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Is a private-credit winter coming? · The Financial Exchange Show

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  Speaker 2: Lane, Good morning, Welcome back to the Financial Exchange. It's Mike,
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  Speaker 2: Paul and Tucker with you on a Tuesday, ahead of
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  Speaker 2: a big earnings week. Here Tomorrow, after the bell, we
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  Speaker 2: are going to be hearing from Microsoft, hold up, Microsoft,
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  Speaker 2: Alphabet and Meta themselves reporting let's see four seven nearly
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  Speaker 2: nine trillion dollars worth of market capitalization. That's ahead of
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  Speaker 2: Thursday's big report will be where we will hear from
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  Speaker 2: both Apple and Amazon, who combined will be reporting more
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  Speaker 2: than six trillion dollars worth of market cap, so big
• 1:49
  Speaker 2: ability to move markets that equates to a round a
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  Speaker 2: fifth or a quarter of total market cap of the
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  Speaker 2: S and P five hundred. We've got announcements from the
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  Speaker 2: likes of UPS as well as Amazon, both of which
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  Speaker 2: have announced that they are making job cuts. In some cases,
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  Speaker 2: UPS already have made significant job cuts on the UPS side,
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  Speaker 2: it's in the thirty plus thousand range. Amazon immediately planning
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  Speaker 2: some fourteen thousand job cuts, with the potential for up
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  Speaker 2: to thirty thousand. The two companies, I know, all of
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  Speaker 2: us kind of think of the two as linked in
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  Speaker 2: some ways, right. They are, you know, shipping companies in
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  Speaker 2: a lot of ways, and we interact with them on
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  Speaker 2: a daily basis. They're cutting different areas. You know, Ups
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  Speaker 2: is purely that logistics company. They're cutting drivers, they're cutting
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  Speaker 2: in store retail locations. Amazon holding on to their logistics
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  Speaker 2: part of their business and really focusing on that corporate
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  Speaker 2: workforce that they are reducing here. But again, big announcement
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  Speaker 2: potential from all of these companies coming up this week
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  Speaker 2: with big earnings. We also have a FED meeting that
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  Speaker 2: is already underway. We expect that they will be cutting
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  Speaker 2: rates tomorrow during their announcements at two pm press conference
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  Speaker 2: at two thirty. The press conference itself, honestly, it will
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  Speaker 2: be interesting, justin so far as I don't know what
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  Speaker 2: you ask the FED right now, because they don't know
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  Speaker 2: the state of the labor market. They have some semblance
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  Speaker 2: of the state of inflation, but mainly I think they're
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  Speaker 2: going to be asked questions like what will you do
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  Speaker 2: if the government doesn't open for another thirty days? Which
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  Speaker 2: is interesting, but I don't know how impactful it is, right,
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  Speaker 2: there's no answer to it. What do you do if
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  Speaker 2: in thirty days the government's still closed? Well, we guess
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  Speaker 2: there's the answer, right Like that that's what we do,
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  Speaker 2: and so they will have some answer on that front.
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  Speaker 2: But again, I think the FED meeting is likely to
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  Speaker 2: not give us a whole lot of new information, nor
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  Speaker 2: should it, because the FED is flying blind a little bit.
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  Speaker 2: Anything else catching your eye in markets or just big
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  Speaker 2: financial news that I missed this morning, Paul.
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  Speaker 3: No, I think we hit on most of them here.
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  Speaker 2: So I am interested in this next piece from the
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  Speaker 2: Wall Street Journal. It is from the opinion section of
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  Speaker 2: the Wall Street Journal. It's from an individual named Dan Wertman,
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  Speaker 2: who I had never heard of before. He's the CEO
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  Speaker 2: of Nohedica market intelligence AI software company. Okay, got it.
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  Speaker 2: There's a lot of these different companies. He's the CEO
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  Speaker 2: of this one, and he writes about private credit and
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  Speaker 2: the winter that is coming. So take us step back, Paul,
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  Speaker 2: talk to us about private credit and the prevalence in
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  Speaker 2: today's markets before we get into why it's heading for
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  Speaker 2: a winter.
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  Speaker 4: So private credit has exploded over the course of the
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  Speaker 4: last ten years. And when we're speaking about private credit,
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  Speaker 4: there is the public credit markets that if your Intel
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  Speaker 4: or Walmart.
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  Speaker 2: Or at and t issue can issue bonds.
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  Speaker 4: That someone at any you know, retail investment firm or
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  Speaker 4: any type of major custodia out there could purchase the
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  Speaker 4: debt that that company is issued. Private obviously implies that
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  Speaker 4: you and I, Mike and Tucker and Paul wouldn't have
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  Speaker 4: access to this funding. They're typically sourcing out funding from
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  Speaker 4: non public markets. So that could be private equity firms,
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  Speaker 4: it could be endowment, hedge funds, pensions.
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  Speaker 2: Family offices. Largely bigger investors though, who are going to
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  Speaker 2: grab up a lot more than ten thousand dollars worth
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  Speaker 2: of a bond.
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  Speaker 4: And it really jolted up when you had a period
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  Speaker 4: of time or interest rates were extremely low and you
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  Speaker 4: were looking for creative ways to be able to get
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  Speaker 4: a better interest.
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  Speaker 3: From a debt perspective, think.
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  Speaker 2: About so the investors were looking for that, right and
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  Speaker 2: the borrowers, I think, we're looking for a new source
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  Speaker 2: because their neighborhood bank that used to issue debt stopped
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  Speaker 2: doing so after the Great Financial Crisis.
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  Speaker 4: Exactly, if you look at sectors like the auto lending market,
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  Speaker 4: if you look at the biggest banks out there, Goldman Sachs, JP, Morgan,
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  Speaker 4: Bank of America, not a lot of lending in that space.
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  Speaker 3: They don't really make a huge focus on it.
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  Speaker 4: So as a result of that, there was liquidity that
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  Speaker 4: needed to be taken up or debt issuance, and that
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  Speaker 4: was sort of absorbed by the private credit market and
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  Speaker 4: it's been a tremendous run where there's been a lot
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  Speaker 4: of investment in that space. And what often happens in
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  Speaker 4: financial markets is there is enthusiasm and growth that outpaces
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  Speaker 4: the regulatory environment, and as a result, you have situations
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  Speaker 4: occurring like we've seen with Tricolor and First Brands, where
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  Speaker 4: the growth led to probably some unsavory business practices or
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  Speaker 4: fraudulent business practices. We don't know the exact specifics yet,
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  Speaker 4: but certainly it outpaced where the regulatory framework was, where
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  Speaker 4: there just wasn't enough visibility onto some of these loopholes
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  Speaker 4: that some of these companies, it seems exploited.
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  Speaker 2: Yeah, here are the pieces that there's a bunch that
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  Speaker 2: we don't know right, like how big all this is,
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  Speaker 2: where does it all lie? Is it concentrated in any
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  Speaker 2: number of banks or insurance companies that would be really
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  Speaker 2: upset if this stuff started to blow up. What we
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  Speaker 2: do seem to know is that with the failure of
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  Speaker 2: Tricolor and then First brands. The private credit industry seemed
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  Speaker 2: a bit blindsided. They were not aware of all of
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  Speaker 2: the different loans that were out there. The mechanisms that
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  Speaker 2: they used to try and control risk did not work
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  Speaker 2: quite as well in private markets where there's less transparency
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  Speaker 2: than in public markets, and it just grew so at
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  Speaker 2: least according to the author, the private credit industry has
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  Speaker 2: grown so fast that the verification audit frameworks quote haven't
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  Speaker 2: kept up with the lending. And so what the author
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  Speaker 2: points out is that since twenty twenty three, but really
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  Speaker 2: in the last quarter alone, there has been a good
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  Speaker 2: hard look at these loans on behalf of the lenders,
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  Speaker 2: and they're trying to in a number of different ways,
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  Speaker 2: find the liabilities that are risky and close off the
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  Speaker 2: risk in some way, shape or form to prevent contagion.
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  Speaker 2: And so he points out, you know, I'm going to
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  Speaker 2: quote right from here, since twenty twenty three, lenders have
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  Speaker 2: started to close off liability management loopholes that make pandemic
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  Speaker 2: era financing so risky. What those specific loopholes are, I mean,
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  Speaker 2: I think it allows you to shift debt from one
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  Speaker 2: organization to another without the lender being able to recapture
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  Speaker 2: some of.
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  Speaker 4: That and move assets too. That's backing behind some of
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  Speaker 4: the debt. But important to note that, you know, like
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  Speaker 4: you mentioned, you hit the main point there where the
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  Speaker 4: lenders are kind of reclassifying some of those turns basically
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  Speaker 4: to make sure that they can get paid if there's
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  Speaker 4: a result of a bankruptcy, making sure that they're high
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  Speaker 4: on that list of creditors who need to be paid back,
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  Speaker 4: and also that they need to have a say in
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  Speaker 4: sort of this bankruptcy process before any other companies kind
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  Speaker 4: of jump the ship here.
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  Speaker 2: So by the very nature of private credit, it's right
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  Speaker 2: in the word, it's pretty private. We don't get a
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  Speaker 2: lot of visibility into what these lenders are doing underneath
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  Speaker 2: the hood, and what the banks and insurance companies and
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  Speaker 2: endowments and everybody else that's buying this stuff are doing
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  Speaker 2: underneath the hood. But this is one of the first
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  Speaker 2: reports that I've seen that points to some specific numbers.
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  Speaker 2: For instance, terms requiring a unanimous lender consent before any
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  Speaker 2: lean subordination jumps twenty three percentage points in the third
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  Speaker 2: quarter and now appear eighty four percent of all credit deals. Again,
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  Speaker 2: we have no way of verifying this, which is kind
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  Speaker 2: of the concerning part other than you know, hearing it
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  Speaker 2: from the major originators and lenders themselves. But this, to
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  Speaker 2: me is the first piece of reporting that I've been
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  Speaker 2: kind of keeping my eyes out for to confirm what
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  Speaker 2: I suspected, which is the lenders seem nervous.
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  Speaker 3: M hm. He makes the parallel.
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  Speaker 4: Not to be clear, this isn't the size of scale
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  Speaker 4: of the housing market back in seven, but similar behaviors
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  Speaker 4: where you saw loan documents sort of loosening before months
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  Speaker 4: before some of the defaults picked up.
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  Speaker 2: So again, how that will play out, over what timeframe
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  Speaker 2: play will play out, and whether or not it blows
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  Speaker 2: up in anybody's face, open questions. Nobody has an answer
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  Speaker 2: to this stuff, but I don't think anybody's out of
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  Speaker 2: the woods yet when it comes to this entire market.
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  Speaker 2: We've got to take a quick break. When we come back,
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  Speaker 2: we're going to be joined by Martha Gimble. She's in
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  Speaker 2: the Budget Lab at Yale and they're doing a study
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  Speaker 2: on AI impact on the labor market. We're gonna be
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  Speaker 2: talking with Martha next on The Financial Exchange.
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  Speaker 2: The budget labb at Yale earlier this year was I
• 11:13
  Speaker 2: would have to say, the most cited source for research
• 11:15
  Speaker 2: on the impact of tariffs in this economy, and it
• 11:19
  Speaker 2: really was the front runner and anybody putting together measurements there.
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  Speaker 2: The Budget labb at Yale is now taking a look
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  Speaker 2: at the AI impact on the labor market. We're joined
• 11:29
  Speaker 2: by Martha Gimble from the Budget Lab at Yale to
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  Speaker 2: talk about the I guess, the kickoff of their research
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  Speaker 2: and what they've been able to measure so far. Martha,
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  Speaker 2: thanks for joining us, appreciate it.
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  Speaker 6: Thank you so much for having me.
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  Speaker 2: So what sort of methodology I guess do you try
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  Speaker 2: to apply to a question like how is artificial intelligence
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  Speaker 2: affecting the labor market? It seems to be the express
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  Speaker 2: goal of AI, but I'm just curious about how you
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  Speaker 2: can even go about measuring something like this.
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  Speaker 6: Yeah, I mean to pic clear, that is the million
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  Speaker 6: billion trillia depending on where you think AI is going,
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  Speaker 6: I guess question right. You know, we tried to really
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  Speaker 6: take this back to first principles and think about what
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  Speaker 6: would you expect to see if and when AI starts
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  Speaker 6: really affecting the labor market. And so what we did
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  Speaker 6: was take existing labor market data, you know, the labor
• 12:25
  Speaker 6: market data that underpins a lot of statistic that many
• 12:30
  Speaker 6: of you are probably used to hearing about the labor
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  Speaker 6: market like the unemployment rate, and used that to look
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  Speaker 6: at how fast things are changing in the labor market,
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  Speaker 6: but also whether or not you're seeing changes and who
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  Speaker 6: is unemployed, who is employed, what that kind of looks like,
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  Speaker 6: and the sort of spoiler is you are not. You
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  Speaker 6: are not seeing big changes here yet, you know. I
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  Speaker 6: think it sort of speaks to how fast this conversation
• 13:02
  Speaker 6: is moving that people expect to already be seeing employment
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  Speaker 6: impacts from AI. Technological change takes time, and I think
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  Speaker 6: our papers are an important reminder of that.
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  Speaker 2: So I guess provided some context. The biggest comparison point
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  Speaker 2: that I can make would be the Internet. Now I've
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  Speaker 2: said publicly that I think that this might be the
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  Speaker 2: biggest technical technological innovation since the Internet. Do you have
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  Speaker 2: some measurement of how long that technology took to affect
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  Speaker 2: the labor market and what we in fact saw in
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  Speaker 2: terms of the impacts.
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  Speaker 6: I mean, the Internet took time, and also it was gradual.
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  Speaker 6: It was not a major shock. And one of the
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  Speaker 6: things that happened because it was gradual was yes, people
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  Speaker 6: lost their jobs, Yes, different skill sets became obsolete, but
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  Speaker 6: it happened in such a way that it was easy
• 13:52
  Speaker 6: for people. I shouldn't say easy. It was easier for
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  Speaker 6: people to retrain and new people coming into the labor market,
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  Speaker 6: we're able to move into occupations that we're going to
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  Speaker 6: have kind of long run options for them. I think
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  Speaker 6: the Internet is the version that a lot of people
• 14:15
  Speaker 6: in AI are really hoping for, but they would say bigger.
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  Speaker 6: I think the version of this that scares people is
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  Speaker 6: the first industrial revolution, where you had a lot of
• 14:27
  Speaker 6: beavers suddenly out of business. Now there are changes, there
• 14:30
  Speaker 6: are things that are different now. Obviously that are different
• 14:32
  Speaker 6: about eighteen twenty two to state the obvious, But I
• 14:36
  Speaker 6: think part of what people are still trying to figure
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  Speaker 6: out is one how long this is going to take,
• 14:41
  Speaker 6: how big it may or may not be, and who
• 14:45
  Speaker 6: it will affect.
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  Speaker 2: Martha when we talk about AI, obviously, you know companies
• 14:50
  Speaker 2: like IBM have been touting artificial intelligence for quite a
• 14:53
  Speaker 2: long time. When's the beginning point according to the budget
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  Speaker 2: Labbid deal for this, I mean it feels like it's
• 14:58
  Speaker 2: definitely been dominating news stories for the last two to
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  Speaker 2: three years. When's the beginning of your measurement? I guess
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  Speaker 2: if we're going to try and guess at the impact
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  Speaker 2: of this.
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  Speaker 6: This is such a good question. So we looked at
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  Speaker 6: specifically the launch of generative AI, particularly chat GBT. You know,
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  Speaker 6: obviously when we talk about AI, there's a lot of
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  Speaker 6: things that are kind of swept into that definition, and
• 15:26
  Speaker 6: for your point, we are often a little bit sloppy
• 15:29
  Speaker 6: and how we talk about this, and we put many
• 15:31
  Speaker 6: different things under that heading. But we are specifically talking
• 15:35
  Speaker 6: about generative AI, which is the release that I think
• 15:41
  Speaker 6: caused a lot of people to start thinking, wait a minute,
• 15:44
  Speaker 6: can AI do my job? Can I do my employee's jobs?
• 15:47
  Speaker 6: Are we going to start seeing some big labor market
• 15:49
  Speaker 6: shifts here? And just to you know, kind of go
• 15:51
  Speaker 6: back to the point at the beginning, not yet right,
• 15:56
  Speaker 6: really clear and looking at our data, and we're not
• 15:59
  Speaker 6: the only ones who have found this that there are
• 16:03
  Speaker 6: not yet major impacts of AI on the local market.
• 16:06
  Speaker 2: One of the places that this has been written about
• 16:09
  Speaker 2: quite a bit is recent college grads. It's been written
• 16:11
  Speaker 2: about the difficult labor market that they are facing as
• 16:14
  Speaker 2: they are graduating. You know, changes in what employers are
• 16:17
  Speaker 2: looking for. Is that measurable? I guess in this moment
• 16:21
  Speaker 2: that recent college grads are in fact facing a tougher
• 16:23
  Speaker 2: labor market, and if not, if not to be blamed
• 16:27
  Speaker 2: on AI, is there another thing that it can be
• 16:29
  Speaker 2: looked at to blame the struggle that recent college grads
• 16:33
  Speaker 2: are facing.
• 16:34
  Speaker 6: So I think there's a couple of things that are
• 16:36
  Speaker 6: happening at once. One is, there are simply more people
• 16:40
  Speaker 6: graduating from college than ever before. And so if you
• 16:45
  Speaker 6: think about the competition for hiring college graduates, it's just
• 16:51
  Speaker 6: not as competitive as it used to be because there
• 16:53
  Speaker 6: are more college graduates. Right, It's a pure supply demand issue.
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  Speaker 6: If you look at some of the worsening outcomes for
• 17:02
  Speaker 6: college graduates, and I should emphasize, you know, this is
• 17:05
  Speaker 6: all relative. You are still seeing much more positive economic
• 17:10
  Speaker 6: outcomes for college graduates relative people who don't have a
• 17:12
  Speaker 6: college degree on average. A lot of that predates this conversation.
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  Speaker 6: I mean, we're talking about things starting in like twenty fourteen.
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  Speaker 6: There's another aspect of this, which is, you know, I
• 17:27
  Speaker 6: have joked repeatedly that I will never forgive Sam Altman
• 17:31
  Speaker 6: for releasing chat GBT in the middle all of a
• 17:34
  Speaker 6: Federal Reserve hiking cycle. But I'm sort of not joking.
• 17:37
  Speaker 6: It makes it really hard to figure out how much
• 17:42
  Speaker 6: of any changes are about technological change versus these sort
• 17:48
  Speaker 6: of macroeconomic cyclical changes. Twenty twenty two was the middle
• 17:53
  Speaker 6: of a federal reserve hiking cycle. We would expect the
• 17:56
  Speaker 6: labor market to slow down. We would expect things to down,
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  Speaker 6: particularly for younger workers who are just coming out of school,
• 18:05
  Speaker 6: because if people stop hiring, that is going to most
• 18:08
  Speaker 6: impact people who are trying to find a job for
• 18:11
  Speaker 6: the first time. And so a lot of what we're
• 18:14
  Speaker 6: seeing is almost certainly about the macroeconomic cycle rather than
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  Speaker 6: technological change.
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  Speaker 2: Martha Gimble is the executive director and co founder of
• 18:23
  Speaker 2: the Budget Lab at Yale, and the most recent analysis
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  Speaker 2: they're undertaking is valuing the impact of artificial intelligence on
• 18:29
  Speaker 2: the labor market, and the good news there is it's
• 18:31
  Speaker 2: going to apparently take some time to measure. Martha, really
• 18:34
  Speaker 2: appreciate you coming on and would love to chat with
• 18:36
  Speaker 2: you again as you release more stuff. So thank you,
• 18:40
  Speaker 2: thank you for having me. Yeah, she's right. This is
• 18:44
  Speaker 2: the trillion plus dollar question, maybe ten trillion dollar question
• 18:47
  Speaker 2: is will there actually be a measurable impact? And to me,
• 18:52
  Speaker 2: this echoes what we were just talking about with the
• 18:54
  Speaker 2: MIT study. Which is to this point, it's too early
• 18:57
  Speaker 2: to tell, right. It's not to say there won't be
• 18:59
  Speaker 2: an effect. It's not to say that you know it
• 19:01
  Speaker 2: won't be this, that and the other. But I especially
• 19:03
  Speaker 2: take her point that we are seeing this happen at
• 19:06
  Speaker 2: the same time that the FED is trying to control
• 19:09
  Speaker 2: the growth in the economy via interest rates, and so
• 19:12
  Speaker 2: very difficult to measure whether or not. Hey, is that
• 19:14
  Speaker 2: an AI effect or is the economy just slowing and
• 19:16
  Speaker 2: therefore the unemployment increasing.
• 19:18
  Speaker 4: So much work to be done there, but it is
• 19:20
  Speaker 4: the fundamental question, and it's great that companies are trying
• 19:23
  Speaker 4: to tackle some research on it.
• 19:25
  Speaker 2: Quick Break when we come back, Wall Street Watch plus
• 19:28
  Speaker 2: Trivia's next.
• 19:38
  Speaker 1: Bringing the latest financial news straight to your radio. Every day,
• 19:43
  Speaker 1: It's the Financial Exchange on the Financial Exchange Radio Network.
• 19:48
  Speaker 1: Time now for Wall Street Watch. A complete look at
• 19:52
  Speaker 1: what's moving markets so far today right here on the
• 19:55
  Speaker 1: Financial Exchange Radio Network.
• 19:58
  Speaker 5: Well, markets are exting games from yesterday's rally. Is the
• 20:02
  Speaker 5: FED kicks off its two day meeting followed by a
• 20:05
  Speaker 5: rate decision on Wednesday. Traders are also writing for a
• 20:08
  Speaker 5: big batch of big tech earnings and a potential China
• 20:12
  Speaker 5: trade deal later this week. Right now, the Dow is
• 20:15
  Speaker 5: up by four tenths of one percent or one hundred
• 20:17
  Speaker 5: and eighty three points. SMP five hundred flat at the moment.
• 20:21
  Speaker 5: NASDAC up about a quarter percent or fifty five points.
• 20:24
  Speaker 5: Rusted two thousands down two cents one percent, Tenure treasureel
• 20:29
  Speaker 5: is down one basis point at three point nine to
• 20:31
  Speaker 5: seventy nine percent, and crude oil down two percent today,
• 20:35
  Speaker 5: trading right around sixty dollars a barrel. Amazon announced that
• 20:39
  Speaker 5: it will lay off about fourteen thousand corporate jobs, marking
• 20:43
  Speaker 5: the largest round of corporate job cuts in the company's history.
• 20:47
  Speaker 5: Reports indicated Amazon's layoffs are expected to effect as many
• 20:51
  Speaker 5: as thirty thousand corporate jobs. Amazon is up slightly meanwhile,
• 20:55
  Speaker 5: ups rallying eight percent after the delivery Giant posted better
• 20:59
  Speaker 5: than a expected third quarter revenue and raised its fourth
• 21:02
  Speaker 5: quarter guidance. The company also said it has reduced its
• 21:05
  Speaker 5: management workforce by about fourteen thousand positions so far this year,
• 21:10
  Speaker 5: in its operational workforce by thirty four thousand positions elsewhere.
• 21:15
  Speaker 5: Microsoft and open Ai finalize a new agreement where Microsoft
• 21:19
  Speaker 5: will get a twenty seven percent ownership stake in open Ai,
• 21:22
  Speaker 5: worth about one hundred and thirty five billion dollars. Microsoft
• 21:26
  Speaker 5: is up about two percent today and has surpassed four
• 21:29
  Speaker 5: trillion dollars in market cap. Apple also crossing that mark today.
• 21:34
  Speaker 5: PayPal shares a climbing about eleven percent after the digital
• 21:37
  Speaker 5: payments company beat third quarter earnings and announced a new
• 21:40
  Speaker 5: e commerce partnership with open Ai. Wayfair surging twenty two
• 21:45
  Speaker 5: percent after the online furniture retailer posted stronger than expected
• 21:48
  Speaker 5: third quarter earnings, and after today's closing bell, Visa will
• 21:53
  Speaker 5: report its third quarter results. I'm Tucker Silva and that
• 21:57
  Speaker 5: is Wall Street Watch, and we haven't done trivia yet,
• 21:59
  Speaker 5: so let's get to it on this day. In twenty
• 22:03
  Speaker 5: twenty one, Mark Zuckerberg announced Facebook will change its corporate
• 22:07
  Speaker 5: name to Meta amid increased public scrutiny over leaked internal documents.
• 22:12
  Speaker 5: So our trivia question today, what year did Mark Zuckerberg
• 22:17
  Speaker 5: launch Facebook? Once again? What year did Mark Zuckerberg launch Facebook?
• 22:23
  Speaker 5: Be the fifth person today to text us at six one,
• 22:26
  Speaker 5: seven thirty six, two thirteen eighty five with the correct answer,
• 22:29
  Speaker 5: and you win a Financial Exchange show t shirt once again.
• 22:31
  Speaker 5: The fifth correct response to textas to the number six one, seven, three, six, two,
• 22:35
  Speaker 5: thirteen eighty five will win that T shirt. See complete
• 22:39
  Speaker 5: contest rules at Financial Exchange Show dot com.
• 22:42
  Speaker 2: The whatever you want to call it, the Halo effect
• 22:44
  Speaker 2: or the Midas touch in the AI sector is at
• 22:48
  Speaker 2: least continuing to play out today. I know Tucker mentioned
• 22:50
  Speaker 2: a couple of these, but I just have to highlight
• 22:52
  Speaker 2: this for a moment. PayPal announces a deal to be
• 22:55
  Speaker 2: the payment processor for open Ai. Stock jumps eleven percent.
• 23:01
  Speaker 2: Nothing's been realized, they haven't implemented it, they haven't gained
• 23:03
  Speaker 2: any revenue, but stock's jumping eleven percent. Microsoft is announcing
• 23:07
  Speaker 2: that there's some clarity in terms of their ownership structure
• 23:09
  Speaker 2: of OpenAI. Stocks jumping two percent on a four trillion
• 23:13
  Speaker 2: dollar company, Nokia, as we just talked about some partnership
• 23:17
  Speaker 2: with Nvidia. It's going to be some sort of equity
• 23:19
  Speaker 2: investment into Nokia buying Vidia stocks jumping what was it,
• 23:23
  Speaker 2: fourteen percent on the news. Again, not to say that
• 23:28
  Speaker 2: any of these are completely out of line, but my
• 23:32
  Speaker 2: read on this is everyone is being treated as a
• 23:35
  Speaker 2: winner in the AI space. There are no losers right now.
• 23:39
  Speaker 2: If you have a business that is interacting with one
• 23:42
  Speaker 2: of these major players, and one thing we know is
• 23:47
  Speaker 2: that that's usually not the case. Usually not everyone is
• 23:52
  Speaker 2: a winner, unless you're a millennial playing soccer in the
• 23:54
  Speaker 2: nineteen nineties.
• 23:55
  Speaker 4: But other than that, I'm sure that probably still continues today.
• 23:58
  Speaker 3: I would imagine.
• 23:59
  Speaker 4: I'm early in soccer coaching career, but I think it's
• 24:01
  Speaker 4: gonna trend that direction.
• 24:02
  Speaker 2: Everybody gets a reped and.
• 24:04
  Speaker 4: Not that I wanted to, but and also all against
• 24:07
  Speaker 4: the backdrop mic of a company who is not public.
• 24:10
  Speaker 4: You know, isn't it like that is they are public drink.
• 24:13
  Speaker 4: They're at the forefront of this revolution. I mean in
• 24:17
  Speaker 4: videos right there with them, and they are other players too.
• 24:19
  Speaker 4: But the seminal product on AI is chat GPT from
• 24:24
  Speaker 4: a company that is not public. It's it's fascinating the
• 24:28
  Speaker 4: tentacles of open AI and the fact that it has
• 24:32
  Speaker 4: grown so big and is still not a publicly traded
• 24:34
  Speaker 4: company yet.
• 24:36
  Speaker 5: The US Virgin Islands aren't just stunning, their thriving and
• 24:39
  Speaker 5: continue to be one of the hottest spots for vacationers
• 24:42
  Speaker 5: in the Caribbean. New cruise port upgrades, better air connections,
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  Speaker 5: islands back on the map for travelers seeking something special.
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  Speaker 5: Saint Thomas is your cruz hub, known for duty free
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• 25:34
  Speaker 6: Uh.
• 25:35
  Speaker 2: There's a piece from Justin Fox and Bloomberg about how
• 25:38
  Speaker 2: the AI stock boom plays out. Unfortunately for all of
• 25:41
  Speaker 2: us out there, he does not have any insight into
• 25:44
  Speaker 2: when it plays out or what happens to the stock
• 25:47
  Speaker 2: market as a whole. In terms of pricing. But he
• 25:50
  Speaker 2: puts together basically a pretty convincing argument to me, which is,
• 25:56
  Speaker 2: as the economic significance of artificial intelligence becomes clear, or
• 26:01
  Speaker 2: the valuations of those companies, price to earnings, price to book,
• 26:04
  Speaker 2: price to all of these things will fall. And it's
• 26:09
  Speaker 2: because when you are dealing with something that is so
• 26:12
  Speaker 2: new and emerging, you don't honestly know how productive it
• 26:16
  Speaker 2: will make the economy, and so what you have is speculation.
• 26:20
  Speaker 2: You have some people betting, well, this is going to
• 26:23
  Speaker 2: make this company ten percent more productive, and therefore I'm
• 26:27
  Speaker 2: going to even if there's plenty of people they're saying, no,
• 26:29
  Speaker 2: it's only going to make them one percent more productive.
• 26:31
  Speaker 2: You take the averages there and you're saying, oh, yeah,
• 26:33
  Speaker 2: this company is going to become that more productive and
• 26:35
  Speaker 2: that more profitable. The answer is that we don't have
• 26:39
  Speaker 2: a real firm idea of how all this is going
• 26:43
  Speaker 2: to work. And so his point is, as it becomes clear,
• 26:47
  Speaker 2: valuations fall. Now, valuations can fall in two ways. Price
• 26:51
  Speaker 2: can come down, stock prices can come down, or these
• 26:55
  Speaker 2: companies are so productive that their earnings go up, and
• 26:58
  Speaker 2: in either case the valuation in those cases does fall
• 27:03
  Speaker 2: and he's not coming out and saying I know which
• 27:05
  Speaker 2: one's going to happen here. But it is a interesting
• 27:08
  Speaker 2: take on all this and why we do focus on
• 27:10
  Speaker 2: that piece quite a bit to say, oh, yeah, we
• 27:13
  Speaker 2: are in the ninety ninth percentile. Ever, in terms of
• 27:16
  Speaker 2: stock valuations, we are in a moment right now where
• 27:19
  Speaker 2: the only time that stock valuations have been pricier was
• 27:23
  Speaker 2: in the late nineties leading up to the dot com bubble.
• 27:26
  Speaker 2: It is because of that mere fact that, hey, there
• 27:28
  Speaker 2: is just so much unknown about this emerging new thing
• 27:32
  Speaker 2: that everyone is so excited about that there are speculators
• 27:37
  Speaker 2: all over there, all over the place trying to determine
• 27:39
  Speaker 2: and trying to bet on who's going to be the
• 27:42
  Speaker 2: winner and how big of a winner they are going
• 27:44
  Speaker 2: to be. And naturally, as you learn more, there will
• 27:48
  Speaker 2: be less speculation, because that's inherent in the idea of speculation,
• 27:52
  Speaker 2: is you're betting on something that you can't possibly know exactly.
• 27:54
  Speaker 4: I thought it was a great framework to sort of
• 27:57
  Speaker 4: lay out the case where basically, with this next technological innovation,
• 28:03
  Speaker 4: the range of earnings growth that could be promised from
• 28:05
  Speaker 4: it is so wide. I mean, it could be minimal
• 28:08
  Speaker 4: into which his point, valuations will have to come crashing
• 28:11
  Speaker 4: down if you don't see a significant amount ofroductivity hancements
• 28:15
  Speaker 4: and earnings growth. But you could see on the other
• 28:17
  Speaker 4: end where you see tremendous earnings growth, and it's much
• 28:20
  Speaker 4: harder to make a clear determination from evaluation perspective where
• 28:25
  Speaker 4: some of these companies should fall because you just don't
• 28:27
  Speaker 4: know with this technology what the earnings growth rate is
• 28:30
  Speaker 4: going to be. It is much easier, for example, to
• 28:34
  Speaker 4: look at a real estate deal where you have a
• 28:36
  Speaker 4: multifamily building and you know how many tenants you have,
• 28:38
  Speaker 4: and you know how much rent and vacancy that you
• 28:40
  Speaker 4: could have. The variables are much more controllable of to
• 28:44
  Speaker 4: These are the amount of people I can fit in
• 28:46
  Speaker 4: this building, and this is the rent I will charge them.
• 28:49
  Speaker 4: Where you're talking about this, the earnings growth that you
• 28:51
  Speaker 4: can have is just far more variable and harder to assess.
• 28:54
  Speaker 4: And that's why you see the speculation and the build
• 28:58
  Speaker 4: up and the buy up of price to earnings valuations
• 29:00
  Speaker 4: here because so much, like you said, is hard to
• 29:03
  Speaker 4: gauge which side it's going to fall on.
• 29:05
  Speaker 2: Let's take a quick break. When we come back, we'll
• 29:08
  Speaker 2: have the trivia winner and stack Roulette.
• 29:11
  Speaker 1: Here the Financial Exchange every day from eleven to noon
• 29:14
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• 29:18
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• 29:24
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• 29:40
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• 29:48
  Speaker 3: Anks trivi.
• 29:49
  Speaker 5: Your question today was what year did Mark Zuckerberg launch Facebook?
• 29:53
  Speaker 5: That would be two thousand and four. Mic from Lebanon,
• 29:57
  Speaker 5: New Hampshire is our winner today taking on Financial Exchange
• 30:00
  Speaker 5: Show t shirt. Congrats to Mike and we play trivia
• 30:03
  Speaker 5: every day here in the Financial Exchange. See complete contest
• 30:06
  Speaker 5: rules at Financial Exchange Show dot com.
• 30:10
  Speaker 2: Time for a bit of Stacker. Let's hear Paul, what
• 30:13
  Speaker 2: do you have for us this morning?
• 30:15
  Speaker 4: Next Era and Google are making an attempt to revive
• 30:19
  Speaker 4: a major nuclear facility in Iowa as an AI energy
• 30:23
  Speaker 4: demand serves. This is something that we talked about on
• 30:25
  Speaker 4: the show a lot. There is going to be a
• 30:28
  Speaker 4: tremendous amount of computing power and electrical power that has
• 30:32
  Speaker 4: required as part of the billions of dollars that these
• 30:36
  Speaker 4: major companies are spending to build these data centers across
• 30:39
  Speaker 4: our country. And as a result of that, nuclear energy
• 30:42
  Speaker 4: has become much more in vogue. And so this particular
• 30:45
  Speaker 4: plant was decommissioned back in twenty twenty, but they're now
• 30:49
  Speaker 4: setting it up to try and get it back online
• 30:52
  Speaker 4: in twenty twenty nine. And the one question that comes
• 30:55
  Speaker 4: to mind is, you know, we're in a huge competition
• 30:59
  Speaker 4: with China to become the leader in terms of AI
• 31:02
  Speaker 4: and the technology and how it evolves and hopefully become
• 31:07
  Speaker 4: the front runner in that space. And there's a huge
• 31:10
  Speaker 4: disparity in terms of the power generation that China has
• 31:13
  Speaker 4: versus the US in terms obviously there are some negatives
• 31:17
  Speaker 4: that comes with China and just how they can put
• 31:21
  Speaker 4: this power online without any regard for human life or
• 31:25
  Speaker 4: you know, the environment or anything like that. But we
• 31:28
  Speaker 4: got to wait four years, you know, three or four
• 31:30
  Speaker 4: years to get this thing online. There needs to be
• 31:32
  Speaker 4: a little bit more regulation. Regulation that is our legislation.
• 31:37
  Speaker 4: Maybe that's stripped back, and we need to be a
• 31:39
  Speaker 4: little faster with this.
• 31:42
  Speaker 2: Yeah, I keep going back to this China US AI
• 31:46
  Speaker 2: race as a theme that's not really discussed or appreciated.
• 31:50
  Speaker 2: I think there's good reason for why it's not discussed,
• 31:53
  Speaker 2: because nobody truly knows. But on the energy side, it's measurable, right,
• 31:59
  Speaker 2: I have done it. But I'm sure somebody has measured
• 32:03
  Speaker 2: the current electricity capacity in China versus the United States,
• 32:07
  Speaker 2: and also measured the pace at which new stuff comes
• 32:09
  Speaker 2: online there compared to the US.
• 32:12
  Speaker 4: They're doing more than ten times this year than we
• 32:15
  Speaker 4: are in terms of I think it's measured it. I've
• 32:19
  Speaker 4: read something that but like.
• 32:21
  Speaker 2: That is measurable. What is not measurable is just how
• 32:25
  Speaker 2: far ahead US chip design is compared and you know
• 32:30
  Speaker 2: general of AI models, how far ahead that design is
• 32:33
  Speaker 2: compared to China. We have some sense that we are
• 32:37
  Speaker 2: far ahead. We know this by the fact that China
• 32:41
  Speaker 2: keeps trying to illegally import our latest and greatest semiconductors
• 32:44
  Speaker 2: and chips in order to design their own models. But
• 32:48
  Speaker 2: that part nobody can really measure. For me, Hey, are
• 32:51
  Speaker 2: we three x more efficient and more capable than China
• 32:56
  Speaker 2: when it comes to chip design? Are we one point?
• 32:59
  Speaker 2: Five x, because here's where the rubber hits the road, right, Like,
• 33:04
  Speaker 2: the reason that we are making and designing these latest
• 33:08
  Speaker 2: and greatest, faster and faster and more efficient chips is
• 33:12
  Speaker 2: to be able to implement them in the United States
• 33:15
  Speaker 2: where we don't have the same power generation. And if
• 33:17
  Speaker 2: it all, if a lot of that just comes down
• 33:21
  Speaker 2: to efficiency, how much power do you need to generate
• 33:25
  Speaker 2: the same level of artificial intelligence computing power, then I
• 33:30
  Speaker 2: think we're kind of screwed. And I'm not saying that
• 33:34
  Speaker 2: that is the case, but there does not seem like
• 33:37
  Speaker 2: any seeming willingness willingness in the United States to catch
• 33:41
  Speaker 2: up to China in terms of the pace at which
• 33:44
  Speaker 2: they can bring on energy infrastructure, no question, And so
• 33:48
  Speaker 2: I don't think that it all just comes down to efficiency.
• 33:51
  Speaker 2: I think it also comes down to speed and other
• 33:56
  Speaker 2: factors when it comes to these chip designs, as well
• 33:58
  Speaker 2: as the AI models themselves. And I hope that the
• 34:03
  Speaker 2: the American edge when it comes to tech innovation and
• 34:06
  Speaker 2: ingenuity and just that edge that we've always seemed to
• 34:09
  Speaker 2: have against other countries when it comes to designing this stuff.
• 34:11
  Speaker 2: And maybe it's because of institutions, maybe it's because of
• 34:14
  Speaker 2: more freedoms, and that stokes the creativeness. But if it all,
• 34:18
  Speaker 2: if all of it just comes down to who can
• 34:22
  Speaker 2: throw more power at the problem, China's gonna win.
• 34:25
  Speaker 3: That game, definitely, definitely, but especially.
• 34:27
  Speaker 2: At least anytime in the next decade, they will far
• 34:30
  Speaker 2: surpass us in that one game. So are we able
• 34:34
  Speaker 2: to innovate, innovate them faster, innovate and prevent them from
• 34:38
  Speaker 2: then they have? Yeah, it's a multi trillion dollar question. Uh,
• 34:45
  Speaker 2: let's see here, what do we want to talk about.
• 34:47
  Speaker 2: Let's talk about Airbnb. Airbnb wants to prevent Halloween parties
• 34:53
  Speaker 2: in the United States and Canada, and next they're canceling Christmas.
• 34:58
  Speaker 2: That's actually not being reported, but Airbnb does have a
• 35:02
  Speaker 2: real problem here where halloweens on a Friday, so you
• 35:08
  Speaker 2: know people are going to be extra sloppy. But really
• 35:12
  Speaker 2: the bigger problem is young people who want to throw
• 35:16
  Speaker 2: a massive party and do not have the space in
• 35:19
  Speaker 2: their four hundred square foot apartment to do So what
• 35:23
  Speaker 2: do you do. You get a bunch of people together
• 35:26
  Speaker 2: and throw a bunch of money at an Airbnb and
• 35:28
  Speaker 2: trash that place instead. So they're they're implementing some innovative
• 35:33
  Speaker 2: new ways to go about this. But they are taking
• 35:36
  Speaker 2: a look and blocking guests, you know, from booking certain
• 35:40
  Speaker 2: properties based on the timing of the booking, how far
• 35:44
  Speaker 2: away the booking is from their place that they're inquiring
• 35:48
  Speaker 2: about it. Right, So if I live in Boston and
• 35:50
  Speaker 2: I'm searching for a place to rent in I don't know,
• 35:54
  Speaker 2: Cape cod then they're they're taking a look at that
• 35:56
  Speaker 2: and saying, Okay, interesting, you're booking it for two nights
• 35:59
  Speaker 2: around Hall's. That's an interesting timing request here. So last year,
• 36:04
  Speaker 2: the companies said it prevented about thirty eight thousand people
• 36:07
  Speaker 2: in the United States and sixty three hundred in Canada
• 36:10
  Speaker 2: from making bookings during this time period.
• 36:14
  Speaker 3: How you know what percentage were actually throwing a party. Yeah,
• 36:17
  Speaker 3: just beyond me. But maybe they have good enough data
• 36:20
  Speaker 3: where they're able to sort that out.
• 36:21
  Speaker 2: Yeah. Look, I know that this is a serious problem
• 36:24
  Speaker 2: for them. I don't I don't really know how much
• 36:29
  Speaker 2: of this falls on Airbnb compared to the owner of
• 36:32
  Speaker 2: the property who's listing it and saying, hey, I'm comfortable
• 36:35
  Speaker 2: with you renting it out over Halloween, like I'm you know,
• 36:39
  Speaker 2: if I'm genuinely worried about this sort of thing. I'm
• 36:41
  Speaker 2: probably just saying, hey, I don't want my property to
• 36:43
  Speaker 2: be trashed, so I'm not going to rent it on
• 36:45
  Speaker 2: this Or.
• 36:45
  Speaker 4: You extend the amount of nights, right, that would box
• 36:47
  Speaker 4: out someone who's trying to do this. You say, okay,
• 36:49
  Speaker 4: you can rent during the time period, but it's got
• 36:50
  Speaker 4: to be five nights. No college age or younger person
• 36:53
  Speaker 4: is going to commit to a five nights of a
• 36:55
  Speaker 4: rental rate just to throw one night party unless they
• 36:59
  Speaker 4: have a real big bankroll, I guess, but you think
• 37:02
  Speaker 4: that would sort of cut it off at the head.
• 37:05
  Speaker 2: So my question then is why isn't Airbnb in the
• 37:09
  Speaker 2: business of having parties, having Halloween parties?
• 37:12
  Speaker 3: Right?
• 37:12
  Speaker 2: If they're going to prevent all of this stuff from happening,
• 37:14
  Speaker 2: they know there's demand. Talk about a business model. Okay,
• 37:18
  Speaker 2: you need to start renting out locations that you can
• 37:21
  Speaker 2: throw a party, not piss off all the neighbors, and
• 37:24
  Speaker 2: charge all these college kids a whole bunch of money.
• 37:27
  Speaker 4: And I'm sure Airbnb executives could throw one hundred thousands
• 37:31
  Speaker 4: of lawsuits at us to explain why they don't want
• 37:34
  Speaker 4: to be in that game. From all of the issues
• 37:37
  Speaker 4: that they've dealt with over the years that I'm sure would.
• 37:39
  Speaker 3: Make our heads spin.
• 37:41
  Speaker 2: Yeah, yeah, I guess, just go look at it.
• 37:43
  Speaker 5: I guess some of these listings have noise meters inside.
• 37:46
  Speaker 3: Wow, like.
• 37:49
  Speaker 2: Rent it to my family, Big quiet the noise meter,
• 37:58
  Speaker 2: My baby can't sleep. Markets are open and remain in
• 38:02
  Speaker 2: positive territory. SMP barely hanging on to gains here for
• 38:06
  Speaker 2: the day, but the Dow and NASDAC up a third
• 38:08
  Speaker 2: of a percent each. Big day tomorrow with Fed meeting
• 38:11
  Speaker 2: a two thirty plus big big earnings reports after the bell.
• 38:15
  Speaker 2: We'll be back at it tomorrow, folks. Have a great
• 38:16
  Speaker 2: rest of your day.