trying to annoy you, as I respect you and I
16:57
Speaker 3: work for you. But I don't know what else to say.
17:00
Speaker 3: You can get any assumption you want out of it.
17:01
Speaker 2: The next meeting for the FED occurs on January twenty eighth.
17:04
Speaker 2: According to the Chicago Mercantile Exchange, the likelihood of a
17:09
Speaker 2: rate cut at that next meeting, which again a little
17:12
Speaker 2: bit more than a month out. We just had a
17:13
Speaker 2: FED meeting last week. That's sitting around a one and
17:17
Speaker 2: four chance of an additional FED rate cut at that meeting.
17:21
Speaker 2: I personally, where I betting on it, I'd be betting
17:25
Speaker 2: higher odds. I think, you know it obviously depends on
17:27
Speaker 2: what you get in January. But if you were to
17:29
Speaker 2: see a repeat increase in the unemployment rate come January,
17:33
Speaker 2: I don't know. Everything about this FED that I have
17:35
Speaker 2: seen is that they are pretty dubvish and have favored
17:41
Speaker 2: lower interest rates in the face of any concerns about
17:43
Speaker 2: the labor market. And this November report I think has
17:47
Speaker 2: some things to be concerned about when it comes to
17:49
Speaker 2: the trend in employment.
17:51
Speaker 3: If you look at this as a typical business cycle,
17:53
Speaker 3: and I'm not sure you should for reasons we discussed
17:55
Speaker 3: in the last segment coming out of COVID, labor market
17:58
Speaker 3: got unnaturally hot. Know what happened to inflation. If you
18:02
Speaker 3: put that PTSD that we all have from that inflation
18:05
Speaker 3: aside for a second, and you look at this as
18:07
Speaker 3: a typical business cycle, Like you said, you've got unemployment
18:10
Speaker 3: going up, payrolls slowing down. Jolt data until the last
18:16
Speaker 3: update was suggesting a reduction in job vacancies. Different report here,
18:22
Speaker 3: but we got some contrary evidence at the last issue
18:24
Speaker 3: of the report. I guess we'll see what it says
18:26
Speaker 3: when it's next released. I guess the upshot of all
18:32
Speaker 3: this is, if you are looking at this through traditional
18:35
Speaker 3: business cycle goggles, Yeah, the economy seems to be slowing.
18:38
Speaker 3: The FED should be cutting, right, How much depends on
18:41
Speaker 3: your view, as I said earlier, of what the natural
18:43
Speaker 3: rate of interest is with the natural rate of unemployment is.
18:45
Speaker 3: These are all the inputs to the models that researchers use.
18:49
Speaker 2: And don't forget they have already now cut at this
18:51
Speaker 2: point by one and a half percentage points. Yeah, that
18:54
Speaker 2: is not insignificant, and it's been done over the course
18:56
Speaker 2: of a year and a half. It has been a
18:57
Speaker 2: significant amount of cutting. And they constantly talk about how
19:01
Speaker 2: long it takes for their policy to actually affect anything.
19:03
Speaker 4: So will they go further? Will they not?
19:06
Speaker 2: Will it actually bring down mortgage rates? Hasn't so far.
19:09
Speaker 2: All of these are reasonable questions to ask. And you know,
19:12
Speaker 2: if they do cut rates, what does that do in
19:14
Speaker 2: terms of sparking even more speculation in equity markets, Because
19:19
Speaker 2: as concerned as we might be about the labor market,
19:21
Speaker 2: we're not seeing any of that concern bleed over into equities.
19:24
Speaker 2: Quick break when we come back full market recap with
19:27
Speaker 2: Wall Street Watch. It's worse and significantly since we started talking.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFE show. Breaking business news is always first right here
19:47
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:52
Speaker 1: Street Watch. A complete look at what's moving market so
19:56
Speaker 1: far today right here on the Financial Exchange Radio Network.
20:00
Speaker 5: If it's a slightly negative territory. As Wall three reacts
20:02
Speaker 5: to the November jobs report posted this morning. As a
20:06
Speaker 5: result of the pause on economic data from the government
20:09
Speaker 5: shutdown last month, sixty four thousand jobs were added, stronger
20:13
Speaker 5: than forecasts of fifty thousand. The unemployment rate ticked higher
20:17
Speaker 5: from four and a half percent to four point six percent.
20:20
Speaker 5: Jobs data from October also revealed one hundred and five
20:24
Speaker 5: thousand jobs were lost. Right now, the Dow is off
20:28
Speaker 5: about four tenths of one percent, or one hundred and
20:30
Speaker 5: eighty three points. SMP five hundred down nearly four tenths
20:34
Speaker 5: of one percent or twenty five points lower, Nasdaq down
20:37
Speaker 5: two tenths of one percent or forty five points lower.
20:40
Speaker 5: Russell two thousand is off a quarter percent. Tenure Treasur
20:44
Speaker 5: reeled down two basis points at four point one sixty
20:46
Speaker 5: one percent, and crude oil down nearly three percent lower,
20:50
Speaker 5: trading just above fifty five dollars a barrel. Ford said
20:54
Speaker 5: it expects about nineteen and a half billion dollars in
20:58
Speaker 5: charges as it scales back it's electric vehicle ambitions and
21:02
Speaker 5: ships focus to gas powered in hybrid vehicles. Ford stock
21:07
Speaker 5: is dipping. Meanwhile, Pfiser issued a twenty twenty six ergings
21:10
Speaker 5: guidance that came in below analysts expectations. The pharma giant
21:15
Speaker 5: also reaffirmed its twenty twenty five outlook. Pfiser shares are
21:19
Speaker 5: down over four percent at the moment. Elsewhere, Craft Heines
21:22
Speaker 5: announced former Kelenova CEO Steve K. Hillane will take over
21:28
Speaker 5: as its chief executive next year as the company prepares
21:31
Speaker 5: to separate into two publicly traded entities. Craft is up
21:36
Speaker 5: by over one percent. Roku down by one percent despite
21:40
Speaker 5: Morgan Stanley double upgrading the streaming platform stock to overweight
21:44
Speaker 5: from underweight, citing its second half revenue growth in solid
21:49
Speaker 5: execution on deepening streaming partnerships. PayPal shares are up modestly
21:53
Speaker 5: after the payments company said it filed an application to
21:57
Speaker 5: establish PayPal Bank that would focus on granting loans and
22:01
Speaker 5: offering savings accounts to small businesses. And after today's clothes,
22:05
Speaker 5: we'll see earnings from home builder lenaar Holdings. I'm Tucker Silvan.
22:10
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22:13
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22:32
Speaker 2: Don't tell them that do it. I don't want to
22:35
Speaker 2: be proven wrong once a week. Leive me this stupid thing,
22:38
Speaker 2: Mike said two years ago.
22:39
Speaker 5: Yeah, it's exactly what you can where you can do.
22:43
Speaker 2: Oh boy, on one of my favorite radio programs that
22:46
Speaker 2: hasn't been on here for a good twenty years, used
22:48
Speaker 2: to have a segment called Stump the Chumps, where they
22:51
Speaker 2: would you give somebody car advice and then bring that
22:53
Speaker 2: person on like two years later to prove them how
22:56
Speaker 2: wrong they were.
22:56
Speaker 4: Maybe we should be doing that.
22:57
Speaker 5: Yeah, we've been around plenty of times.
23:00
Speaker 4: Yeah, interesting stuff.
23:01
Speaker 2: Productivity is about to slump that that wouldn't be good, Mark.
23:06
Speaker 2: Let's talk about productivity before we get into the whole
23:08
Speaker 2: AI arms race and how it's going to change all
23:11
Speaker 2: of our.
23:11
Speaker 4: Lives for the better. It's tough for me to argue
23:15
Speaker 4: that any.
23:18
Speaker 2: I guess you know, growth metric matters a lot more
23:22
Speaker 2: than productivity, and I want to talk about why.
23:24
Speaker 3: The equivalent of standard of living, So.
23:26
Speaker 2: Yeah, let's talk about that. How does productivity equate to
23:30
Speaker 2: bettering standard of living?
23:31
Speaker 3: It's the only way that real wages, that what you
23:35
Speaker 3: get paid goes up. And this makes sense if you're
23:38
Speaker 3: not more productive if and the literal definition is output
23:41
Speaker 3: per hour, So if you're not doing more year after year,
23:45
Speaker 3: don't expect your real wages to go up. I think
23:48
Speaker 3: we all know that as employees. It applies to the
23:50
Speaker 3: economy as a whole as well. So it is the
23:53
Speaker 3: key to growing living standards over time.
23:55
Speaker 2: When the printing press came around and you no longer
23:58
Speaker 2: had to pay a bunch of you know, monks to write,
24:02
Speaker 2: you know, write script down over and over again, or
24:05
Speaker 2: however you paid to do that back in the day,
24:07
Speaker 2: productivity went up because you could use the printing press
24:10
Speaker 2: and print a whole bunch more books and that person
24:12
Speaker 2: then operating the printing press got compensated more. And you know,
24:16
Speaker 2: the guy that used to manually write spreadsheets down at
24:20
Speaker 2: the uh the Boston Fidelity office back in the nineteen
24:24
Speaker 2: seventies was made more productive by the advent of the computer,
24:27
Speaker 2: who could then run Excel spreadsheets, and then the Internet.
24:32
Speaker 2: Why okay, so obviously that leads to more output a
24:38
Speaker 2: more output person, which allows hypothetically for that person to
24:42
Speaker 2: be paid more, or for profits to grow, or in
24:45
Speaker 2: the US case both, Why does the author effectively argue that, hey,
24:52
Speaker 2: you know, productivity is about to follow you can you
24:54
Speaker 2: tell me?
24:54
Speaker 3: Mike, I'm sorry, I don't have the answers.
24:57
Speaker 4: Basically that it's been it's been, you know, doing a
25:00
Speaker 4: reed for radio show today.
25:02
Speaker 3: Ologies.
25:04
Speaker 2: The argument has basically been that we have since twenty
25:09
Speaker 2: twenty three seen a big productivity gain, and historically, once
25:13
Speaker 2: you get to that level, it's unlikely to continue. Since
25:18
Speaker 2: twenty twenty three, labor productivity gains have been pacing it
25:21
Speaker 2: nearly twice the longer term rate, which has been you know,
25:26
Speaker 2: one and a half to two percent since nineteen sixty
25:29
Speaker 2: and since then we've been you know, running at three
25:32
Speaker 2: point three percent pace, probably due to a number of factors,
25:35
Speaker 2: once again the weird COVID aftershocks.
25:38
Speaker 4: That we've all been feeling.
25:40
Speaker 2: And so the argument is, hey, there's no technology that's
25:43
Speaker 2: going to save us here. Even if AI is everything
25:45
Speaker 2: that it's dreamed up to be, it usually takes a
25:48
Speaker 2: little while for it all to come into play and
25:52
Speaker 2: actually have effects on productivity. It doesn't happen overnight, is
25:56
Speaker 2: their argument.
25:57
Speaker 3: Yeah, that's absolutely true. Any technology, from railroads to electrification
26:02
Speaker 3: and all the knock on benefits took decades to permeate,
26:07
Speaker 3: to seep into all types of economic activity and show
26:12
Speaker 3: up in the show up in growth in the sense
26:15
Speaker 3: that it matters living standards.
26:17
Speaker 2: Let's take true the Internet as an example here, so
26:21
Speaker 2: as we came to use it really got invented in
26:24
Speaker 2: the late nineties and early two thousands, and I want
26:29
Speaker 2: to think through in our minds, like how long it
26:32
Speaker 2: took for companies to kind of harness the power of
26:36
Speaker 2: that and build profitable businesses because it was not overnight.
26:40
Speaker 2: I think through some of the biggest companies in the
26:42
Speaker 2: world today. Right, Maybe Microsoft isn't a great example here,
26:47
Speaker 2: but let's take Facebook first, Facebook accounts I think got
26:51
Speaker 2: created in two thousand and four, four to five years
26:53
Speaker 2: after the creation of the Internet. Uber didn't exist until
26:57
Speaker 2: two thousand and nine. Google really started getting it. I
27:01
Speaker 2: don't even know when Google went public, but you know,
27:03
Speaker 2: it started to really gain some traction in the mid
27:06
Speaker 2: to late two thousands, and that is, you know, a
27:12
Speaker 2: pretty recent event.
27:13
Speaker 4: It took a.
27:13
Speaker 2: Good decade for two thousand and four on Google was
27:17
Speaker 2: founded in No. Four or when publican I went public
27:19
Speaker 2: went public and four. So my point would be it
27:23
Speaker 2: took quite a long time, even with a technology as
27:25
Speaker 2: recent as the Internet, for companies to come about and
27:28
Speaker 2: monetize it. And that's the point that I've been making
27:31
Speaker 2: to folks when I speak to them, is you can
27:33
Speaker 2: believe that AI is the most incredible generational transformation technology
27:38
Speaker 2: that we've seen in our lifetimes.
27:40
Speaker 4: I'm not sure I buy.
27:41
Speaker 2: The argument, but unless you also buy that it is
27:45
Speaker 2: so different this time that is going to be monetized
27:48
Speaker 2: faster than any technology in history, then we've got some
27:52
Speaker 2: pain coming.
27:53
Speaker 3: Yeah. So, in terms of computer it's just the IT revolution.
27:56
Speaker 3: Mainframe computers became available in the nineteen sixties. Desktops of
28:01
Speaker 3: the seventies and eighties. Throughout those decades, partly for other reasons,
28:06
Speaker 3: productivity slowed, potential economic growth slowed. Eventually, we had a
28:11
Speaker 3: little productivity boom from nineteen ninety six to two thousand
28:13
Speaker 3: and four, if you just look at the jump in
28:16
Speaker 3: the series, But even that petered out. So it took
28:19
Speaker 3: decades for computers to make their way into the productivity statistics,
28:23
Speaker 3: and it wasn't very long lasting. If you look at
28:26
Speaker 3: if you want to see this all encapsulated in one series,
28:29
Speaker 3: just look at the trend. Just look at GDP, you
28:31
Speaker 3: can google it, look at its trend, and you'll see
28:35
Speaker 3: that there was no There was a brief jump in
28:37
Speaker 3: the mid nineties, just like there was a jump in
28:40
Speaker 3: the fifties and sixties. The slope of the line increased,
28:43
Speaker 3: indicating an increased growth rate if you look at it
28:45
Speaker 3: the right way. But none of this stuff, is my point,
28:48
Speaker 3: is changed the trend in growth. Bless you. None of
28:52
Speaker 3: this stuff changed the trend in growth and standard of living.
28:56
Speaker 3: So unless AI, however, you wanted to find that turn,
29:01
Speaker 3: it's got to be different, different than every other technology,
29:04
Speaker 3: including those on which it's piggybacking. You mean to tell
29:07
Speaker 3: me AI is going to be, and it may be,
29:09
Speaker 3: but I think the burden is on the person making
29:12
Speaker 3: the claim, or making the investment, or trying to make
29:15
Speaker 3: the investment with your money, that it's going to be
29:17
Speaker 3: more revolutionary, more trend changing than electrification and all the
29:22
Speaker 3: knock on benefits than the IT revolution, which took decades
29:26
Speaker 3: and was relatively short lived in terms of its change
29:28
Speaker 3: in the trend. I think that's a pretty optimistic claim.
29:31
Speaker 3: I'm not saying it won't turn out to be the case.
29:33
Speaker 3: I know by the way stocks are priced as if
29:34
Speaker 3: it's going to be the case, so it had better.
29:37
Speaker 2: Let's take a quick break when we come back. I
29:40
Speaker 2: want to take a temporary break from our AI obsession
29:43
Speaker 2: and I want to go over to the Twin Cities
29:46
Speaker 2: who have a pretty interesting case study in rent control,
29:50
Speaker 2: which the state of Massachusetts is now considering. Quick break,
29:53
Speaker 2: We're talking rent control next on the Financial Exchange.
29:56
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29:58
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30:04
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30:18
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30:22
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30:33
Speaker 2: This year, in the state of Massa Choose Commonwealth of Massachusetts,
30:37
Speaker 2: petitioners successfully cleared an initial hurder by submitting over one
30:42
Speaker 2: hundred and twenty four thousand signatures on a rent control
30:46
Speaker 2: ballot initiative. The national political landscape and as far as
30:51
Speaker 2: I'm concerned, seems to be well economically, it seems to
30:55
Speaker 2: be talks of affordability, right like that seems to be
30:58
Speaker 2: dominating every election, every narrative that we're hearing. It dominated
31:02
Speaker 2: the New York City mayoral elections, It dominated pretty much
31:06
Speaker 2: every other election that's happening.
31:07
Speaker 4: And I'm guessing that's what's going.
31:09
Speaker 2: To dominate the midterms in twenty twenty six as well.
31:13
Speaker 2: The President's talking about it, Democrats are talking about Republicans
31:15
Speaker 2: are talking about it. And so therefore I wouldn't be
31:20
Speaker 2: surprised if nationally we're going to be having more of
31:24
Speaker 2: these debates around rent control. And so while Street journal
31:28
Speaker 2: I had no idea that this actually had happened a
31:31
Speaker 2: few years ago, and they go over to Minnesota and
31:34
Speaker 2: talk about the cities of Minneapolis and Saint Paul. If
31:38
Speaker 2: you're not familiar with the geography of Minneapolis and Saint Paul,
31:41
Speaker 2: go take a look. They're basically the same city, divided
31:44
Speaker 2: by the Mississippi River, and they have different legislatures and
31:47
Speaker 2: different policies and enacted different ones. And so this is
31:51
Speaker 2: one I will admit for a moment here that this
31:53
Speaker 2: is not a statistical analysis that they've done.
31:56
Speaker 3: It's better. It's what a research you will call a
31:59
Speaker 3: natural ext It's like getting twins and subjecting one to
32:04
Speaker 3: humiliation and really tough parenting and taking a totally different
32:09
Speaker 3: style with the other and then finding.
32:10
Speaker 4: Out which which ones worked better.
32:11
Speaker 3: I don't know why I cite that as an example,
32:13
Speaker 3: but twin studies are an example. There's sort of natural.
32:16
Speaker 3: You take advantage of these.
32:17
Speaker 2: And it's pretty close to you can get because you
32:19
Speaker 2: know what, there's not a big difference in whether patterns
32:22
Speaker 2: or or employment or anything else.
32:25
Speaker 3: It's in every way it's a beautiful natural experiment.
32:28
Speaker 2: And so what happened here. In twenty twenty two, Saint
32:32
Speaker 2: Paul passed a series of rules when it came to
32:35
Speaker 2: rent control, largely passing a law that said the Ordnance
32:39
Speaker 2: capped annual rant increases at three percent for most apartments,
32:43
Speaker 2: even empty ones, and did not adjust that for inflation
32:49
Speaker 2: twenty twenty two, by the way of some of the
32:50
Speaker 2: worst inflation we have seen in five decades, and then
32:55
Speaker 2: Minneapolis did not. And so what have we learned in
32:59
Speaker 2: the couple of years since that enactment.
33:02
Speaker 4: One we can look at rents.
33:05
Speaker 2: According to co Star, the average rent in Minneapolis over
33:09
Speaker 2: the course of two years rose to one thousand, five
33:13
Speaker 2: hundred and six dollars a month, which is a seven
33:16
Speaker 2: ten percent average increase. According to that co Star reading,
33:21
Speaker 2: that is pretty much pretty substantially lower than the national
33:23
Speaker 2: average of three point three percent, and is less than
33:27
Speaker 2: half the rent increase in Saint Paul, Minnesota, who enacted
33:30
Speaker 2: rent control, which saw average growth of one point eight
33:34
Speaker 2: percent during that period. The other unsurprising and yet interesting
33:38
Speaker 2: piece is the pace of multifamily building permits in Minneapolis
33:43
Speaker 2: compared Mint to Saint Paul. Prior to this enactment, Saint
33:47
Speaker 2: Paul was running much higher than Minneapolis. After the enactment
33:51
Speaker 2: of rent control, the multi family permitting in Minneapolis soared
33:56
Speaker 2: to well above what Saint Paul was experiencing. To say
34:00
Speaker 2: that it's still early in the game, I'm willing to
34:02
Speaker 2: say that you should look at this a decade from
34:04
Speaker 2: now too, although Saint Paul is now rolling back some
34:06
Speaker 2: of their rent control because it was a pretty stupid idea.
34:09
Speaker 2: It looks like, but this is the exact stuff we're
34:13
Speaker 2: going to be. I promise you this will not be
34:15
Speaker 2: the last city in the country to consider enacting something
34:19
Speaker 2: along now.
34:19
Speaker 3: Dumb dumb ideas never die. I mean, economist, we know
34:23
Speaker 3: for yeah it's true because people stop reading or nobody's
34:27
Speaker 3: done a TikTok where they wrap about rent control, so
34:29
Speaker 3: millennials don't understand the issue, right, economists have known for
34:33
Speaker 3: a long time. It discourages new construction.
34:34
Speaker 4: The reason I know anything about Hamilton.
34:38
Speaker 3: Discourages new construction. Why would you build if your profits
34:42
Speaker 3: are going to be limited? Landlords will convert rental units
34:45
Speaker 3: to I'm just reciting which I by the way, I'm
34:47
Speaker 3: taking off Gemini. They cite scholarly sources, so I know
34:51
Speaker 3: this is probably this is a good summary, but AI
34:55
Speaker 3: is a good tool for quick summaries. Like this, when
34:57
Speaker 3: you forget what the literature says. They talk about converting
35:00
Speaker 3: mental units to other uses, absolutely spot on reducing quality
35:03
Speaker 3: and maintenance. Why would you do any more than the
35:05
Speaker 3: bare minimum legally required if you were a landlord, if
35:08
Speaker 3: your profits are capped.
35:09
Speaker 2: Also, just psychologically, if I know that I cannot rent,
35:12
Speaker 2: increase my rent by more than three percent, I'm going
35:15
Speaker 2: to increase it by three percent every year.
35:17
Speaker 3: And you're going to do as little as possible units
35:20
Speaker 3: compliant with code.
35:21
Speaker 2: And if I have to wait a little while to
35:22
Speaker 2: find a new tenant, that's okay, because I know that
35:25
Speaker 2: if demand turns around and I should be able to
35:28
Speaker 2: raise rent by ten percent, but I'm capped to three percent,
35:30
Speaker 2: I won't be able to see.
35:31
Speaker 3: Rent Controls are as dumb as tariffs. Anyone who's ever
35:34
Speaker 3: looked at them says they reduce this. They do the
35:37
Speaker 3: opposite of what it is you are trying to do.
35:40
Speaker 3: And why we insist on shooting ourselves in the foot
35:43
Speaker 3: when the evidence of past shots to the foot is
35:45
Speaker 3: playing for anybody who can, as I did in this
35:48
Speaker 3: case as Gemini, to find some scholarly recent scholarly studies.
35:52
Speaker 3: And by the way, the difference in rents in this
35:54
Speaker 3: study proves nothing because they're not controlling for other factors.
35:57
Speaker 3: There may be something that happened in Saint Paul, or
35:59
Speaker 3: something unique that some unique demography that these two cities,
36:04
Speaker 3: the twin cities, don't They aren't twins in every respect,
36:06
Speaker 3: I guess, is what I'm saying. So, like you said,
36:08
Speaker 3: it's going to take a few years and a few
36:09
Speaker 3: actual studies that can hold other factors constant. But it
36:12
Speaker 3: is suggestive and it is consistent with what every study
36:16
Speaker 3: that's ever looked at rent control has found.
36:19
Speaker 4: So good luck Masschest's voters.
36:21
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37:35
Speaker 2: As we head towards the top of the hour, here
37:38
Speaker 2: we've got all three major US indicies in negative territory,
37:41
Speaker 2: although NASDAK is attempting to stage a comeback as we
37:44
Speaker 2: speak now flat for the day, but the S and
37:46
Speaker 2: P five hundred off about fifteen points one fifth of
37:50
Speaker 2: one percent now off ninety five points percentage wise, the
37:53
Speaker 2: exact same as the SMP five hundred and when we
37:57
Speaker 2: take a look around at some other markets. Here price
38:00
Speaker 2: of a barrel of oil dropping another three percent today,
38:03
Speaker 2: down to fifty five bucks per barrel. We've got a
38:07
Speaker 2: whole lot more to cover on the second hour of
38:09
Speaker 2: the Financial Exchange, including Ford's nineteen and a half billion
38:12
Speaker 2: dollar charge on their ev business.
38:15
Speaker 4: Stay tuned, folks,