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SK Hynix IPO Tests Wall Street’s AI Chip Appetite · The Financial Exchange Show

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Speaker 1: and Mark Vandetti.
1:09
Speaker 2: Welcome to this Friday edition of the Financial Exchange. Paul Lane,
1:13
Speaker 2: Mark Vendetti, and Tucker Silva here with you. In what's
1:16
Speaker 2: been a relatively quiet week in terms of economic information.
1:20
Speaker 2: We did have the Federal Reserve meeting minutes come out
1:23
Speaker 2: this Wednesday. Big takeaways from that is inflation continues to
1:27
Speaker 2: remain a concern of the Federal Reserve, and also they
1:31
Speaker 2: are concerned about the AI Data Center investment and its
1:35
Speaker 2: impact on persistent inflation, So that is something that is
1:38
Speaker 2: certainly a focus. We did have Q two earnings that
1:41
Speaker 2: have come out this week. We've had a first few
1:44
Speaker 2: handful of couple companies who have reported their numbers, but
1:47
Speaker 2: really earning season will kick into high gear next week
1:52
Speaker 2: when the banks will kick off the earning cycle on Tuesday,
1:55
Speaker 2: July fourteenth, with some of the big financial institutions coming
1:59
Speaker 2: out with their qu to earnings numbers. Here taking a
2:02
Speaker 2: look at markets this morning, we're relatively in mixed territory.
2:06
Speaker 2: There's not a tremendous amount of activity going on. Oil
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Speaker 2: continues to remain relatively flat after a pretty significant uptick
2:14
Speaker 2: earlier this week, as the usn I RAN situation has
2:18
Speaker 2: muddied a bit where there has been trading military action
2:22
Speaker 2: on both sides here, but President Trump hoping that they
2:25
Speaker 2: get back to the negotiating table soon. But we kick
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Speaker 2: off our program this morning by talking a little bit
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Speaker 2: about a company that's probably not too well known to
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Speaker 2: many investors here domestically in the United States. This is
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Speaker 2: sk Heinez. It is a South Korean company that is
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Speaker 2: analogous to Micron and Sandis. They are a chip maker
2:48
Speaker 2: that provides memory chicks for AI data centers. That has
2:53
Speaker 2: been an area of really significant investor enthusiasm over the
2:57
Speaker 2: course of the last six months or so here and
3:00
Speaker 2: even dating back to twenty twenty five as well. S
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Speaker 2: k Hunicks is going to debut on Wall Street. They
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Speaker 2: are going to be raising about twenty six point five
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Speaker 2: billion in this IPO that is far less than SpaceX
3:14
Speaker 2: ipo that we just had about a month or so ago,
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Speaker 2: but does rank very high in terms of dollar value
3:20
Speaker 2: from other IPOs that we've seen over the course of
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Speaker 2: the last ten plus years or so, and mark this
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Speaker 2: continues to be an area of significant investment demand and
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Speaker 2: they're trying to leverage what is basically a unsatiated appetite
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Speaker 2: for anything that is chip related.
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Speaker 3: Here, Yeah, when a company wants to raise capital, there
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Speaker 3: are two stories here. I think one is they need
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Speaker 3: to raise money to build factories to make more chips,
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Speaker 3: and we're in a boom cycle. That's to be expected.
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Speaker 3: That also shows the seeds of the destruction of the
3:58
Speaker 3: end of the boom cycles. So while it's in the moment,
4:06
Speaker 3: it catalyzes, you know, more enthusiasm. It also means that
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Speaker 3: the bust when it happens, and it will and this
4:13
Speaker 3: is I hate to sound doomish, but all booms are
4:17
Speaker 3: followed by busts. You could argue, we don't know it's
4:20
Speaker 3: a boom until the bust occurs. Then in retrospect it
4:23
Speaker 3: was obvious. But I think it's pretty plain to most observers,
4:27
Speaker 3: even enthusiasts, that we're living through a boom. This is
4:29
Speaker 3: more evidence of that, and they're looking to take advantage
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Speaker 3: of it. So there's that part of the story which
4:33
Speaker 3: has both a good and a bad interpretation. Sheen, I
4:40
Speaker 3: don't know, whatever you want to call it. And then
4:42
Speaker 3: there's the more encouraging story. You hear a lot of
4:45
Speaker 3: doomsayers talk about the devise of the dollar. Is the
4:47
Speaker 3: world's reserve currency. And you're gonna immediately think, where's he
4:51
Speaker 3: going with this? Where am I going with this? But
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Speaker 3: this is testimony to the fact that when companies want
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Speaker 3: to raise capital, they don't do it on the decks.
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Speaker 3: They don't do it on the FOOTSI they whatever the
5:05
Speaker 3: name of London stocking cams, you know what I mean.
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Speaker 2: I know it's ft SE is the letters for it.
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Speaker 2: But the fuzzi is always funny to hear out loud.
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Speaker 2: I get what you're coming with.
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Speaker 1: Right right.
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Speaker 3: When you want to raise money, you do it here.
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Speaker 3: And you could you could argue, well, cynically, they're looking
5:22
Speaker 3: to take advantage of the astronomical prices so called valuations,
5:28
Speaker 3: prices a multiple of whatever earnings is your favorite definition
5:32
Speaker 3: of earnings. They want to take advantage of a bubble,
5:35
Speaker 3: and that is true. But to me, it's also testimony
5:39
Speaker 3: to the fact that US has the deepest and most
5:43
Speaker 3: dynamic financial markets in the world. And as long as
5:47
Speaker 3: that is the case, and as long as we really
5:49
Speaker 3: don't screw things up, and there are plenty of ways
5:51
Speaker 3: in which we could, the dollar will remain the world's
5:55
Speaker 3: reserve currency, and that has benefits in terms of lower
5:58
Speaker 3: interest rates, ease of doing transit actions and stuff like that,
6:01
Speaker 3: and higher standards of living at the end of the day.
6:03
Speaker 3: For so, this is a testament to the strength and
6:06
Speaker 3: the dynamism of the US economy and financial markets.
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Speaker 2: To me, absolutely, it will be the largest sale by
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Speaker 2: a non US company with this IPO here. So what
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Speaker 2: they do when you list on the US Stock Exchange
6:20
Speaker 2: for a foreign company like Skhiinex, that is a South
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Speaker 2: Korean company, they will have what are called American Depository
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Speaker 2: receipts or ADRs. What will occur is they are going
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Speaker 2: to offer one hundred and seventy eight million ADRs. The
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Speaker 2: ratio of ADRs to shares is for every ten ADRs
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Speaker 2: that you buy, you get one share of the company.
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Speaker 2: They are going to be priced at one hundred and
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Speaker 2: forty nine dollars each. So if you want to buy
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Speaker 2: ten shares of the ADR to get one share of
6:51
Speaker 2: the actual company, you'd spend about fourteen hundred and ninety
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Speaker 2: bucks here, So we'll see what the appetite looks like
6:59
Speaker 2: for this IPO here. It certainly has been an area
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Speaker 2: that has seen tremendous amount of investment and enthusiasm and
7:07
Speaker 2: to Mark's point earlier, they are harnessing that enthusiasm to
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Speaker 2: raise additional capital to build out their capacity. And the
7:17
Speaker 2: question for all of us as investors and people who
7:21
Speaker 2: follow the market is to your point, Mark, certainly there
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Speaker 2: is just it seems like unparalleled enthusiasm for everything within
7:30
Speaker 2: the tech stack that goes into these data centers. How
7:33
Speaker 2: long does that go on for? Is what will continue
7:36
Speaker 2: debate for months here? Yeah, any cracks, that's what we're
7:39
Speaker 2: going to be looking for.
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Speaker 3: Yeah, no, no doubt. The appetite, as you put it,
7:43
Speaker 3: will be voracious. The question is that a good sign
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Speaker 3: or a bad sign?
7:48
Speaker 1: Right?
7:49
Speaker 3: It may seem like a silly question. Ask they want
7:51
Speaker 3: to raise money, they're going to raise it, and they're
7:53
Speaker 3: going to use that to make investments. Those investments will
7:55
Speaker 3: make chips cheaper more plentiful. These things are a commodity.
7:59
Speaker 3: Is you've talked about Zada and Mike Armstrong talked about
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Speaker 3: a lot. So again, these boom periods, whether it's the
8:05
Speaker 3: nineteen twenties, or real estate in the nineteen eighties more narrowly,
8:09
Speaker 3: or internet infrastructure in the nineteen nineties, they tend to
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Speaker 3: contain the seeds of their own demise.
8:17
Speaker 2: Hopefully that doesn't come sooner rather than later, but like
8:20
Speaker 2: you said, it always is going to be something that
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Speaker 2: looms on investors' minds. Here.
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Speaker 4: By the way, I'm sorry, Paul. Just just before ten
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Speaker 4: o'clock this morning, Bloomberg's reporting that the EIGHTDR is at
8:32
Speaker 4: one hundred and seventy five dollars each. Wow, okus seventeen
8:36
Speaker 4: percent higher than its offering. So that's a clear Blomberg.
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Speaker 2: Clearly there is some appetite and demand out there for
8:45
Speaker 2: those ADRs. There is a lot of enthusiasm, which it
8:48
Speaker 2: is to be expected. I think that a lot of
8:50
Speaker 2: investors have been incredibly blown away by the returns of
8:55
Speaker 2: the Philadelphia Semiconductor Index. To be clear, es Keehannix isn't
8:58
Speaker 2: going to be immediately eligible for that, but that's certainly
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Speaker 2: I feel as if is part of their plan here
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Speaker 2: to list on US markets, to get access to that capital,
9:07
Speaker 2: to get access to that investment, to narrow down some
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Speaker 2: of the valuation gap between Micron, which I would say
9:14
Speaker 2: is it's kind of US counterpot that has just surged
9:16
Speaker 2: dramatically year to date and certainly over the course of
9:20
Speaker 2: the last twelve months. The tech sector today in early trade.
9:23
Speaker 2: It's been really volatile all week long, but it seems
9:27
Speaker 2: to be relatively flat at the moment. But we'll keep
9:30
Speaker 2: you a prize to further market action there, and we'll
9:33
Speaker 2: keep your prize as to how s Kehinda comes out
9:35
Speaker 2: in its early trading here. Clearly seems like there is
9:39
Speaker 2: a lot of enthusiasm.
9:40
Speaker 3: What's interesting about that? You say, narrow the valuation gap.
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Speaker 3: But you're going to hear that phrase a lot I
9:44
Speaker 3: think over the next couple of days with respect to this,
9:46
Speaker 3: of course, and what we mean by that, correct me
9:48
Speaker 3: if I'm wrong, is that investors in the US are
9:51
Speaker 3: willing to pay a higher multiple of earnings than investors elsewhere. Correct,
9:56
Speaker 3: So you want to list your shares here if you're
9:59
Speaker 3: p years here in the United States are getting a
10:02
Speaker 3: higher multiple because you can raise more capital. So why
10:06
Speaker 3: is there are we more savvy long term investors or
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Speaker 3: maybe speculators than the rest of the world. I mean,
10:14
Speaker 3: that's when you think about that, it raises it might
10:18
Speaker 3: raise some concerns. Why are US investors willing to pay
10:21
Speaker 3: a higher multiple for the same thing. We're talking about
10:24
Speaker 3: the same like this is not They're not starting a
10:27
Speaker 3: different company here doing something, they're doing the same thing
10:29
Speaker 3: as they are abroad. They can raise more money here
10:33
Speaker 3: all l sqel because markets here are arguably frothier.
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Speaker 2: Does it also play into this the enthusiasm for the dollar,
10:42
Speaker 2: like I mean, that's kind of always been the issue
10:44
Speaker 2: with international markets versus US ones where we've commanded a
10:47
Speaker 2: higher multiple. Is it that playing out to on this side?
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Speaker 3: I guess it depends on what you think about what
10:52
Speaker 3: the exchange rate's going to do, And I don't know that.
10:54
Speaker 3: I don't know that any right. If you think the
10:55
Speaker 3: dollar is going to go up, and you are an
10:59
Speaker 3: investor living abroad, say you're in South Korea, they is
11:04
Speaker 3: it a dollar or where you're you want or whatever
11:08
Speaker 3: their currency is. If we care cash, we only care
11:12
Speaker 3: about the dollar here. If you think your currency is
11:15
Speaker 3: going to gain value relative to the dollar, or you
11:18
Speaker 3: think the dollar is going to gain value relative your currency,
11:20
Speaker 3: you might want to own more dollar denominated assets. So
11:24
Speaker 3: that might be an angle for some, but I suspect
11:27
Speaker 3: most are just looking to cash in on the boom, just.
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Speaker 2: The froth yeahsh right, all right, we're going to take
11:35
Speaker 2: a quick break here on the financial exchange. But when
11:38
Speaker 2: we come back talking about an issue that should be
11:41
Speaker 2: impacting all listeners at the moment is grocery store prices.
11:44
Speaker 2: Volumes are down, and grocers are looking to make cuts
11:48
Speaker 2: across the board to entice you to fill up that
11:50
Speaker 2: grocery basket a little bit more than you were previously.
11:54
Speaker 2: We're going to cover everything on the consumer spending and
11:57
Speaker 2: the grocery stores right after this break here on the
11:59
Speaker 2: Financial Exchange.
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12:38
Speaker 2: Consumers are pairing down there spending at grocery stores, and
12:42
Speaker 2: grocery stores are racing to cut prices. We covered this
12:46
Speaker 2: earlier a little bit this week, as Walmart announced that
12:49
Speaker 2: it was going to be cutting prices on ground beef, rolls, cherries,
12:54
Speaker 2: potato chips, a twenty four pack of Coca cola, and
12:57
Speaker 2: all of these measures are aimed at get getting consumers
13:01
Speaker 2: across the United States back into their stores. What grocers
13:05
Speaker 2: have seen is a decline in volume in terms of
13:08
Speaker 2: what people are spending year over year In the four
13:11
Speaker 2: weeks that ended the month of June, across sixty one categories,
13:16
Speaker 2: if we looked year over year on the volume, we
13:19
Speaker 2: have seen a two percent decline in volume of groceries
13:24
Speaker 2: purchased by American consumers. And so as a result of that,
13:27
Speaker 2: what these grocers are trying to do, though they operate
13:30
Speaker 2: on incredibly narrow margins as it is anywhere from one
13:33
Speaker 2: and a half to two percent is the average grocer margin,
13:36
Speaker 2: they're looking at some potential loss leaders to just entice
13:39
Speaker 2: people to not only come in the door, but put
13:42
Speaker 2: more in their basket and mark. This speaks to sort
13:45
Speaker 2: of the larger inflationary story. We focus so much on
13:50
Speaker 2: the oil and gas side of things here, but inflation
13:53
Speaker 2: has percolated across many different categories, and that's why you
13:56
Speaker 2: have in running at about four percent year every year.
14:00
Speaker 2: The FED typically will look to strip out the impacts
14:04
Speaker 2: of food and energy because they do tend to be volatile,
14:07
Speaker 2: but it certainly is part of the inflationary story for sure.
14:11
Speaker 3: Yeah, inflation CPI Consumer Price Index, which is what we
14:15
Speaker 3: normally devote our attention to and what people think of
14:18
Speaker 3: when you say inflation. There are other measures. FED uses
14:22
Speaker 3: a slightly different measure, but for reasons that are not
14:26
Speaker 3: important to this discussion. Inflation is the average change in prices,
14:32
Speaker 3: So there's a lot of other stuff in there, and
14:35
Speaker 3: food could be a driver one month, insurance contract insurance
14:41
Speaker 3: premiums could be a driver another month. Cell phone services
14:44
Speaker 3: could be on the margin distorting the trend in inflation.
14:51
Speaker 3: There are lots of subcategories, lots of components, which is
14:55
Speaker 3: why the FED prefers measures that strip out things they
15:00
Speaker 3: believe to be outliers, not always food and energy. That
15:04
Speaker 3: measure that we call core is imperfect. There's no assurance
15:08
Speaker 3: that the biggest distortions of what's really going on in
15:12
Speaker 3: inflation you're going to come from those two segments, Paul.
15:15
Speaker 3: That's why Chairman Warsh has cited trimmed measures, including the median,
15:21
Speaker 3: which is the one in the middle. So you trim
15:23
Speaker 3: everything except for the except for the observation whatever that
15:27
Speaker 3: category is in the middle, and that changes every month
15:29
Speaker 3: to get it what the trend is in inflation. It's
15:33
Speaker 3: a really hard thing to do, Paul. We don't know
15:35
Speaker 3: what inflation is, what it truly is in real time.
15:41
Speaker 2: Is definitely difficult to try and assess. But certainly from
15:46
Speaker 2: what you're seeing in terms of transaction volume, it does
15:49
Speaker 2: seem like there's no way that you can cut it
15:52
Speaker 2: otherwise that Americans are looking to slightly deviate in terms
15:56
Speaker 2: of what is going to their grocery basket on a
15:59
Speaker 2: weekly or however frequently they shot basis. Now some of
16:02
Speaker 2: the reasons that are attributed to this decline and volume.
16:06
Speaker 2: The rise in weight locks drugs is something that has
16:08
Speaker 2: been cited. The reduction in food stamps is another one
16:11
Speaker 2: that has been mentioned. But however you look at it,
16:14
Speaker 2: shoppers are buying less. It is anticipated that over the
16:18
Speaker 2: course of this year that we would see the prices
16:22
Speaker 2: across all food categories rise about three point two percent.
16:27
Speaker 2: That's according to the Department of Agriculture Economic Research. So
16:31
Speaker 2: it will be something that will be on the front
16:33
Speaker 2: of consumer's mind. So we'll continue to fall it. But
16:36
Speaker 2: another story that I really.
16:38
Speaker 3: But I just can I point out can say another
16:40
Speaker 3: thing about that this is a gimmick. I mean, yes,
16:44
Speaker 3: you're lowering prices on some conspicuous things. That little basket
16:47
Speaker 3: you quoted was a sort of eclectic, random selection of things. Overall,
16:56
Speaker 3: food prices are going to continue to rise. Transportation costs
16:58
Speaker 3: are going up, and Chuck and others on this show
17:01
Speaker 3: have talked about diesel prices they've spiked and they're going
17:04
Speaker 3: to continue to go up because Russia is now cutting
17:06
Speaker 3: off exports. Obviously, that makes transportation more expensive, which feeds
17:10
Speaker 3: into food and grocery prices. So it's going to take
17:13
Speaker 3: more than a couple of gimmicks by industries that are
17:17
Speaker 3: bullied by say the President, and understandable if I were
17:20
Speaker 3: in his shoes, I guess I'd be doing the same
17:22
Speaker 3: thing if to the extent that I had influence, and
17:24
Speaker 3: he does. So they're going to make some big, conspicuous cuts,
17:27
Speaker 3: but it's not going to make a dent in overall
17:30
Speaker 3: inflation because the forces driving inflation don't originate with grocery
17:35
Speaker 3: store pricing practices, So browbeating grocery stores or gas stations
17:41
Speaker 3: misdiagnoses the problem. There are a lot of things the
17:43
Speaker 3: government can control. It can control the money supply via
17:49
Speaker 3: via the usual methods that the Fed employees. It can
17:54
Speaker 3: control shorter interistrates, I should have said via its control
17:57
Speaker 3: over the money supply, and that's something that is within
17:59
Speaker 3: the federal government's control. But if you tighten monetary policy
18:03
Speaker 3: to reduce inflation, you generally also drive up unemployment.
18:08
Speaker 2: That's that's the difficult balance that you find yourselves in. Yeah,
18:11
Speaker 2: to be clear, just because Walmart announces that they're giving
18:15
Speaker 2: you a deal on cherries or twenty four pack of
18:19
Speaker 2: Coca Cola, that doesn't mean that they're just foregoing their
18:23
Speaker 2: margins on other areas. And both those markets, both gas
18:27
Speaker 2: and food, there are low margin businesses, so there really
18:30
Speaker 2: isn't a lot to cut. There's a tremendous amount of
18:33
Speaker 2: competition in both of them, so they can only do
18:36
Speaker 2: so much. And to your point, market is a bit
18:38
Speaker 2: of a promotional endeavor, and I yeah, and you know,
18:42
Speaker 2: listeners shouldn't take it as all of a sudden. There
18:44
Speaker 2: are deals everywhere and everything's on sale. It's just a
18:49
Speaker 2: promotional activity to try and get you into the stores
18:52
Speaker 2: and hopefully when you're in there you buy more stuff.
18:55
Speaker 2: That is certainly something that all the grocers are focused on.
19:00
Speaker 2: Taking a look around at markets we're in relatively light
19:04
Speaker 2: trading activity today. The S and P five hundred is
19:07
Speaker 2: up slightly and the Dow Jones is up about seventy
19:12
Speaker 2: eight points. Taking a look at oil, it sits around
19:15
Speaker 2: seventy two dollars a barrel of down about a half
19:18
Speaker 2: percent or so. We're going to take a break here
19:21
Speaker 2: in the Financial Exchange, but when we come back, we're
19:23
Speaker 2: going to have Wall Street Watch and much more on
19:27
Speaker 2: interest rates right after this break.
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19:55
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20:00
Speaker 4: Markets trading modestly lower to close out the week as
20:03
Speaker 4: investors castes cautiously await developments out of the Middle East
20:07
Speaker 4: between the US and Iran. South Korean ship maker sk
20:10
Speaker 4: Hynix is also making its debut on the Nasdaq later
20:14
Speaker 4: on this morning, most likely in the largest ever market
20:16
Speaker 4: debut by a foreign company. Right now, the Dow is
20:20
Speaker 4: down just over a tenth of a percent, SMP five
20:22
Speaker 4: hundred is down merely five points. NASDAK down about a
20:26
Speaker 4: quarter percent, Russ two thousands down two thirds of a percent,
20:29
Speaker 4: Russell two thousand excuse me tenyure treasureeled is up two
20:33
Speaker 4: bass points at four point five to six percent, and
20:36
Speaker 4: oil down about a half a percent, trading right around
20:40
Speaker 4: seventy one dollars a barrel. Delta beat second quarter earnings expectations,
20:45
Speaker 4: citing strong demand across the board. CEO Ed Bashan said
20:48
Speaker 4: in an interview with CNBC that he expects pricing power
20:51
Speaker 4: from the surge in jet fuel prices for the company
20:55
Speaker 4: to last even as oil prices fall. Delta down by
20:59
Speaker 4: two percent. It's meanwhile, shares in WD forty jumping nearly
21:03
Speaker 4: seventeen percent after beating earnings expectations and also hiking it's
21:07
Speaker 4: full year guidance. Elsewhere, the Wall Street Journal reported that
21:10
Speaker 4: Netflix is discussing the addition of live channels and bundling
21:14
Speaker 4: other subscription based streaming services to bolster subscriber engagement. Netflix
21:20
Speaker 4: shares are off by three percent and shares in telecommunications
21:24
Speaker 4: firm Vodaphone jumping thirteen percent after it was revealed French
21:29
Speaker 4: billionaire Xavier Neil took a sixteen percent stake in the
21:32
Speaker 4: company worth about six billion dollars. I'm Tucker Silova, and
21:37
Speaker 4: that is Wallstreet Watch.
21:40
Speaker 2: Axios has a piece here regarding the yields on inflation
21:44
Speaker 2: protected long term treasury bonds. There are a lot higher
21:48
Speaker 2: than they've been in decades, and they are quoted as saying, Axios,
21:53
Speaker 2: this is one of the times when what is happening
21:55
Speaker 2: in the bond market matters to the stock market mark.
21:59
Speaker 2: It was wonder if you could elaborate on just what
22:01
Speaker 2: tips are treasure inflection inflation protected securities and why it
22:06
Speaker 2: is so important as to its impact at the moment.
22:09
Speaker 3: No, I'm kidding.
22:12
Speaker 2: Then I'm in trouble because this is this is this
22:16
Speaker 2: is a good topic.
22:16
Speaker 3: This is a this is a good to Now you
22:18
Speaker 3: could handle it just fine, but you need to give
22:21
Speaker 3: me something to do.
22:22
Speaker 1: So.
22:23
Speaker 3: Uh so, real yields are I'll just define them. You
22:28
Speaker 3: take the stated interest rate, the one in the newspaper,
22:30
Speaker 3: the ten year treasury yield about four point five percent.
22:33
Speaker 3: You subtract expected inflation from that because inflation, well you
22:39
Speaker 3: subtracted expected inflation. You get the real yield. That's the
22:42
Speaker 3: textbook definition. But as you may have sense from that definition,
22:49
Speaker 3: these things are not There's no such thing as a
22:50
Speaker 3: real yield, so we have to infer it from financial
22:53
Speaker 3: instruments that are adjusted for inflation. They get you close
22:57
Speaker 3: to what the real yield the after inflation interest rate,
23:00
Speaker 3: which is what we care about is investors. They get
23:04
Speaker 3: you close to what that should be. The real yield
23:07
Speaker 3: on say the ten year Treasury is up about zero
23:10
Speaker 3: point four percentage points forty basis points if you prefer
23:14
Speaker 3: the finance jargon this year, So real yields are rising.
23:19
Speaker 3: Real yields again after inflation. Interest rates had been coming
23:25
Speaker 3: down for decades right along with nominal yields. Interest rates
23:29
Speaker 3: have been declining, had been through COVID, declining since the
23:32
Speaker 3: early nineteen eighties. So something's changed. If you look at
23:35
Speaker 3: a chart of say the yield on the ten year
23:37
Speaker 3: treasury real or nominal nominal as finance jargon for interest
23:41
Speaker 3: rates with inflation, and it's the rate you see quoted
23:43
Speaker 3: in the newspaper that's been trending up since COVID, So
23:47
Speaker 3: what's changed. Well, if you think about longer term rates
23:51
Speaker 3: as being composed of two things, short future short term
23:56
Speaker 3: rates like what the Fed's going to do in the future,
23:58
Speaker 3: and then some kind of reward a risk premium for
24:05
Speaker 3: buying a bond and holding it for say, ten years,
24:07
Speaker 3: when you don't know what the future is going to hold.
24:09
Speaker 3: That allows you to think and turn about, well, if
24:13
Speaker 3: those are the components of real rates, future, expected short
24:17
Speaker 3: term real rates and future and some compensation for uncertainty
24:22
Speaker 3: of risk premium, that gives you a framework for thinking
24:25
Speaker 3: about what might be driving real rates upward over the
24:29
Speaker 3: past several years, and we've seen that trend continue this year.
24:35
Speaker 2: I am just I've been so startled since the beginning
24:38
Speaker 2: of your explanation that you just were going to cut
24:41
Speaker 2: off and not give the explanation of the first Listit
24:43
Speaker 2: made me reminiscent to when I kicked you and I
24:47
Speaker 2: had a scratch in my throat and you gave me
24:50
Speaker 2: two word answer on another show and I was dying.
24:54
Speaker 3: Prompt me to rant about the feed or something which
24:58
Speaker 3: is not hard.
24:59
Speaker 2: It's not our I don't think fed.
25:01
Speaker 3: So there's a little bit more on this, and naturally
25:06
Speaker 3: we've got a framework now. Well, ray real rates could
25:08
Speaker 3: be going up because expected future that's a little redundant,
25:12
Speaker 3: but expected short term rates are going up, or the
25:15
Speaker 3: premium for holding say a government instrument over a long
25:19
Speaker 3: period of time, is going up because the government's fiscal
25:21
Speaker 3: situation gets worse by the minute. It could be one
25:25
Speaker 3: or both of those things that are driving up real
25:27
Speaker 3: rates this year. It could also be there's actually a
25:31
Speaker 3: third factor, and it's investment demand. All these data centers,
25:35
Speaker 3: all the debt being issued by the so called hyper scalers,
25:39
Speaker 3: that firms like Meta and others that are building the
25:42
Speaker 3: infrastructure to run these AI programs, buying computers to run
25:46
Speaker 3: AI programs. In short, that soaks up capital. Competes with
25:51
Speaker 3: you and me for capital. You want to take out
25:53
Speaker 3: a mortgage, you're competing with Meta if they're in the
25:56
Speaker 3: putt in, not not directly, but indirectly. Sure, so that
25:59
Speaker 3: could also be driving up future expectations of future rates. Paul.
26:02
Speaker 2: To that point, we hit a trough on the US
26:04
Speaker 2: tenure treasury earlier this year around three point nine to
26:08
Speaker 2: five percent. It peaked out at four point sixty six percent.
26:12
Speaker 2: We now sit at four point five five percent, and
26:16
Speaker 2: that has a direct impact on what we're seeing here
26:19
Speaker 2: in the housing market. We just got data yesterday for
26:22
Speaker 2: the month of June in terms of what we saw
26:25
Speaker 2: for the US domestic home sales, and it was a
26:27
Speaker 2: very weak month of June, which is typically the most
26:32
Speaker 2: activity that you'll see in a calendar year is occurring
26:34
Speaker 2: in the month of June, a really sort of crystallization
26:37
Speaker 2: of the spring housing market coming through. And what we
26:39
Speaker 2: saw was a two point four percent decline in terms
26:43
Speaker 2: of sales in the month of Jude compared to the
26:47
Speaker 2: month of May. And there are numerous different factors to
26:51
Speaker 2: kind of examine with this housing data that we got yesterday. First,
26:55
Speaker 2: like I mentioned, is you know, the decline in transaction
26:58
Speaker 2: volume month over month. Some of that I think does
27:01
Speaker 2: play into what we've seen on the mortgage rate front,
27:03
Speaker 2: where we were just below six percent on the thirty
27:07
Speaker 2: year fixed mortgage earlier this year. Last week the average
27:11
Speaker 2: was about six point four to three percent, So we've
27:14
Speaker 2: almost seen about a half percent increase from the troughs
27:17
Speaker 2: on the thirty year fixed mortgage to where we were
27:20
Speaker 2: as of last week. And Lawrence Young, who is the
27:23
Speaker 2: head economist of the National Associate of Realtors, has mentioned
27:26
Speaker 2: that the reason that we're seeing the divergence and monthly
27:29
Speaker 2: activity is because of this sensitivity to interest. Rakes Mark, Yeah, you.
27:35
Speaker 3: Know, I'm looking at the thirty year fixed rate mortgage.
27:38
Speaker 3: You could see this in a number of places Yahoo
27:41
Speaker 3: or the Federal Reserve Economic Database so called FRED. It
27:45
Speaker 3: much like inter because it moves in sync with the
27:47
Speaker 3: ten year treasury, because most mortgages are paid off a
27:49
Speaker 3: lot sooner than than thirty years. As you know, and
27:52
Speaker 3: as anybody listening knows, because you guys talk about it
27:54
Speaker 3: a lot. Ten year treasury thirty year mortgage very highly correlated.
27:58
Speaker 3: Their daily movements have a close correspondence. That also the
28:03
Speaker 3: thirty year mortgage. To fix the rate on the thirty
28:05
Speaker 3: year mortgage trended down for three decades and in the
28:08
Speaker 3: twenty tens never got higher than five percent once or
28:12
Speaker 3: twice early in the decade. Since twenty twenty two, it's
28:16
Speaker 3: been above six percent, above seven at times and has
28:19
Speaker 3: never looked back. So there's been a shocking if you're
28:23
Speaker 3: a mortgage a potential borrower, there's been a shocking change
28:27
Speaker 3: to that trend as well. Equally, shot, if you had
28:31
Speaker 3: told you or me that I think six years ago,
28:33
Speaker 3: before all this business, this covided business, the resulting inflation,
28:37
Speaker 3: et cetera started, and you told us that the fixed
28:40
Speaker 3: rate mortgage was going to be double the average. The
28:42
Speaker 3: thirty year was going to be double the average this
28:45
Speaker 3: decade relative to last decade. I would have predicted a
28:48
Speaker 3: because I would have said, well, all lse equal housing
28:50
Speaker 3: presidents should collapse, right, because it's they have to move
28:55
Speaker 3: inversely to interest rates at some point. But they haven't,
28:58
Speaker 3: which is which is surprising.
29:01
Speaker 2: Yeah, we can think not think I'm going to be
29:03
Speaker 2: sarcastic when I say this, the limited development on the
29:07
Speaker 2: inventory front post great financial crisis to the as to
29:10
Speaker 2: the reason why prices hasn't come down, and it's been
29:14
Speaker 2: a detriment for a lot of home buyers out there.
29:16
Speaker 2: You've only you not only have you had to combat
29:19
Speaker 2: higher interest rates twice what they were, you know, five
29:22
Speaker 2: or six years ago, but also you've had home prices appreciate,
29:25
Speaker 2: you know, upwards of fifty percent depending on the region
29:28
Speaker 2: over the course of the last five or six years,
29:31
Speaker 2: making the affordability issue at the forefront of many Americans minds.
29:35
Speaker 2: We now have hit a record for the national median
29:38
Speaker 2: home price of four hundred and forty six hundred dollars
29:42
Speaker 2: as of June's data. On the inventory front, we still
29:47
Speaker 2: are running at about one point five million active homes
29:50
Speaker 2: being listed. That's equivalent at this sales pace to about
29:54
Speaker 2: four point six months of inventory. Typically, you kind of
29:56
Speaker 2: want it to be around six months to have a
29:58
Speaker 2: good balance between inventory for buyers and sellers to really
30:02
Speaker 2: be able to strike a fair deal. And it dovetails
30:05
Speaker 2: into our story here about just younger Americans are questioning
30:09
Speaker 2: as to whether or not buying a home is a
30:13
Speaker 2: valuable investment. In this piece, the outline the opportunity cost
30:18
Speaker 2: that one homeowner experienced by putting thirty percent down on
30:21
Speaker 2: a property that was valued at nine hundred and fifty thousand.
30:24
Speaker 2: He claims that if he had invested in the s
30:26
Speaker 2: and P five hundred, that he would have done far. Brother,
30:29
Speaker 2: that's a little bit of cherry picking. What was a
30:31
Speaker 2: very robust time for the SMP. So, I don't know
30:35
Speaker 2: if I fully ascribe to that, but certainly the affordability
30:38
Speaker 2: issue has been prevalent mark for the last few years here.
30:43
Speaker 3: Yeah, I mean, have you seen them do anything other
30:46
Speaker 3: than new construction? Are they doing anything other than, aside
30:49
Speaker 3: from multifamily, tearing down a reasonably priced, modest size home,
30:54
Speaker 3: modest meaning much bigger than the house I grew up
30:56
Speaker 3: in but these days be less than twenty five hundred
30:57
Speaker 3: square feet. They're tearing them down and building monsters for
31:02
Speaker 3: or so thousand square feet. Just pulling those numbers out
31:04
Speaker 3: of thin air. But I bet I'm not too far off.
31:06
Speaker 3: So we've got at least here in the Northeast, new
31:10
Speaker 3: supply is probably a lot more expensive than whatever it's replacing.
31:14
Speaker 3: That's one thing that sort of comes to mind. I
31:16
Speaker 3: have no data on that, but I suspect that's part
31:19
Speaker 3: of the driver. What was the other point you made.
31:22
Speaker 2: Definitely is that was just that that investors not investors, Americans,
31:26
Speaker 2: younger ones less conscious.
31:28
Speaker 1: Yeah, I can.
31:29
Speaker 3: I mean, let me answer that. Look how home prices
31:31
Speaker 3: competing with like stock prices in terms of appreciation, that's
31:34
Speaker 3: an anomaly. Up to the nineties, home prices changed about
31:38
Speaker 3: the rate of inflation. In other words, you got out
31:41
Speaker 3: with what you put in adjusted for changes in the
31:46
Speaker 3: level of prices adjusted for inflation. So homes were not
31:49
Speaker 3: historically up until the nineties, when admittedly something changed, homes
31:54
Speaker 3: were not an investment. I'm not saying real estate was
31:56
Speaker 3: not an investment. I'm not saying homes in certain markets
32:00
Speaker 3: in Florida and southern California at one time weren't didn't
32:07
Speaker 3: appreciate tremendously. I'm just saying on average, home prices were
32:10
Speaker 3: not did not do any better than inflation in terms
32:13
Speaker 3: of their growth rate.
32:15
Speaker 2: We'll have to keep an eye on the real estate
32:17
Speaker 2: data as it comes out here in subsequent months. But
32:19
Speaker 2: not a great month of June.
32:20
Speaker 1: Here.
32:20
Speaker 2: We're gonna take a quick break here on the Financial Exchange.
32:23
Speaker 2: But when we come back, we're going to be talking
32:25
Speaker 2: about the oil market. It is not ready for the
32:29
Speaker 2: Iran ceasefire to end. We'll have much more on the
32:31
Speaker 2: energy markets and the markets in general right after this break.
32:34
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33:04
Speaker 2: Prices at the Pump have come down a little bit
33:07
Speaker 2: from the peak levels that we saw at four dollars
33:10
Speaker 2: and fifty cents a gallon. We now sit with a
33:13
Speaker 2: national gas average of three dollars and eighty five cents
33:16
Speaker 2: a gallon. However, this peak here in the Wall Street
33:20
Speaker 2: Journal discusses how this is not something that is permanent
33:25
Speaker 2: by any means. We are going to continue to see
33:27
Speaker 2: potential volatility in the energy markets here over the course
33:32
Speaker 2: of the next few months or so. What's occurred is
33:34
Speaker 2: over the course of the war, many countries have depleted
33:38
Speaker 2: a lot of their strategic reserves to kind of keep
33:41
Speaker 2: the market, the oil market bullyed here in terms of
33:44
Speaker 2: the supply and demand imbalance that we are experiencing. With
33:47
Speaker 2: the Strait of Hormuz closed. However, it leaves places and
33:51
Speaker 2: different countries in a lean spot if we were to
33:54
Speaker 2: go through any type of further disruption that was evidenced
33:57
Speaker 2: earlier this week when fighting between the US and Io
34:00
Speaker 2: ran resumed. We saw oil spike up about five or
34:03
Speaker 2: six percent, and it continues to be an area that
34:07
Speaker 2: is quite fragile. Mark here heading into the next couple
34:11
Speaker 2: months that there doesn't leave a lot of inventory left
34:16
Speaker 2: within reserves because of what's gone on in the prior
34:19
Speaker 2: months here during the war.
34:21
Speaker 3: Yeah, so we'll probably see inflation come and go, And
34:25
Speaker 3: I was gonna say fits and starts, but it's more
34:27
Speaker 3: like episodic bursts followed by periods of disinflation. The rate
34:33
Speaker 3: of inflation following that is for the foreseeable future. I mean,
34:37
Speaker 3: there's no end to this. Whatever we're calling it now,
34:40
Speaker 3: you get into trouble if you call it a war
34:43
Speaker 3: with some people. The President himself calls it a war
34:46
Speaker 3: from time to time, conflict, dust up, stalemate. I don't
34:50
Speaker 3: know what to call it without offending some people, so
34:53
Speaker 3: we'll just call it conflict in the Middle East. Iran
34:56
Speaker 3: has no incentive to bring this to ahead any to
35:01
Speaker 3: resolve this anytime soon they like, well, for lots of
35:06
Speaker 3: different reasons. They have no incentive. We don't appear to
35:09
Speaker 3: have a clear endgame in mind. We're just gonna bomb
35:12
Speaker 3: them every so often. That didn't work for like eight
35:14
Speaker 3: weeks straight, but we're gonna continue to do that periodically
35:17
Speaker 3: and hope that what brings them to their senses or something.
35:21
Speaker 3: But at the same time, we don't think they have
35:22
Speaker 3: senses to be brought to So I don't know, Paul,
35:24
Speaker 3: Might I guess if I had to guess based on
35:26
Speaker 3: this sort of incoherent policy on our part and the
35:29
Speaker 3: incentives facing the Iranians who have no accountability to their electorate.
35:35
Speaker 3: This goes on what a long time.
35:38
Speaker 2: I could see that for sure.
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36:59
Speaker 2: Tucker reference to earl, Delta came out with their earnings
37:02
Speaker 2: yesterday for the second quarter. They're still feeling the impacts
37:06
Speaker 2: of fuel expenses, which are up seventy seven percent from
37:10
Speaker 2: a year earlier. In Q two, they spent about four
37:12
Speaker 2: point four billion on fuel. However, they continue to see
37:16
Speaker 2: a tremendous amount of demand for their airfares, and the
37:19
Speaker 2: CEO was quoted as saying that they don't anticipate bringing
37:23
Speaker 2: down airfares. Even with the recent drop in energy prices,
37:27
Speaker 2: Delta continues to drive a lot of margin from their
37:32
Speaker 2: premium travelers. That premium seat market is up seventeen percent
37:36
Speaker 2: from where it was last year. That has been a
37:38
Speaker 2: big focus of the airline. Broadly speaking, airfares from the
37:43
Speaker 2: end of the month of May or up twenty seven
37:45
Speaker 2: percent from where they were last year, and by all accounts,
37:49
Speaker 2: it doesn't seem like travel demand is slowing across all
37:53
Speaker 2: of the major airline carriers, and they continue to combat
37:56
Speaker 2: higher prices on the fuel side of things. So we'll
37:59
Speaker 2: keep you aprop as more earnings come out from some
38:02
Speaker 2: of those major airliners over the course of the next
38:04
Speaker 2: few weeks. That's all the time that we have for
38:07
Speaker 2: the first hour of our program here. Markets are open
38:09
Speaker 2: and relatively mixed, territory pretty flat on the day. We'll
38:13
Speaker 2: have much more on the markets and the economy right
38:16
Speaker 2: after this break here on the Financial Exchange