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Oil Surges, Stocks Slide — Is This Conflict About to Hit the U.S. Economy? · The Financial Exchange Show

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Speaker 1: making a donation Today. Face is the Financial Exchange with
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Speaker 2: Good morning, Welcome back to the Financial Exchange. If you
1:15
Speaker 2: liked the rebound we saw towards midday trading yesterday in stocks,
1:21
Speaker 2: you're not going to be terribly happy about what we're
1:23
Speaker 2: seeing this morning. The Dow Jones Industrial Average off about
1:26
Speaker 2: eleven hundred points two and a quarter percent, SMP down
1:28
Speaker 2: one point two percent, in the Nasdaq down four hundred
1:32
Speaker 2: and seventy seven two point one percent. As we mentioned yesterday,
1:36
Speaker 2: you shouldn't read too much into a single day move
1:39
Speaker 2: on stocks to interpret what investors might be doing next.
1:42
Speaker 2: But uh, you know, it's it's day two in trading
1:46
Speaker 2: at least of this conflict in Iran becoming a little
1:50
Speaker 2: bit clearer that it is not just going to wrap
1:52
Speaker 2: up in a couple of days, as the President himself
1:54
Speaker 2: has mentioned. And we're starting to see things move around
1:58
Speaker 2: in markets, and this time beyond just oil markets, though
2:01
Speaker 2: those are moving as well. We enter today with oil
2:05
Speaker 2: prices up an additional eight percent after I think closing
2:08
Speaker 2: up a good five to six percent yesterday. In total,
2:13
Speaker 2: that brings West Texas crude from about let's see sixty
2:18
Speaker 2: five bucks a barrel at the close on Friday up
2:21
Speaker 2: to where we are now at seventy seven dollars per barrel.
2:24
Speaker 2: We're obviously already seeing that filter into gas prices across
2:28
Speaker 2: the country.
2:28
Speaker 3: TRIPLEA puts the.
2:30
Speaker 2: Average to day at three dollars eleven cents per gallon,
2:35
Speaker 2: up from a little under three bucks a gallon as
2:38
Speaker 2: of late. And then the other piece that people are
2:41
Speaker 2: talking about, which we will get to why this is happening,
2:45
Speaker 2: but interest.
2:45
Speaker 3: Rates on the move.
2:46
Speaker 2: Mortgage rates the piece that people can most commonly relate to.
2:51
Speaker 2: As of yesterday, according to Mortgage News Daily, the average
2:55
Speaker 2: thirty year fixed rate mortgage had jumped from a just
2:58
Speaker 2: under six percent to six point one two percent yesterday
3:02
Speaker 2: and climbing further today. So I think, taken in the aggregate,
3:08
Speaker 2: whatever it was that drove equity market investors to be
3:11
Speaker 2: calm yesterday is clearly not carrying through to today. And obviously,
3:16
Speaker 2: as time goes on, we're learning a little bit more.
3:20
Speaker 2: And so I want to talk about some of the
3:21
Speaker 2: big economic disruptions that we concretely know about today across
3:27
Speaker 2: the Middle East, and then we you know, I don't
3:30
Speaker 2: really want.
3:30
Speaker 3: To hypothesize about how.
3:33
Speaker 2: Long this is going to go on how you know
3:37
Speaker 2: how much it will pull in other countries throughout the
3:40
Speaker 2: Middle East. That's pure conjecture, I think really starting with
3:43
Speaker 2: what we know today, one the straight of hormones effectively
3:48
Speaker 2: closed mainly not so much because they had the Iranians
3:52
Speaker 2: have effectively closed it, but the threats were enough to
3:55
Speaker 2: cause insurance companies to effectively cancel coverage for anybody that
4:00
Speaker 2: wants to navigate through the strait, and premiums in order
4:04
Speaker 2: to do so increase by as much as fifty percent,
4:06
Speaker 2: making that type of insurance just non.
4:09
Speaker 3: Viable for any sort of operators.
4:10
Speaker 2: And as has been cited elsewhere, a roughly twenty percent
4:13
Speaker 2: of global oil and LNG traverses through this choke point.
4:17
Speaker 2: So pretty clear what's happening in the oil markets. I
4:20
Speaker 2: think most people are aware of that. For those that
4:24
Speaker 2: don't travel regularly, either to the Middle East or through Asia,
4:28
Speaker 2: I think some might be surprised at just the volume
4:31
Speaker 2: of transit through those areas. You were talking before, Mark
4:35
Speaker 2: about several of these areas being financial hubs and people
4:38
Speaker 2: that work in financial services being kind of stranded there
4:41
Speaker 2: for the moment. Israel, Qatar, Syria, Iraq, Kuwait and the
4:45
Speaker 2: UAE partially closed their airspace, temporary shutdowns of some big
4:51
Speaker 2: global hubs, including Dubai, which a lot of flights fly
4:54
Speaker 2: through Doha Abu Dhabi. Over eighteen hundred flights were canceled
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Speaker 2: within the first forty eight hours of the conflict, and
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Speaker 2: that's leading to severe travel disruptions not only, but I
5:06
Speaker 2: think importantly, not only across the Middle East, where a
5:09
Speaker 2: bunch of big airlines operate, but you know, transiting the
5:13
Speaker 2: United States to Australia or to China oftentimes connects through there,
5:18
Speaker 2: or you know, connecting Europe to those places connects right
5:21
Speaker 2: through the Middle East and has been seen at least
5:23
Speaker 2: over the last twenty years as a safer place to
5:26
Speaker 2: transit through.
5:27
Speaker 4: Fifty years ago, Dubai International Airport had about two million
5:30
Speaker 4: passengers a year. Today the figure is nearly one hundred million.
5:36
Speaker 2: Okay, pretty significant growth hub. Obviously, there have been a
5:40
Speaker 2: tax on energy infrastructure in addition to just the transitting
5:44
Speaker 2: through the Strait of Horn moves. There was a Saudi
5:47
Speaker 2: refinery strike, there was a Katari L and G halt
5:50
Speaker 2: after that place was halted, and so LNG prices you
5:54
Speaker 2: saw in Europe at least you know, spike by fifty
5:57
Speaker 2: percent in a single day. On the result of that,
5:59
Speaker 2: that's not something that we feel domestically quite as much,
6:02
Speaker 2: but you know, obviously something that is to beware of.
6:06
Speaker 2: And then you know, when you talk about all this,
6:09
Speaker 2: you have stock prices here in the United States, but
6:12
Speaker 2: markets in places like the UAE and Kuwait. In some
6:15
Speaker 2: cases we're completely suspended trading because of the volatility taking place.
6:19
Speaker 3: In some of those markets.
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Speaker 2: And so, yeah, there's some big questions across the Middle
6:25
Speaker 2: East as to how all of this develops. And I
6:28
Speaker 2: don't think it is terribly surprising to be sitting here
6:32
Speaker 2: in a moment where it feels like equity market investors
6:34
Speaker 2: in the United States aren't really sure what to do.
6:36
Speaker 4: One of the big differences between today and i'll say
6:39
Speaker 4: fifty years ago. I'm rounding up a little bit the
6:42
Speaker 4: last regime change in Iran, and we can get into
6:48
Speaker 4: oil intensity of the US economy, YEP, and other things
6:52
Speaker 4: like that is the program unfolds.
6:53
Speaker 5: But stocks are much.
6:55
Speaker 4: Much more expensive today relative to earnings. We talk about
7:00
Speaker 4: pe metrics a lot. Is one way to answer the
7:03
Speaker 4: question how richly or not priced our equities. The ten
7:08
Speaker 4: year inflation adjusted the ten year average inflation adjusted earnings,
7:13
Speaker 4: which we sometimes called the cyclically adjusted.
7:15
Speaker 5: PE ratio or a CAPE.
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Speaker 4: Sure, it was one quarter of its level in nineteen
7:20
Speaker 4: seventy eight the last Revolution seventy eight seventy nine, one
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Speaker 4: quarter of its level today. Said differently, stocks are much
7:27
Speaker 4: more expensive relative to future earnings. That's one question that
7:31
Speaker 4: that ratio answers today than they were in nineteen seventy nine,
7:35
Speaker 4: which makes them a lot more vulnerable to big sharp pullbacks.
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Speaker 2: It does, and I think look, the lesson from the
7:42
Speaker 2: last probably quarter century or so has been when it
7:46
Speaker 2: comes to big geopolitical tensions kind of faded to background
7:49
Speaker 2: noise because it's not likely to have a big disruptive
7:52
Speaker 2: impact on the US economy. And I think that's largely
7:55
Speaker 2: the strategy that investors are trying to take here. I
7:58
Speaker 2: don't know that it will play out that way, but
7:59
Speaker 2: that it has been. I think a pretty common lesson
8:02
Speaker 2: from the last quarter century is, in spite of big
8:04
Speaker 2: geopolitical concerns and issues in Russia and Ukraine, war in
8:08
Speaker 2: the Middle East, US involvement in those things hard to
8:12
Speaker 2: pinpoint an area where it's been truly disruptive to the
8:15
Speaker 2: structure of the US economy or structure of US markets.
8:18
Speaker 2: Those have been dominated by other forces. And so part
8:22
Speaker 2: of the lesson that I think investors have taken is Okay,
8:25
Speaker 2: you know, pay attention to this stuff, but kind of
8:26
Speaker 2: faded to the background when it comes to making your
8:28
Speaker 2: long term investment decisions. And we will see if that
8:32
Speaker 2: is the same lesson that holds true this time around.
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Speaker 4: Yet, you know, in nineteen ninety ninety one the operation
8:39
Speaker 4: was un approved and limited in scope. Oil prices rising
8:46
Speaker 4: hit at the same time as the economy was slowing.
8:48
Speaker 4: The FED was trying to slow inflation at the time,
8:50
Speaker 4: and so we did have a brief recession. It was
8:53
Speaker 4: pretty shallow. I don't even think there were two consecutive
8:56
Speaker 4: They may have been two consecutive quarters of a contraction
8:59
Speaker 4: in GDP, but again it was shallow. The recovery was
9:02
Speaker 4: painfully slow, and of course, of course it cost Georgie H. W.
9:06
Speaker 4: Bush the presidency. So that's probably the most similar to today,
9:12
Speaker 4: where the economy is less energy intensive today, and we
9:15
Speaker 4: could talk about what that means is the program unfolds,
9:20
Speaker 4: But in the modern era, that's probably the closest parallel.
9:23
Speaker 4: The economy slowed a lot in the third from the
9:25
Speaker 4: third to the fourth quarter. We saw that last week.
9:28
Speaker 4: So similar to last similar to that episode, and I'm
9:33
Speaker 4: straining here a little bit, but similar to that to
9:35
Speaker 4: that episode, we got a slowing economy. The FED did
9:38
Speaker 4: start to ease dramatically in ninety ninety one, well not
9:42
Speaker 4: not dramatically enough. The FED was easy as it is today.
9:45
Speaker 4: The economy was slowing as it is today. That's one parallel, Mike.
9:49
Speaker 4: The difference, the big difference is that that that was
9:52
Speaker 4: done under the ambit. That was done under the under
9:55
Speaker 4: the under the umbrella of a un approved action with
10:00
Speaker 4: one hundred and some odd other countries backing us very
10:02
Speaker 4: limited scope.
10:04
Speaker 2: Mark off air this morning, you and I and others
10:07
Speaker 2: were talking about recessions, let's call it before nineteen ninety
10:12
Speaker 2: and the perception that a lot of them caused by
10:15
Speaker 2: things like oil price spikes, and how this moment of
10:17
Speaker 2: time in previous right, in previous decades would be seen
10:21
Speaker 2: as a real recession risk. I want to take a
10:23
Speaker 2: quick break, but then I want to talk through that
10:26
Speaker 2: thought process and how energy price spikes can lead to
10:31
Speaker 2: economic pullbacks and what is different structurally about the importance
10:35
Speaker 2: of oil in the world in US economy today compared
10:38
Speaker 2: to decades past. That's next year. On the Financial Exchange.
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Speaker 2: Over the last two days, the oil prices have surged
12:01
Speaker 2: by let's call it fifteen ish percent. You pointed out
12:08
Speaker 2: during the last semit that in previous generations, really post
12:12
Speaker 2: World War two, you would have seen an oil price
12:16
Speaker 2: bike like this, accompanied by a lot of people theorizing
12:20
Speaker 2: about recession in the United.
12:22
Speaker 5: States because it always happened.
12:23
Speaker 3: And I hear a lot.
12:26
Speaker 2: Of concerns about, you know, a lot of things right
12:28
Speaker 2: now when it comes to this conflict, but very few
12:30
Speaker 2: of them are focused on how this specifically is going
12:33
Speaker 2: to cause a recession in the US. So what's changed
12:35
Speaker 2: on that narrative other than the obvious, which is the
12:39
Speaker 2: United States is now a very large oil producer.
12:42
Speaker 3: But what was the going theory?
12:46
Speaker 2: You know, I guess prior to the modern last quarter
12:49
Speaker 2: century or so when it comes to oil prices and recession.
12:52
Speaker 4: But the reason I say that is that we've had
12:53
Speaker 4: twelve recessions in the post war era, including COVID. Okay,
12:57
Speaker 4: everyone but two was followed by a big jump in
13:00
Speaker 4: the price of oil, including two thousand and one. We
13:02
Speaker 4: don't think of that as being oil induced, but oil
13:05
Speaker 4: roughly doubled in the run up. I just checked to
13:07
Speaker 4: make sure I was remembering that correctly. So it is
13:10
Speaker 4: a research will call that a very strong empirical relationship.
13:14
Speaker 2: And what's the theory there, Like, Hey, I've got fewer
13:17
Speaker 2: dollars to spend on everything.
13:18
Speaker 4: Else short the short run sensitavity. You can't control how
13:22
Speaker 4: much drive in the short term for the most part.
13:24
Speaker 4: You can cut out some trips, you can double up
13:27
Speaker 4: on some trips, stuff like that, But for the most part,
13:29
Speaker 4: the elasticity is a researcher would say, which means exactly
13:32
Speaker 4: what it sounds like, how much does my spending on
13:35
Speaker 4: something changed when the price of it goes up. If
13:37
Speaker 4: it doesn't change at all, you'd say my spending is inelastic.
13:39
Speaker 4: A researcher would say. Sometimes you see that term run around,
13:42
Speaker 4: and you may see it in the next few weeks
13:43
Speaker 4: as people talk about the elasticity of spending on oil.
13:46
Speaker 4: So that's that's why I digress a little bit on
13:49
Speaker 4: that concept. So you get this this phenomenon that oil
13:54
Speaker 4: price spikes have almost always been followed by recession. There've
13:57
Speaker 4: been a couple of counter examples two thousand and three.
14:00
Speaker 4: Again I look this up to make sure I was
14:02
Speaker 4: getting this right. There was a spike, didn't cause recession.
14:05
Speaker 4: The run up to the GFS to the global Financial
14:07
Speaker 4: Crisis of two thousand and eight through nine roughly was
14:11
Speaker 4: preceded by a slow but unyielding, pretty steady rise in
14:16
Speaker 4: the price of oil, though many and you may recall it.
14:20
Speaker 4: Oil hit like a buck fifty a barrel, something in
14:22
Speaker 4: that range. So there were other contributing factors to the GFC,
14:25
Speaker 4: but oil certainly didn't help. So there's this strong relationship
14:28
Speaker 4: Mike that cries out for an explanation. Does that mean
14:31
Speaker 4: it's gonna happen again?
14:32
Speaker 5: Of course not.
14:33
Speaker 4: One of the things, as you guys know and as
14:35
Speaker 4: listeners probably know, is that our the extent to which
14:39
Speaker 4: we not just the extent to which we rely on
14:41
Speaker 4: foreign oil, because that's really not relevant. Oil is a
14:43
Speaker 4: global commodity, It has a global price.
14:45
Speaker 2: Price goes up and we will all feel it regardless
14:47
Speaker 2: of how much we put in, and thank.
14:49
Speaker 4: You perfect there's this question, Well, we need much less
14:54
Speaker 4: oil to produce a dollars worth of GDP than we
14:58
Speaker 4: did fifty years ago. We need about seventy percent less
15:03
Speaker 4: oil to produce a dollar's worth of GDP than we
15:07
Speaker 4: did in the early nineteen seventies. That may argue for
15:11
Speaker 4: a diminished economic impact.
15:14
Speaker 2: I would also imagine there's some formula here by which
15:18
Speaker 2: you know, with increased oil prices and the fact that
15:21
Speaker 2: the US does now produce twenty percent of the world's
15:24
Speaker 2: oil supply. That yeah, with increased prices, employment in the
15:28
Speaker 2: sector can increase over time, and other factors lead to
15:31
Speaker 2: higher profits for demes.
15:33
Speaker 4: Question is today spend that to the same degree? Can
15:35
Speaker 4: that offset the retrenchment on the part of everybody else
15:39
Speaker 4: because we're paying more for gas?
15:40
Speaker 3: I would think not, It's not a that's not a
15:42
Speaker 3: huge labor in time.
15:43
Speaker 5: I'm scanning.
15:44
Speaker 4: I'm reacquainting myself or for first time, acquainting myself with
15:48
Speaker 4: the research in this area, and it seems to be
15:51
Speaker 4: that our spending on gas is way less. No, it
15:55
Speaker 4: doesn't make up for it is the is the short answer,
15:57
Speaker 4: Like you.
15:57
Speaker 2: Just said, The Wall Street Journal has a piece today
16:00
Speaker 2: Greg Yep wrote, and I'm going to quote for a
16:02
Speaker 2: minute here taking the optimistic outlook on this, which is
16:05
Speaker 2: always difficult to do in the midst.
16:06
Speaker 3: Of the fog of war.
16:07
Speaker 2: But quote, if Iran, along with Venezuela, is soon ruled
16:11
Speaker 2: by a regime friendly or at least not hostile towards
16:13
Speaker 2: the US, that would neutralize two oil exporters who have
16:16
Speaker 2: regularly been the cause of supply disruptions in recent generations,
16:20
Speaker 2: basically leaving Russia as the only adversarial oil power. And
16:25
Speaker 2: while I do take Greg's point on this that, yes,
16:29
Speaker 2: if Iran is no longer causing issues in the straight
16:32
Speaker 2: upward moves, if Venezuela is not doing the things they do,
16:34
Speaker 2: I'm just really unsure how valuable that is in twenty
16:40
Speaker 2: twenty six. To your point, the US is less dependent
16:45
Speaker 2: on that oil. The economy as a whole is far
16:48
Speaker 2: less dependent on that. And I've just been thinking this
16:52
Speaker 2: through in the context of other not necessarily commodities, but
16:56
Speaker 2: other areas of the economy that would be horribly disrupted
17:00
Speaker 2: by this type of conflict. And obviously my mind immediately
17:04
Speaker 2: goes to Taiwan and semiconductors, and I just think through
17:09
Speaker 2: one this has a lot to do with concentration where
17:12
Speaker 2: you know, I think at last look Opek was producing
17:15
Speaker 2: thirty five to forty percent of the world's oil, whereas
17:18
Speaker 2: Taiwan produces ninety nine percent of the world's semiconductors. But
17:22
Speaker 2: I'm just unconvinced that in twenty twenty six, oil production
17:28
Speaker 2: and stability among Venezuela and Iran is the far most
17:33
Speaker 2: important structural thing to the US economy, Which is which
17:36
Speaker 2: is the piece that Greg is in a roundabout way
17:39
Speaker 2: making is, Hey, maybe if this all goes well, the
17:42
Speaker 2: world will be far more stable in terms of oil prices,
17:45
Speaker 2: and how beneficial would that be towards our economy? And
17:48
Speaker 2: at the same time I'm thinking, well, yeah, but there
17:51
Speaker 2: are now other things that seem far more important to
17:53
Speaker 2: me than oil prices and oil stability.
17:57
Speaker 4: So his point is that what oil could be a
18:00
Speaker 4: little cheaper if if we pull all this off.
18:02
Speaker 2: I think the point is more that there will be
18:04
Speaker 2: fewer of the shocks if we pull this off, so
18:07
Speaker 2: not so much that oil might be cheaper. I don't
18:09
Speaker 2: think anybody has any idea, but if there are fewer
18:13
Speaker 2: volatile regimes that strongly disagree with their neighbors and generally.
18:18
Speaker 3: The shocks states.
18:19
Speaker 5: I mean, you know, you can't. Shocks are whack them mole.
18:21
Speaker 5: Yeah I'm not. Yeah, you can't.
18:23
Speaker 4: It's that all l sequel logic that casual commentator forgive me,
18:27
Speaker 4: it sounds a little snooty, but casual commentators like, Okay, great,
18:31
Speaker 4: you had this little mental experiment, you found it interesting,
18:34
Speaker 4: so you wrote about it. You can't hold all l sql.
18:36
Speaker 4: There could be shocks elsewhere to your point where less
18:39
Speaker 4: energy dependent? How much is it really gonna matter? Foreign energy?
18:42
Speaker 4: Foreign energy independence, as we said, really doesn't matter.
18:44
Speaker 5: Though.
18:46
Speaker 4: Yeah, I don't know, Mike, that doesn't really, it doesn't.
18:48
Speaker 4: It doesn't really do it for me.
18:49
Speaker 3: It didn't fly it to me. Yeah, Like, I'm just
18:51
Speaker 3: thinking about it.
18:53
Speaker 5: Write something.
18:54
Speaker 2: I think about the context of this and oil prices
18:58
Speaker 2: versus the context of something as important is the United
19:00
Speaker 2: States developing its own domestic semiconductor industry. And I know
19:04
Speaker 2: I'm connecting things that are seemingly very disconnected. But a
19:08
Speaker 2: lot has been talked about recently about the stability in Taiwan,
19:11
Speaker 2: threats from China, and other areas of focus, and to me,
19:16
Speaker 2: a lot of this, while critical for the Middle East,
19:19
Speaker 2: seems like a bit of a distraction from the most
19:21
Speaker 2: crucial things. We got to take a quick break. Wall
19:24
Speaker 2: Street Watch is coming off, coming up next. Stocks selling
19:27
Speaker 2: off very strongly in early trading here. We'll have a
19:30
Speaker 2: full recap next.
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Speaker 1: on the Financial Exchange Radio Network. Tell now full wol
19:52
Speaker 1: Street Watch treking the stocks, the data, and the headlines
19:55
Speaker 1: driving markets so far today right here on the Financial
19:58
Speaker 1: Exchange Radio Network.
20:01
Speaker 6: The markets are selling off significantly following yesterday's midday comeback
20:05
Speaker 6: as investors are growing more concerned that the conflict with
20:08
Speaker 6: the US and around could last longer than expected. Oil
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Speaker 6: price is leaping higher again today as a result. Right now,
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Speaker 6: the Dow is down by about two and a half percent,
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Speaker 6: SMP five hundred down two point three percent or one
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Speaker 6: hundred and fifty six points, Nasdaq selling off two and
20:25
Speaker 6: a half percent or five hundred and sixty nine points lower,
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Speaker 6: Russell two thousand, down three and a half percent. Ten
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Speaker 6: Your Treasure realed up one basis point at four point
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Speaker 6: zero seven to one percent. Crew to Oil jumping eight
20:38
Speaker 6: percent higher, trading at seventy seven dollars and forty four
20:41
Speaker 6: cents a barrel. Target beat earnings expectations, but bost a
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Speaker 6: lower profit for the holiday quarter, marking its thirteen straight
20:48
Speaker 6: quarter of declining sales. New CEO Michael Fidelki t's the
20:51
Speaker 6: retailers turnaround plan will be presented shortly, target up by
20:56
Speaker 6: three percent, sticking with retail where best buys. Quarterly sales
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Speaker 6: and outlook disappointed, but it's adjusted per share earnings came
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Speaker 6: in strong, sending shares in the electronics retailer up by
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Speaker 6: five percent. I Meanwhile, shares in the social media platform
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Speaker 6: pinchrees jumping five percent after Elliott Investment Management made a
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Speaker 6: one billion dollar investment, with the company plans to use
21:16
Speaker 6: the money to buy back stock as part of a
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Speaker 6: three and a half billion dollar share repurchase program. Elsewhere,
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Speaker 6: database company Mango dB offered a soft quarterly guidance, feeling
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Speaker 6: concerns that AI could upend its business. Shares are tanking
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Speaker 6: twenty five percent, and Swiss sneaker maker On Holding is
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Speaker 6: seeing its stock tumble thirteen percent after the company's annual
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Speaker 6: sales guidance underwhelmed investors. I'm Tucker Silva and that is
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Speaker 6: Wall Street watch mark.
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Speaker 2: Before the break, we are talking a bit about the
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Speaker 2: overall conflict and potential impacts. Look, I've been asked, I
21:51
Speaker 2: don't know three or four times over the last few days, like, well,
21:53
Speaker 2: what sectors are going to be most heavily harmed or
21:56
Speaker 2: benefited by something like this?
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Speaker 3: And the answer is nobody. Nobody knows.
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Speaker 2: Like it is very early to try and understand what's
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Speaker 2: going to happen here and how deep the conflict is
22:06
Speaker 2: going to be and how and why it could disrupt
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Speaker 2: the US economy. But like another conflict just four years ago,
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Speaker 2: I think there are a couple things that you can say.
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Speaker 3: Are more likely than not.
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Speaker 2: And one of them that I'm comfortable saying is it's
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Speaker 2: very difficult for me to envision a scenario where a
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Speaker 2: conflict in the Middle East that drives up oil prices
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Speaker 2: in the short term would be disinflationary. Difficult for me
22:36
Speaker 2: to envision that scenario, right, Like.
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Speaker 4: I've not heard any serious person make that argument.
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Speaker 2: I can't imagine how right, So, like, if anything else,
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Speaker 2: I think we are sold on.
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Speaker 4: I mean, just you know, for the sake of filling
22:50
Speaker 4: some airtime, maybe why might it be disinflationary? Well, the
22:54
Speaker 4: economy tumbles into.
22:57
Speaker 3: Everybody afraid of going outside.
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Speaker 5: Then Mark gets fall.
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Speaker 4: There's a wealth effect of so so I'm just playing it, yeah,
23:03
Speaker 4: I'm just playing it out like it's like an you know,
23:05
Speaker 4: you asked an exam question.
23:06
Speaker 5: You're looking for creative answer something.
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Speaker 2: But in any case, we have oil prices moving up,
23:11
Speaker 2: we've got bond prices moving down, meaning yields moving up.
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Speaker 2: And I think you also have new spending on defense,
23:19
Speaker 2: which has been pretty consistent over the last couple of years,
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Speaker 2: as the United States kind of rebuilds some of the
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Speaker 2: stuff that's gone to Ukraine over the last few years.
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Speaker 2: But presumably the cost of conducting a strike a series
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Speaker 2: of strikes in war in Iran is going to cost
23:34
Speaker 2: the defense budget some And so all of these lead
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Speaker 2: I think me to come to the conclusion that it's
23:41
Speaker 2: more likely than now that this is a high pressure
23:43
Speaker 2: on upwards price upper prices, or at least unlikely to
23:48
Speaker 2: result in disinflation in the US economy. And perhaps that
23:54
Speaker 2: is some of what is contributing to the cell off
23:56
Speaker 2: that we are seeing, because as we mentioned, bond prices
23:59
Speaker 2: are re acting today not a huge surge in in
24:04
Speaker 2: or in bond yields We've got the ten year treasury
24:07
Speaker 2: up barely point zero two percent up to four point
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Speaker 2: zero seven. It got up to four h nine, and
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Speaker 2: that practically means that mortgage rates are moving up, and
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Speaker 2: practically speaking means that it's looking tougher. I think for
24:22
Speaker 2: the FED to conduct a rate cutting cycle in this environment.
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Speaker 4: Yeah, the Fed can't cut rates when the price of
24:29
Speaker 4: the price of energy, which is a big part of
24:32
Speaker 4: headline CPI, is going up. That will push up the
24:36
Speaker 4: price of goods into which energy is an input. It
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Speaker 4: will push up inflation expectations. The FED made the mistake
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Speaker 4: in the seventies of not reacting too energy price spikes.
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Speaker 4: Weight underlying inflation was elevated.
24:51
Speaker 3: Even shorter term.
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Speaker 2: More recently, I think that one of the main criticisms
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Speaker 2: of J. Powell in twenty twenty two and the Federal
24:59
Speaker 2: Reserve then was is taking a look at the Russian
25:01
Speaker 2: invasion of Ukraine and saying, well, it's hard to say
25:04
Speaker 2: what impact this could have on prices, when pretty clearly
25:08
Speaker 2: it ended up having way.
25:09
Speaker 3: You have a pressure.
25:10
Speaker 4: The Fed can either accommodate is the language that monetary
25:15
Speaker 4: researchers use, or not A so called supply shock so
25:18
Speaker 4: there's a lot of jargon in that one little sentence.
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Speaker 4: Accommodate means either ease or don't react when the price
25:25
Speaker 4: of something, in this case it's oil, It could be
25:28
Speaker 4: could be any number of things that are meaningful or
25:31
Speaker 4: not meaningful, like anything that goes into CPI. Couldn't, theory
25:33
Speaker 4: push inflation up if its price changes goes up and
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Speaker 4: other prices stay the same. That is, when CPI is calculated,
25:41
Speaker 4: that will push up the average price. So the FED
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Speaker 4: then has a choice. Do we respond to this because
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Speaker 4: inflation has gone up, or do we, like the COVID
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Speaker 4: FED chose do we believe that it will pass, that
25:53
Speaker 4: it will be so called transitory and therefore we don't
25:56
Speaker 4: need to respond. Well, the danger in not responding is
25:58
Speaker 4: that in inflation, expectation rise with inflation, and then the
26:02
Speaker 4: process sort of becomes self perpetuating and self fulfilling. So
26:05
Speaker 4: everybody pretty much agrees that the FED should have reacted sooner.
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Speaker 4: The cost would have been some output, more specifically higher unemployment,
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Speaker 4: but the benefit would have been lower inflation. The FED
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Speaker 4: is going to be faced with a similar choice.
26:21
Speaker 3: Here we hear the.
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Speaker 2: Conclusion or phrase, you know oil seeps into everything, right,
26:30
Speaker 2: And what I'm talking about here is that you know,
26:33
Speaker 2: whether you are Target or American Airlines or your neighborhood
26:38
Speaker 2: grocery store, if energy prices increase, generally speaking, it's going
26:43
Speaker 2: to lead to higher input costs to you as a business,
26:45
Speaker 2: and it could lead you to need to raise prices
26:47
Speaker 2: in order to maintain margins. How much of an actual
26:50
Speaker 2: effect do we see there, right? Like, do energy prices
26:53
Speaker 2: actually lead to higher inflation core inflation? When you look
27:00
Speaker 2: at actual data points here throughout history? How can the
27:04
Speaker 2: average person conclude what might happen with prices overall if
27:08
Speaker 2: we see an oil price I.
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Speaker 4: Mean, look, if you're interested in this, when, I'm gonna
27:11
Speaker 4: do it now obviously, But if anyone wants to take
27:13
Speaker 4: this offline, the guy to read his Alan Blinder. He
27:15
Speaker 4: wrote a famous paper in the very late seventies. He
27:18
Speaker 4: updated it in the early eighties. He updated it again
27:20
Speaker 4: in two thousand and eight two thousand and nine with
27:22
Speaker 4: a co author, and he documented that say, a jump
27:25
Speaker 4: in this case in oil prices does make its way
27:27
Speaker 4: into core inflation. Whether or not that results in persistent
27:31
Speaker 4: and prolonged inflation depends on whether or not that it's
27:34
Speaker 4: just a one time increase followed by a decrease, a
27:37
Speaker 4: one time increase followed by a leveling off, a one
27:40
Speaker 4: time increase followed by further increases. It depends on how
27:45
Speaker 4: on how long or short lived this conflict is, Mike.
27:48
Speaker 4: But the short answer is, and you're going to hear
27:50
Speaker 4: a lot I think over the next couple of weeks
27:52
Speaker 4: that just because the price of oil goes up doesn't
27:54
Speaker 4: mean inflation goes up. That's a really wrong thing to say.
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Speaker 4: And I can understand why someone who hasn't thought about
28:03
Speaker 4: it much, maybe or has some ulterior motive, might want to,
28:08
Speaker 4: or maybe someone wants to just be reassuring might say that.
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Speaker 5: But it's wrong.
28:11
Speaker 4: It's wrong empirically, meaning that's not what's happened historically, and
28:14
Speaker 4: it's wrong in theory too.
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Speaker 3: Let's take a quick break when we come back.
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Speaker 2: We're to take a break from the overall story here
28:21
Speaker 2: when it comes to Iran oil prices and the price
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Speaker 2: bikes here because prior to all this there was big
28:28
Speaker 2: dispersion going on in markets that we've started to allude to.
28:31
Speaker 3: But sectors that had.
28:32
Speaker 2: Been performing not performing in twenty twenty six, and the
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Speaker 2: variation in returns between individual companies across the S and
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Speaker 2: P five hundred in US stocks again even before the
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Speaker 2: attacks in Iran were notable and like something we haven't
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Speaker 2: seen in quite a few years. We're gonna take a
28:52
Speaker 2: quick break. Then we're talking about that market frenzy a bit.
28:54
Speaker 2: Next on the Financial Exchange.
28:56
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29:30
Speaker 2: All right, mark time for technical term definition time. I'm
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Speaker 2: hoping you can help me out up market dispersion bit
29:38
Speaker 2: of a technical word.
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Speaker 3: What do we be spread out talking about?
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Speaker 2: When we talk about market dispersion and how it's particularly
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Speaker 2: I guess wide or severe this year?
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Speaker 4: How spread out the winners are from the losers? So
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Speaker 4: you got pretend you had a market of two stocks
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Speaker 4: A and B. One is up fifty, one is down
29:57
Speaker 4: fifty If it's a market cap weighted into and the
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Speaker 4: companies are the same size, your market return is zero,
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Speaker 4: but that hides a lot of volatility under the surface.
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Speaker 2: So here's how the Wall Street Journal quantified some of
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Speaker 2: this stuff. So the S and P five hundred this
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Speaker 2: year has trade within a range of just two point
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Speaker 2: seven percent the average company in the index. So again,
30:21
Speaker 2: the S and P five hundred is taking an average,
30:23
Speaker 2: but it's taking a market cap weighted average. Where this
30:25
Speaker 2: is just saying, okay, what's the average return of the
30:27
Speaker 2: individual components of here. It's been moving around about seven
30:32
Speaker 2: times the degree of the index in total. Okay, so
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Speaker 2: average company moving up or down fourteen percent throughout the
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Speaker 2: course of this year, index itself up two point seven percent.
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Speaker 2: They point out that this is pretty severe in terms
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Speaker 2: of how much the dispersion exists.
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Speaker 3: It's the ratio. It's the largest that's been since nineteen.
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Speaker 5: How to calculate the average? Is it a simple average
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Speaker 5: or is it a weighted average?
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Speaker 3: Would imagine it's a simple average.
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Speaker 2: I they're getting the data from Barclays, but the way
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Speaker 2: that they are phrasing this to me means simple average.
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Speaker 2: They're not saying it matters more that Microsoft is down
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Speaker 2: eighteen percent.
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Speaker 5: So they're not marketing it.
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Speaker 2: I think they're taking averages and saying how wild their
31:15
Speaker 2: stuff is?
31:15
Speaker 5: That opened, good, sir, I'll let you finish.
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Speaker 3: No, no, please?
31:18
Speaker 5: Is that unusual?
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Speaker 2: Well, it's the most dispersion since ninety four, but you
31:23
Speaker 2: know that doesn't mean that it wasn't very close in
31:25
Speaker 2: twenty twenty two or something like that. So I think
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Speaker 2: there's the main question that I had with this is
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Speaker 2: who does this actually matter for?
31:36
Speaker 5: Why did you write this piece?
31:37
Speaker 1: Right?
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Speaker 3: Should I care?
31:38
Speaker 5: Why am I reading this?
31:39
Speaker 3: Should I care? Because a few things.
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Speaker 2: One, I don't think anyone or I didn't see in
31:44
Speaker 2: the Wall Street Journal article anyone doing any sort of
31:46
Speaker 2: analysis to say, oh, and when this happened, right, historically
31:50
Speaker 2: you've seen a fast market downturn. We certainly didn't get one.
31:53
Speaker 2: I guess we saw some market turmoil in the mid nineties,
31:56
Speaker 2: but largely it led.
31:57
Speaker 5: To if that started raising, I'm not gonna take them
32:01
Speaker 5: with me.
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Speaker 2: Largely, you know, markets continued moving right up through the
32:05
Speaker 2: dot com bubble, So I don't think that's an issue.
32:07
Speaker 2: But I guess who it does matter for is if
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Speaker 2: you are not that plane vanilla buy s and P
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Speaker 2: five hundred and sit there for the next two decades,
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Speaker 2: then it matters a.
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Speaker 3: Heck of a lot for you.
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Speaker 2: And so if you are, you know, this individual stock
32:22
Speaker 2: investor who has made their entire portfolio out of the
32:28
Speaker 2: mag seven well one that might not have been the
32:32
Speaker 2: most stable idea in the first place, and you should
32:34
Speaker 2: expect volatility. But maybe maybe you are an individual stock investor,
32:37
Speaker 2: or maybe you are somebody who does you know, move
32:40
Speaker 2: their holdings from sector to sector, then this year feels
32:44
Speaker 2: a lot different to you than in the last few years.
32:48
Speaker 2: I guess where I keep going back to, though, and
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Speaker 2: I'm not sure this is a good thing or a
32:53
Speaker 2: bad thing. But when you take a look at how
32:56
Speaker 2: much money has flowed into mega diversified index funds over
33:03
Speaker 2: the course of the last two decades, the portion of
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Speaker 2: investors that this actually disrupts is pretty small. It is
33:13
Speaker 2: fascinating to me. It's interesting to me that we can
33:15
Speaker 2: have a market where Nvidia and Microsoft are down in
33:17
Speaker 2: twenty twenty six and the index until today was up
33:20
Speaker 2: for the year, Like that's fascinating and interesting and then
33:23
Speaker 2: signifies something to me. But for the average person doesn't
33:26
Speaker 2: feel like I think it's.
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Speaker 4: A marketing talking point. For active managers, they want you
33:30
Speaker 4: to think that the environment is a fertile one for
33:33
Speaker 4: them who look at all this dispersion, I'm going to
33:35
Speaker 4: jump in and take advantage of it. It doesn't It
33:38
Speaker 4: doesn't follow from the fact that there is more dispersion
33:41
Speaker 4: that stocks are moving around a lot more on average
33:44
Speaker 4: then the market cap weighted averages, and follow from that
33:46
Speaker 4: that you'll make money with it. That would be the
33:48
Speaker 4: manage that they have to have the skill to exploit it.
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Speaker 2: That would be the fascinating and interesting question to me,
33:53
Speaker 2: which it's too late to take advantage of now anyway.
33:55
Speaker 2: But is there any evidence that active mutual fund managers,
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Speaker 2: for example, outperform their benchmark?
34:03
Speaker 4: Yes, yes there is, but they're not the same ones
34:06
Speaker 4: who did it the last time dispersion was high, So
34:08
Speaker 4: they're just the lucky coin flippers this time around. So
34:11
Speaker 4: the answer your question is yes, and they want you to,
34:13
Speaker 4: and they'll show you a graphic with and when I
34:15
Speaker 4: say they, and if I sound a little cynical here,
34:17
Speaker 4: it's because I am of active managers generally, not that
34:20
Speaker 4: some aren't good, but most are no good at all,
34:24
Speaker 4: and they know it and they're just trying to fool you.
34:26
Speaker 4: So that you'll hand your assets over to them and
34:28
Speaker 4: they can charge you ten twenty thirty times what you
34:31
Speaker 4: pay for an index fund. There's my little homily on
34:35
Speaker 4: active management. Most people should avoid it. That said, there
34:39
Speaker 4: are very few who can exploit environments like the one
34:42
Speaker 4: that we're in today. The problem is that those winners
34:45
Speaker 4: generally lose their touch over time if they can repeat
34:49
Speaker 4: it all.
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36:04
Speaker 5: Mark.
36:04
Speaker 2: I hate making assumptions about people, so I'm going to
36:07
Speaker 2: try and avoid it here. But my assumption about you
36:09
Speaker 2: is that you don't frequently visit Target. Is that a
36:12
Speaker 2: reasonable concision? No, you're there all the time. Oh yeah, okay,
36:15
Speaker 2: So what is your conclusion about Target as just a
36:19
Speaker 2: place to shop compared to their competition?
36:23
Speaker 4: Why do you go having samp Because it's close and
36:25
Speaker 4: they bring stuff out.
36:26
Speaker 5: To your car.
36:27
Speaker 3: Got it, okay?
36:29
Speaker 4: And they're tolerant when my dog lunges at them.
36:31
Speaker 5: Well, the windows closed.
36:32
Speaker 3: But that's that's a nice few get.
36:36
Speaker 4: Five percent off if you link their debit card to
36:39
Speaker 4: your bank account.
36:39
Speaker 2: I didn't even know that that's a decent perk for
36:43
Speaker 2: those that aren't. Where Target has had a pretty rough
36:45
Speaker 2: couple of years. The likes of Walmart have been investing
36:49
Speaker 2: heavily in areas like grocery and online delivery. Target kind
36:53
Speaker 2: of struggled to keep up, and frankly, you know, a
36:55
Speaker 2: few missteps here and there, but I think largely their
36:58
Speaker 2: problem has been inability to really differentiate their brand and
37:03
Speaker 2: stay modern. The new CEO has been pushing pretty heavily
37:06
Speaker 2: and investing pretty heavily, and released earnings this week and
37:12
Speaker 2: on a day when the stock market overall is selling
37:15
Speaker 2: off by two and a third percent, Target stock is
37:18
Speaker 2: up three and a third percent, which says something.
37:20
Speaker 3: It's a lot.
37:21
Speaker 2: It's basically flat for the last twelve months, so not
37:23
Speaker 2: a great story for investors overall. But they have been
37:27
Speaker 2: investing pretty heavily in improving merchandise, refreshing their stores, integrating
37:34
Speaker 2: new technology into their operations. And I can't say I'm
37:37
Speaker 2: intimately familiar with Target's business overall, but I can see
37:41
Speaker 2: how those things are necessary at this stage. The piece
37:43
Speaker 2: that I don't know what they should do with is
37:45
Speaker 2: their grocery business, because they're in this position where they're groceries,
37:50
Speaker 2: in my opinion, at least, kind of suck like walls
37:55
Speaker 2: full of selection that.
37:57
Speaker 3: I can't go to Target and do a grocery shop.
38:00
Speaker 2: If I'm there, I might buy some milk, but that
38:03
Speaker 2: kind of makes it like a CVS. If I'm there anyway,
38:05
Speaker 2: maybe I'll get these cough drops, but I'm not going
38:07
Speaker 2: to go there intentionally.
38:09
Speaker 3: Quick break.
38:09
Speaker 2: Lotmore to cover in the second hour of the financial exchange.
38:12
Speaker 2: We will be right back