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Bond Market Fears Meet a Still-Strong Consumer · The Financial Exchange Show

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Speaker 1: is The Financial Exchange with Chuck Zotta and Mike Armstrong.
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Speaker 2: It's Chuck, Mike, and Tucker with you here.
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Speaker 3: Hope you all had a great weekend.
1:15
Speaker 2: As we kick into the first full week of October....
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Speaker 3: Calendar's a little light this week. We had ISM services
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Speaker 3: data this morning. We get FOMC minutes on Wednesday. Jobless
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Speaker 3: claims Thursday. Consumer sentiment Friday.
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Speaker 2: Take it or leave it.
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Speaker 3: I don't really care about it at this point because
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Speaker 3: I think that index is broken. But we kick things
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Speaker 3: off today with a great topic. The fiscal apocalypse, which is...
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Speaker 3: Not my favorite apocalypse, if we're picking... What's yours, like
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Speaker 3: the AI apocalypse?
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Speaker 4: No, I mean.
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Speaker 3: Is that going to turn into your top three? No,
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Speaker 3: I mean, favorite apocalypse has to be the zombie apocalypse, personally.
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Speaker 3: You know, that's as good as it gets.
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Speaker 5: As long as they're not the fast zombies.
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Speaker 3: I know, I don't like the trend in modern zombie
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Speaker 3: lore where somehow they gain speed on normal humans.
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Speaker 2: That doesn't click with me. I'm not saying they need... Yeah,
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Speaker 2: like World War Z, like too fast. Yeah, you know,
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Speaker 2: I'm not saying The Last of Us... Yeah, yeah. I'm
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Speaker 2: not saying they need to be.
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Speaker 4: I like The Walking Dead speed.
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Speaker 2: Right. That's a good zombie speed. They walk. There's a
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Speaker 2: reason why.
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Speaker 3: It's like, yeah, what's this guy doing over here? Right,
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Speaker 3: there's a reason why no one's ever been called The
2:31
Speaker 3: Running Dead... You know, like, that's just not coherent with
2:36
Speaker 3: the theme.
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Speaker 4: Jogging dead.
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Speaker 6: But with the fiscal apocalypse, okay. Choose the way we die.
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Speaker 6: With the fiscal.
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Speaker 3: Apocalypse, this does raise the question of what happens to, like,
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Speaker 3: fish when they become zombies.
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Speaker 2: The swimming dead? The floating dead? The bobbing dead?
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Speaker 5: Financial exchange, asking the hard questions.
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Speaker 7: Fiscal apocalypse.
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Speaker 2: Fiscal apocalypse.
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Speaker 3: What is the fiscal apocalypse? So this is the first
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Speaker 3: thing that you need to understand. When we talk about
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Speaker 3: the fiscal apocalypse, we're not talking about like a financial crisis.
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Speaker 3: We're not talking about a recession. Specifically, we are talking
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Speaker 3: about the idea of a debt spiral where, hey, as
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Speaker 3: the amount of debt goes up, it ends up resulting
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Speaker 3: in higher interest costs, which then result in more debt,
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Speaker 3: which there's not enough buyers for. which results in higher
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Speaker 3: interest costs, and it spirals.
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Speaker 2: It feeds on itself. And I do agree with.
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Speaker 3: The first premise here before the MDASH that's in the title.
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Speaker 3: Surging treasury yields don't signal a U.S. fiscal apocalypse. You
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Speaker 3: don't need to say the yet piece, okay? Because yet
3:51
Speaker 3: implies that you're going to, by definition, see a fiscal
3:56
Speaker 3: apocalypse at some point. which I don't know that those
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Speaker 3: facts are in evidence. Now, I'm not saying that the U.S.
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Speaker 3: fiscal situation is good. Those of you who have listened
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Speaker 3: to our show for more than the last five minutes
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Speaker 3: know that we generally have talked about, hey, no one
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Speaker 3: is serious about reining in the debt, and no one
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Speaker 3: has been.
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Speaker 2: For 30 years.
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Speaker 5: And zombies.
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Speaker 2: They haven't reined in the debt either.
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Speaker 6: Correct.
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Speaker 2: Here's the deal.
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Speaker 3: We've talked about this a lot the last month or
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Speaker 3: so because it's one of like the two things everyone
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Speaker 3: wants to talk about now is like, hey, is like
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Speaker 3: the U.S. debt going off the rails and is AI
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Speaker 3: going to kill us? We only like to talk about
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Speaker 3: the bad things, I guess, in this world. But our
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Speaker 3: answer on one of them, at least, is we're fine
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Speaker 3: for the moment. And that is on the debt side
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Speaker 3: of things. And again, it's not to say that things
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Speaker 3: are hunky-dory, like you're running 6% deficits.
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Speaker 2: It's not good. But here's the deal.
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Speaker 3: In the last month, and I keep giving people new
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Speaker 3: numbers on this just because they continue to reinforce my belief,
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Speaker 3: the 10-year Treasury has gone from 5.01% to 5.31%, up
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Speaker 3: 30 basis points. So yields up is a condition of
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Speaker 3: the fiscal apocalypse. The yields have to be rising, which...
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Speaker 3: They are. Number two, fiscal apocalypse. If the problem is that, hey,
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Speaker 3: it's creating this cycle where there's not enough demand for
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Speaker 3: your debt and so that feeds into higher yields, which
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Speaker 3: reinforces it, then your currency should also be weakening. The
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Speaker 3: dollar in the last month has gone from $ 99.
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Speaker 2: 57 to $ 102.
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Speaker 4: 32.
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Speaker 2: Michael, is $ 102 smaller than $ 99?
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Speaker 1: No.
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Speaker 4: No.
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Speaker 2: Even a zombie can agree on this. Not that I'm
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Speaker 2: calling you a zombie.
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Speaker 5: You seemed like you were.
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Speaker 2: I'm just saying.
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Speaker 5: You at least implied it.
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Speaker 3: No, I was trying to go the Geico, you know,
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Speaker 3: so simple a caveman could do it. This was, hey,
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Speaker 3: so simple a zombie can do it.
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Speaker 5: Oh, okay.
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Speaker 3: That's where I was going. Not so simple an Armstrong
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Speaker 3: can do it. That would be inappropriate for a Monday. So,
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Speaker 3: the dollar has strengthened 2.5%.
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Speaker 5: While yields have risen.
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Speaker 1: Hmm.
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Speaker 2: Good.
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Speaker 3: Not fiscal apocalypsy. And furthermore, gold has gone from $ 42. 72
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Speaker 3: on the spot price. Again, I'm not using the futures.
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Speaker 3: I'm using spot. Gone from $ 42. 72 to $ 41.
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Speaker 2: 44. Gold has weakened.
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Speaker 3: Again, it's not people scrambling for hard assets because the
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Speaker 3: debt is running.
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Speaker 2: Away with itself. So... fundamentally, these are the three things.
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Speaker 3: Again, if you just look at yields, you can make
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Speaker 3: a story out of anything, but you need to look
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Speaker 3: at how things are going across different asset classes in
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Speaker 3: different areas. And what I'm seeing is that between yields, currency,
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Speaker 3: and hard assets, things are not moving in a way
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Speaker 3: that suggests the fiscal apocalypse is upon us.
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Speaker 5: So I agree on all those things, Chuck.
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Speaker 6: One of the things that I think people clearly like
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Speaker 6: to do, though, is dream up the scenarios under which
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Speaker 6: you could get there. So I want to dream up
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Speaker 6: the scenarios under which we could get to a fiscal apocalypse.
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Speaker 6: Because the thing that we talk about consistently, like why
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Speaker 6: running these big deficits is such a problem, is not
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Speaker 6: because there's some magical.
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Speaker 5: Number after which you hit, everything falls apart.
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Speaker 2: Right?
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Speaker 5: Like we hit $ 40 trillion, I didn't think we'd get here.
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Speaker 3: And It's a big round number, which everyone loves to
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Speaker 3: talk about, which that also happened in the last month.
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Speaker 3: So people are like, oh, the debt's $ 40 trillion and
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Speaker 3: now yields are going up.
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Speaker 1: Right.
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Speaker 5: I get it.
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Speaker 2: Like, big round numbers. Like, I get it.
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Speaker 6: So, you know, what concerns me would be we are
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Speaker 6: currently running not dollar deficits, but, you know, percentage of
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Speaker 6: GDP deficits that we rarely see outside of deep, deep
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Speaker 6: recession like 2009 or, you know, big global wars, which arguably,
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Speaker 6: you know, we are– finding ourselves in one right now
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Speaker 6: or a couple between, you know, funding Ukraine and the
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Speaker 6: situation in the Middle East. But the concern would be
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Speaker 6: what happens if the economy falters, right? And pick your,
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Speaker 6: you know, pick your cause however you'd like. I practically
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Speaker 6: think the most easy one that comes to mind would
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Speaker 6: be overhype on the AI leading to a lack of
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Speaker 6: investment there. The question then becomes to me, what do
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Speaker 6: you need to do to stimulate the economy again and
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Speaker 6: make sure that the unemployment situation doesn't become horribly burdensome?
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Speaker 6: And again, I think all of this stuff is tough
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Speaker 6: to envision to some degree, but what you would logically
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Speaker 6: do would be increase spending at the government level further.
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Speaker 6: And if that then sparked a bunch of inflation, which again,
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Speaker 6: pretty tough to happen because usually when we get a big,
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Speaker 6: scary recession... It comes with a whole bunch of demand
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Speaker 6: just drying up out of the economy, and therefore prices fall.
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Speaker 6: Tough to have $ 100 oil when nobody's driving to their
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Speaker 6: job because they lost their job.
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Speaker 5: But hypothetically, you could get.
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Speaker 6: That situation where economy weakens, Fed feels that they need
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Speaker 6: to make a choice between combating inflation and combating higher unemployment.
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Speaker 6: They choose the unemployment side of the equation. that leads
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Speaker 6: to higher inflation. And you find yourself suddenly in this
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Speaker 6: position where, oh yeah, the government spending that used to
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Speaker 6: lift the economy and get things back on track just
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Speaker 6: doesn't have the same effect because it's already so big.
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Speaker 6: And so to me, that's the easiest one to paint,
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Speaker 6: but also acknowledging for a moment, really tough for me
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Speaker 6: to envision it actually happening, right? The circumstances you need
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Speaker 6: to get to see both high unemployment and high inflation
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Speaker 6: are are fairly unique, which is why the only time
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Speaker 6: we really saw it was back in the 1970s.
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Speaker 2: Yeah, it's a very rare phenomenon.
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Speaker 3: If we look just at, again, some of the things that,
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Speaker 3: you know, you look at, you say, okay, like, this
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Speaker 3: is not ideal. Back in 2000, actually, let's do this.
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Speaker 3: If you go back to 2007, the federal government was
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Speaker 3: spend $ 2. 99 trillion, call it $ 3 trillion.
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Speaker 2: Just as an example.
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Speaker 3: Of that spending, about $ 400 billion, give or take a
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Speaker 3: few billion, because we're all friends here, it's just a
10:32
Speaker 3: few billion.
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Speaker 7: Dollars, $ 400.
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Speaker 3: Billion out of the $ 3 trillion was debt service. So
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Speaker 3: you do the math out, and you say, okay, $ 400
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Speaker 3: into $ 3 trillion, about 13% of our spending in 2007.
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Speaker 3: went to servicing the federal debt.
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Speaker 2: Got it.
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Speaker 3: Now remember, before that, interest rates were in this range.
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Speaker 3: We didn't have crazy low interest rates.
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Speaker 2: By the time we got to, I.
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Speaker 3: Don't know, by the time we got to, let's call
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Speaker 3: it 2019, federal budget was $ 4. 8 trillion. Okay, so it
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Speaker 3: expanded quite a bit. And debt service was $ 564 trillion.
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Speaker 3: So again, you do the math, 564 into 4,800, and
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Speaker 3: you say debt service was around 12% of all expenditures.
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Speaker 3: But that was during a period where the deficit expanded
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Speaker 3: a ton, but interest rates went from being, you know,
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Speaker 3: 4-5% pre-crisis to 1-2% post-crisis. Today, in this world right now,
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Speaker 3: federal government, through Q2 of.
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Speaker 2: 26, spent $ 7. 7 trillion. okay, in the previous 12 months.
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Speaker 2: All right.
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Speaker 3: So 7.7 trillion. Interest expense was 1.28. So again, now
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Speaker 3: you do the math out and you say, okay, debt
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Speaker 3: service is up to like 16, 17% of our spending.
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Speaker 3: And this is the problem is that like it crowds
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Speaker 3: out other spending potentially, or, you know, becomes such a
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Speaker 3: big line item that it just, you know, it kind
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Speaker 3: of compounds on itself and becomes an issue. So When
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Speaker 3: does it become an issue?
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Speaker 2: No one knows. Again, this is not physics.
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Speaker 3: And it's not to say that it definitely has to,
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Speaker 3: but it's on a very concerning trajectory. And so I
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Speaker 3: understand if people out there are concerned about the amount
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Speaker 3: of debt that is being issued and what it means
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Speaker 3: for the future sustainability of the U.S.
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Speaker 2: Fiscal situation.
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Speaker 3: But that doesn't mean that the recent rise in interest
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Speaker 3: rates has anything to do with that. It's not like
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Speaker 3: we suddenly just woke up and are like, hey, there's debt.
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Speaker 3: It's been coming. We've known, man.
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Speaker 2: Counterpoint.
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Speaker 3: Hey, these things are the kind of things that can
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Speaker 3: happen slowly, slowly, slowly, and then suddenly. But none of
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Speaker 3: the data is suggesting that we're in that suddenly phase
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Speaker 3: because we're not getting confirming signals from the dollar, precious metals,
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Speaker 3: or anything else.
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Speaker 2: That would suggest it.
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Speaker 7: And.
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Speaker 6: Before you assume that we're about to get to the
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Speaker 6: sudden stage, I will also just mention that people have
13:12
Speaker 6: been warning about us reaching the sudden stage for much
13:17
Speaker 6: of modern history.
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Speaker 2: Yeah. Like since the 1980s.
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Speaker 3: If you've built a career on, oh, it's going to
13:23
Speaker 3: become a problem now, your career probably hasn't lasted very long.
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Speaker 2: Let's take a quick break.
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Speaker 3: When we come back, we'll talk a little bit about
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Speaker 3: what we're seeing from Scott Besant and the U.S.
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Speaker 2: Treasury next.
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14:05
Speaker 2: All right, we got a piece here in Bloomberg.
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Speaker 3: The title is Scott Besson's rosy forecaster putting his credibility
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Speaker 3: at risk.
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Speaker 2: I'll quote here.
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Speaker 3: In his 20 months on the job, Treasury Secretary Scott
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Speaker 3: Besson has made a habit of putting his economic predictions
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Speaker 3: on the record. The housing market, he said, in February
14:22
Speaker 3: 2025 will unfreeze within weeks and inflation could quickly return
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Speaker 3: to the Federal Reserve's 2% target. In April, he offered
14:28
Speaker 3: a forecast that spoke directly to the pocketbook concerns of
14:31
Speaker 3: many Americans. I'm optimistic that any time... that sometime between
14:35
Speaker 3: June 20th and September 20th that we can have $ 3
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Speaker 3: gas again. He's made similar rosy projections for economic growth,
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Speaker 3: budget deficits, and more. And then the next sentence in
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Speaker 3: the next paragraph is, most of those forecasts have been
14:47
Speaker 3: off the mark. So the question is, hey, is Besant
14:54
Speaker 3: in his role? And make no mistake, I think Besant
14:56
Speaker 3: has probably been I can't remember another Treasury Secretary that
15:03
Speaker 3: has been so media-forward in terms of consistently showing up
15:10
Speaker 3: on talk shows. He's always out there.
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Speaker 5: Yeah.
15:14
Speaker 6: I was going to ask, is this piece about Scott
15:17
Speaker 6: Bessant hurting his personal future credibility? Because I read it
15:22
Speaker 6: more as, here's how he could hurt Treasury credibility. And
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Speaker 6: my question is, I do think that matters if that's
15:31
Speaker 6: what it's about, but I think we should define why
15:33
Speaker 6: that matters because we talk all the time about credibility
15:36
Speaker 6: at the Federal Reserve and how important that function is.
15:40
Speaker 6: It's fundamentally different when you're talking about a political appointee
15:43
Speaker 6: whose job is to cheer, part of his job or
15:46
Speaker 6: her job is to cheerlead the policies of the administration.
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Speaker 3: I think it's different. So there's a few different things here.
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Speaker 3: The first is Again, go back through U.S. Treasury secretaries
16:00
Speaker 3: that we've had. And again, look, I haven't been alive
16:04
Speaker 3: for 250 years of Treasury secretaries, so I can't tell
16:08
Speaker 3: you how much Alexander Hamilton was out there, though his.
16:11
Speaker 2: Play suggests it was quite a bit.
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Speaker 5: Yeah. I had no idea he had such a meteoric
16:18
Speaker 5: rapping career.
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Speaker 2: Exactly.
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Speaker 3: So here's the thing. You go back through the last...
16:24
Speaker 3: Treasury secretaries that we've had. Janet Yellen was not out
16:28
Speaker 3: doing Sunday shows every week. Steve Mnuchin, first Trump administration.
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Speaker 3: Had a public, like more public facing, but not like this.
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Speaker 2: Yeah, agreed. Jack Lew.
16:40
Speaker 3: Does anyone even know who Jack Lew was aside from me?
16:44
Speaker 3: I remember Jack, but I couldn't have named him if
16:46
Speaker 3: you asked me for the Treasury secretary.
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Speaker 2: Correct. Tim Geithner.
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Speaker 3: People know the name because it was during the recovery
16:53
Speaker 3: from the great financial crisis. Same with Hank Paulson.
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Speaker 1: Yeah.
16:56
Speaker 3: Does anyone know who the two treasury secretaries were in
17:00
Speaker 3: George W.
17:01
Speaker 2: Bush's first term?
17:03
Speaker 1: No.
17:04
Speaker 2: Paul O'Neill, not the Yankees left fielder. Right fielder?
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Speaker 4: I thought he was a right fielder.
17:11
Speaker 2: Right fielder.
17:11
Speaker 6: I didn't know they were a baseball player or a
17:13
Speaker 6: treasury secretary named Paul O'Neill.
17:14
Speaker 2: And John Snow, not of the Night Watch.
17:18
Speaker 6: Yeah.
17:19
Speaker 5: So.
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Speaker 6: Okay, let's take the obvious stance here, then, that Besant
17:25
Speaker 6: appears to be taking a much more public-facing role within
17:28
Speaker 6: this administration than Treasury Secretaries before him. Correct.
17:32
Speaker 3: Because the Treasury Secretary's job is generally pay the bills
17:35
Speaker 3: and don't get noticed. You're kind of like an offensive
17:38
Speaker 3: lineman in football.
17:39
Speaker 1: Right.
17:39
Speaker 6: And so if you're thrust into that position, I would
17:41
Speaker 6: say it's pretty natural that you are going to have
17:44
Speaker 6: a whole bunch of forecasts that turn out to be wrong.
17:47
Speaker 5: Frankly... go pull our tape.
17:49
Speaker 6: If you talk 10 hours a week, you're going to
17:52
Speaker 6: say things that in hindsight look pretty stupid.
17:54
Speaker 2: Like thinking that we'd have a Hyperloop running by now.
18:00
Speaker 2: You're welcome. That was me about 10 years ago. Here's
18:05
Speaker 2: the thing.
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Speaker 3: I don't think that this hurts the credibility of the U.S.
18:10
Speaker 3: Treasury Department because as long as they can pay the bills,
18:12
Speaker 3: which hint, they always can, then you're not going to
18:16
Speaker 3: have issues there. What hurts the credibility of the U.S.
18:19
Speaker 3: Treasury Department more, quite honestly, is when we go through
18:21
Speaker 3: all the debt ceiling nonsense and we're like, oh, like
18:24
Speaker 3: maybe we'll pretend not to pay the bills for.
18:25
Speaker 2: Like a week or two. And it's like, guys, what
18:27
Speaker 2: are we doing here?
18:28
Speaker 5: I'll say one thing.
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Speaker 6: You know, Besson came out pretty strong earlier this early
18:34
Speaker 6: in September with the stated goal of controlling interest rates
18:37
Speaker 6: and failed miserably to do so. And I don't know
18:40
Speaker 6: that his words on that have any power going forward.
18:43
Speaker 3: But that's not his job. That's the point I'll make.
18:47
Speaker 3: The Treasury Department is not tasked with capping interest rates
18:53
Speaker 3: at a certain point.
18:54
Speaker 2: But they did attempt to do so.
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Speaker 3: I don't think this is a Treasury issue so much
19:02
Speaker 3: as a Besant issue.
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Speaker 5: In that.
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Speaker 2: Look, remember, Besson, his whole promise.
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Speaker 3: In when he was, you know, campaigning for treasury secretary
19:11
Speaker 3: in the year before the 2024 election, it was this
19:14
Speaker 3: idea of the 3-3-3 plan. We're going to get deficits
19:17
Speaker 3: down to 3%, produce 3 million.
19:19
Speaker 2: More barrels of oil.
19:21
Speaker 3: And I forget what the third three was even, but
19:24
Speaker 3: none of them are happening is my point. These are
19:27
Speaker 3: Besson issues, not treasury whose job is to pay the bills.
19:32
Speaker 3: I'll get the third three for you after the break.
19:34
Speaker 2: Quick break here.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
19:44
Speaker 1: Breaking business news is always first, right here on the
19:47
Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
19:53
Speaker 1: Tracking the stocks, the data, and the headlines driving markets
19:56
Speaker 1: so far today, right here on the Financial Exchange Radio Network.
20:00
Speaker 4: Markets are mixed to begin the week as the bond
20:02
Speaker 4: market continues to remain in focus where treasury yields remain
20:05
Speaker 4: at multi-year highs. And now the Dow is off about
20:09
Speaker 4: a third of a percent or 149 points lower. S
20:12
Speaker 4: & P 500 is up a third of a percent
20:15
Speaker 4: or 24 points up. NASDAQ up two-thirds of a percent
20:18
Speaker 4: or 166 points. Russell 2000 is up over a quarter.
20:21
Speaker 2: Of a percent.
20:22
Speaker 4: Ten-year Treasury yield is up three basis points at 5.315%.
20:25
Speaker 4: Crude oil down 1.5%, trading at $ 89 a barrel, while
20:28
Speaker 4: Brent is trading at $ 101 a barrel. Francis Schneider Electric
20:36
Speaker 4: agreed to buy U.S. industrial software maker PTC in an
20:40
Speaker 4: all-cash deal that values PTC at $ 22. 6 billion. That stock
20:46
Speaker 4: is jumping 34%. Meanwhile, Intel down nearly 2% after Elon
20:51
Speaker 4: Musk posted that his chip venture TerraLab was in talks
20:56
Speaker 4: to work with Intel competitor Taiwan Semiconductor. Bank of America
21:00
Speaker 4: upgraded DraftKings to buy from Neutral, saying the company's prediction
21:04
Speaker 4: markets are win-win. Shares in DraftKings are rallying 7%. Barclays
21:10
Speaker 4: upgraded Estee Lauder to overweight, saying it was bullish on
21:14
Speaker 4: the beauty company's growth and earnings profile over the next
21:17
Speaker 4: several years. Estee Lauder is up over 1.5%. And later
21:21
Speaker 4: this week, we'll see third quarter earnings start to trickle
21:23
Speaker 4: in from Delta, Pepsi, and Levi Strauss. Earnings season is
21:27
Speaker 4: ramps up next week when major banks, including JPMorgan Chase,
21:31
Speaker 4: Bank of America, and other, report their third quarter results.
21:34
Speaker 4: I'm Tucker Sullivan, and that is Wall Street Watch.
21:38
Speaker 2: I got the third three, Michael. Ooh.
21:40
Speaker 3: Scott Besson's 3-3-3 plan was 3% real GDP growth, increase
21:45
Speaker 3: oil production by 3 million barrels a day, and reduce.
21:50
Speaker 2: Budget deficits to 3%.
21:51
Speaker 5: Okay, we are far away.
21:54
Speaker 2: We're not close on any of those.
21:55
Speaker 3: The.
21:57
Speaker 3: GDP growth is basically continually running in the twos. This
22:00
Speaker 3: quarter is going to be hot.
22:01
Speaker 5: The deficit one was never fundamentally serious.
22:05
Speaker 6: I mean, none of them were, but you could have
22:08
Speaker 6: at least gotten some oil production increase before the war.
22:12
Speaker 5: These are preposterous.
22:14
Speaker 3: Yeah, I mean, you take a look at the deficit
22:16
Speaker 3: as a percentage of GDP. Do you know the last
22:19
Speaker 3: year that we were under 3%?
22:20
Speaker 1: Oh, 7? 2015. Okay.
22:20
Speaker 3: 2015 and 14. Aside from those, you're correct with 2007.
22:31
Speaker 3: So we've had two years in the last 19 with
22:35
Speaker 3: under 3% deficits.
22:38
Speaker 2: And other than that, they've all been bigger.
22:42
Speaker 3: Which is not great, given that for basically all of
22:47
Speaker 3: the last 20 years, we have not been in, you know,
22:52
Speaker 3: a large-scale military operation.
22:55
Speaker 6: Mm-hmm.
22:56
Speaker 2: Of any kind.
22:57
Speaker 1: Yep.
22:57
Speaker 2: Like, generally, like, you talk about 6% deficits, and... Look,
23:05
Speaker 2: before the.
23:05
Speaker 3: Last 20 years, the only time that the U.S. ever
23:09
Speaker 3: ran larger than 6% deficits was World War II.
23:12
Speaker 2: Yeah.
23:13
Speaker 5: Correct.
23:14
Speaker 3: Like, the only time in the last 100 years. I'm not, like, cherry-picking.
23:20
Speaker 3: It's the only time. The closest that we got aside
23:23
Speaker 3: from that was 1983.
23:25
Speaker 2: 1983? And that was in the midst.
23:27
Speaker 3: Of a two-year recession that saw significant unemployment and so
23:32
Speaker 3: lower tax receipts, higher outlays. But that's the closest that
23:37
Speaker 3: we got was 1983.
23:38
Speaker 6: And again, this is my concern, is what do you
23:40
Speaker 6: need to juice that to to stimulate the economy if
23:43
Speaker 6: it all falls apart?
23:45
Speaker 5: Ten.
23:45
Speaker 2: Yeah, it's going to be nuts. Legitimate.
23:48
Speaker 3: Here's what you see in recessions. You generally see the
23:52
Speaker 3: deficits expand by anywhere from.
23:56
Speaker 2: two to 6%.
23:56
Speaker 3: So that means that your annual deficits go from six
24:01
Speaker 3: to somewhere between eight and 12. That's not great. It's
24:07
Speaker 3: not great, but I digress. Uh, soft jobs report boosts
24:11
Speaker 3: market bets that fed will skip October rate increase. So
24:15
Speaker 3: that's the headline from the New York times. Uh, Friday,
24:17
Speaker 3: we got a jobs report that was, it was soft ish.
24:22
Speaker 6: I mean, I, yeah, the, the increase in unemployment rate
24:24
Speaker 6: was a rounding error. The revisions were relatively significant, but
24:29
Speaker 6: the July-August numbers were pretty blowout to the upside, so
24:32
Speaker 6: kind of brought them back in line with averages. And
24:35
Speaker 6: the job creation number for September was admittedly, you know,
24:39
Speaker 6: among the weaker of the year.
24:40
Speaker 2: I mean, here's the thing. We know that these get adjusted.
24:44
Speaker 3: Like, okay, so it came in at 29,000.
24:47
Speaker 2: The estimate was 90.
24:47
Speaker 3: If it gets revised up to 60, that's.
24:50
Speaker 2: Well within, like, the rounding error of the whole thing.
24:53
Speaker 2: And so, like.
24:54
Speaker 3: I saw people talking about this like, oh, this is
24:56
Speaker 3: a weak job report. I'm like, I'm not really sure
24:59
Speaker 3: it is. But what I will say is back-to-back days,
25:05
Speaker 3: we got some interesting items here in terms of what
25:09
Speaker 3: it meant for.
25:13
Speaker 2: The bond market.
25:13
Speaker 3: Because this is what matters to everything right now is
25:18
Speaker 3: the bond market.
25:20
Speaker 2: Is Thursday.
25:22
Speaker 2: Got it.
25:23
Speaker 3: We came in on Thursday and we saw hot ISM
25:27
Speaker 3: manufacturing with a prices paid number through the roof.
25:32
Speaker 2: And yet, what did we end up seeing?
25:35
Speaker 3: Well, bonds didn't sell off anymore. So you're like, oh,
25:39
Speaker 3: like all of the sellers are gone. Then on Friday,
25:43
Speaker 3: we get a weak jobs report. What do you normally
25:46
Speaker 3: do on a weak jobs report? You want to buy
25:48
Speaker 3: bonds because you're nervous the economy might be slowing. Well,
25:51
Speaker 3: bonds couldn't find a bid on Friday. So what it
25:55
Speaker 3: tells me to a certain extent is that we've got
25:59
Speaker 3: this range on the 10-year treasury now. It's between 5.1
26:05
Speaker 3: and 5.3, somewhere in that range. And to the high
26:10
Speaker 3: end of that, well, buyers are kind of willing to
26:12
Speaker 3: step in and get paid 5.3% now. And to the
26:15
Speaker 3: low end of that, sellers are still looking to exit
26:18
Speaker 3: because they're not sure that they want to be holding
26:20
Speaker 3: bonds in this environment now.
26:23
Speaker 2: So it suggests to me that we're.
26:26
Speaker 3: Maybe in a little bit of a range-bound place on
26:28
Speaker 3: bonds that maybe could drift a little higher. I still
26:31
Speaker 3: think there's some upward drift that's present now.
26:35
Speaker 1: But.
26:36
Speaker 3: The thing that's going to start biting is the fact
26:40
Speaker 3: that you've got real interest rates. Again, when you factor
26:43
Speaker 3: in inflation expectations, that's how it's typically done with tips, bonds,
26:47
Speaker 3: and things like that. You've got real interest rates that
26:50
Speaker 3: are the highest they've been in decades and that are
26:52
Speaker 3: typically at levels that are pretty restrictive. It doesn't show
26:56
Speaker 3: up right away because not everyone's buying a house today.
26:58
Speaker 3: Not everyone's buying a car. Not everyone is taking out
27:00
Speaker 3: a business loan. But I got to tell you, the
27:03
Speaker 3: next three to six months, I wouldn't be surprised if
27:05
Speaker 3: these higher real rates really start to bite the U.S.
27:08
Speaker 5: Economy.
27:09
Speaker 3: The question is, is it enough bite to overwhelm what's
27:12
Speaker 3: going on with the AI capex that's happening? And as
27:17
Speaker 3: we just discussed, these giant deficits that we're running. And
27:19
Speaker 3: I don't know the answer there.
27:20
Speaker 6: Yeah, it is really a tale of the AI economy
27:24
Speaker 6: versus everything else. Because these rates are quite restrictive for
27:27
Speaker 6: pretty much any business that is not supplying the AI
27:31
Speaker 6: build-out in some way, shape, or form. And by the way,
27:35
Speaker 6: that list of sectors and companies is massive, right? It
27:38
Speaker 6: is not just the tech sector and the chip.
27:41
Speaker 5: Sellers, right?
27:42
Speaker 6: You've got all sorts of services companies that supply utilities
27:46
Speaker 6: and everything in between that are benefiting too. But You know,
27:53
Speaker 6: go talk to homebuilders, go talk to, you know, others
27:57
Speaker 6: that are originating business loans. And it is not a
28:01
Speaker 6: not a conducive interest rate environment to, you know, business growth.
28:05
Speaker 3: So in terms of where we stand right now for
28:08
Speaker 3: rate hike possibilities, federal funds rate today is at three
28:14
Speaker 3: point seven five to four percent. Right now, there's nothing
28:17
Speaker 3: priced in for October in three weeks.
28:20
Speaker 6: Yep.
28:21
Speaker 3: There is a hike priced in for December and maybe
28:27
Speaker 3: another one in March.
28:29
Speaker 2: Three hikes.
28:30
Speaker 1: Yeah.
28:31
Speaker 6: And look, the Fed had given, there are a bunch
28:33
Speaker 6: of speakers that, you know, whether they were defying Warsh
28:37
Speaker 6: or just, you know, he gave them tacit approval to
28:40
Speaker 6: give these speeches, basically told the public that they would,
28:45
Speaker 6: saw a path to vote for no rate hike at
28:47
Speaker 6: this next meeting in October. And so, Friday's job report,
28:50
Speaker 6: I think all it did was provide that additional cover
28:53
Speaker 6: to avoid hiking rates in October, which is, again, not
28:57
Speaker 6: really a big deal.
28:58
Speaker 2: No, again, the U.S.
29:01
Speaker 3: Economy is strong enough to support rate hikes if those
29:04
Speaker 3: are what are needed to get interest rates into that
29:06
Speaker 3: restrictive place. The interesting piece is that the back end
29:10
Speaker 3: of the yield curve might have already done a lot
29:12
Speaker 3: of the work and the Fed might not need to
29:14
Speaker 3: hike too much. The counter, again, like you game this
29:17
Speaker 3: out because it's okay. What's the first order effect and
29:19
Speaker 3: how do people respond to that? And then, you know,
29:21
Speaker 3: you kind of go from there.
29:24
Speaker 2: Okay.
29:24
Speaker 3: So you've got, you know, these higher real rates now
29:26
Speaker 3: where like 30 year tips are at 3.4% real. The
29:31
Speaker 3: U S government also like is going to have trouble
29:33
Speaker 3: financing that long-term as well. Again, like you talk about
29:36
Speaker 3: more and more debt rolling.
29:38
Speaker 2: Up to these higher rates.
29:39
Speaker 3: So this does become potentially a problem that either a
29:43
Speaker 3: slows the economy or B, this is where the Treasury
29:46
Speaker 3: Secretary in the future at some point does have a
29:48
Speaker 3: role where they say, yeah, like these these interest expenses
29:52
Speaker 3: are just biting, we've got to figure out how to
29:54
Speaker 3: rein this in. Unfortunately, no one's going to like the
29:57
Speaker 3: answer to that, which is you've got to stop just
29:59
Speaker 3: giving people money and trying to do the fun stuff,
30:03
Speaker 3: which we're not good at. The last 30 years has
30:05
Speaker 3: just been all fiscal expansion. It's been all gas, no brakes.
30:11
Speaker 3: And the problem is eventually you come to a hairpin turn.
30:14
Speaker 3: You're like, oh, we've got to step on the brakes.
30:16
Speaker 3: And you're like, where's that pedal? And you're like, haven't
30:18
Speaker 3: used it in 30 years. Yeah, it's rusted out, and
30:21
Speaker 3: we don't know how to do that. So let's take
30:24
Speaker 3: a quick break. When we return, let's see.
30:29
Speaker 2: Do we want to talk consumer spending?
30:33
Speaker 5: Yeah, that's an interesting piece.
30:35
Speaker 2: I like that one. Let's go to that after we
30:37
Speaker 2: take a break here.
30:38
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30:59
Speaker 7: Peace in the Wall Street Journal.
31:11
Speaker 3: The mighty American consumer is crashing through inflation and driving growth.
31:16
Speaker 2: It's pretty wild.
31:16
Speaker 5: The dollar amount spent by U.S.
31:17
Speaker 6: Households rose by 6.1% in the 12 months that were
31:21
Speaker 6: through August. Obviously, a large portion of that is inflation,
31:25
Speaker 6: but you still have consumer spending boosted by 6.1% year
31:29
Speaker 6: over year.
31:30
Speaker 2: People are complaining about it. No one likes it. Sure.
31:33
Speaker 3: But it's also no longer the, dare I say, K-shaped economy,
31:39
Speaker 3: because we're seeing from whether it's Bank of America, PNC Bank,
31:43
Speaker 3: They are saying from their data, hey, it's not just
31:47
Speaker 3: that top third of spenders that's driving this now. The
31:50
Speaker 3: bottom two thirds have picked up as well. And so
31:52
Speaker 3: this is a more broad based trend in spending at
31:56
Speaker 3: this point.
31:57
Speaker 6: Now, what does this say to my point about the
31:59
Speaker 6: whole narrative that AI is the only thing that matters
32:02
Speaker 6: in this economy when you have consumer spending growing 6%
32:04
Speaker 6: year over year? Because it's certainly, I'm not sure it
32:08
Speaker 6: matters or not, but it's certainly contributing to growth.
32:11
Speaker 2: Here's the thing.
32:12
Speaker 3: Remember, inflation, depending on the metric that you want to
32:15
Speaker 3: look at, again, if you're taking a look at CPI,
32:20
Speaker 3: it's at 3.4. PCE is at 3.4. PPI is at 5.4.
32:24
Speaker 3: So call it, let's say inflation is 3.5. If consumer
32:28
Speaker 3: spending is rising at 6, it's only 2.5% real consumer
32:33
Speaker 3: spending growth, which is in line with basically where the
32:35
Speaker 3: economy has been growing, which gets to my point. Hey,
32:38
Speaker 3: the consumer has been fine for They're not a main
32:41
Speaker 3: driver of growth. They're not subtracting from it. They're just
32:45
Speaker 3: along for the ride, basically, because on an inflation-adjusted basis,
32:49
Speaker 3: they're not doing anything unique.
32:51
Speaker 2: Here are two.
32:52
Speaker 6: Things that I'm seeing that we've talked about, these things
32:53
Speaker 6: we've talked about over and over again. One would be
32:56
Speaker 6: a large and growing group of baby boomers who are
32:59
Speaker 6: retired and pretty readily able to deal with inflation based
33:04
Speaker 6: on COLA from Social Security plus portfolio values that are
33:08
Speaker 6: larger than they've ever been. And then second, you've got
33:12
Speaker 6: a demo that is in the, let's call it lower
33:17
Speaker 6: third of the earning spectrum that's actually seeing wage boosts
33:20
Speaker 6: pretty significantly right now because that's where all the tightness
33:23
Speaker 6: seems to be coming from the labor market is blue
33:25
Speaker 6: collar work where there is a lack of supply of
33:28
Speaker 6: labor that's driving up wages on that end.
33:31
Speaker 3: So I think it's interesting to watch where this goes,
33:33
Speaker 3: just because we still don't have any data from September,
33:36
Speaker 3: which is when the higher gas prices and diesel prices
33:39
Speaker 3: and things like that really kicked in. But through the summer,
33:42
Speaker 3: at least, guys, we've been saying it all year. There
33:45
Speaker 3: is no sign of actual spending weakness with the American consumer.
33:49
Speaker 3: There's a lot of grumbling, like none of us like
33:51
Speaker 3: what's going on from a pricing perspective. But consumer spending
33:55
Speaker 3: in the aggregate, not weakening.
33:58
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35:06
Speaker 2: Peace in the New York Times. U.S.
35:08
Speaker 3: And allies agree to release diesel reserves as prices soar.
35:12
Speaker 3: I'll quote here, under the plan, the group of seven countries,
35:14
Speaker 3: the US, France, Italy, Germany, Japan, Britain, and Canada, will
35:18
Speaker 3: release 100 million barrels of diesel and crude oil from
35:20
Speaker 3: strategic stockpiles over the coming four months. So you've got
35:25
Speaker 3: Europe agreeing to release some diesel. Again, the US does
35:28
Speaker 3: not have any strategic diesel reserves. Europe, on the other hand,
35:32
Speaker 3: holds most of their strategic reserves in diesel and gasoline
35:37
Speaker 3: rather than in crude. But The big thing here, and again,
35:42
Speaker 3: where I kind of came around to over the last
35:44
Speaker 3: week is, look, you don't keep saying, well, I might
35:47
Speaker 3: consider a diesel export ban if you're going to actually
35:51
Speaker 3: do it, because then everyone just exports the diesel before
35:53
Speaker 3: the ban.
35:53
Speaker 2: Like, you don't just keep talking about it. You just
35:55
Speaker 2: do it one day.
35:57
Speaker 3: It does seem like this was most likely the Trump
36:00
Speaker 3: administration trying to lean on Europe to do some kind
36:02
Speaker 3: of diesel release. The big thing, it's not making a
36:05
Speaker 3: huge difference in pricing. Diesel cracks, meaning the difference between
36:11
Speaker 3: what a refiner receives for diesel and what they have
36:14
Speaker 3: to pay for crude, are still right around $ 100 a barrel.
36:17
Speaker 3: So they're down from $ 110, $ 115. So some of the
36:20
Speaker 3: edges come off. But diesel cracks are normally around $ 30
36:24
Speaker 3: a barrel.
36:25
Speaker 6: I mean, diesel prices are down $ 0. 20 since their mid-September high.
36:30
Speaker 6: that is not largely due to this, uh, G seven
36:34
Speaker 6: release that has more refinery issues domestically. But I mean, look,
36:39
Speaker 6: take any reprieve you can get there. And 20 cents
36:42
Speaker 6: is 20 cents.
36:43
Speaker 3: We still need to just see how the next month,
36:45
Speaker 3: next two months, like basically through Thanksgiving, uh, that is
36:49
Speaker 3: the high risk period for diesel to move precipitously higher.
36:52
Speaker 2: Uh, It may, it may not.
36:55
Speaker 3: We don't know, but we're still sitting here 81 cents
36:57
Speaker 3: above the previous all-time high. And, you know, kind of
37:02
Speaker 3: watching to see your 71 cents rather, watching to see,
37:05
Speaker 3: you know, where things go. We're in such a steep
37:08
Speaker 3: part of the demand curve that small changes in supply
37:13
Speaker 3: have an outsized impact on price. So you could have
37:15
Speaker 3: a very small change in supply that drives price down
37:19
Speaker 3: by 20 cents, like we've seen with this one refinery
37:21
Speaker 3: coming back online. if you have more hiccups, you know,
37:26
Speaker 3: if there's a late season hurricane that hits, you know,
37:29
Speaker 3: the Gulf, sure. You could easily see things move higher.
37:33
Speaker 3: So it's, it's a very dangerous area and prices still
37:36
Speaker 3: remain very high, but maybe this helps to take some
37:39
Speaker 3: of the edge off and some of that risk, uh, as,
37:42
Speaker 3: as a result. Uh, so this is kind of where
37:46
Speaker 3: we stand as it relates to diesel right now. Uh,
37:49
Speaker 3: we're seeing prices settling into that, you know, 630 range,
37:54
Speaker 3: there may be a little bit more room to the downside,
37:56
Speaker 3: maybe another 10 to 12 cents based on what the
37:58
Speaker 3: wholesale market is showing. But there's not a ton of
38:01
Speaker 3: space out there. Just because the picture remains very tight,
38:06
Speaker 3: even with this release. Let's take a quick break.
38:09
Speaker 2: We got our two coming up in a little bit.