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Is the Fed in a lose-lose scenario? · The Financial Exchange Show

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Speaker 1: Face is the Financial Exchange with Mike Armstrong and Mark Vandetti.
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Speaker 2: Good morning, welcome back to the Financial Exchange. We've got
1:14
Speaker 2: a market here in negative territory, but slowly improving. The
1:17
Speaker 2: Dow off currently one hundred and forty points, about a
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Speaker 2: third of a percent. The S and P is similarly down,
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Speaker 2: and the NASDAC off a little bit worse about a
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Speaker 2: half a percent, but cutting those losses about in half
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Speaker 2: from earlier trading. It's Mike Armstrong, Mark Vandetti and Tucker
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Speaker 2: Silva with you here on a Tuesday ahead of a
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Speaker 2: Wednesday FED meeting, and they are going to face a
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Speaker 2: challenging series of FED meetings, I think, over the next
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Speaker 2: several months here, because as they have alluded to, they're
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Speaker 2: just uncertain as to whether they need to be focusing
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Speaker 2: more on employment or more on inflation, which, by the way,
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Speaker 2: we're dramaticizing this a little bit right now. They are
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Speaker 2: always focused on those two items and financial stability generally,
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Speaker 2: which I guess is a little bit more sensitive today
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Speaker 2: than has been at other times recently. But this is
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Speaker 2: nothing new. The FED is always concerned about the dual mandate,
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Speaker 2: their job of maintaining full employment and stable prices. The
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Speaker 2: question is will that be significantly more challenging in twenty
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Speaker 2: twenty five than it has been over the course of J.
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Speaker 2: Powell's previous tenure.
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Speaker 3: Yeah, you know, if you look at recent history and
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Speaker 3: episodes where they may have gotten the balance between those
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Speaker 3: two forces, between the force of the forces that drive
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Speaker 3: inflation up the forces that drive unemployment up, or what
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Speaker 3: is the same thing employment in growth down. In twenty twenty,
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Speaker 3: for example, the FED was faced with how to respond
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Speaker 3: to a massive shock to supply things stopped coming in
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Speaker 3: and to demand. Both the Trump and the Biden administrations
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Speaker 3: poured a lot of money into the economy David directly to.
3:02
Speaker 2: Consumers PPP stimulus checks.
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Speaker 3: Yeah, three trillion under Trump and then another at least
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Speaker 3: that much under Biden. And the continued deficits to this
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Speaker 3: day are a form of stimulus. So the Fed's good
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Speaker 3: to decide is this temporary? Is it going to affect
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Speaker 3: expectations which are an important part of the inflation process.
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Speaker 3: Should we tighten in response, should we loosen in response
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Speaker 3: to the supply show.
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Speaker 2: Good Michael, you paved over something that I think is
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Speaker 2: important for us to identify. The deficits that the United
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Speaker 2: States run are a form of stimulus. It's very basic.
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Speaker 2: But can can you back up and kind of explain that,
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Speaker 2: because by its very nature, running a deficit, to your point,
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Speaker 2: is a stimulative measure. Right, you are run us through it,
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Speaker 2: I guess. But why do we have deficits?
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Speaker 3: Well, for different reasons at different times. But the reason
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Speaker 3: they're generally considered to be stimulative or expansionary use of
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Speaker 3: to economic expansion is that they put money into the economy.
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Speaker 3: When the government runs a deficit, it's because it's spending
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Speaker 3: more than it takes in. Government takes in money, mostly
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Speaker 3: from income taxes, but also a little bit from tariffs
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Speaker 3: and fees and remittances from the Federal Reserve, which typically
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Speaker 3: but not always earns money and excess of its operating expenses.
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Speaker 3: So when the government spends more than it takes in,
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Speaker 3: this is I know you all know this, but it's
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Speaker 3: worth remembering that big deficits constitute putting more money other
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Speaker 3: than the government otherwise otherwise could from receipts into the economy,
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Speaker 3: and that's generally considered to be stimulative.
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Speaker 2: And so, for example, economic activity in twenty twenty four,
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Speaker 2: I don't know many people that were receiving physical stimulus checks.
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Speaker 2: Maybe a few people that didn't didn't receive theirs when
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Speaker 2: they should have. But not a lot of people were
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Speaker 2: receiving actual stimulus checks, but we ran what six seven
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Speaker 2: percent deficits. So yeah, while they weren't payments going directly
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Speaker 2: to individuals, there were payments going to semiconductor manufacturers and
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Speaker 2: all sorts of green energy companies and right, significantly more
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Speaker 2: than the tax revenue that was being collected.
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Speaker 3: And the part I left out was that the government
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Speaker 3: borrows by issuing debt. People buy that debt. The government
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Speaker 3: uses the money that people give them when they buy debt,
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Speaker 3: whether it's US buying treasury bills, notes, or bonds, or
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Speaker 3: foreigners recycling the dollars that come from trade into treasury
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Speaker 3: securities that is then used by consumers to whom the
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Speaker 3: government sends money. Think of people who get Social Security
5:31
Speaker 3: and people who get any other number of people who
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Speaker 3: are employed by the government, for example, any number of
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Speaker 3: things that government may spend money on that in turn
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Speaker 3: is put into the economy and becomes current consumption. So
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Speaker 3: they're borrowing the government is to fund current consumption. And
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Speaker 3: thankfully foreigners have been willing to lend us the money
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Speaker 3: to finance current consumption.
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Speaker 2: At pretty nice rates.
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Speaker 3: That's why we yeah since World War Two. Really the
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Speaker 3: privilege of being the world's reserve currency, privilege that comes
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Speaker 3: along with being the world's most trusted creditor, which is
6:04
Speaker 3: why the Secretary Bessett this morning said the United States
6:09
Speaker 3: will never default. The US government shouldn't even have to
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Speaker 3: reiterate that, but it is a cornerstone principle of the
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Speaker 3: sound and orderly functioning of the world economic order.
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Speaker 2: So the Wall Street Journal says the FED is confronting
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Speaker 2: a lose lose scenario amid these tariff rollouts. Would you
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Speaker 2: describe it as such? And what are the pitfalls for
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Speaker 2: the FED?
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Speaker 3: Here? The way I would put it is they got
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Speaker 3: a tough choice when this stagflationary stag being the slow
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Speaker 3: down part, flationary being the price increased part. When the
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Speaker 3: stagflationary effects of tariff's hits, the FED has to decide
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Speaker 3: do we keep rates where they are so that inflation
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Speaker 3: doesn't persist and it can persist through expectations or other mechanisms,
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Speaker 3: or do we accommodate even this shock to mitigate the
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Speaker 3: stag part by lowering interest. It's a little bit in
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Speaker 3: which case inflation could really spiral lot of control. The
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Speaker 3: FED made this mistake during the nineteen seventies, arguably in
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Speaker 3: response to oil and food and other shocks. There was
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Speaker 3: a productivity shock. There were numerous shocks that did during
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Speaker 3: the nineteen seventies that the FED didn't in retrospect respond
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Speaker 3: adequately restrictively too. So yeah, they've got there are no
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Speaker 3: good options here. The question is do you want to
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Speaker 3: let inflation run up a bit and not sacrifice as
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Speaker 3: much growth, not let unemployment go up as much as
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Speaker 3: it otherwise would, or do you want to stamp out
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Speaker 3: inflation pressures? Maybe mindful of what just happened with the
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Speaker 3: COVID inflation episode and how that roiled the political landscape
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Speaker 3: and has imperiled the Fed's independence, the FED wouldn't be
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Speaker 3: in the position it's in today with respect to its
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Speaker 3: independence being threatened had they not made the choices they
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Speaker 3: did in twenty twenty. Maybe they were the right choices.
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Speaker 3: I'm not arguing at your point. I'm saying there are
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Speaker 3: no good choices in the face of a stagflationary shock.
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Speaker 2: And how much of the depends on which shows up first.
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Speaker 2: It is not necessarily like if you get stagflation. It's
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Speaker 2: not necessarily the case that all of a sudden, come
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Speaker 2: June of twenty twenty five, you're gonna have unemployment and
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Speaker 2: inflation showed up both by you a percentage point and
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Speaker 2: a half. It's quite possible that you get the inflation
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Speaker 2: piece before you get the stag piece, and I don't
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Speaker 2: know how they react in that.
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Speaker 3: I agree with you. I'm trying to reference. I wish
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Speaker 3: I could reference some work on this subject that says, well,
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Speaker 3: they hit some of the stag inflation, the economics slow
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Speaker 3: down and the price level jump, and then the ongoing
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Speaker 3: inflation hit simultaneously. I tend to think we'll see the
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Speaker 3: inflation first and then be GDP because it's delayed a quarter.
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Speaker 3: We'll see the effect of the shock of tariffs on growth. Well,
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Speaker 3: we already have seen the effect of the shock of
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Speaker 3: tariff's unbehavior. We saw that negative first quarter GDP growth.
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Speaker 2: To me, the question is what comes first, the signals
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Speaker 2: unemployment or the signals on inflation.
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Speaker 3: Well, unemployment is more backward looking, so I expect inflation.
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Speaker 3: We'll go we'll see this, we'll see the we'll see
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Speaker 3: the inflation part of stagflation first. I agree with you
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Speaker 3: and then further signs of economic distress.
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Speaker 2: Yeah, so again very challenging. The comparisons being made to
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Speaker 2: like a soccer goaltender, right, do you dive left and
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Speaker 2: try and or dive right and try and guess what
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Speaker 2: is coming in terms of next for this economy. And
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Speaker 2: in the short term, they're probably not going to move
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Speaker 2: at all. They're going to stand there and wait to
9:33
Speaker 2: see what happens. But eventually, I suspect the FED is
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Speaker 2: going to be forced to either address inflation or address unemployment.
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Speaker 2: And my guess would be they favor the unemployment side
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Speaker 2: more than they do the inflation side. History would show
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Speaker 2: that out. And I don't you know, I have no
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Speaker 2: guess what happens next in that scenario. But the United
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Speaker 2: States has rarely over the last fifty years been plagued
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Speaker 2: by a prolonged period of inflation, and so I think
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Speaker 2: that my guess would be, if you start facing this
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Speaker 2: stagflationary environment, they are going to favor the employment side
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Speaker 2: more and they are going to start whipping out the
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Speaker 2: transitory word.
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Speaker 3: Again, problem is, we don't know how quickly prices will
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Speaker 3: adjust to the slow down and growth. Assuming there is
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Speaker 3: a stag a severe stag part of the stagflation, the
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Speaker 3: FED is going to hope prices adjust fast. If they don't,
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Speaker 3: that's when you get persistent inflation, which was a problem
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Speaker 3: during the nineteen seventies. The only little prediction I'll make
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Speaker 3: here is that nobody's going to be happy with the Fed,
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Speaker 3: not you, not me, certainly not the president, and nobody
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Speaker 3: generally will be happy with the Fed in six months.
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Speaker 3: It doesn't have any good choices.
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Speaker 2: What else is new? Yeah, in terms of those expectations,
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Speaker 2: obviously for this next meeting tomorrow, almost guaranteed no move
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Speaker 2: on rates, ninety seven percent probability that rates stay exactly
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Speaker 2: where they are according to the Chicago Mercantile Exchange FED
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Speaker 2: Watch tool by the end of this year. However, if
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Speaker 2: we take a look there again, we are at the
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Speaker 2: the target range of between four and a quarter and
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Speaker 2: four and a half percent. The most likely outcome for
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Speaker 2: FED funds rate is to be in the three and
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Speaker 2: a half to three seven to five range, nearly three
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Speaker 2: quarters of a percent lower than where we are right now,
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Speaker 2: and a wide dispersion there, with some scenarios calling for
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Speaker 2: dramatic cuts. But the thing I take away here, which
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Speaker 2: once again, just playing contrarian here for a moment. Nobody's
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Speaker 2: betting on rates going up, and I think that's justified
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Speaker 2: because I don't know that there's enough money sloshing around
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Speaker 2: when we're talking about all this to lead to prolonged inflation.
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Speaker 2: But you know, you get tax cuts, you get a
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Speaker 2: whole bunch of you know, maybe you get bailouts for
11:40
Speaker 2: farmers or other things in response to these tariffs. I
11:44
Speaker 2: am worried about that risk to the upside on rates
11:47
Speaker 2: that is definitely not being priced into markets right now.
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Speaker 3: I think that's a great point.
11:51
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11:53
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13:16
Speaker 2: Mark. I just got back from Arizona. I was over
13:18
Speaker 2: there over the weekend, visiting family, celebrating somebody's life, and
13:23
Speaker 2: one thing I was surprised about, just giving its politics
13:26
Speaker 2: as well as geography, is gas prices in Arizona. So
13:30
Speaker 2: the average nationally for gas is three dollars sixteen cents.
13:34
Speaker 2: In Arizona, it's nearly three dollars thirty cents compared to Massachusetts,
13:39
Speaker 2: where the average is sitting below three dollars per gallon.
13:42
Speaker 2: At the moment, all of this reaction to oil prices
13:46
Speaker 2: really plummeting over the last few months. Here we've got
13:49
Speaker 2: the price of a barrel of oil on West Texas
13:52
Speaker 2: crewed below sixty dollars right now. It's moving up a
13:55
Speaker 2: little bit today. Actually, it's up two dollars fifty cents
13:58
Speaker 2: today on just some kind of bottom buying, it seems.
14:02
Speaker 2: But according to Diamondback Energy, shale output has seemingly peaked.
14:08
Speaker 2: And I don't know how much this kind of contradicts
14:10
Speaker 2: the Trump stated goal of, you know, drilling everywhere we can.
14:14
Speaker 2: But the fact of the matter is that at these prices,
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Speaker 2: the premium base and shale just does not look terribly
14:21
Speaker 2: attractive right now in terms of profitability to get oil
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Speaker 2: out of the ground.
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Speaker 3: Now the irony and we all welcome lower oil prices,
14:28
Speaker 3: though strangely, as you just pointed out, it hasn't really
14:31
Speaker 3: translated into this is always so perplexing and frankly infuriating.
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Speaker 3: Why aren't prices coming down quicker? There are good reasons
14:38
Speaker 3: why I always forget them in my fury that gas
14:42
Speaker 3: prices aren't coming down quicker. But there are good reasons
14:44
Speaker 3: I think why that we.
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Speaker 2: Need a year ago, the average for gas in the
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Speaker 2: United States was three dollars and sixty five cents. That
14:51
Speaker 2: that's in spite of the fact that oil prices over
14:55
Speaker 2: the course of the last year. You know, a year
14:58
Speaker 2: ago we're sitting at eighty dollars a barrel. Today were
15:01
Speaker 2: below sixty. So you know that a quarter of it
15:05
Speaker 2: twenty five percent drop in oil prices, and not nearly
15:08
Speaker 2: as much in terms of gas prices.
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Speaker 3: Rightly, so the irony of cheaper oil is that we
15:13
Speaker 3: will make less of it here because shale this getting
15:18
Speaker 3: oil out of tight spots, which is what fracking does, right,
15:21
Speaker 3: It pulls oil out of these really hard to get
15:23
Speaker 3: to spots that technology had to advance to the point
15:26
Speaker 3: where it could be extracted from them. From the irony
15:31
Speaker 3: is at these levels the world oil price and is
15:34
Speaker 3: a world price.
15:35
Speaker 2: We'll buy more Saudi stuff.
15:37
Speaker 3: We're going to become more dependent on. This is unavoidable.
15:40
Speaker 3: We've never been energy independent in the sense that we
15:43
Speaker 3: always export some oil because of where it's produced and
15:47
Speaker 3: the tie it's used. It gets complicated and I think
15:50
Speaker 3: we all get that, but there's absolutely no question will
15:53
Speaker 3: be produced and we already are as evidence by diamondbacks
15:57
Speaker 3: and others statements lately.
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Speaker 2: Tough to read into too much what's going on with
16:02
Speaker 2: energy prices at any given point in time. That seems
16:04
Speaker 2: like a fool's error. But a few things just kind
16:07
Speaker 2: of come to mind in terms of oil prices. One,
16:09
Speaker 2: you do have demand concerns right if you're worried about recession,
16:13
Speaker 2: which clearly the globe is worried about recession right now
16:18
Speaker 2: across the world.
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Speaker 3: We didn't get into drivers, but that seems to be
16:21
Speaker 3: the key driver.
16:22
Speaker 2: That seems to be a big one. The other piece, though,
16:25
Speaker 2: would be there seems to maybe be a price cap
16:29
Speaker 2: too under the Trump administration. I don't mean that they
16:31
Speaker 2: would implement any sort of price cap, but simply that
16:35
Speaker 2: they would be very willing to approve new drilling wells
16:39
Speaker 2: and off sure drilling. That there is not the same
16:42
Speaker 2: restriction to oil production that there was under a Biden administration.
16:46
Speaker 2: And so should you see prices, you know, shoot back
16:49
Speaker 2: up to ninety dollars a barrel, you would assume that
16:52
Speaker 2: US production would turn on so rapidly that it might
16:55
Speaker 2: bring prices back down rather quickly. Is part of my
16:58
Speaker 2: read on this too. I don't know how that plays
17:00
Speaker 2: into prices at all. It's very difficult to measure. Most
17:03
Speaker 2: of this seems to be recession concern at the moment.
17:06
Speaker 3: Yeah, I think that's how that's how you would expect
17:08
Speaker 3: this market to work. But I'll just say again, the
17:11
Speaker 3: big takeaway from me is we're going to be producing
17:14
Speaker 3: a lot less oil at sixty than we were at
17:16
Speaker 3: eighty poor ninety. We're doing like twelve thirteen million barrels
17:19
Speaker 3: a day according to the Energy Information Administration EIA, and
17:24
Speaker 3: sixty percent or so of that little more than sixty
17:26
Speaker 3: percent is shale oil.
17:28
Speaker 2: Yeah. It's always a good reminder on this stuff too.
17:30
Speaker 2: You know, people when they think about politics and the
17:35
Speaker 2: effect on markets, right, you know, one of the many
17:40
Speaker 2: things that I heard over and over again was oh,
17:42
Speaker 2: you know, what does well under a Trump presidency? What
17:45
Speaker 2: does poorly? And to be fair, this time around, all
17:48
Speaker 2: those bets are off because every investor that I've heard
17:51
Speaker 2: from out there has been surprised by the regime change
17:54
Speaker 2: when it comes to how this president is affecting markets
17:58
Speaker 2: and you know, directing things. But certain only one of
18:01
Speaker 2: the beneficiaries that a lot of people spoke to was, oh,
18:03
Speaker 2: energy markets, right, you know, if you're an oil producer.
18:07
Speaker 2: You're going to be faced with a far more relaxed
18:09
Speaker 2: regime under a Trump administration than you would have been
18:13
Speaker 2: under a Biden administration or a Harris administration. And yet
18:18
Speaker 2: the energy sector down about eight percent this year on
18:21
Speaker 2: that price effect. And by the way, very similar things
18:24
Speaker 2: played out under Bush. You had the loosening of these
18:28
Speaker 2: policies brought energy prices down, and those companies didn't do
18:32
Speaker 2: terribly well, Whereas when you had a whole bunch of
18:34
Speaker 2: really restrictive stuff going on that may have led to
18:37
Speaker 2: higher prices on oil, those companies could rake in a
18:41
Speaker 2: huge profit because you know, those who already owned the
18:44
Speaker 2: wells and were able to drill and get the oil
18:46
Speaker 2: out of the ground stood to do so at a
18:49
Speaker 2: much higher profit margin. So my lesson there is very
18:52
Speaker 2: simply that the relationships that you think are going to
18:55
Speaker 2: play out in one way or another based on how
18:58
Speaker 2: politicians phrase things don't often come true that way. And yeah,
19:03
Speaker 2: some of the you know green energy pushers out there,
19:07
Speaker 2: you know, oversaw some of the best periods of time
19:09
Speaker 2: for big oil because prices went up.
19:12
Speaker 3: It's hard for politicians to influence markets in the way
19:15
Speaker 3: they like to they're always unintended consequences that you can
19:18
Speaker 3: draw a straight line from a policy or statement to
19:21
Speaker 3: markets from yep.
19:22
Speaker 2: But you know, in terms of trying to guess what's
19:24
Speaker 2: going to be affected can be a fool's Errand let's
19:27
Speaker 2: take a quick break when we come back. Trivia winner
19:30
Speaker 2: and then talking about buying American over in Europe. Quick
19:33
Speaker 2: break would be next.
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20:00
Speaker 1: are covering. This is the Financial Exchange Radio Network.
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20:34
Speaker 2: European a bit of a backlash against American made goods
20:38
Speaker 2: and New York Times has a piece today on the subject.
20:41
Speaker 2: They mentioned specifically Hurley Davidson, which is apparently one of
20:44
Speaker 2: the hottest motorcycle brands in Sweden, Jack Daniels Whiskey, Levi Jeans, Tesla,
20:50
Speaker 2: and McDonald's. I just figured it kind of a quick
20:52
Speaker 2: recap on those stock prices so far this year might
20:55
Speaker 2: be helpful here. So Harley Davidson, tickersymble Hog stock is
20:59
Speaker 2: off by about it fifth so far this year, down
21:01
Speaker 2: twenty percent, which I would imagine is fairly similar to
21:04
Speaker 2: what you've seen to automakers here. Let's see General Motors
21:08
Speaker 2: for example. Yeah, General Motors only off about eleven percent
21:11
Speaker 2: so far this year. McDonald's actually up about eight percent
21:14
Speaker 2: so far this year. Tesla this is gonna be the
21:17
Speaker 2: loser in the scenario, off about twenty seven percent so
21:20
Speaker 2: far this year, Levi Straussen company down seven percent, and
21:23
Speaker 2: then the owner of Jack Daniels Whiskey off about seven
21:29
Speaker 2: percent as well so far this year. The question is,
21:33
Speaker 2: you know which of these companies represent Does Europe represent
21:36
Speaker 2: a huge buyer's market for it? And I don't think,
21:40
Speaker 2: as we've talked about before, the US is fairly well
21:43
Speaker 2: insulated from trade war because these companies that do business
21:47
Speaker 2: across the globe, they sell a lot of product into
21:50
Speaker 2: the United States, and we tend to produce and consume
21:55
Speaker 2: a lot of things domestically here. However, any degree of
21:59
Speaker 2: backlash against these companies, should it actually come to fruition,
22:03
Speaker 2: will be felt by shareholders pretty significantly here. Yes, it
22:06
Speaker 2: might be felt harder in Canada, for instance, if we
22:08
Speaker 2: end up in a trade war there or in China.
22:10
Speaker 2: But I don't think it can be overstated just how
22:14
Speaker 2: big the stock market impact can be, even if the
22:17
Speaker 2: economic shocks in the United States are not as bad
22:20
Speaker 2: as felt elsewhere.
22:21
Speaker 3: Sure, even a low single digit hit to profit over
22:25
Speaker 3: time cumulatively is enormous. This is the point I tried
22:30
Speaker 3: to make in the last hour. I'm much more concerned
22:33
Speaker 3: about the long term impact on growth both here and globally,
22:37
Speaker 3: because those two things are interdependent. The amount of misinformation
22:42
Speaker 3: on trade that's being disseminated at the very highest levels.
22:48
Speaker 3: I've never seen such an uninformed economic discussion in my life,
22:51
Speaker 3: and I'm not that old. In my early fifties, so
22:54
Speaker 3: I'm not that young either, and I lived through the
22:55
Speaker 3: NAFTA discussion of the early nineteen nineties, got mic.
22:58
Speaker 2: I was gonna say, I'm interested to hear where you
23:01
Speaker 2: go with this, but I'm not sure I agree because
23:04
Speaker 2: here's what I Here's what I mean by that is like,
23:06
Speaker 2: I think there's been a lot of misinformation put out
23:08
Speaker 2: there about how all this works and who actually pays
23:11
Speaker 2: for the tariffs. But it seems that the American public
23:13
Speaker 2: gets it. Yeah, no, they do.
23:15
Speaker 3: I'm sorry. I've never seen such a deliberate or inadvertent
23:21
Speaker 3: representation by In this case, it's the White House. And
23:25
Speaker 3: trade is a ripoff, trade is a subsidy. Those two
23:29
Speaker 3: things are the exact opposite of what trade represents. Trade
23:32
Speaker 3: between Massachusetts and Rhode Island, for example, makes everybody in
23:36
Speaker 3: big residents of both states better off. We do things
23:39
Speaker 3: where relatively better at here in Massachusetts, Rhode Island does things,
23:43
Speaker 3: or Maine or whatever example you want to use, those things,
23:45
Speaker 3: they're relatively better at. We're all why are you smirking
23:48
Speaker 3: because you think all Maine does is No, I'm just
23:51
Speaker 3: trying to guess, like Trappal officesters the relevant Mike.
23:54
Speaker 2: No, I was making fun of Hode Island, not main Actually,
23:56
Speaker 2: I'm just trying to think of the relative dominance of
23:59
Speaker 2: the Rhode Island and industry compared to the Massachusetts industry.
24:02
Speaker 2: I know they have a big toy lemonade, del Del
24:04
Speaker 2: lemon Lemonade, Spike lemonade, Clips, coffee.
24:06
Speaker 3: Syrup, right, yeah, probably various black market cigarette brands.
24:13
Speaker 2: There you go, there you go. Okay, okay, so.
24:15
Speaker 3: We're fairly self sufficient. I still identify that that way sometimes.
24:19
Speaker 3: You know, I've been a mass resident for longer than
24:21
Speaker 3: I was a Rhode Island resident. Anyhow, trade makes let
24:25
Speaker 3: me let me just state this as clearly as possible.
24:27
Speaker 3: Trade makes everybody better off on average. There are always
24:31
Speaker 3: some people who are displaced, and that sounds like a
24:34
Speaker 3: very clinical and overly dispassionate way of describing people who
24:38
Speaker 3: lose their jobs. But you're supposed to compensate them through
24:41
Speaker 3: unemployment insurance and by retraining them. Maybe we didn't do
24:45
Speaker 3: enough of that. I think Massachusetts and Rhode Island too,
24:47
Speaker 3: for that matter, and probably everybody in our listening audience
24:50
Speaker 3: here in in In in southern New England are good
24:54
Speaker 3: examples of economies that were able to transition away from manufacturing. Patucket,
24:59
Speaker 3: Rhode Island, Lowe, Massachusetts. This was the industrial capital of
25:04
Speaker 3: American colonies.
25:06
Speaker 1: Right.
25:07
Speaker 3: Yes, we transitioned away gradually. It was sometimes painful, but
25:12
Speaker 3: we got to a place where we're predominantly services oriented
25:16
Speaker 3: and where the among we are the fastest growing region
25:19
Speaker 3: save parts of California, in the country. My point is
25:23
Speaker 3: trade makes everybody better off. It is not a ripoff.
25:26
Speaker 3: We're not subsidizing anybody. We are consuming more than we
25:30
Speaker 3: produce because foreigners want to in turn buy our assets,
25:33
Speaker 3: whether it be treasuries or making investments here in the
25:36
Speaker 3: United States, and the degree to which that's been distorted
25:38
Speaker 3: and probably deliberately represented is to me the most appalling
25:43
Speaker 3: example of economic ignorance wilful that I've seen in my life,
25:47
Speaker 3: way worse than the NAFTA debate, which was far more responsible.
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27:06
Speaker 2: Mark. I just had to digest what you were saying
27:08
Speaker 2: there for a moment, and I want to kind of
27:11
Speaker 2: repeat it back to you. But I guess I disagree
27:13
Speaker 2: in a couple minor ways, which would be one, I
27:18
Speaker 2: don't know. I think that free trade from an economic
27:22
Speaker 2: theory perspective, does indeed make everybody better off. Absolutely there
27:26
Speaker 2: are areas that specialize in things that are better at
27:28
Speaker 2: manufacturing one thing than another, and that trade, you know,
27:32
Speaker 2: benefits everybody. When you have a situation like we do
27:37
Speaker 2: between the United States and China, as I've brought up,
27:40
Speaker 2: I do see a bit of a problem there where. Hey,
27:43
Speaker 2: whether it's due to the unfair trade practices, whether it's
27:46
Speaker 2: due to them willing to you know, allegations of slavery,
27:50
Speaker 2: or just massive subsidies for their own industries. I do
27:54
Speaker 2: get more concerned about that situation than I do, say
27:58
Speaker 2: trade between the United States and Canada and deficits there,
28:01
Speaker 2: I think that's a meaningless problem. My main problem with
28:06
Speaker 2: the strategy that we've been talking about has been less
28:09
Speaker 2: that I think, you know, universally we should be trading
28:12
Speaker 2: with everybody, is, you know, the best route of things.
28:16
Speaker 2: My problem is that I don't understand what the strategy
28:20
Speaker 2: is with the tariffs. Right. If the strategy were very clearly, hey,
28:25
Speaker 2: let's get everybody that is of the similar political mind
28:29
Speaker 2: on board to standing up in opposing China in a
28:33
Speaker 2: more direct way using tariffs, I could get behind that.
28:37
Speaker 2: If the theory were we want to use tariffs in
28:41
Speaker 2: order to bring in income and dramatically reduce income taxes.
28:46
Speaker 2: I don't think it's a good idea, but I could
28:48
Speaker 2: at least, you know, be willing to see how that
28:50
Speaker 2: plays out. If it were all about bringing manufacturing jobs
28:53
Speaker 2: back to the United States, you know what, We're a
28:55
Speaker 2: big country with a lot of diverse abilities to manufacture
28:58
Speaker 2: a whole bunch of things. I could get on board
29:00
Speaker 2: with that. My problem has been from the beginning that
29:03
Speaker 2: there doesn't seem to be at least a stated goal
29:07
Speaker 2: with all of this, and because of that, it's tremendously
29:11
Speaker 2: difficult to allocate capital, make decisions, make trade deals, and
29:16
Speaker 2: for CEOs to move on and say, Okay, yeah, this
29:18
Speaker 2: is what we are going to do next, because you
29:21
Speaker 2: don't know what the strategy is and therefore what the
29:23
Speaker 2: end goal is.
29:23
Speaker 3: All of those objectives that you mentioned can be achieved
29:26
Speaker 3: in ways that don't involve distorting production here and adopting
29:37
Speaker 3: inefficient methods of production, which is what tariffs lead to.
29:41
Speaker 3: They can all be achieved in ways that don't lead
29:43
Speaker 3: to those inefficiencies and that don't make us relatively poorer
29:46
Speaker 3: over time. You want more manufacturing, subsidize it. I didn't
29:50
Speaker 3: like it, but the last regime, the Biden regime, subsidized manufacturing.
29:54
Speaker 3: They started building a lot of green energy stuff. I
29:56
Speaker 3: didn't like it, but it would sort of reasonably effectively
30:00
Speaker 3: just to investment went through the roof. Investment, which is
30:02
Speaker 3: an important part of GDP, and future growth went through
30:05
Speaker 3: the roof. Again, I didn't like.
30:06
Speaker 2: It, but it was like that would be my For example,
30:08
Speaker 2: I think it's a stupid idea for US to manufacture
30:10
Speaker 2: what like ninety percent of the world's latest generation semiconductors
30:14
Speaker 2: on a tiny island off the coast of China that
30:16
Speaker 2: we debate who owns it like that, I think that
30:18
Speaker 2: was a bad thing to allow to happen, and I
30:20
Speaker 2: think that, you know, policies should, but that was.
30:22
Speaker 3: A relatively targeted way to remedy that without distorting the
30:26
Speaker 3: entire economy. So that I'm trying to make as full
30:31
Speaker 3: throat it as I can a defense of the idea
30:33
Speaker 3: of free trade for the same reason it's worth it
30:35
Speaker 3: for Massachusetts and Rhode Island, or Massachusetts in Maine or Maine,
30:38
Speaker 3: Rhode Island, whatever to do something they're relatively good at
30:41
Speaker 3: and export that and import things that they can't produce
30:45
Speaker 3: relative and I use the word relatively very advisedly. I
30:48
Speaker 3: mean the efficiency with which you can produce one thing
30:52
Speaker 3: compared to another. And this does get a little bit
30:53
Speaker 3: technical and it is not intuitive. I think you have
30:56
Speaker 3: to learn why free trade is beneficial. But amazingly, because
31:00
Speaker 3: you pointed out in the last segment.
31:02
Speaker 2: The public seems to get it. People and the.
31:04
Speaker 3: Numbers I've never seen support the idea of free trade.
31:07
Speaker 3: All it took was this threat of tariffs and all
31:09
Speaker 3: the knock on uncertainty.
31:11
Speaker 2: And by the way, I am open to being corrected
31:13
Speaker 2: on this right, Like maybe there is.
31:15
Speaker 3: You say that you think you could be corrected about it.
31:16
Speaker 3: I didn't hear anything that that.
31:17
Speaker 2: There is an underlying strategy that I'm just unaware of.
31:20
Speaker 3: Oh no, there's no It changes.
31:22
Speaker 2: It seems to and that's what concerns That's what concerns
31:24
Speaker 2: me the most.
31:25
Speaker 3: Totally incoherent.
31:25
Speaker 2: But I'm willing to be corrected if it turns out, yeah,
31:28
Speaker 2: there was a strategy to all of this all along
31:30
Speaker 2: and this is where it developed. But you have to
31:32
Speaker 2: you have to see that come to fruition at some point,
31:34
Speaker 2: like it.
31:35
Speaker 3: May be that you can fine tune the world economy
31:37
Speaker 3: to get better outcomes for everybody, like some people in
31:41
Speaker 3: this White House want to do. But if there were
31:44
Speaker 3: people around who were smart enough to do that, they're
31:47
Speaker 3: not in charge right now. These people, frankly don't even understand.
31:50
Speaker 3: And it's true of many Democrats too, don't even understand
31:52
Speaker 3: how trade works. It's not a ripoff, it's not a subsidy,
31:57
Speaker 3: it's not a game of hostage taking or whatever their
32:00
Speaker 3: warped construct is. These people don't even get the basics.
32:04
Speaker 3: I wouldn't expect them to arrive at a solution.
32:07
Speaker 2: I will say, except with China, I think I carve
32:10
Speaker 2: out a caveat for the way that China trades with
32:13
Speaker 2: the United States. But nonetheless, let's move on quick break.
32:16
Speaker 2: When we come back, bit of stack Roulette is next.
32:19
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33:17
Speaker 2: More tariff news. Was this announced overnight or what was
33:21
Speaker 2: the Hollywood tariffs announced?
33:23
Speaker 4: This was Sunday night into Monday morning, I believe, so.
33:28
Speaker 2: New tariffs of one hundred percent on quote imported movies,
33:32
Speaker 2: which I have a lot of questions about how this
33:35
Speaker 2: is going to work. But you go and film a
33:37
Speaker 2: movie overseas and you are now going to be subject
33:41
Speaker 2: to a one hundred percent tariff. My question is on what,
33:45
Speaker 2: because how, for instance, do you value the intellectual property
33:51
Speaker 2: of the latest Mission Impossible film. So there's a lot
33:56
Speaker 2: of open questions on how this is going to work.
33:58
Speaker 2: But this is a stated new tariff that is going
34:00
Speaker 2: to apply. I suppose you could go and look at
34:03
Speaker 2: the production costs of that movie and say, okay, they
34:07
Speaker 2: are going to face a one hundred percent tariff if
34:09
Speaker 2: they go and sell tickets to that movie back in
34:11
Speaker 2: the United States. Squid Game is a perfect example here,
34:15
Speaker 2: even though it's not a movie, but I have the
34:16
Speaker 2: numbers on it here. So uh. Netflix made the first
34:21
Speaker 2: season of Squid Game for an estimated twenty one million
34:23
Speaker 2: dollars over in Korea and then obviously brought that show
34:27
Speaker 2: to Netflix. Question would be, okay, how do you face
34:32
Speaker 2: that tariff? Is it on the production cost? Is it
34:34
Speaker 2: on something else? Is it on you know, the fact
34:36
Speaker 2: that that move that that series approximately increased Netflix value
34:41
Speaker 2: by some nine hundred million dollars according to figure scene
34:44
Speaker 2: by Bloomberg. Do you make it based on some assessment
34:48
Speaker 2: of the IP value of that show? What if it's
34:50
Speaker 2: a total bomb? Right? What if? What if you say,
34:52
Speaker 2: oh yeah, Mission Impossible is valued at two hundred million
34:56
Speaker 2: dollars and it only makes fifty in the box office.
35:00
Speaker 2: There's a lot of open questions on how on earth
35:02
Speaker 2: this is going to work?
35:03
Speaker 3: So would this apply to we're asking questions. I know
35:06
Speaker 3: they don't have the answers to because this does this
35:08
Speaker 3: seems like a sort of seat of the pants thing.
35:09
Speaker 3: Maybe that's a great idea. I don't have an opinion,
35:12
Speaker 3: Well I do.
35:12
Speaker 2: It seems silly you have an opinion.
35:14
Speaker 3: Well, I think I do, Mike, because I like free trade,
35:16
Speaker 3: and look, I'm a free market fanatic. I'm very easy
35:18
Speaker 3: to figure out. If it's if it frees up people
35:21
Speaker 3: to do what makes them happy, I'm for it. If
35:23
Speaker 3: it doesn't, then I'm generally against it, to the extent
35:26
Speaker 3: that there's no public safety justification. I'm extremely easy to
35:29
Speaker 3: figure out. So if a movie is made in Ontario,
35:32
Speaker 3: which a lot of movies are made in Canadian cities
35:34
Speaker 3: that look like American cities, right.
35:36
Speaker 4: And Just My Minecraft, which is a big blockbuster hit
35:40
Speaker 4: Mark was filmed into Canada.
35:42
Speaker 3: Right, So the Yeah, so that would be tariff under
35:47
Speaker 3: this scheming.
35:47
Speaker 2: Hypothetically, But I don't. I just don't have any idea
35:50
Speaker 2: what the value would be assigned to the tariff, because
35:53
Speaker 2: what is the value of.
35:55
Speaker 3: The intellectual properties? Yeah, you don't know what the movies it's.
35:58
Speaker 2: It's not as though I oppose you could say, I
36:01
Speaker 2: mean maybe if most of the film, Yeah, maybe if
36:04
Speaker 2: Hollywood goes and buys a British made film, but that's
36:07
Speaker 2: not typically what happens. Usually a Hollywood studio goes to
36:10
Speaker 2: the UK and makes a film and then distributes it worldwide.
36:14
Speaker 2: So it's pretty unclear as to how all of this
36:16
Speaker 2: would operate. It is true, by the way, and this
36:19
Speaker 2: has always infuriated me, because the states in the United
36:22
Speaker 2: States do the same thing. Like Massachusetts has a big
36:25
Speaker 2: old tax credit for filming in Massachusetts. I'm sure Rhode
36:29
Speaker 2: Island does. Every state has one of these things, and
36:32
Speaker 2: countries do too. Canada offers big subsidies for filming movies
36:35
Speaker 2: in Canada. The United Kingdom does too. If you combine
36:39
Speaker 2: that with you know, I'm sure other countries like Vietnam
36:42
Speaker 2: have the same thing. And then you add in the
36:44
Speaker 2: cheaper labor cost there to film a movie, I can
36:47
Speaker 2: see why you might be upset as an American camera
36:51
Speaker 2: crew that, well, there goes my job because this all
36:55
Speaker 2: used to be filmed on a lot in Hollywood and
36:57
Speaker 2: now it's going over to the Kingdom, or to Vietnam
37:01
Speaker 2: or this place or the other place based on these
37:03
Speaker 2: subsidies that they're providing. But this is a really tricky one.
37:07
Speaker 2: I have no idea how this plays out and what
37:09
Speaker 2: the guidance is going to be to these movie makers or.
37:11
Speaker 3: What, as you said earlier, what's the justification? Is there
37:14
Speaker 3: a national we're still, by the way, under a national emergency.
37:17
Speaker 3: That's the power this president is exercising to unilaterally make
37:21
Speaker 3: tax policy.
37:23
Speaker 2: Not the industry that I thought he was going to
37:25
Speaker 2: go out and protect.
37:26
Speaker 3: No, no, and no exce. Maybe there's a good reason,
37:29
Speaker 3: but we need to understand what it is well.
37:32
Speaker 2: I think the answer seems to me to be The
37:35
Speaker 2: answer to me seems to be the unfairness of other
37:37
Speaker 2: countries' policies when it comes to movie subsidies. But if
37:40
Speaker 2: you're going to do that, then you do need to
37:41
Speaker 2: take a look at Massachusetts and every other state out
37:44
Speaker 2: there that effort offers huge tax subsidies to film something
37:49
Speaker 2: in their own area. I know the United States as
37:51
Speaker 2: a country doesn't, but many states often.
37:54
Speaker 3: What are you going to do murder on the Orient
37:55
Speaker 3: Express on? You can do it on the Asella, right, Yeah,
38:00
Speaker 3: I like that.
38:01
Speaker 2: Yeah, we'll do it on the We'll do it on
38:02
Speaker 2: the Essella down to one.
38:04
Speaker 3: On the Asella. Nobody noticed because it happened in Jersey.
38:07
Speaker 2: And Dallas, and p and Nasdaq all off more than
38:10
Speaker 2: half a percent as we close out today's show. Tomorrow,
38:13
Speaker 2: we've got a FED meeting at two pm. We'll be
38:15
Speaker 2: discussing that, but Nasdaq leaning the way down, off one
38:18
Speaker 2: hundred and sixteen points. We'll be back tomorrow. Have a
38:21
Speaker 2: great rest of you day, folks,