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What can investors learn from DeepSeek day? · The Financial Exchange Show

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Speaker 1: heroes by visiting da V five K dot Boston and
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Speaker 1: making a donation Today. Face is the Financial Exchange with
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Speaker 1: Mike Armstrong and Mark Vandetti.
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Speaker 2: More than Happy Tuesday, and welcome back to the Financial Exchange.
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Speaker 2: It's day one of our post Deep Seek lives. Yesterday
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Speaker 2: was day zero, today's Day one. Markets were off substantially yesterday,
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Speaker 2: with big tech companies like Nvidia leading the way down,
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Speaker 2: which drags all markets down because it's the largest company
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Speaker 2: in the United States, or at least it was, I'm
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Speaker 2: not sure it still is. It's Mike Armstrong, Mark Fandetti,
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Speaker 2: and Tucker Silva with you today and I think still today,
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Speaker 2: in spite of a very busy earnings week, in spite
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Speaker 2: of Federal Reserve talk coming tomorrow, a lot of this
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Speaker 2: is still going to be dominated by what we learned
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Speaker 2: yesterday out of this company from China. I'm not going
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Speaker 2: to spend thirty minutes on the show like we did
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Speaker 2: yesterday explaining what we.
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Speaker 3: Know so far about it.
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Speaker 2: If you'd like to do that, you can check out
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Speaker 2: our podcast, which Tucker will tell you how to do.
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Speaker 2: To listen to yesterday's show, well why.
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Speaker 4: Don't you, Yeah, Financial Exchange show on Spotify, Apple, iHeart
2:06
Speaker 4: wherever you're listening to podcasts also on YouTube as well,
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Speaker 4: So it's.
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Speaker 3: Like the first segment of the show. We talked.
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Speaker 2: We talked at length about that, but I'll try and
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Speaker 2: summarize in fewer than two minutes here. Over the course
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Speaker 2: of the last few days, in the last few months,
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Speaker 2: really a new AI general of AI chat bot was
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Speaker 2: developed similar to the results that you would get from
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Speaker 2: a chat GPT, and if you actually look at the
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Speaker 2: scorecards that many researchers keep on these sorts of things,
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Speaker 2: it has been producing results that are, like I said,
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Speaker 2: similar to chat GPT. What came out very recently and
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Speaker 2: took a little while find people to digest, was a
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Speaker 2: paper put out that basically indicated that the cost to
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Speaker 2: initially train this AI model was around one percent of
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Speaker 2: what US companies have been spending, and the cost to
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Speaker 2: run it on an ongoing basis was about three percent.
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Speaker 2: And so that's the basics is, Hey, you're getting similar
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Speaker 2: results to the most high end AI models developed here
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Speaker 2: in the United States, and if the research paper is true,
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Speaker 2: you are getting those results at a small fraction of
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Speaker 2: the cost, which pretty much upended everything we previously knew
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Speaker 2: about AI, because if there's one thing that seemed known
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Speaker 2: before Monday, it was that to get better results from
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Speaker 2: AI you needed to spend exponentially more on faster computing power,
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Speaker 2: more high end chips, and that was what was driving
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Speaker 2: the AI trade. There wasn't really anything all that interesting
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Speaker 2: that had occurred yet. You know, AI hadn't solved any cancers,
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Speaker 2: it hadn't displaced a million American jobs, So there wasn't
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Speaker 2: any real end user story that I could write home about. Yeah, Chuck,
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Speaker 2: you know writes funny poems, and I drafted a funny
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Speaker 2: poem for my kids about a Christmas tree around the holidays.
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Speaker 2: But that's not exactly something that's changing in the universe.
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Speaker 2: What was changing the world was this demand for chips,
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Speaker 2: this demand for energy, and yesterday that whole narrative was
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Speaker 2: flipped on its head. It reminds me of a quote
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Speaker 2: from a great philosopher named k Fifteen hundred years ago,
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Speaker 2: everybody knew the Earth was the center of the universe.
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Speaker 2: Five hundred years ago, everybody knew the Earth was flat,
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Speaker 2: And fifteen minutes ago you knew that humans were alone
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Speaker 2: on this planet. It's men in black, So that's okay
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Speaker 2: from men in black, But it flipped the entire narrative
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Speaker 2: on its head. Now, I guess I'll turn to you here, Mark,
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Speaker 2: and we want to get into the lessons for the markets,
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Speaker 2: and many of which we don't really know yet, because
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Speaker 2: it's not like this is putting Nvidia out of business.
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Speaker 2: But there are many parts of this that are not
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Speaker 2: really provable yet. The claim that they spent less than
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Speaker 2: six million dollars developing the tool, for example, I don't
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Speaker 2: think anything else really know, right.
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Speaker 5: I don't know how we'd verify that, but someone can
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Speaker 5: very quickly, I think back into a number like that,
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Speaker 5: given that they've pretty transparent, I think so.
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Speaker 2: And that is a key difference of this tool compared
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Speaker 2: to many of the US models. It was developed with
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Speaker 2: an open source platform. What that means is that I
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Speaker 2: can't do this.
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Speaker 3: Because I am not computer literate enough to do it.
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Speaker 2: But if you wanted to, you could go download the
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Speaker 2: source code for this tool and effectively, you know, reverse
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Speaker 2: engineer it fairly easily. And so to Mark's point, within
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Speaker 2: I would say a few months, somebody out there is
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Speaker 2: probably going to try and replicate this and redo it
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Speaker 2: and see if it's possible to use in the shortcuts
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Speaker 2: that they created get the same type of eye.
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Speaker 5: I really think the best way for most of us
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Speaker 5: to think about this is imagine people have been solving
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Speaker 5: a math problem using many steps, very complicated. Twenty steps
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Speaker 5: took a full page, yep. Imagine some clever high school
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Speaker 5: kid comes along This actually happened a couple of years
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Speaker 5: ago and said, oh, there's a shortcut you don't need
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Speaker 5: to use. In this case. It was the quite erratic formula.
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Speaker 5: We've all used it to solve for where a particular
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Speaker 5: type of equation hits zero. Before that was around. There
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Speaker 5: are other methods. There is completing the square. I mentioned
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Speaker 5: it because we've all had pre calculus, sure, we've all
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Speaker 5: had high school algebra. If you've ever tried both those methods,
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Speaker 5: you know, the quadratic formula's easier. And then a few
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Speaker 5: years ago someone came along with an even easier method
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Speaker 5: that works in some cases. So that's the first thing
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Speaker 5: that came to mind to me. I don't know how
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Speaker 5: these models are programmed. It's not the type of coding
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Speaker 5: that I personally do. So everything I think I know
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Speaker 5: about this comes from third parties who may or may
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Speaker 5: not know what they're talking about. So I always I
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Speaker 5: feel like we're on thin ice here, agreed, Anybody in finances.
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Speaker 3: Yeah, I tend to agree, and the dangers.
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Speaker 2: I think we were on thin ice with what we
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Speaker 2: thought we knew previously, which was, oh, we need exponentially
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Speaker 2: more semiconductors to power this whole industry, and we need
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Speaker 2: nuclear power plants turned back online because look at all
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Speaker 2: the power it's going to do well. No one in
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Speaker 2: finance actually had any idea that it was going to
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Speaker 2: require a bunch of nuclear power plants.
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Speaker 3: Were just relying on what other people.
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Speaker 5: I'm just gonna add that all of computer science is
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Speaker 5: about improving computational speed, and every so often a shortcut
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Speaker 5: comes along. I use the quadratic formulas as example, because
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Speaker 5: we've all heard of it. It's a great shortcut. Don't
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Speaker 5: assume new shortcuts aren't gonna and I wish I as
7:22
Speaker 5: soon as I read the story, I said, why didn't
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Speaker 5: somebody smart think of this, because there's plenty of precedent
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Speaker 5: for it. For years and years, we do something the
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Speaker 5: hard way, banging our head up against a wall, and
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Speaker 5: then somebody says, did you know there's a shortcut and
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Speaker 5: it simplifies everything, and that that's my take, that's my
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Speaker 5: understanding of what's happening here. Someone came along who cracked
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Speaker 5: the problem, and it's a math problem more efficiently, and
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Speaker 5: it will probably happen again. This is a new frontier.
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Speaker 2: So there's a few things about this one. Do I
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Speaker 2: fundamentally believe inherently that this Chinese hedge fund claims that
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Speaker 2: it costs less than six million dollars using very basic
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Speaker 2: chips from Nvidia to develop this tool and it's very
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Speaker 2: easily replicable.
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Speaker 3: No, not really.
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Speaker 2: I don't think there's a lot of evidence. But the
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Speaker 2: point that I think you made initially, Mark was the
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Speaker 2: good one, which is we don't need to trust some
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Speaker 2: opaque Chinese hedge fund about how they developed this. Within
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Speaker 2: a few months, it will be pretty clear whether this
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Speaker 2: was all just smoke and mirrors, or whether it's able
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Speaker 2: to be replicated, whether, as it's been described, you're able
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Speaker 2: to download the entire AI system onto a relatively inexpensive
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Speaker 2: computer compared to running the thing on a giant server
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Speaker 2: farm with nuclear power powering it. It won't take long
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Speaker 2: for us to know the answer to some of these things,
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Speaker 2: and that is the possibility of changing this industry, as
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Speaker 2: many have said, possibly for the better, because this is
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Speaker 2: a truly innovative, new solution to things, but it also
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Speaker 2: has the potential to severely disrupt what's been known previously.
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Speaker 5: I've been struggling for an analogy that might work here,
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Speaker 5: and the.
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Speaker 3: One that comes up to mid Faudratic equation.
9:09
Speaker 1: Right.
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Speaker 5: It's a shortcuts and we've all seen it in high
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Speaker 5: school and it did actually change computational speed. What we
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Speaker 5: do on computers would not be possible without shortcuts like that.
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Speaker 5: A more accessible one might be balloon framing. To build
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Speaker 5: a house, the wood frame process that we all know
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Speaker 5: about today, they frame up a house in like two weeks.
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Speaker 5: That's relatively new, I want to say, like mid nineteenth century,
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Speaker 5: maybe even latter half of the nineteenth century. Before that,
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Speaker 5: it was posts and beams, and anybody knows balloon frame.
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Speaker 1: Me.
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Speaker 5: I'm not a construction guy, and someone will correct me
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Speaker 5: if I'm wrong here, but that revolutionized home building. It's
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Speaker 5: still used today, whether it's wood or steel studs or
9:47
Speaker 5: whatever it's you go to the balloon frame. I think
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Speaker 5: in most cases for residential building, that's an example of
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Speaker 5: a process that cheez, Why didn't we think of that
9:55
Speaker 5: five hundred years ago? And maybe somebody's got a good
9:58
Speaker 5: answer to that. Like as well, dummy. We couldn't produce
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Speaker 5: the studs to conform five hundred years ago, but we
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Speaker 5: could with sawmills. I don't know the answer, but that's
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Speaker 5: one analogy that comes to mind. It was it's simple,
10:08
Speaker 5: it doesn't use it doesn't require different technologies. You still
10:11
Speaker 5: frame it up with a hammer and nails and all
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Speaker 5: the other paraphernalia. But it changed the way home building
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Speaker 5: has done. It made it quicker and cheaper. That's another
10:20
Speaker 5: analogy that comes to mind.
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Speaker 1: There.
10:21
Speaker 5: Probably you know about some in your field, depending on
10:25
Speaker 5: what you did professionally or where you specialize.
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Speaker 2: Now, I want to reiterate why quicker and cheaper is
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Speaker 2: a bad thing for US stocks yesterday. Quicker and cheaper
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Speaker 2: could be a great thing for many small companies that
10:36
Speaker 2: want to use artificial intelligence but cannot develop it on
10:39
Speaker 2: their own because it's too resource intensive. This could change
10:43
Speaker 2: that dramatically in the positive for a number of smaller
10:45
Speaker 2: companies because to date, really it's been limited to the
10:49
Speaker 2: likes of open Ai, Microsoft, Google, Meta companies.
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Speaker 3: With very deep pockets. This could change that.
10:56
Speaker 2: On the flip side, if you're a company whose stock
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Speaker 2: was bid up substantially over the course of the last
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Speaker 2: twelve months because there was a narrative that you are
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Speaker 2: going to need so much more energy than was previously understood.
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Speaker 2: This could also change that for the negative, and we
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Speaker 2: saw that play out in trading yesterday and what I
11:12
Speaker 2: would describe as quite honestly a pretty rational type of way.
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Speaker 2: Like I got asked a question, was this in overreaction?
11:17
Speaker 2: And of course maybe, but how often does in Vidio
11:21
Speaker 2: go up by ten to fifteen percent on a daily
11:23
Speaker 2: basis just based on their earnings. I don't think this
11:26
Speaker 2: was a hugely irrational move by the markets on some
11:30
Speaker 2: of these companies.
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Speaker 3: Let's take a quick break. When we come back.
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Speaker 2: I don't want to entirely move away from this, but
11:35
Speaker 2: I want to think about some of the possible lessons here,
11:38
Speaker 2: which are the same ones that we talk about a lot.
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Speaker 2: But let's say a quick break and talk a little
11:42
Speaker 2: bit about the lessons learned from yesterday.
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Speaker 2: So Mark trying to always bring this back to the
13:01
Speaker 2: everyday investor and what lessons can be learned here, and
13:04
Speaker 2: to me, there's a very basic one of diversification and
13:07
Speaker 2: so I won't I won't hit that one heart too
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Speaker 2: hard for too long, but very obviously, if you have
13:13
Speaker 2: a portfolio that was concentrated in AI type stocks yesterday,
13:17
Speaker 2: you didn't have a great day.
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Speaker 3: And this type of movement is just a reminder.
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Speaker 2: Out there that, look, the AI trade as it's been
13:27
Speaker 2: play so far, was really considered to be I won't
13:31
Speaker 2: say it's a safe bet, but it was a bet
13:32
Speaker 2: on these highly profitable companies, these companies that were already
13:36
Speaker 2: showing massive growth, and so you weren't relying on some
13:40
Speaker 2: heavily unprofitable company to come up with the next great
13:42
Speaker 2: innovation to make money in the AI trade to this point,
13:45
Speaker 2: you were betting on the company that was already printing,
13:48
Speaker 2: printing money like nothing we've ever seen before. And so
13:52
Speaker 2: it just reminds me that, you know, the narrative of
13:55
Speaker 2: what we know can change really rapidly, right, Like the
13:59
Speaker 2: best account firm in the world was Enron until it
14:03
Speaker 2: turned out they were, you know, running a massive accounting
14:06
Speaker 2: scandal and fraud and defrauding all of their investors. Bernie
14:09
Speaker 2: Madoff was the best or one of the best portfolio
14:12
Speaker 2: manager in the world and turned out until it turned
14:13
Speaker 2: out that he was stealing all his clients' money. And
14:15
Speaker 2: you simply can't possibly know everything going on in the
14:19
Speaker 2: inside of the company. And in Vidia didn't even do
14:21
Speaker 2: anything untoward here. It wasn't the same thing as one
14:25
Speaker 2: of those. But those types of risks of lack of
14:29
Speaker 2: full knowledge exist everywhere.
14:31
Speaker 5: Sure might think about personal computers in an office context.
14:36
Speaker 5: If you went back to nineteen eighty two, what types
14:38
Speaker 5: of machines would you have seen on somebody's desk. You
14:40
Speaker 5: would have seen wangs. DEC's digital elect I forget it's
14:46
Speaker 5: digital something Electronic Corporation, something like that. I even forgot
14:48
Speaker 5: the name. Sure IVM of course made them. If you
14:51
Speaker 5: went into somebody's home, you might have seen a commodore.
14:53
Speaker 5: You might have seen an Atari. There were Apples. They
14:56
Speaker 5: were very high end, though only the rich kids had them.
15:00
Speaker 5: Point is, with the exception of Apple, none of those
15:02
Speaker 5: companies exist anymore. But if you had told a stock
15:05
Speaker 5: market investor that we're entering the computer age, everybody's gonna
15:08
Speaker 5: have one, not just on their desktop.
15:09
Speaker 3: Were the ones that are Atari?
15:12
Speaker 5: Obviously they dominate the home market. It's what I did
15:15
Speaker 5: my little basic coding on. So it's just very The
15:20
Speaker 5: larger point I think is don't try to pick winners
15:24
Speaker 5: because you just don't know. Industries that are new or
15:27
Speaker 5: by definition going to be characterized by upheaval from time
15:31
Speaker 5: to time, and AI is going to get continually disrupted.
15:34
Speaker 5: I assume.
15:35
Speaker 2: So if you're listening right now, and maybe you did
15:39
Speaker 2: jump on the AI bandwagon, if you will, and yesterday
15:42
Speaker 2: was not terribly not a terribly good day for you,
15:45
Speaker 2: and you're trying to assess what steps do you take? One,
15:49
Speaker 2: I think you have to take a very critical look
15:50
Speaker 2: at what you are invested in and pave a worst
15:53
Speaker 2: case scenario. Right, if all this stuff turns out to
15:56
Speaker 2: be true, what does it mean for the companies that
15:58
Speaker 2: you own? And then why do you own them in.
16:00
Speaker 3: The first place?
16:01
Speaker 2: Right? Is it, Hey, I made all this money and
16:03
Speaker 2: I chose not to sell because I'm worried about taxes?
16:06
Speaker 2: Is it because I truly believe in the AI narrative
16:09
Speaker 2: and I want it to continue? And then, I think,
16:13
Speaker 2: most importantly for me is do you still need the
16:17
Speaker 2: types of returns that you saw recently in order to
16:21
Speaker 2: justify your financial scenario right. Like a lot of people
16:26
Speaker 2: that I talked to, they've already kind of won the game, right.
16:31
Speaker 2: And as difficult as it is to buy a winning stock,
16:35
Speaker 2: the more difficult thing in my experience when speaking to
16:38
Speaker 2: people is knowing when to get out of a bet
16:40
Speaker 2: that you have won on when you don't need that
16:43
Speaker 2: extra one hundred and fifty percent return that you've seen
16:45
Speaker 2: over the course the last few years to make your
16:47
Speaker 2: own finances work. If you are starting to come out
16:53
Speaker 2: from the damage yesterday and trying to figure out what
16:55
Speaker 2: this event that we saw yesterday might mean for your
16:59
Speaker 2: portfolio and or financial future, crucially, I would encourage you
17:03
Speaker 2: to take a good critical look, but I would also
17:05
Speaker 2: encourage you to seek help, seek assistance, and talk to
17:08
Speaker 2: a professional that does work on this type of thing
17:12
Speaker 2: every day. If you would like to speak with one
17:14
Speaker 2: of the professionals at Armstrong Advisory Group, please give us
17:17
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17:44
Speaker 2: Mark, I don't want to leave AI and Deep Seek
17:47
Speaker 2: too quickly, but is there anything else that you want
17:49
Speaker 2: to touch on on the subject before we move on?
17:52
Speaker 5: General market reaction was actually pretty mild. S ANDP broad
17:55
Speaker 5: market down one point four percent. That happens on average
17:59
Speaker 5: one once every three weeks his store.
18:01
Speaker 3: It wasn't crazy.
18:03
Speaker 5: Nasdaq pulled back by about three percent. That happens about
18:08
Speaker 5: three percent of the time. That's a little rare, but
18:11
Speaker 5: it's still eight times a year on average. These were
18:14
Speaker 5: kind of normal events. It's just a question of what
18:16
Speaker 5: the trigger is going to be.
18:17
Speaker 2: And it was very different from many of the events
18:19
Speaker 2: that we talk about. I think about when I typically
18:22
Speaker 2: get calls from people, it's, you know, the whole market
18:24
Speaker 2: sold off by one to two percent or more and
18:27
Speaker 2: everything's down. That was not the case yesterday. Right like
18:30
Speaker 2: you had some very companies down, the Dow was up.
18:34
Speaker 2: Many companies that were reporting earnings were up, and it
18:36
Speaker 2: also presents.
18:37
Speaker 3: A unique challenge.
18:38
Speaker 2: Right Frequently, what we talk about on this show is, hey, Okay,
18:42
Speaker 2: the economy or the market took a new narrative, and
18:45
Speaker 2: it might be that investors are now anticipating higher inflation,
18:48
Speaker 2: and so what needs to happen for markets to reappreciate, Well,
18:54
Speaker 2: the inflation data needs to come in better than was previous,
18:56
Speaker 2: than was expected. And that's, you know, how markets continue
19:01
Speaker 2: to climb that wall of worry, if you will, is Hey,
19:04
Speaker 2: we've got this issue that's looming out here. Maybe it
19:06
Speaker 2: comes true, maybe it doesn't. This is different than that.
19:09
Speaker 2: This is a very rapid change in what was previously
19:13
Speaker 2: known about a specific technology, and I think how that
19:17
Speaker 2: plays out over the course the next few months is
19:19
Speaker 2: also pretty unknown.
19:20
Speaker 5: If verifiable, it's a very good thing for the economy.
19:23
Speaker 5: Cheap effective ass I would be wonderful.
19:25
Speaker 2: And very potentially bad thing for a few specific companies.
19:29
Speaker 2: Quick Break Wall Street Watch is next.
19:45
Speaker 1: Like us on Facebook and follow us on Twitter at
19:48
Speaker 1: TFE show. Breaking business news is always first right here
19:52
Speaker 1: on the Financial Exchange Radio Network. Time Now for Wall
19:57
Speaker 1: Street Watch a complete look and what's moving market so
20:00
Speaker 1: far today? Right here on the Financial Exchange Radio network.
20:04
Speaker 4: All after yesterday's tech sell off driven by deep seek
20:08
Speaker 4: AI concerns, Markets today are bouncing back, is earning season
20:11
Speaker 4: chugs along, and investors await the conclusion to the Fed's
20:15
Speaker 4: monetary policy meeting tomorrow afternoon at two. Right now, the
20:19
Speaker 4: Dow is up by about a third of a percent,
20:22
Speaker 4: or one hundred and thirty nine points, SMP five hundred
20:25
Speaker 4: up by about half a percent or twenty seven points,
20:29
Speaker 4: and the Nasdaq is up just over one percent higher
20:31
Speaker 4: are two hundred and four points. Russell two thousand is
20:34
Speaker 4: up only two points so far today, Tenure Treasure reeled
20:37
Speaker 4: up by four basis points at four point five to
20:40
Speaker 4: six percent, and crude oil is up by about four
20:43
Speaker 4: tenths of a percent, trading a seventy three dollars in
20:46
Speaker 4: forty five cents a barrel after it's seventeen percent plunge yesterday,
20:51
Speaker 4: and video shares rebounding by about three percent today. Other
20:54
Speaker 4: big losers from yesterday, including Oracle in Broadcom, are also
20:59
Speaker 4: bouncing back by about two percent. Meanwhile, General Motors posted
21:03
Speaker 4: fourth quarter results ahead of the open this morning, with
21:05
Speaker 4: the Detroit Carmaker posted a loss partly due to a
21:09
Speaker 4: shakeup of his struggling Chinese operations. The company did say
21:13
Speaker 4: earnings were set to grow this year. However, GM shares
21:16
Speaker 4: down by nine percent. Elsewhere, a Royal Caribbean saw its
21:20
Speaker 4: quarterly profits sur pass estimates, where the cruise company said
21:23
Speaker 4: it had recently enjoyed some of the best weeks of
21:25
Speaker 4: bookings on record, that stock jumping by nine percent. Boeing
21:30
Speaker 4: reported fourth quarter results posting nearly a four billion dollar loss. However,
21:34
Speaker 4: CEO Kelly Ortberg said the company's making progress on its recovery,
21:39
Speaker 4: including by focusing on core business and stabilizing production. That
21:44
Speaker 4: stock jumping by six percent. Jet Blue, however, down by
21:47
Speaker 4: twenty four percent after the airlines financial outlook disappointed investors,
21:53
Speaker 4: and after today's closing bell, we'll see fourth quarter results
21:56
Speaker 4: from Starbucks, which would mark the first quarter under new CEO,
22:00
Speaker 4: Brian Nickel. I'm Tucker Silvan. That's Wallstree watch.
22:04
Speaker 2: Donald Trump is renewing his universal tariff threat to quote
22:07
Speaker 2: protect our country. I think I've got a rule here
22:11
Speaker 2: for for tariff talk, Tucker, and you can override me,
22:14
Speaker 2: of course, because you're the one in charge.
22:16
Speaker 3: Yeah, we've talked about this already we have. Yes, well
22:19
Speaker 3: it's a different rule. Okay, do you want to hear
22:22
Speaker 3: about it?
22:23
Speaker 4: Sure, I'm all ears.
22:24
Speaker 2: So obviously, February one has been the deadline, so we'll
22:26
Speaker 2: continue to talk about tariffs ey day until February one. Now,
22:29
Speaker 2: if they don't go into place on February first, if
22:33
Speaker 2: no tariffs get to go into place on February first,
22:36
Speaker 2: then I think we can only talk about tariffs once
22:39
Speaker 2: a week or in the event that an actual tariff
22:42
Speaker 2: goes into place anything.
22:44
Speaker 3: But I'm fine with that, good with that.
22:45
Speaker 4: Yeah, we gotta have some sort of update.
22:47
Speaker 2: Gotta have some sort of an update, So we'll do
22:49
Speaker 2: something once a week as new tariff threats come out
22:51
Speaker 2: and new conjecture about who's going to face them actually does.
22:54
Speaker 2: But if nothing actually happens on February one, yeah, then
22:57
Speaker 2: I think we all need to take it to take
22:59
Speaker 2: a big step back and say I'm not sure that
23:00
Speaker 2: anything's happening.
23:01
Speaker 5: Because nothing's going to happen on February first. Okay, he's
23:05
Speaker 5: too timid, he's too worried about disrupting the stock market,
23:09
Speaker 5: and almost surely would be disrupted.
23:11
Speaker 2: So we will see again, we're three days away here, right,
23:14
Speaker 2: So we will see what happens on February one, whether
23:18
Speaker 2: or not any new tariffs go into place.
23:21
Speaker 3: It's been all over the place. There's been discussion in
23:23
Speaker 3: Mexican Canada terriffs.
23:24
Speaker 2: There's been like.
23:24
Speaker 5: That that he's not going to put a broad based tariff
23:26
Speaker 5: in place. He might ding Mexico with a ten percent
23:30
Speaker 5: tariff on something ambolic.
23:34
Speaker 2: Yeah, okay, fair enough. So the stuff that's being tossed around.
23:39
Speaker 2: Most recently, Scott Bessant has pushed a gradual two and
23:42
Speaker 2: a half percent universal tariffs are two and a half
23:44
Speaker 2: percent on everyone across the board, and then just ratcheted
23:48
Speaker 2: up from there. So it's occurring slowly and companies can
23:50
Speaker 2: get used to these tariffs. I have no idea if
23:53
Speaker 2: that has any real possibility of happening, given that Donald Trump,
23:57
Speaker 2: when asked about that idea of a two and a
23:58
Speaker 2: half percent, said that he that he didn't think Besson
24:01
Speaker 2: actually supported that and wouldn't favor it himself. So again,
24:05
Speaker 2: these are both quotes from one person versus another, but
24:08
Speaker 2: doesn't seem that Donald Trump's in favor of it. I
24:11
Speaker 2: think where I've landed on all this and why it's
24:13
Speaker 2: been bothering me, So I'm sorry.
24:15
Speaker 5: Let me get this straight, just for just so I
24:16
Speaker 5: understand the degree of coherence we're going to get out
24:19
Speaker 5: of this administration. His Treasury secretary just confirmed testified that
24:24
Speaker 5: he favored abroad two and a half percent tariff in
24:29
Speaker 5: two and a half percent increments until they get to twenty.
24:31
Speaker 2: Correct, And that Donald Trump said didn't think that same day.
24:34
Speaker 2: I don't know if it was the same.
24:35
Speaker 5: Day after in time. Yeah, that he No, he didn't
24:39
Speaker 5: think that. Besson, who had just that was part of
24:41
Speaker 5: his testimony to the Senate.
24:43
Speaker 3: Yes, okay, yep, thanks any lack of clarity on that.
24:46
Speaker 5: No, No, perfectly clear, thank you.
24:48
Speaker 2: So the quote from Donald Trump is here, we are
24:51
Speaker 2: going to protect our people and our businesses, and we're
24:53
Speaker 2: going to protect our country with tariffs. And to me,
24:56
Speaker 2: that's the piece that really bothers me because it's to me,
24:59
Speaker 2: just another version of the nanny state. We've talked about,
25:02
Speaker 2: you know, welfare programs and all these different things that
25:07
Speaker 2: I think Republicans generally have despised, and when you talk
25:10
Speaker 2: to businesses who have been affected by global trade and
25:14
Speaker 2: other issues, it's not I think by and large that
25:17
Speaker 2: manufacturers are saying, hey, you know, we can't compete and
25:21
Speaker 2: so we need tariffs. They're saying that no, certain countries
25:25
Speaker 2: have dramatically subsidized their industries, like Chinese aluminum, and so
25:30
Speaker 2: that there's no possible way than in a free market economy,
25:33
Speaker 2: we can actually compete with these products. And that's my
25:36
Speaker 2: problem with the way that tariffs are being approached right
25:39
Speaker 2: now is I think if you went after China and said, hey,
25:41
Speaker 2: these countries are cheating in terms of how they approach
25:46
Speaker 2: free market trade and there's no way US producers can
25:49
Speaker 2: compete with that, so we're going to slap tariffs on it,
25:51
Speaker 2: everybody would be in agreement. I think you have a
25:54
Speaker 2: much tougher time making that same compelling argument when you're
25:58
Speaker 2: talking about Mexico and Canada. And that's the piece that
26:01
Speaker 2: I have a problem with, is it it comes across
26:04
Speaker 2: this quote especially we're going to protect our people in
26:06
Speaker 2: our businesses, and we're going to protect our country with tariffs.
26:09
Speaker 3: To me at least reads as nanny state.
26:13
Speaker 2: We don't want to compete, we don't think we can compete,
26:16
Speaker 2: so we're going to slap tariffs in here to make
26:19
Speaker 2: it so that we can compete.
26:20
Speaker 5: I thought they were supposed to raise revenue. The stated
26:22
Speaker 5: objective keeps changing too, sure, so the amount, the object
26:28
Speaker 5: or subjects, whatever the right way to think about it is,
26:31
Speaker 5: and the stated objective, all these things keep changing depending
26:34
Speaker 5: on who's speaking, including Trump himself, from day to day.
26:37
Speaker 2: Yeah, so we'll leave it at that for tariff talk
26:40
Speaker 2: for the day, I guess. In one other item, Tucker
26:42
Speaker 2: mentioned General Motor earnings that did come out, and in
26:45
Speaker 2: the conference call they did speak to tariffs a little bit,
26:47
Speaker 2: and they said that they are making plans for potential tariffs,
26:51
Speaker 2: among other things.
26:52
Speaker 3: They did report a loss, as.
26:53
Speaker 2: Tucker mentioned, that was mainly due to a restructuring of
26:55
Speaker 2: their Chinese business, where guess what, they can't sell any
26:58
Speaker 2: cars there, so they're shut down factories and really dramatically
27:03
Speaker 2: reducing the number of vehicles for sale there. But what
27:07
Speaker 2: they said about terraffs was effectively that hey, if they
27:10
Speaker 2: come into place, we're going to very quickly bring everything
27:13
Speaker 2: that we can from Mexico and Canada into the country.
27:17
Speaker 2: That's not really a plan for tariffs, right, Like, Hey,
27:20
Speaker 2: if we face tariffs, we're just going to quickly expedite
27:22
Speaker 2: all of our delivery, so hopefully we don't face those tariffs.
27:26
Speaker 2: They did say that the company would wait and see
27:29
Speaker 2: for specifics before deciding whether, you know, more expensive, longer
27:32
Speaker 2: term responses would be needed. And those longer term responses
27:35
Speaker 2: that I think of would be, Okay, we have a
27:39
Speaker 2: manufacturing facility near Ottawa that is going to have to
27:43
Speaker 2: be shut down, and we're going to have to build
27:45
Speaker 2: a new facility in the United States because it's now
27:48
Speaker 2: costing us twenty percent on top of what we produced
27:50
Speaker 2: there to actually get the stuff over.
27:52
Speaker 5: The underlying delusion here is that you can bring manufacturing
27:54
Speaker 5: jobs back somehow. If you look at the last fifty years,
27:57
Speaker 5: there's been a steady decline in manufacturing jobs. Not the
28:01
Speaker 5: dollar value of our manufacturing output, by the way, but
28:05
Speaker 5: manufacturing jobs. Because we've gotten better at producing things, productivity
28:08
Speaker 5: has gone up, but that steady decline is not reversible.
28:12
Speaker 5: Nobody's going to change that. Nobody's bringing those jobs back,
28:14
Speaker 5: and I blame I guess financial journalists, maybe the economics
28:17
Speaker 5: profession a little bit for not doing a better job
28:19
Speaker 5: of educating people as to how we became a service economy,
28:22
Speaker 5: how that's enabled us to realize unprecedented levels of wealth
28:26
Speaker 5: and growth, where the envy of the world, and how
28:29
Speaker 5: that's probably not why, that's probably not reversible. It's all
28:33
Speaker 5: based on this policy such as it is, because it
28:37
Speaker 5: keeps changing every day. I hesitate to even call it
28:39
Speaker 5: a coherent policy.
28:40
Speaker 1: But it's based on a fantasy.
28:42
Speaker 2: So, like I said, we'll continue to talk about it
28:44
Speaker 2: for another three days. If it doesn't go into place
28:45
Speaker 2: in February one, then I do think we you just
28:47
Speaker 2: need to take a break from tariff talk because I'm
28:50
Speaker 2: a big proponent of watch what I do, not what
28:54
Speaker 2: I say, and so I'm just not going to keep
28:56
Speaker 2: chasing this around every day. Let's take a quick break.
28:59
Speaker 2: When we come back, I want to move along from
29:01
Speaker 2: tariff talk and deep seek. Let's talk about home prices
29:06
Speaker 2: in twenty twenty five, what they did in twenty twenty four,
29:09
Speaker 2: what we might expect in the new year.
29:10
Speaker 3: Quick break. We'll be back with that.
29:12
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29:54
Speaker 2: In addition to all the other craziness this week, we
29:57
Speaker 2: do have a number of different we can out with
30:00
Speaker 2: data points coming out. So we already talked about the
30:02
Speaker 2: fact that we're going to have a lot of earnings.
30:04
Speaker 2: This morning, we heard from major defense companies. This afternoon
30:07
Speaker 2: after the bell?
30:08
Speaker 1: Is it?
30:08
Speaker 3: Both Starbucks and McDonald's are reporting after the bell.
30:11
Speaker 4: Tucker, I'm only seen Starbucks, okay, so let me look
30:14
Speaker 4: at McDonald's.
30:14
Speaker 3: Okay.
30:16
Speaker 2: Later this week we will hear from Meta, Tesla, Microsoft,
30:22
Speaker 2: I believe Apple as well, so big earnings reports. Tomorrow,
30:26
Speaker 2: We're going to be getting Jerome Powell speaking basically just
30:31
Speaker 2: fielding questions about how he's going to react to Donald
30:33
Speaker 2: Trump's decisions. It's basically the entire press conference would be
30:36
Speaker 2: my guest, is just littered with questions about how he's
30:39
Speaker 2: going to really and everything else.
30:42
Speaker 3: Do you yeah, I do.
30:46
Speaker 2: I've softened on him a bit, but one of the
30:49
Speaker 2: data points that we saw this week was around home prices.
30:52
Speaker 2: So new home sales came out for the month of December,
30:54
Speaker 2: which are always pretty muted. They did come in a
30:57
Speaker 2: little bit better than expected, near seven hundred thousand forecasted
31:00
Speaker 2: for six seventy. And then the S and P Case
31:03
Speaker 2: Shiller Home Price Index was released at nine am this morning.
31:08
Speaker 2: You know, Marcus as Robert Schiller's best buddy, maybe you
31:10
Speaker 2: can explaine what the Case Shiller.
31:13
Speaker 3: Home Price Index does. Yeah, all right, Mark calls Robert
31:17
Speaker 3: him Bob.
31:19
Speaker 5: But earlier today in an internal meeting, what you know,
31:21
Speaker 5: we talked about the Apparently old Michael took away from
31:24
Speaker 5: my remarks.
31:25
Speaker 2: Correct, Can you explain what what Robert Shiller did and
31:30
Speaker 2: why everyone repeats you know Case Shiller price to earnings
31:34
Speaker 2: and and Schiller case Shiller home price indicies. What makes
31:39
Speaker 2: his formulas more useful than what we used previously?
31:41
Speaker 5: I guess, well, here we're talking about home prices. He's
31:45
Speaker 5: a busy little beaver. He he pioneered this home price
31:48
Speaker 5: index along with uh I forget his first name. The
31:52
Speaker 5: another economist, Case who's at Wellesley here in town. So
31:57
Speaker 5: we're talking about the home price index, which is up
31:59
Speaker 5: and unbelievable, unprecedented fifty percent in the last five year,
32:05
Speaker 5: virtually unprecedented. Only in the bubble of the late nineties
32:09
Speaker 5: early two thousands did it rise nearly as fast. It's
32:13
Speaker 5: it just it's mind blowing. So we've got the case
32:16
Speaker 5: Carl Case. Excuse me, cheez, Carl Case, Robert Schuller home
32:18
Speaker 5: price index, which S and P sends bought so you'll
32:20
Speaker 5: see it sometimes reported is the S and P core
32:23
Speaker 5: Logic Gase Shiller Home Price Index.
32:25
Speaker 3: It's a mouthful, Yeah, it really is.
32:27
Speaker 5: And that's just for licensing reasons that they have to see.
32:29
Speaker 2: So it gives you home prices across twenty cities. And
32:32
Speaker 2: how does it intentionally and how does it attempt to
32:35
Speaker 2: normalize them in in fact you're using.
32:38
Speaker 5: Well, you can do the normalization. So when did you
32:41
Speaker 5: do that yourself? You ask? You might want to know
32:43
Speaker 5: how much of price has gone up since two thousands,
32:46
Speaker 5: so you can use the You can use the index.
32:48
Speaker 5: Any index can be used as a base for something.
32:51
Speaker 5: The consumer price index serves the same function. You divide
32:56
Speaker 5: the number by the base figure to figure out how
32:58
Speaker 5: much it's gone up. So if the index is one
33:00
Speaker 5: ten this year, and your base figure is one hundred,
33:04
Speaker 5: you get ten ten percent increase. So the Case Shiller Index,
33:09
Speaker 5: I think is an improvement over others because it is national.
33:12
Speaker 5: There are regional variations too.
33:13
Speaker 2: It strips out home size and type, so it's able
33:16
Speaker 2: to kind of give you.
33:17
Speaker 3: A normalized view of the housing.
33:19
Speaker 2: Market as well. But to Mark's point, as everyone has experienced,
33:23
Speaker 2: home prices have rarely climbed as rapidly as they know.
33:26
Speaker 5: It safe to call the market we're in in many
33:30
Speaker 5: respects unprecedented, but you all know that anyway.
33:33
Speaker 2: And I think at least when I look out at
33:36
Speaker 2: home prices over the course of twenty twenty five. Let's
33:39
Speaker 2: assume for a moment here that we don't get some
33:41
Speaker 2: staggering recession that increases unemployment by a few percentage points,
33:45
Speaker 2: because if it does, then all bets are off. But
33:47
Speaker 2: assuming we don't get that, even in the face of
33:50
Speaker 2: seven percent plus mortgages, I have a really tough time
33:54
Speaker 2: seeing how many places home prices actually fall. They probably
33:57
Speaker 2: will in a few markets where we're already seeing inventory
34:00
Speaker 2: eclipse what we saw back in twenty twenty and twenty nineteen. Florida, Texas,
34:05
Speaker 2: to name a few places, places where a lot of
34:08
Speaker 2: people flocked to during COVID, are now seeing inventory levels
34:12
Speaker 2: that are quite a bit higher than they were prior
34:14
Speaker 2: to COVID, And so with seven plus percent mortgage rates,
34:18
Speaker 2: I do expect that home prices in Florida might fall
34:20
Speaker 2: a little bit in twenty twenty five. But nationally, it
34:24
Speaker 2: remains the case that this is all a story about inventory.
34:27
Speaker 2: It is a pure story about supply and demand, and
34:30
Speaker 2: the demand hasn't really moved all that much in spite
34:34
Speaker 2: of high mortgage rates, and the supply is still nowhere
34:36
Speaker 2: to be seen. And so I have a tough time
34:38
Speaker 2: seeing where home prices fall.
34:40
Speaker 5: Deep enough for session.
34:41
Speaker 2: You bet they'll fall, right, Yeah, And that's where all
34:44
Speaker 2: bets are off.
34:44
Speaker 3: Right, If you have a bunch of people.
34:47
Speaker 2: That are forced to sell their home because they're out
34:50
Speaker 2: of a job, then all bets are off.
34:52
Speaker 3: You're right.
34:53
Speaker 2: But in that case, also mortgage rates are dropping precipitously
34:56
Speaker 2: and a whole bunch of affordability.
34:58
Speaker 5: Stag inflationary environm. So add tariffs to that word to
35:03
Speaker 5: scary words. It's hard to imagine right now from our
35:08
Speaker 5: present vantage point, but stranger things have happened.
35:11
Speaker 2: So what, then, do you think of a great new
35:16
Speaker 2: innovative way to bring home prices down that is being
35:19
Speaker 2: debated in New York, Virginia, Nebraska, among other places, that
35:23
Speaker 2: will restrict large financial firms from buying homes. I don't,
35:28
Speaker 2: by the way, I have no idea how you defind
35:30
Speaker 2: a large financial firm if it's a private equity fund
35:33
Speaker 2: or a hedge fund, or or assets over a certain
35:36
Speaker 2: dollar amount. But New York Governor Kathy Hochel Hochel HOCl.
35:40
Speaker 5: I say ho Hochel.
35:42
Speaker 2: She has proposed restrictions on large financial firms buying home.
35:45
Speaker 2: State legislators in Virginia Nebraska have similar ideas, and the
35:50
Speaker 2: rationale is pretty simple. Price is a factor of supply
35:54
Speaker 2: and demand, So if you remove some of the demand equation,
35:57
Speaker 2: then you should bring home prices down. Do you buy it,
35:59
Speaker 2: Mark Uh?
36:01
Speaker 5: I'm not sure I do. The evidence on this I
36:05
Speaker 5: think points toward, not surprisingly, because they represent such a
36:09
Speaker 5: big pool of capital. Evidence points toward them pushing up
36:13
Speaker 5: prices in markets where they become heavily involved, where they
36:17
Speaker 5: where their ownership percentage crosses some meaningful threshold. I'm sorry,
36:21
Speaker 5: I forget which but I did see conclusions research conclusions
36:24
Speaker 5: to this effect sometime in the past couple of years.
36:27
Speaker 5: If I were a politician, I would absolutely this is easy.
36:31
Speaker 5: Everybody hates large companies buying homes. Yeah, it's not quite
36:35
Speaker 5: dark money, but this this sort of sinister Goldman Saxish
36:40
Speaker 5: backed investment pool of money scooping into.
36:45
Speaker 3: Shape or form.
36:46
Speaker 5: Well, we don't know that for sure. Other sovereign wealth
36:48
Speaker 5: funds could easily own a chunk of that fund.
36:49
Speaker 1: You have.
36:50
Speaker 5: No I didn't know. I'm you're I know you're ridiculing
36:54
Speaker 5: me here, but you're you're. I think you're onto something there.
36:56
Speaker 5: So as a politician, I would absolutely this is a
36:59
Speaker 5: no brainer. They should have done it yesterday. Will it
37:02
Speaker 5: help price pressure on the margin, maybe a little bit.
37:05
Speaker 5: It could also push it. It could also accelerate the
37:08
Speaker 5: pullback in prices when it eventually occurs, because these people
37:12
Speaker 5: have no attachment to the assets that they own. They'll
37:15
Speaker 5: fire sale them just to raise capital in a bad
37:18
Speaker 5: in an otherwise a poor economic climate.
37:21
Speaker 2: I just to me, it is continually fascinating that we
37:25
Speaker 2: come up with so many innovative, silly ways to try
37:28
Speaker 2: and get home prices down. When The easiest thing you
37:34
Speaker 2: can do is just deregulate. If you deregulate and just
37:37
Speaker 2: say you can build more houses because we are reducing
37:40
Speaker 2: zoning requirements and building more stuff, then you will bring
37:44
Speaker 2: home prices down, like you know will. Yes, getting private
37:48
Speaker 2: equity out of single family homes could bring the sales
37:51
Speaker 2: prices down, but I'm not sure it would bring down
37:53
Speaker 2: the overall cost of shelter because guess what, a hedge
37:56
Speaker 2: fund billionaire isn't going to go live in your three
37:58
Speaker 2: hundred thousand dollars home in Nebraska, going to go and
38:00
Speaker 2: rent it, And so you know, potentially, yeah, you might
38:03
Speaker 2: have a higher sales price, but you can still go
38:05
Speaker 2: rent that home at a reasonable price when private equity
38:08
Speaker 2: gets in. So these ideas might become popular, but I
38:12
Speaker 2: maintain that they won't have much of an effect.
38:14
Speaker 3: Let's take a quick break.
38:15
Speaker 2: When we come back, we're gonna recap markets for you
38:17
Speaker 2: because they've taken a positive swing here. And then a
38:19
Speaker 2: little bit more on the upcoming FED meeting that's next.