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Why Fed independence is necessary to control inflation · The Financial Exchange Show

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  Speaker 1: Armstrong and Mark Vandetti.
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  Speaker 2: Good morning, Happy Tuesday, and welcome back to the Financial Exchange.
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  Speaker 2: It's Mike Armstrong, Mark Fandetti and Tucker Silva with you
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  Speaker 2: on a Tuesday where I wouldn't normally cover markets this early,
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  Speaker 2: but I have to report that I think this is
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  Speaker 2: the flattest stock market that I have ever seen at
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  Speaker 2: the beginning of a radio show for me personally. We've
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  Speaker 2: got the Dow off nine points, We've got the S
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  Speaker 2: and P off less than half a point, and the
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  Speaker 2: Nasdaq off less than two points, all of which are
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  Speaker 2: basically exactly flat for the day, which again not anything
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  Speaker 2: particularly notable, but I just have to know that this
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  Speaker 2: is the literal flattest market that I have ever seen
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  Speaker 2: at the beginning of one of our programs, so I
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  Speaker 2: thought it was worth mentioning. We've got a fair bit
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  Speaker 2: to cover today, including new escalations on the tariff side
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  Speaker 2: of things, after that's been quiet for a few weeks now,
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  Speaker 2: lots of talk about in terms of the housing market
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  Speaker 2: car purchases as well, but the only thing that is
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  Speaker 2: dominating financial news this morning is yesterday's firing of a
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  Speaker 2: Federal Reserve governor, Lisa Cook and so we're going to
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  Speaker 2: start things off right there. Markets, like I said, barely
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  Speaker 2: moving on this news, but certainly financial reporting has been
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  Speaker 2: all over it since last night, and futures at least
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  Speaker 2: initially had a quick reaction to it. We on this
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  Speaker 2: program have talked a lot about federal reserve independence and
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  Speaker 2: the importance of it, and I think before we get
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  Speaker 2: into the firing of Lisa Cook and all the questions
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  Speaker 2: about legality that's surrounded, I wanted to spend a few
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  Speaker 2: minutes just kind of recapping. I don't want to go
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  Speaker 2: into the weeds on it, but recapping in I don't know,
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  Speaker 2: mark three minutes or less. Why US central bank independence,
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  Speaker 2: which is kind of the origination of central bank independence,
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  Speaker 2: has become such a cornerstone of the US financial system
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  Speaker 2: and perhaps even its dominance in the global financial system.
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  Speaker 2: Why that independence is deemed so important by economists and
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  Speaker 2: financial experts.
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  Speaker 3: It's important to remember that what the FED does is
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  Speaker 3: controls the money supply. It's not interest rates they target them,
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  Speaker 3: but they control the money supply. So the question is
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  Speaker 3: when inflation and indirectly therefore they control inflation because in
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  Speaker 3: the long run, though not the short run, it's the
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  Speaker 3: money supply or it's growth. More accurately, that determines the
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  Speaker 3: rate of inflation. So just keep that relationship in mind.
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  Speaker 3: The Fed's responsible for controlling inflation. Inevitably inflation will be
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  Speaker 3: hotter than the FED would prefer, then people would prefer.
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  Speaker 3: We had a very recent example of this, YEP. So
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  Speaker 3: the question is how much pain is going to be
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  Speaker 3: involved in getting inflation down. In the most recent episode,
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  Speaker 3: which is being referred to now by researchers as a
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  Speaker 3: miraculous disinflation isn't a lot of pain. Although inflation is
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  Speaker 3: not completely back to target either by many measures, it
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  Speaker 3: remains elevated.
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  Speaker 2: There are some political turboil there was a lot of
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  Speaker 2: people voted out of office, but right in terms of
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  Speaker 2: pain on the general I'm.
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  Speaker 3: Getting so you asked, you want me to get to that. No, no, no,
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  Speaker 3: and no, this is good. I don't want this to
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  Speaker 3: be a freaking lecture. I'm not qualified to give one.
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  Speaker 3: There should be a conversation. I'm just trying to draw
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  Speaker 3: the connection between what the FED does and why independence
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  Speaker 3: is important. And the reason independence is important in a nutshell,
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  Speaker 3: is that for the FED to bring inflation down when
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  Speaker 3: it inevitably has to. It makes it a lot easier
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  Speaker 3: if people believe the FED can bring inflation down. They've
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  Speaker 3: got to be And you see this word over and
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  Speaker 3: over again in the literature credible and economist didn't make
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  Speaker 3: that word up. Obviously, we all use it. Credible conjures
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  Speaker 3: up images of someone with integrity, someone who can be believed.
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  Speaker 3: It's a good it's a nice word as a it's
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  Speaker 3: a it's a it has positive. Positive associations are easy
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  Speaker 3: to make with that word.
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  Speaker 4: Basically, I think maybe maybe a mystery.
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  Speaker 2: But what what you're getting at with that credibility piece
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  Speaker 2: is the Fed's job is a lot easier to control
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  Speaker 2: inflation if people believe that they actually have ZA.
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  Speaker 3: I think I did a good job setting that up
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  Speaker 3: because you just made the key point very.
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  Speaker 2: Well that they have both the willingness and the ability
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  Speaker 2: to crush the economy into submission.
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  Speaker 4: If they need to control inflation, and.
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  Speaker 3: You so, then they won't have to. It's like as
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  Speaker 3: a parent, you don't want to punish your kid. Just
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  Speaker 3: the threat is enough to get them to behave because
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  Speaker 3: punishment is hard, it's unpleasant for you. They don't like
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  Speaker 3: it either, but just the threat of it is enough
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  Speaker 3: to keep them in line, and once in a while
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  Speaker 3: you get to lower the boom, but you'd rather not.
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  Speaker 3: So you are a credible parent if you can get
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  Speaker 3: your kid to behave the way you want without actually
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  Speaker 3: disciplining them. And there are other analogies too. What we
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  Speaker 3: learned in the nineteen seventies here and elsewhere is that
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  Speaker 3: credibility makes disinflation a lot less painful. So it is
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  Speaker 3: important as a consequence to have a credible federal reserve.
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  Speaker 3: And the danger in where we are going where we've
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  Speaker 3: already gone, I mean, we've already crossed the rubicon here.
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  Speaker 3: The danger with a politicized FED, a FED that's beholden
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  Speaker 3: to either party or a particular president, is that they're
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  Speaker 3: perceived as not being credible. They're going to put the
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  Speaker 3: president's goals. In this case, the administration prefers cheap deficit financing.
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  Speaker 3: They're going to put that goal above controlling inflation.
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  Speaker 2: And I would I think it's pretty safe to say
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  Speaker 2: that any president wants lower interest rates, cheaper deficit financing,
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  Speaker 2: but lower interest rates, sure, yeah.
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  Speaker 4: Right, I mean, I mean maybe in June of twenty twenty.
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  Speaker 2: Two, Biden didn't want lower interest rates because he would
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  Speaker 2: have looked like a complete moron had he called for them.
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  Speaker 2: But other than those specific examples, where you are navigating
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  Speaker 2: a very high inflation environment, you generally want lower interest
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  Speaker 2: rates as president, or at least you don't. Yeah, it
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  Speaker 2: boosts the economy, it and it you know, helps you
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  Speaker 2: out generally digging with reelection.
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  Speaker 3: Yeah, it's not so much that I don't think is
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  Speaker 3: every president wants the FED to take it easy close
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  Speaker 3: to re election time. They don't want the Reagan's treasury.
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  Speaker 3: I think it was a Jim Baker, Jim Baker who
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  Speaker 3: was a chief Staff treasure Secretary effort. I always get
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  Speaker 3: screwed up in my head about the timing of this
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  Speaker 3: because they all traded jobs after the first term. But anyway,
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  Speaker 3: he cornered Vulkar and this, Yah, this is Jim Baker.
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  Speaker 3: This is something he would do, tough Texan like LBJ
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  Speaker 3: cornered Vulgar, putting his finger in his chest. You're not
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  Speaker 3: going to raise it. There was nineteen eighty four. I'm
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  Speaker 3: not going to this is I wasn't there. Obviously, this
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  Speaker 3: isn't a book by Alan Blinder. You're not going to
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  Speaker 3: raise interest rates this year and Vulgar's like, well, I
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  Speaker 3: wasn't going to anyway, but okay, last time I know
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  Speaker 3: of something like that happening was then, and this was
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  Speaker 3: not public of course.
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  Speaker 4: Sure.
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  Speaker 3: The larger point, Mike, is that politicians have stayed out
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  Speaker 3: of the Fed's business, and Clinton really established this as
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  Speaker 3: a practice.
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  Speaker 2: And important because obviously, if well maybe not obviously, if
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  Speaker 2: the central bank isn't in dependent and it's instead controlled
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  Speaker 2: by politicians who want to artificially keep interest rates lower,
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  Speaker 2: what inevitably will happen is inflation will spike at some point.
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  Speaker 3: Yes, it's a lot harder once the horse is out
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  Speaker 3: of the barn.
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  Speaker 2: Yeah, And again that leads to all sorts of problems.
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  Speaker 2: But let's just think about the most basic one. You
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  Speaker 2: are a large foreign institution that wants to lend money
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  Speaker 2: to the United States, and you're going to do so
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  Speaker 2: by buying a thirty year Treasury bond, which is doesn't
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  Speaker 2: matter what the interest rate is paying. If you are
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  Speaker 2: concerned about central bank independence and therefore concerned that inflation
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  Speaker 2: will be higher in the future, you're going to be
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  Speaker 2: quite concerned about lending that money as to whether or not, Hey,
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  Speaker 2: I lend this money in US dollars thirty years ago
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  Speaker 2: and inflation ran four percent instead of the normal two percent,
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  Speaker 2: And suddenly my money being returned to me thirty years
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  Speaker 2: from now is worth a heck of a lot less
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  Speaker 2: than what.
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  Speaker 3: I would So you need to be compensated for the
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  Speaker 3: risk of that possibility.
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  Speaker 2: Which is why like hung Arian bonds go for twenty
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  Speaker 2: percent over ten years. And you know, I don't know
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  Speaker 2: why I picked on Hungry in this example.
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  Speaker 3: But we're now in the class of countries unfortunately that
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  Speaker 3: constitute monetary basket cases.
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  Speaker 2: I'm not sure there, but we are threatening to be Mike,
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  Speaker 2: it's happening.
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  Speaker 3: Yeah, we have to markets look ahead. As a market participant,
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  Speaker 3: I'm looking ahead. Yes, I think inflation will be hire.
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  Speaker 3: Therefore I demand a higher premium for lending money. It's already.
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  Speaker 3: It's happening on the long end of the yeal curb
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  Speaker 3: this morning. Not a lot, It's not dramatic. Markets aren't
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  Speaker 3: sure whether he'll actually be able to whether the president
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  Speaker 3: will actually be able to fire Lisa Cook, and we
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  Speaker 3: can get into whether or not she actually.
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  Speaker 2: Should be Let's say, right, let's go, we have to
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  Speaker 2: talk about that too. Right, Let's take a quick break.
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  Speaker 2: I wanted to get the central bank independence piece out
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  Speaker 2: of here because this is not the first threat to
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  Speaker 2: central bank independence that we've been talking about this year, obviously,
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  Speaker 2: but we do need to talk about Lisa Cook's specific
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  Speaker 2: scenario here quick break that part of the independent story.
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  Speaker 4: Next on the Financial Exchange.
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• 10:26
  Speaker 4: So our top story of the day remains the removal of.
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  Speaker 2: Lisa Cook from the Federal Reserve, which is likely going
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  Speaker 2: to end up in the courts here is announced last
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  Speaker 2: night by the President, and I believe their announcements by
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  Speaker 2: the Justice Department as well for finding the cause.
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  Speaker 4: But here's the story.
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  Speaker 2: Unlike other areas of the government, the Federal Reserve occupies
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  Speaker 2: a unique space where presidents aren't traditionally allowed to remove
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  Speaker 2: governors without cause. And unless I'm missing something, I don't
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  Speaker 2: think it's ever been done for cause, not to my knowledge,
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  Speaker 2: so this would be the first time ever Lisa Cook
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  Speaker 2: is being accused of falsifying mortgage application documents.
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  Speaker 4: Basic story.
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  Speaker 2: You can get a lower interest rate on a mortgage
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  Speaker 2: if it's your primary residence. She is alleged to have
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  Speaker 2: claimed primary residence on two separate mortgage applications, you know,
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  Speaker 2: at the not at the same time, but you know,
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  Speaker 2: while while not actually trying to make both of them her, Well,
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  Speaker 2: you can't make both of them your primary residence or
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  Speaker 2: not making them both.
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  Speaker 4: Your primary residence. If true, it's a crime.
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  Speaker 2: And you are in charge of a government organization that
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  Speaker 2: is in charge of bank regulation and a whole bunch
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  Speaker 2: of other things other than just directing the economy. So
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  Speaker 2: if these accusations are true and there is compelling evidence,
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  Speaker 2: I gotta be honest. I don't think she should be
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  Speaker 2: doing the job. I don't think you should be able
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  Speaker 2: to run for Congress. I don't don't think you should
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  Speaker 2: be able to be in charge of the SEC or
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  Speaker 2: a whole.
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  Speaker 4: Bunch of organizations.
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  Speaker 2: Frankly, if an employee of mine at a financial services company,
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  Speaker 2: forget about even being proven guilty, like I don't know
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  Speaker 2: what the statute of limitations are on this sort of thing.
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  Speaker 2: If there were compelling evidence that an employee of mine
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  Speaker 2: had done something like this, I wouldn't trust them with
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  Speaker 2: managing client money. So there's I think, if true, perfectly
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  Speaker 2: just cause to remove Lisa Cook for this type of crime.
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  Speaker 2: If it is true, the question is is there evidence
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  Speaker 2: that it actually happened, because there's been none released. I
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  Speaker 2: don't know that I would expect to. I'm no sort
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  Speaker 2: of legal expert in terms of what happens when you
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  Speaker 2: do all this, but it does come across as very rapid.
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  Speaker 2: There were accusations made last week, a couple days later
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  Speaker 2: removal of the Fed officials. So I do expect this
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  Speaker 2: to end up in court. I do expect Lisa Cook
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  Speaker 2: to fight it, and I'll be very interested to see
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  Speaker 2: just where it lands and how hard it gets fought,
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  Speaker 2: because it leads to a whole bunch of other questions,
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  Speaker 2: like what is cause. So, for instance, in twenty twenty
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  Speaker 2: two and twenty twenty three, we spent a lot of
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  Speaker 2: time on this program arguing that Jay Powell and the
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  Speaker 2: Federal Reserve are doing a bad job of handling interest
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  Speaker 2: rate moves in regards to inflation. You called him a
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  Speaker 2: monetary whimp and a failure is cause? Saying that is cause?
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  Speaker 2: Saying that somebody did a bad job in the president's opinion,
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  Speaker 2: how you just.
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  Speaker 3: Some sort of malfeasance or no, Well, look not a lawyer.
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  Speaker 3: I'm a criminal lawyer. I can't say yeah, that'll all
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  Speaker 3: be adjudicated.
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  Speaker 2: I guess rosst negligence Like these are just big questions
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  Speaker 2: that I don't have answers to and why. Again, on
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  Speaker 2: the surface, I look at this. If this is true,
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  Speaker 2: she should be out. You should be fired for.
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  Speaker 3: Yeah, but if you were uncomfortable with the president being
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  Speaker 3: secured after he left office, they hunted four things he
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  Speaker 3: may have. Some of them were paperwork violations he did.
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  Speaker 3: The president did the exact same thing he he allegedly well,
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  Speaker 3: a jury said he did it falsified a loan application
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  Speaker 3: to get a bigger, more favorable loan terms. I think
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  Speaker 3: every developer in Manhattan did what the President did, but
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  Speaker 3: they were out to get him. Everybody knows this. He
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  Speaker 3: did it, but they were also out to get him.
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  Speaker 3: It's no different than a cop following you around knowing
• 14:26
  Speaker 3: that you have a drinking problem and just waiting for
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  Speaker 3: your moment of weakness to nail you while letting ten
• 14:31
  Speaker 3: other people, ten other stude prunes drive right past you.
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  Speaker 3: It's unfair, but it happens every day in America. So
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  Speaker 3: what's happening to her is maybe a little unfair. He
• 14:41
  Speaker 3: Trump told Poulty at Freddie mac go look at every
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  Speaker 3: FED official, the ones I want off and find something
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  Speaker 3: on them. And he's doing it. He's done it with
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  Speaker 3: others too. You could say, well, well, therefore it's unfair. Well,
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  Speaker 3: but at the same time they may have broken the law.
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  Speaker 4: This is why I'm I'm excluded. You want to have
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  Speaker 4: that job expold you to a higher standard.
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  Speaker 3: No, you're exposed. You have to accept that your political
• 15:04
  Speaker 3: opponents might go after you. How stupid are you that
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  Speaker 3: you do? If she did it, and if it was
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  Speaker 3: a knowing i e. On purpose, then she's an idiot
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  Speaker 3: and she shouldn't be there, or she's greedy, as you said, Mike,
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  Speaker 3: she's morally compromised and she shouldn't be there. At the
• 15:19
  Speaker 3: same time, he's looking for any pretext for remaking the FED.
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  Speaker 3: That's a somewhat different question.
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  Speaker 4: I do see them as two separate issues.
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  Speaker 3: Yeah, I do as well, And that's why I'm minds
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  Speaker 3: on this.
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  Speaker 2: It's it's it's it's straight, and I don't feel the
• 15:32
  Speaker 2: media is doing that part justice, which is to say
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  Speaker 2: the media is painting this purely as a attack on
• 15:40
  Speaker 2: FED independence, and it sort of is. It is, but
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  Speaker 2: they are failing to acknowledge that this is pretty serious
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  Speaker 2: if it did occur, And that's that's kind of where
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  Speaker 2: I land on it. Is it a serious crime that
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  Speaker 2: somebody would go to prison for?
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  Speaker 4: No, probably not.
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  Speaker 2: But is it a crime that you would be comfortable
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  Speaker 2: with a member of the Federal Reserve, a governor of
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  Speaker 2: the Federal Reserve having committed Absolutely not, and her underlings,
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  Speaker 2: you know, all the people that work for her under
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  Speaker 2: that Federal Reserve role, if they had been accused of
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  Speaker 2: doing the same thing, there's no way they'd ever be hired.
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  Speaker 4: So that's where I land on. It is if true out,
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  Speaker 4: but it is also attack on the independence of the
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  Speaker 4: Federal Reserve, which is distressing to see and is likely
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  Speaker 4: not something that breaks markets or screws things up immediately.
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  Speaker 4: It is that slow erosion of that credibility that you
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  Speaker 4: worry about and what that looks like five ten years
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  Speaker 4: from now, because remember the precedent that all this sets right.
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  Speaker 4: If you are I think there's a lot.
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  Speaker 2: Of people who are comfortable with, for instance, the White
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  Speaker 2: House making an investment in intel.
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  Speaker 3: Or comfortable or uncomfortable.
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  Speaker 2: Comfortable support is of the president being comfortable with that
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  Speaker 2: investment and being comfortable with other.
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  Speaker 4: Exact The problem with.
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  Speaker 2: That is he's not going to be the president three
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  Speaker 2: years from now, and so I keep running back to like, okay,
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  Speaker 2: am I comfortable with Alexandria or Cassio Cortes making these
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  Speaker 2: same investments and decisions about interest rates because that is
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  Speaker 2: where hypothetically we could land. And my answer is no,
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  Speaker 2: I'm not comfortable with anybody doing it. But that is
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  Speaker 2: the concern when you talk about independence of the FED
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  Speaker 2: or expansion of executive powers, which is being done dramatically.
• 17:23
  Speaker 4: Now, so let's move on from the Federal Reserve. That's
• 17:26
  Speaker 4: enough talk about that.
• 17:27
  Speaker 2: We'll cover it more, I'm sure, because this is probably
• 17:30
  Speaker 2: going to play out in courts for quite some time
• 17:33
  Speaker 2: as it all gets figured out. Two stories that are
• 17:37
  Speaker 2: worth mentioning and not doing much else. With President Trump
• 17:40
  Speaker 2: threatening new tariffs on countries that tax tech companies. These
• 17:43
  Speaker 2: would be your digital services tax things about companies like Facebook,
• 17:46
  Speaker 2: Google and others doing business in Europe, as well as
• 17:50
  Speaker 2: a story about Chinese made magnets coming into the United
• 17:55
  Speaker 2: States and President Trump warning of a two hundred percent
• 17:58
  Speaker 2: tariff on China if those exports are curbed. I'm going
• 18:02
  Speaker 2: to mention these stories because it's interesting to me that
• 18:04
  Speaker 2: it's one of the first times we've heard of trade
• 18:06
  Speaker 2: escalation again with Europe and or China in the last
• 18:09
  Speaker 2: several weeks. I just don't know that it's worth giving
• 18:13
  Speaker 2: more time to than mentioning, because there have been so
• 18:18
  Speaker 2: many of these types of announcements that get thrown out
• 18:21
  Speaker 2: there as a starting negotiating point and don't result in
• 18:26
  Speaker 2: anything real when it actually comes to tariff policy. So
• 18:31
  Speaker 2: I think rightfully, the President is feeling empowered by his
• 18:34
  Speaker 2: successful negotiations on tariff. So far, he has I think
• 18:40
  Speaker 2: driven a harder bargain than most people were anticipating with
• 18:44
  Speaker 2: countries like Europe, not so much with China. I said,
• 18:48
  Speaker 2: countries like Europe, it's not a country.
• 18:49
  Speaker 3: Is that how I succeed? Is that how his tariff
• 18:51
  Speaker 3: negotiations are perceived as being successful?
• 18:54
  Speaker 4: I think you think, I think, so, what's this?
• 18:57
  Speaker 3: What's the standard there? The trading system didn't blow?
• 19:00
  Speaker 4: Yeah?
• 19:00
  Speaker 2: Oh okay, yeah, Because I mean, look, if you look
• 19:03
  Speaker 2: at it, I think that a lot of experts were
• 19:06
  Speaker 2: calling for you know, big escalations and back and forth
• 19:09
  Speaker 2: tip for tat trade war, and that's not what we
• 19:11
  Speaker 2: got out of this. Instead, what we got was, especially
• 19:14
  Speaker 2: in the case of Europe, higher tariffs on European goods
• 19:17
  Speaker 2: with no real reaction.
• 19:18
  Speaker 4: Quick Break Wall Street watches.
• 19:20
  Speaker 1: Next, Like us on Facebook and follow us on Twitter
• 19:36
  Speaker 1: at TFFE show. Breaking business news is always first right
• 19:40
  Speaker 1: here on the Financial Exchange Radio Network. Time now for
• 19:45
  Speaker 1: Wall Street. Watch a complete look at what's moving markets
• 19:49
  Speaker 1: so far today right here on the Financial Exchange Radio Network.
• 19:53
  Speaker 5: Markets are flat as investors are mostly shruggering off the
• 19:56
  Speaker 5: latest development between President Trump and the FED, where Trump
• 19:59
  Speaker 5: ordered the removal FED Governor Lisa Cook. However, Cook said
• 20:03
  Speaker 5: Trump has no authority to fire her and won't resign
• 20:07
  Speaker 5: ongoing developments there. Right now, the Dow is down by
• 20:11
  Speaker 5: only thirteen points, SMP five hundred is up merely three points,
• 20:16
  Speaker 5: Nasdaq is up by two tenths of one percent, or
• 20:19
  Speaker 5: thirty nine points higher. RUSSA two thousand is up three
• 20:22
  Speaker 5: quarters of one percent. Ten year treasureeled is flat at
• 20:26
  Speaker 5: four point two eight one percent, and crude oil down
• 20:29
  Speaker 5: one percent today, trading right around sixty four dollars a barrel.
• 20:34
  Speaker 5: Eli Lilly's up three percent after the pharmaceutical Giants weight
• 20:38
  Speaker 5: loss pill cleared another late stage trial. The higher dose
• 20:42
  Speaker 5: of the pill help patients lose ten point five percent
• 20:45
  Speaker 5: of their weight on average at seventy two weeks, compared
• 20:49
  Speaker 5: to just two point two percent weight loss in the
• 20:51
  Speaker 5: placebo group. Meanwhile, AT and T said it would buy
• 20:55
  Speaker 5: some wireless spectrum licenses from EchoStar for twenty three billion dollars,
• 21:01
  Speaker 5: sending shares an echo Star surging eighty one percent, while
• 21:06
  Speaker 5: AT and T stock is down only one percent. Elsewhere,
• 21:09
  Speaker 5: retailers including Canada Goose, VF Corp, and Rocky Brands are
• 21:13
  Speaker 5: seeing gains after Barrett upgraded the stocks to outperform. Canada
• 21:18
  Speaker 5: Goose up eight percent, VF is rising six percent, and
• 21:22
  Speaker 5: Rocky Brand stock is jumping eleven percent higher. Truest upgraded
• 21:27
  Speaker 5: chip maker AMD to buy from hold, where the analysts
• 21:29
  Speaker 5: noted that hyperscale customers have been increasingly partnering with the
• 21:33
  Speaker 5: company and expressing trust interest in deploying AMD at scale.
• 21:38
  Speaker 5: AMD is up over two percent higher. Interactive Brokers will
• 21:42
  Speaker 5: join the S and P five hundred, replacing Walgreens Robinhood
• 21:45
  Speaker 5: again failed to make the cut, and digital identity management
• 21:49
  Speaker 5: company Octa will report their earnings after today's closing bell.
• 21:54
  Speaker 5: I'm Tucker Silva, and that is Wall Street watch mark.
• 21:56
  Speaker 4: We're talking a little bit over the breaks. I think
• 21:58
  Speaker 4: it flashed across the screen.
• 22:00
  Speaker 2: The number of exchange traded funds, more than forty three
• 22:05
  Speaker 2: hundred of them across the financial industry, now eclipses the
• 22:10
  Speaker 2: total number of individual stocks that are available to trade
• 22:13
  Speaker 2: in US markets. We've been talking about kind of both
• 22:16
  Speaker 2: sides of this story for years now. One would be
• 22:19
  Speaker 2: the trend towards fewer companies listing publicly.
• 22:22
  Speaker 4: For a line of reasons.
• 22:24
  Speaker 2: Two would be the explosion of exchange traded funds into
• 22:31
  Speaker 2: the investment world over the course of I mean really
• 22:33
  Speaker 2: the last what thirty years since they started, but it
• 22:36
  Speaker 2: really started booming over the last several by by way
• 22:42
  Speaker 2: of background, the exchange traded fund has not been around
• 22:47
  Speaker 2: as long as the mutual fund, but is different in
• 22:49
  Speaker 2: a few key ways. One, it's exchange traded, so you
• 22:52
  Speaker 2: can trade it throughout the day. It's usually a bundle
• 22:55
  Speaker 2: of stocks and bonds like a mutual fund. Traditionally, when
• 22:58
  Speaker 2: they first started coming out from the likes of Vanguard.
• 23:01
  Speaker 2: They were also tied to an index, so rather than
• 23:04
  Speaker 2: an actively managed fund with higher expenses, they were typically
• 23:07
  Speaker 2: a little bit cheaper in terms of that overall expense ratio.
• 23:11
  Speaker 2: That line has now been blurred quite a bit because
• 23:13
  Speaker 2: there are now active and passive ETFs. There's active and
• 23:16
  Speaker 2: passive mutual funds. But generally speaking, the biggest difference is
• 23:20
  Speaker 2: a mutual fund trades once a day after hours.
• 23:24
  Speaker 4: The index fund trades throughout the day.
• 23:26
  Speaker 2: But they're both generally a basket of diversified things, although
• 23:30
  Speaker 2: these days all of those other.
• 23:32
  Speaker 4: Lines are kind of blurred. Do you have any major
• 23:35
  Speaker 4: takeaways about this, because at first I was like.
• 23:37
  Speaker 2: Oh, I can't really be good, right, We're having this
• 23:40
  Speaker 2: massive financialization. People are going to choose bad options if
• 23:44
  Speaker 2: there are this many choices to make.
• 23:48
  Speaker 4: That may hold true, but I don't know that I
• 23:50
  Speaker 4: take it as bad news.
• 23:53
  Speaker 3: No, not on the surface. There are probably too many
• 23:56
  Speaker 3: active managers in existence. And I say that because dous
• 24:00
  Speaker 3: most underperform. They are so called. Yeah, I was trying
• 24:06
  Speaker 3: to think of a more relatable way to say it.
• 24:07
  Speaker 3: There indices may not be a way to say, let's
• 24:11
  Speaker 3: just call the S and P five hundred your typical
• 24:13
  Speaker 3: active manager benchmark, and the S and P five hundred
• 24:16
  Speaker 3: is just a collection weighted by the value of stock outstanding,
• 24:22
  Speaker 3: the so called market capitalization or market cap of leading
• 24:26
  Speaker 3: which S and P defines US companies that you can
• 24:30
  Speaker 3: buy very, very inexpensively, just a couple of percents of
• 24:35
  Speaker 3: a percent expenses typical on an index fund these days.
• 24:40
  Speaker 3: So you could do that, or you could buy an
• 24:41
  Speaker 3: active strategy that attempts to outperform the S and P
• 24:46
  Speaker 3: five hundred, that attempts to beat that as an index fund.
• 24:49
  Speaker 3: I get the sense that there are way more actively
• 24:52
  Speaker 3: managed products, whether you're talking ETFs or mutual funds, than
• 24:55
  Speaker 3: there are than there are view 's on one company's
• 25:02
  Speaker 3: likelihood about performing over another. In other words, there are
• 25:06
  Speaker 3: way more ETFs and mutual funds than there are diverse
• 25:11
  Speaker 3: of views on stocks in the marketplace. YEA, that's I'm
• 25:16
  Speaker 3: gonna have to think about how I just phrased that,
• 25:18
  Speaker 3: But you know what I mean.
• 25:20
  Speaker 2: I guess I am more if I had to choose
• 25:25
  Speaker 2: one of these, I'm more concerned about the dramatic, dramatically
• 25:31
  Speaker 2: lower number of stocks available for purchase on the public
• 25:34
  Speaker 2: markets and the tendency for companies to stay private longer,
• 25:38
  Speaker 2: mainly because that's a limited group who's able to access
• 25:42
  Speaker 2: those privately held companies than I am about the explosion
• 25:46
  Speaker 2: of exchange traded funds, and I don't.
• 25:48
  Speaker 4: Really care about that quite as much.
• 25:50
  Speaker 2: Yes, it makes choosing the right fund more difficult, but
• 25:53
  Speaker 2: I'm not sure that it represents a problem. The fact
• 25:57
  Speaker 2: that fewer companies are listing on public exchanges says something
• 26:01
  Speaker 2: to me about the dynamics of it, and I'm not
• 26:03
  Speaker 2: sure if it's I think it probably says a few things.
• 26:06
  Speaker 2: One regulatorily, it's just really difficult to be a publicly
• 26:09
  Speaker 2: traded company and expensive to be a publicly traded company
• 26:11
  Speaker 2: these days. And also that yeah, if you're not worth
• 26:16
  Speaker 2: you know, fifty one hundred million dollars, then you don't
• 26:19
  Speaker 2: get access to these companies in their infancy, when some
• 26:22
  Speaker 2: of them are growing rapidly and don't need access to
• 26:25
  Speaker 2: the public market funds anymore.
• 26:26
  Speaker 3: Both, it's the flip side of the explosion and so
• 26:29
  Speaker 3: called private equity. People go public because they need to
• 26:32
  Speaker 3: raise capital if you can do that at lessense from
• 26:37
  Speaker 3: passive investors, which pension funds are they're limited partners, as
• 26:40
  Speaker 3: are we. If you buy private equity through a mutual
• 26:45
  Speaker 3: fund vehicle, you have no say in how the private
• 26:48
  Speaker 3: equity manager runs their portfolio, similar to the arrangement with
• 26:51
  Speaker 3: public publicly traded securities. There are other ways to raise
• 26:56
  Speaker 3: capital now that's less costly ways.
• 26:59
  Speaker 2: The bactpone of the global auto supply chain at risk
• 27:02
  Speaker 2: from Trump's tariffs, And to me, the only surprising part
• 27:06
  Speaker 2: of all this is that the President and the White
• 27:08
  Speaker 2: House haven't done more to the benefit the big American
• 27:12
  Speaker 2: three automakers. I mean, that's the only piece of this
• 27:15
  Speaker 2: that has been a bit surprising to me. We're talking
• 27:18
  Speaker 2: about this at length. The auto industry across the globe
• 27:23
  Speaker 2: other than China faces a number of struggles as we
• 27:29
  Speaker 2: head into the second half of twenty twenty five and
• 27:31
  Speaker 2: twenty twenty six. Most of them I think are of
• 27:34
  Speaker 2: their own making. Honestly, like most of these things, I
• 27:38
  Speaker 2: don't think are because of the trade war and because
• 27:41
  Speaker 2: of this, that or the other. I think it's missteps
• 27:43
  Speaker 2: over and over by these automakers for decades now. They're
• 27:48
  Speaker 2: getting their lunch eaten by China.
• 27:50
  Speaker 4: Why is that?
• 27:51
  Speaker 2: Because they all went into the Chinese market and made
• 27:54
  Speaker 2: the same sacrifice that every company does, which is give
• 27:57
  Speaker 2: over your intellectual property for the promise of being able
• 28:01
  Speaker 2: to sell your vehicles into that growing market.
• 28:03
  Speaker 4: And guess what.
• 28:04
  Speaker 2: Now you have a bunch of really competitive Chinese automakers
• 28:07
  Speaker 2: who built themselves on the knowledge that they gained by
• 28:10
  Speaker 2: you doing business in your country. So that one's your fault. Two,
• 28:15
  Speaker 2: you way overestimated the demand for electric vehicles, at least
• 28:18
  Speaker 2: many automakers did. Toyota didn't, and a few others didn't,
• 28:21
  Speaker 2: But they spent all this money developing evs and battery
• 28:27
  Speaker 2: technology and manufacturing capability here domestically. Yes, some of that
• 28:31
  Speaker 2: was in reaction to Biden era policy, but again, you
• 28:35
  Speaker 2: weren't forced to do any of this, and you completely
• 28:38
  Speaker 2: misread the market. And so, yeah, the trade policy that's
• 28:44
  Speaker 2: ongoing right now could be the nail in the coffin
• 28:46
  Speaker 2: for some of these but it's only the latest piece
• 28:50
  Speaker 2: that has been a misstep on the part of these automakers.
• 28:53
  Speaker 2: And yeah, it's going to be a real challenge to
• 28:55
  Speaker 2: figure out what to do with these supply chains because
• 28:58
  Speaker 2: none of this is likely to be permanent in terms
• 29:00
  Speaker 2: of the tariffs that are in place.
• 29:04
  Speaker 3: Yeah, these tariffs are not manufacturer friendly.
• 29:07
  Speaker 2: Non manufacturer fund and they're also not congressionally approved, so
• 29:10
  Speaker 2: they have no likelihood of being in place.
• 29:12
  Speaker 3: For Mike car national economic policy is just a mess
• 29:16
  Speaker 3: right now. You could say I agree with certain parts
• 29:18
  Speaker 3: of it. Honest, people can disagree about what industry should
• 29:22
  Speaker 3: be protected and whether government should be in the business
• 29:25
  Speaker 3: of scooping up shares in private companies. The extreme left
• 29:29
  Speaker 3: and the extreme right both seem to agree that nationalization
• 29:32
  Speaker 3: is a good thing. To me, that's bewildering. We know
• 29:35
  Speaker 3: what happens when a government becomes involved and when the state,
• 29:38
  Speaker 3: any state, not just US government, becomes involved in the
• 29:40
  Speaker 3: management of a private company. Look at the British experience
• 29:43
  Speaker 3: following World War Two. They nationalized like crazy. The industry's
• 29:46
  Speaker 3: got flaccid and lazy and stagnant, and so Thatcher had
• 29:51
  Speaker 3: to unwind it and British growth suffered and the adjustment
• 29:56
  Speaker 3: was tough. We apparently need to learn that lesson again,
• 29:59
  Speaker 3: just like we need to learn about the value of
• 30:01
  Speaker 3: central bank fed in our case independence again. Like nobody's
• 30:05
  Speaker 3: tried this before, Like nobody thought historically buying up shares
• 30:09
  Speaker 3: in a government owning part of a private company would
• 30:13
  Speaker 3: somehow better align their interest with the public good. Civilizations
• 30:18
  Speaker 3: not just civilizations. That's overly, overly fancy way of putting in.
• 30:25
  Speaker 3: Democracies like ours, advanced sophisticated democracies have tried these policies before,
• 30:30
  Speaker 3: and they've They've ended up hurting, not helping growth. So
• 30:36
  Speaker 3: why we have to learn that lesson again is frustrating.
• 30:39
  Speaker 4: Let's take a quick break.
• 30:40
  Speaker 2: When we come back, want to talk a little bit
• 30:42
  Speaker 2: about the local New England economy for a moment. Here
• 30:45
  Speaker 2: there's a report on the Massachusetts biotech industry. Cover that
• 30:49
  Speaker 2: next here in the Financial Exchange Business.
• 30:52
  Speaker 1: And financial news affecting the markets and your wallet. We've
• 30:56
  Speaker 1: got it all straight from Wall Street right here on
• 30:59
  Speaker 1: the Financial extra Change Radio network.
• 31:06
  Speaker 5: The Financial Exchange is a proud partner of the Disabled
• 31:09
  Speaker 5: American Veterans Department of Massachusetts. And now's the perfect time
• 31:12
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• 31:37
  Speaker 2: Well Mark, I'm covering the next story entirely to toot
• 31:39
  Speaker 2: our own horn. I don't remember exactly when we talked
• 31:43
  Speaker 2: about this, but I remember having a conversation on this
• 31:45
  Speaker 2: program about the Trump administrations looking at funding of different programs,
• 31:52
  Speaker 2: especially universities and scientific research, and.
• 31:57
  Speaker 4: I wondered out loud if this could lead to in
• 32:01
  Speaker 4: especially a difficult time for the greater Boston region.
• 32:05
  Speaker 2: I just, you know, looking at employment in the public
• 32:08
  Speaker 2: education sector, looking at employment and investment in.
• 32:13
  Speaker 4: The biotech industry.
• 32:15
  Speaker 2: A lot of that stems at least initially from public investment.
• 32:19
  Speaker 2: Right It's public research grants. It's all the money that
• 32:21
  Speaker 2: was spent during COVID on researching vaccines, and that stuff
• 32:26
  Speaker 2: has dried up. VC investment in Massachusetts based companies dropping
• 32:29
  Speaker 2: more than seventeen percent to two point seven billion dollars
• 32:33
  Speaker 2: for the first half of twenty twenty five. That compares
• 32:36
  Speaker 2: to the same that's compared to the same period in
• 32:38
  Speaker 2: twenty twenty four. It's also the lowest level since twenty seventeen.
• 32:43
  Speaker 2: Master's projected to receive around four hundred and sixty three
• 32:46
  Speaker 2: million dollars less in National Institutes of Health funding this
• 32:51
  Speaker 2: year compared to what it did in twenty twenty four.
• 32:54
  Speaker 2: And then firms invested eight billion dollars in Massachusetts biotech
• 32:58
  Speaker 2: companies in twenty twenty and more than thirteen billion in
• 33:01
  Speaker 2: twenty twenty one. So we are seeing this big drop
• 33:04
  Speaker 2: off here in the Massachusetts and I would say greater
• 33:07
  Speaker 2: Boston and greater New England economy. This is an industry
• 33:11
  Speaker 2: that's kind of reached its tentacles out throughout New England.
• 33:15
  Speaker 2: Big base obviously in Cambridge and in the Boston area
• 33:18
  Speaker 2: in general. But there's even an empty lot that's been
• 33:21
  Speaker 2: sitting empty and flattened for a few years now that
• 33:23
  Speaker 2: was supposed to be lab space for the biotech industry
• 33:27
  Speaker 2: and the old If you know this area and you've
• 33:30
  Speaker 2: ever driven down one twenty eight in Needa, Massachusetts, there
• 33:34
  Speaker 2: used to be a big old Muzzy Ford car dealership.
• 33:38
  Speaker 2: That sign was kind of well known in the area.
• 33:41
  Speaker 2: That thing has been empty now for what is it
• 33:45
  Speaker 2: low it's four years more than that four plus years
• 33:49
  Speaker 2: because they can't find a tenant and can't figure out
• 33:51
  Speaker 2: what to build, because that booming demand for all this
• 33:54
  Speaker 2: lab space has pretty much evaporated. On the other hand,
• 33:59
  Speaker 2: it's not as though we've seen a massive spike in
• 34:01
  Speaker 2: unemployments in Massachusetts or any of these other pieces.
• 34:04
  Speaker 4: But should this.
• 34:06
  Speaker 2: Continue, it's an area that could look a lot different
• 34:09
  Speaker 2: than it has for the last five years.
• 34:11
  Speaker 3: Yeah, hard to say how much of this is attributable
• 34:13
  Speaker 3: to maybe a hangover effect from the frenzy of investment
• 34:16
  Speaker 3: that happened during the early twenty twenties for obvious reasons.
• 34:20
  Speaker 3: We were all scrambling for a COVID cure. The promise
• 34:24
  Speaker 3: of mRNA technology was apparent after the COVID vaccine success,
• 34:33
  Speaker 3: So I don't know. They don't provide here a longer
• 34:35
  Speaker 3: term look. VC a venture capital, which is a subcategory
• 34:41
  Speaker 3: of so called private equity, which we were talking about earlier.
• 34:44
  Speaker 3: The pace of vcs putting capital to work has slowed globally,
• 34:52
  Speaker 3: so this is partly that. I don't deny that the
• 34:55
  Speaker 3: uncertainty with respect to grants and other forms of federal
• 34:59
  Speaker 3: funny has something to do with it, But it's hard
• 35:02
  Speaker 3: to at least based on what we are looking at here,
• 35:05
  Speaker 3: which is very little. Hard to say how much of
• 35:07
  Speaker 3: what's happened lately is attributable to trumps, which are all
• 35:12
  Speaker 3: of funds from universities, which hits mass, especially art as
• 35:15
  Speaker 3: you said, versus larger trends.
• 35:18
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• 36:15
  Speaker 2: New York Times reporting that as housing demand continues to fall,
• 36:18
  Speaker 2: builders getting creative by lowering prices and adding incentives. Can
• 36:25
  Speaker 2: we talk about what the word creativity means for a moment,
• 36:29
  Speaker 2: creative would be I don't know, like changing the type
• 36:32
  Speaker 2: of homes you build, or using new materials, or building
• 36:36
  Speaker 2: smaller homes or something to get at the overall situation.
• 36:41
  Speaker 2: Can we all agree that lowering the price on a
• 36:43
  Speaker 2: home is not being creative. I just think it's the
• 36:46
  Speaker 2: wrong word. This isn't surprising. There is a huge lack
• 36:51
  Speaker 2: of demand, in lack of demand for new homes from people,
• 36:57
  Speaker 2: especially in Florida, Texas, Colorado, Louisiana, some of these markets
• 37:03
  Speaker 2: that have been over supplied by housing over the course
• 37:06
  Speaker 2: of the last several years.
• 37:08
  Speaker 4: And so it's a swing back in the other direction.
• 37:11
  Speaker 3: There is a nod to some of that here doing
• 37:13
  Speaker 3: things like making do with what you've got. Unfortunately, we
• 37:16
  Speaker 3: don't have good data because the national market is so fragmented.
• 37:20
  Speaker 3: We should know what the average home size new construction
• 37:24
  Speaker 3: is as of say twelve thirty one, twenty twenty four,
• 37:27
  Speaker 3: but to my knowledge, we don't because again, because.
• 37:31
  Speaker 4: It's very fragmented.
• 37:32
  Speaker 2: Yeah yeah, yeah, we got to take a quick break here.
• 37:35
  Speaker 2: Markets opening in mixed territory at the moment. Dowd down,
• 37:38
  Speaker 2: SMP and Nasdaq both up. Will be covering that and
• 37:43
  Speaker 2: a heck of a lot more in the second hours.
• 37:44
  Speaker 2: To stay tuned, folks,