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Are Markets Calm — or Just Waiting for the Next Shock? · The Financial Exchange Show

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Speaker 1: a donation Today. Face is the Financial Exchange with Mike
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Speaker 1: Armstrong and Mark Vandetti.
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Speaker 2: Good morning, Happy Tuesday, and welcome back to the Financial Exchange. Tuesday.
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Speaker 2: That feels like Monday for anybody that works on Wall Street.
1:17
Speaker 2: Sorry for all of those that didn't have yesterday off
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Speaker 2: like like those that do work on Wall Street did.
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Speaker 2: But we are kicking off another week here with markets
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Speaker 2: you know, I'm not gonna say floundering, but you know,
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Speaker 2: bopping all over the place and opening up in negative
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Speaker 2: territory here. And I'm trying to, I guess put a
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Speaker 2: synopsis together on where markets stand right now or where
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Speaker 2: we take investor sentiment at the moment, because on the surface,
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Speaker 2: markets look pretty boring. If you just look at the
1:50
Speaker 2: S and P five hundred, the S and P five
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Speaker 2: hundred right now sitting just below sixty eight hundred. Back
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Speaker 2: in October, Let's see when do we reach this level?
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Speaker 2: Back in October, right around October twenty fourth, we were
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Speaker 2: at the same exact level that we are today. In
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Speaker 2: spite of that, it doesn't really feel that way to
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Speaker 2: a lot of investors because there has been a fair
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Speaker 2: bit of churn in market. It's a fair bit of
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Speaker 2: rotation in and out of different sectors, different stocks, and
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Speaker 2: I think may that's healthy, that's you know, you don't
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Speaker 2: necessarily like to see people just blindly buying entire sectors
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Speaker 2: or companies of the stock market. But on the other hand,
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Speaker 2: it's been defined by I think brief periods of a
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Speaker 2: lot of concern about AI, the impact on certain industries,
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Speaker 2: whether or not the entire thing could erupt in some
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Speaker 2: sort of stock market bubble popping. And yeah, I think
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Speaker 2: it's left investors a little bit jittery. At this point
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Speaker 2: in time.
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Speaker 3: The AI conversation is getting really interesting. You had growth,
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Speaker 3: you had the economy expanded at pretty rapid pace in
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Speaker 3: the last three quarters of last year. We don't have
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Speaker 3: fourth quarter to eight yet, we'll get that in a
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Speaker 3: couple of days. But it looks like the economy grew
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Speaker 3: in the last in the final three quarters of twenty
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Speaker 3: twenty five, in quarters two, three, and four, grew at
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Speaker 3: like a four percent or somewhere in that ballpark real rate, right,
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Speaker 3: unemployment employment more accurately, employment or more appropriately for what
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Speaker 3: I'm about to say, I think seems to have been
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Speaker 3: like flat. So that means productivity went up by a lot,
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Speaker 3: which is just output per hour, So we produced a
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Speaker 3: lot more with like the fewer people. Yeah, so was
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Speaker 3: that a result of AI. There are some very influential
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Speaker 3: growth researchers who think that we are in the early
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Speaker 3: stages of harvesting years worth of investments in AI. What
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Speaker 3: I'm getting to Mike is for capital markets, AI could
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Speaker 3: also So that is a that is an interesting, somewhat disruptive,
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Speaker 3: somewhat unsettling story. AI allowed us to do more with
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Speaker 3: the same or fewer people, disturbing from a labor market
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Speaker 3: point of view, encouraging from maybe a long term growth
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Speaker 3: point of view. The jury will be out on that
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Speaker 3: for some time. In equity markets, we're seeing some companies
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Speaker 3: investors souring on some companies prospects because of the same,
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Speaker 3: seemingly the same unfolding phenomenon.
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Speaker 2: Yeah, and the concerns that I'm hearing about AI today
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Speaker 2: are pretty substantially different from this time last year, when
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Speaker 2: the narrative I think this time last year was, oh,
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Speaker 2: these companies that are developing AI. Maybe it's all just overblown,
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Speaker 2: maybe it's not as impressive, And there were early signs
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Speaker 2: that it wasn't terribly impressive. These tools were bad at math,
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Speaker 2: misidentified people, and were not all that usable and I
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Speaker 2: think a lot of people were scratching their heads saying,
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Speaker 2: is this really you know, making in VideA, for instance,
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Speaker 2: a four trillion dollar company, Is this really justifiable in
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Speaker 2: terms of what we're seeing for a cost build out.
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Speaker 2: And while those questions are still being raised, you know,
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Speaker 2: is it going to be sustainable for Amazon, Microsoft Beta
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Speaker 2: and Alphabet to spend six hundred and fifty million dollars
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Speaker 2: on AI development over the course of the next year.
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Speaker 2: Those questions exist, but the bigger questions today seem to
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Speaker 2: be the tools are actually quite impressive, and so which
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Speaker 2: companies is this going to completely put out of business?
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Speaker 2: And that story seems to be rotating every week as well.
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Speaker 2: We've gone from software companies to financial services companies. I
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Speaker 2: think there was another one just last week that logistics
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Speaker 2: companies now like shipping logistics companies, were all called into
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Speaker 2: question in terms of their core business models over the
5:28
Speaker 2: course of the last three weeks. And I won't be
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Speaker 2: surprised if some new company that last week it was
5:35
Speaker 2: a former karaoke company that ruled out of logistics software.
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Speaker 2: So you know, God knows we're going to get hit
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Speaker 2: with next time. It's probably going to be a movie
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Speaker 2: theater that rolls out a AI tool for uh, you know,
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Speaker 2: selling tickets and competing with Ticketmaster for all I know.
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Speaker 2: But the rotation continues. And in spite of that, people
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Speaker 2: aren't rotating and saying that's it. I'm out. It's time
5:58
Speaker 2: to go to cash, as you will say, or you know,
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Speaker 2: buy into bond markets. It's more been well, I don't
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Speaker 2: know what this sector is going to do, so I'm
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Speaker 2: going to take my money and put it over here.
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Speaker 2: Still largely in US talks.
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Speaker 3: Yeah, the trick here and I think you and Chuck
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Speaker 3: sadd have talked about this is oh that maybe the
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Speaker 3: paradox is a better way to put it. AI may
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Speaker 3: not benefit most or on average or your average publicly
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Speaker 3: traded company, So maybe it seems unthinkable that AI could
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Speaker 3: be this transformative, revolutionary through every other cliche you want
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Speaker 3: in that description thing and at the same time bad
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Speaker 3: for publicly, bad for the s and P five hundred
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Speaker 3: because maybe the benefits a crew to private firms.
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Speaker 2: Right, I mean, we're smaller, very well could be, and
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Speaker 2: some of the top leaders in that space are privately held.
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Speaker 2: Open AI SpaceX which is now combined with XAI Clauds
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Speaker 2: what's what's Claudes parent company, Anthropic all privately held companies,
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Speaker 2: not to say that they will be the primary beneficiaries
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Speaker 2: of some AI advancement, but massive privately.
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Speaker 3: They'll go public.
7:09
Speaker 1: Awards.
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Speaker 2: The counterpoint to that would be that they all seem
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Speaker 2: to be racing to get to public markets before the
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Speaker 2: before the ship turns. So we shall see other news
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Speaker 2: this week. Walmart will be reporting earnings. We will get
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Speaker 2: more inflation data GDP, as Mark alluded to, will be
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Speaker 2: released this week. Uh So, more more information to come out.
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Speaker 2: I mentioned Walmart. We also have earnings from Deer Live Nation, Neumont,
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Speaker 2: Western Union, and you know, a partial blocking of the
7:35
Speaker 2: Strait of Horn moves which is not even moving oil markets.
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Speaker 2: This morning, we're going to take a quick break here.
7:43
Speaker 2: I don't know, I'm a little bit early. Let's take
7:44
Speaker 2: a quick break. When we come back, I want to
7:46
Speaker 2: talk a little bit about this uh piece from Financial
7:50
Speaker 2: Times that you know, markets in the economy are heading
7:52
Speaker 2: into our uncharted territory when it comes to FED policy
7:56
Speaker 2: and the state of things right now. Is it truly uncharted?
7:59
Speaker 2: And what is there to worry about? If so? Quick break?
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Speaker 2: That's next on the Financial Exchange.
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9:15
Speaker 2: Mark Richard Bernstein writes that US markets and the economy
9:18
Speaker 2: are headed into uncharted territory, which these types of stories
9:23
Speaker 2: tend to bother me because I feel like everyone and
9:25
Speaker 2: their mother has been writing about unprecedented times. And he
9:28
Speaker 2: specifically calls that out as you know many publications calling
9:31
Speaker 2: things unprecedented, and then goes on to talk about how
9:34
Speaker 2: twenty twenty six is going to be unprecedented. So let's
9:38
Speaker 2: for a moment acknowledge that every single day is unprecedented,
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Speaker 2: and we've been using that word a lot recently. What
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Speaker 2: does Richard kind of layout here as the unprecedented unprecedented
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Speaker 2: circumstances that he is concerned about in twenty twenty six?
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Speaker 3: In a nutshell, the Fed has eased and may continue
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Speaker 3: to ease to sp I elevated inflation, strong growth, as
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Speaker 3: we just talked about.
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Speaker 2: By easing, we mean lowering. Interesting. Yeah, So prior to September,
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Speaker 2: the FED fund's upper target rate was four and a
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Speaker 2: half percent. It's now three seven to five.
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Speaker 3: Yeah, And to elaborate a little bit further on what
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Speaker 3: the Fed does, and we'll reset this every time because
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Speaker 3: listeners come and go throughout the course of.
10:22
Speaker 2: The show'll tune in at ten oh six and stay
10:26
Speaker 2: there right till eleven fifty six, and we appreciate it.
10:28
Speaker 2: Thank you.
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Speaker 3: Well, then pardon me if you're hearing this for the
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Speaker 3: nth time since I since I started bringing it up whenever,
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Speaker 3: you could think of the FED as indirectly controlling overall demand. Technically,
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Speaker 3: like nominal GDP, we always report real, but nominal has
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Speaker 3: inflation in it, which the FED can control. They attempt
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Speaker 3: to stimulate demand when they think the economy needs it,
10:53
Speaker 3: when they think it's running flat, by lowering interest rates,
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Speaker 3: and behind the scenes, they're actually increasing the supply of money.
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Speaker 3: They don't control interest rates per se, there's not a dial.
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Speaker 3: They increase the supply of money, which allows banks to
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Speaker 3: lend at lower interest rates. So that's what the FED does,
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Speaker 3: but indirectly they're targeting demand. His point, and it's well taken,
11:14
Speaker 3: is that normally, when you're faced with a set of
11:17
Speaker 3: economic indicators such as we're faced with today, strong growth,
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Speaker 3: very low unemployment by historical standards, and elevated inflation, the
11:26
Speaker 3: Fed would not be He doesn't say this as I'm
11:28
Speaker 3: putting it, but you can read between the lines here.
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Speaker 3: The Fed would be raising or at very least holding
11:35
Speaker 3: steady interest rates, not cutting them. And then he goes
11:38
Speaker 3: on to make a bunch of investment recommendations for an
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Speaker 3: environment in which perhaps not unlike the nineteen seventies. By
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Speaker 3: the way, there is some precedent for what he describes.
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Speaker 3: He doesn't make the point directly, but what did well
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Speaker 3: in the seventies commodities versus US equities, international equities versus
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Speaker 3: US equities, and some other things what you might call alternative,
11:56
Speaker 3: though not in the modern way alternative is used investments.
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Speaker 2: So I guess that's where I get to is how
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Speaker 2: unprecedented is I don't think that the FED should go
12:08
Speaker 2: on a rampant rate cutting path, and you know, to me,
12:13
Speaker 2: it's not ultimately clear if they are going to do so,
12:16
Speaker 2: even though Kevin worsh who is the new selection, has
12:19
Speaker 2: been pretty clear that he wants to. I'll acknowledge that,
12:22
Speaker 2: you know, you say a lot of things to get jobs,
12:24
Speaker 2: and we'll see what he actually does when he is
12:26
Speaker 2: in there. But to me, twenty nineteen is not terribly dissimilar.
12:31
Speaker 2: You know, in twenty nineteen we were looking at so
12:37
Speaker 2: July twenty nineteen, the FED funds target rate was two
12:39
Speaker 2: and a half percent, substantially lower than where it is now.
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Speaker 2: Unemployment rate was very low, in the high threes, low fours,
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Speaker 2: and we had the dollar index sliding at that point
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Speaker 2: in time too. You had the Fed then cut rates
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Speaker 2: three times, and then COVID hit, and you know, all
12:58
Speaker 2: hell broke loose, and we said on a very different course.
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Speaker 2: But I'm just curious how unprecedented this time he is.
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Speaker 2: And you know, if the Fed does go on a
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Speaker 2: path of cutting rates by half a percent, does that,
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Speaker 2: you know, doom us into some sort of inflation loop
13:14
Speaker 2: that we need to be concerned.
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Speaker 3: About, possibly if they're misreading the structure of the economy
13:19
Speaker 3: as they did chronically throughout the nineteen seventies. Twenty nineteen
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Speaker 3: expectations were inflation expectations were a little lower, not a lot,
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Speaker 3: a little lower than they are today, and nobody was And.
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Speaker 2: By the way, I'm not sure that cutting rates in
13:31
Speaker 2: twenty nineteen was a good idea.
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Speaker 3: Yeah, that was in response to what a big market
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Speaker 3: downturn and which was in turn in response to a
13:37
Speaker 3: growth scare. So the Fed did like a one to eighty.
13:39
Speaker 3: Powell had been raising rates. Trump pounded his head into
13:43
Speaker 3: the pavement metaphorically speaking, and the FED did a quick
13:48
Speaker 3: u turn, lowered rates, stocks rocketed right back up. In
13:52
Speaker 3: twenty nineteen was a great year. Inflation was moderate, economic
13:56
Speaker 3: growth was strong, and stock market performance was good. So
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Speaker 3: in retrospect, nothing nothing broke, and the Fed didn't risk
14:04
Speaker 3: an unleashing of inform. Although inflation was steady in twenty nineteen,
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Speaker 3: it didn't exactly fall. And who knows what would happen
14:11
Speaker 3: if COVID didn't hit after that. This to me is
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Speaker 3: more like the seventies, and it the FED faces heavy
14:18
Speaker 3: political pressure, and I think that's an understatement. I mean,
14:21
Speaker 3: the president is said he wants lower interest rates. The
14:23
Speaker 3: new FED share will come in pushing for lower interest rates.
14:26
Speaker 3: That's reckless. That's like a doctor before they even meet
14:29
Speaker 3: with you, knowing what they want to prescribe because their
14:33
Speaker 3: boss is telling them to prescribe that. Right, Can you imagine?
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Speaker 2: Right?
14:38
Speaker 3: These are so good Michael no No.
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Speaker 2: I think that is that is the ultimate fair point,
14:42
Speaker 2: which is this incoming FED share has predescribed what he
14:48
Speaker 2: intends to do prior to meeting with any of the
14:51
Speaker 2: researchers at the Federal Reserve and talking about where they
14:54
Speaker 2: think things are right now, and so that has some
14:57
Speaker 2: inherent risks. And the inherent risk is moving moving towards
15:04
Speaker 2: a much looser policy, which ends up driving a whole
15:07
Speaker 2: bunch of new economic activity. And what you need to
15:11
Speaker 2: happen for that to work out properly. Is this productivity
15:15
Speaker 2: boom really lock itself in for a number of years, right?
15:19
Speaker 2: That would be I suppose the excuse you could use
15:23
Speaker 2: for lowering interest rates is if we do, in fact
15:25
Speaker 2: see economic activity continue to climb without more hours.
15:31
Speaker 3: That shouldn't that should necessarily call for lower interest rates.
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Speaker 3: Higher productivity all else equal, calls for higher neutral rates
15:36
Speaker 3: because it stokes the demand for loanable Think of Think
15:39
Speaker 3: of all the capital expenditure so called cap X that
15:43
Speaker 3: sucks up investment, and that investment has to compete the
15:48
Speaker 3: dollars that's used, whether it's issuing stocks or bonds to
15:51
Speaker 3: pay for that investment, is competing with other investments out there,
15:55
Speaker 3: and that bids up the price of bonds or whatever. General.
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Speaker 2: In any case, I'm not certain that this point in
16:01
Speaker 2: time is truly unprecedented. But what is the points of
16:06
Speaker 2: time that you can compare it to when there has
16:09
Speaker 2: been immense pressure on the federal reserve to fulfill a
16:12
Speaker 2: specific policy, and an economy that may not be able
16:17
Speaker 2: to absorb those lower interest rates. The period of time
16:21
Speaker 2: that's comparable is not a great one in our us.
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Speaker 3: Mike, I just don't I know. I've said this before.
16:27
Speaker 3: If you had presented anybody with the state of the
16:32
Speaker 3: economy as measured by inflation, unemployment, and GDP, GDP growing
16:36
Speaker 3: it like twice, most researchers estimates of potential GDP inflation
16:40
Speaker 3: remaining somewhat elevated somewhere in the high two's low threes,
16:43
Speaker 3: depending on the measure you use. It ain't too I
16:45
Speaker 3: can tell you that, and unemployment being remarkably low by
16:50
Speaker 3: historical standards that any other in any other era, the
16:53
Speaker 3: prescription would have been higher, or at the very least maintained.
16:58
Speaker 3: Thank you, maintaining a federal.
17:00
Speaker 2: H That part is really undoubtable and why I think
17:06
Speaker 2: most serious economists are pretty concerned about the path that
17:08
Speaker 2: it could go down. Tucker, I know you picked this
17:11
Speaker 2: piece because you wanted me to ridicule it. Wallsreet Journal
17:14
Speaker 2: says the economy may have stuck the soft landing. Nobody
17:17
Speaker 2: wants to jinx it, Okay, So, first of all, let's
17:20
Speaker 2: describe what everybody was talking about with the soft landing.
17:24
Speaker 2: Back in twenty twenty two. You had Fed funds target
17:28
Speaker 2: rate at effectively zero percent. Money was free back then.
17:33
Speaker 2: You could get a mortgage for next to nothing like
17:35
Speaker 2: I did. The Fed then, out of concern of inflation,
17:39
Speaker 2: which was well warranted and way behind, raised interest rates
17:44
Speaker 2: all the way up to five and a half percent
17:46
Speaker 2: for their target and everybody was asking themselves, hey, we
17:50
Speaker 2: just raised interest rates by five and a half percent,
17:52
Speaker 2: five and a quarter percent over the course of a
17:54
Speaker 2: twelve month period. Usually when that happens, the economy falls apart.
17:57
Speaker 2: Is it going to fall apart? Are we going to
17:59
Speaker 2: get a recession now? We didn't. One. The economy never lands,
18:04
Speaker 2: so the economy's constantly in flux. It's always going to move. Two.
18:07
Speaker 2: If the economy goes into recession today, can we really
18:10
Speaker 2: blame it on the policy from the Fed back in
18:12
Speaker 2: early twenty twenty two, I don't think so. We might
18:15
Speaker 2: be able to blame it on the policy the Fed now,
18:17
Speaker 2: But is there any justification mark in your mind to
18:20
Speaker 2: say that, oh, yeah, the interest rate hikes back of
18:23
Speaker 2: twenty twenty two caused a recession in the second half
18:26
Speaker 2: of twenty twenty six, because that just doesn't ring realistic
18:30
Speaker 2: to me.
18:31
Speaker 3: With respect to the soft landing, we did achieve it.
18:34
Speaker 3: I think aig inflation came down. Part of it was luck.
18:38
Speaker 3: There doesn't seem to seem to have been any output
18:41
Speaker 3: cost associated with the Fed's attempts at disinflation, which is
18:44
Speaker 3: historically unusual. People were very worried about that because it's
18:49
Speaker 3: what had always happened after the FED raised Indeed, that's
18:51
Speaker 3: how the FED works.
18:52
Speaker 2: So if you bought the narrative that a soft landing
18:54
Speaker 2: could exist, I don't know how you could describe what
18:57
Speaker 2: we got of the last few years as anything but
18:59
Speaker 2: a soft landing. Unemployment did not move much higher, inflation
19:04
Speaker 2: came down, the economy did not see a notable recession,
19:07
Speaker 2: markets relatively stable. We got the soft landing. If now
19:12
Speaker 2: we go into a recession in twenty twenty six, that
19:14
Speaker 2: is not related, in my mind, directly to the actions
19:17
Speaker 2: of the FED three and a half years ago. Other
19:21
Speaker 2: problems maybe, but not what happened.
19:23
Speaker 3: I don't think it's even useful to debate whether we
19:25
Speaker 3: had a soft landing. Seems pretty clear.
19:26
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Speaker 4: Alstraders are back from the holiday and breading for a
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Speaker 4: week ahead that includes a look at fourth quarter GDP,
20:04
Speaker 4: the Fed's preferred measure of inflation, and the core PCE
20:08
Speaker 4: index in Walmart's fourth quarter earnings. Right now, we're seeing
20:13
Speaker 4: another tech sell off. The Dow is down by two
20:16
Speaker 4: thirds of a percent, or two hundred and ninety eight
20:19
Speaker 4: points lower. SMP five hundred is down over eight tenths
20:22
Speaker 4: of a percent or fifty six points lower Tech heavy
20:26
Speaker 4: NASDAC down one and a quarter percent or two hundred
20:28
Speaker 4: and eighty points. Russell two thousand is down about three
20:31
Speaker 4: quarters of a percent. Ten Your treasure reel down one
20:34
Speaker 4: basis point at four point zero four to four percent,
20:37
Speaker 4: and crude oiled down nearly nine tenths of a percent,
20:40
Speaker 4: rating at sixty two dollars and thirty five cents a barrel.
20:44
Speaker 4: We have yet another development on the deal for Warner
20:47
Speaker 4: Brothers Discovery after Warner agreed to reopen negotiations with Paramount
20:53
Speaker 4: for a potential bidding war with Netflix. The streaming giant
20:56
Speaker 4: granted Warner's board a week to discuss Paramount's most recent proposal.
21:02
Speaker 4: Shares and Warner Brothers are up two percent, Paramount stock
21:06
Speaker 4: is rising five percent, and Netflix shares a down over
21:09
Speaker 4: one percent. Meanwhile, the Wall Street Journal report of the
21:12
Speaker 4: Genuine Parts, the parent company to NAPA Autocare Centers, plans
21:17
Speaker 4: to separate its auto parts business from its industrial parts
21:21
Speaker 4: unit into two separate public companies. That stock is tumbling
21:25
Speaker 4: by twelve percent. Elsewhere, the Wall Street Journal also reported
21:29
Speaker 4: that activist investor Elliott Management has built a more than
21:32
Speaker 4: ten percent stake in Norwegian Cruise Line and plans to
21:36
Speaker 4: push for changes to turn the struggling cruise ship operator around.
21:40
Speaker 4: Norwegian stock is jumping by six percent and shares in
21:44
Speaker 4: serial maker General Mills falling nearly seven percent after the
21:48
Speaker 4: company cut its annual sales and profit outlook. I'm Tucker Silva,
21:53
Speaker 4: and that is Wall Street Watch.
21:56
Speaker 2: Massachusetts is considering rent control via ballot measure. That is
22:02
Speaker 2: pretty much there in terms of signatures from what I
22:06
Speaker 2: saw so very likely that this could be on the
22:09
Speaker 2: ballot in the Commonwealth of Massachusetts in twenty twenty six.
22:13
Speaker 2: And details are important here, so I'm going to I
22:16
Speaker 2: think everyone listening already knows my conclusion about rent control, which,
22:19
Speaker 2: by the way, is my same general feeling about caps
22:23
Speaker 2: on credit card interest rates or food price controls on food,
22:29
Speaker 2: or any of these same things, because they are the
22:31
Speaker 2: same economic effect, which is rent control. The specifics of
22:36
Speaker 2: the policy would stop landlords from raising rents by more
22:39
Speaker 2: than the state's annual rate of inflation, but no higher
22:43
Speaker 2: than five percent in a year. So if inflation runs
22:45
Speaker 2: ten percent, too bad, your cap to five percent. In
22:47
Speaker 2: either case, they are going to publish the state's rate
22:50
Speaker 2: of inflation. You cannot raise rents above that rate of inflation.
22:55
Speaker 2: They will allow an exemption for new construction buildings for
22:59
Speaker 2: the first ten years, as well as owner occupied buildings
23:03
Speaker 2: with for or fewer units in them, so everything else
23:06
Speaker 2: will be subject to this rule. It would be among
23:08
Speaker 2: the strictest rent control laws in the country. Most other
23:11
Speaker 2: rent control programs that are in there are generally city
23:15
Speaker 2: by city rather than statewide. They also tend to allow
23:19
Speaker 2: for a inflation plus cap of increase. In either case,
23:24
Speaker 2: I would still be opposed to it even if they
23:26
Speaker 2: had looser restrictions on all of this. But I want
23:29
Speaker 2: to talk about We'll talk about the generalities of why
23:33
Speaker 2: rent control seems to be a bad idea that all
23:36
Speaker 2: economists universally agree is a bad idea. Some powerful people
23:41
Speaker 2: in Massachusetts are dividing on this. The governor is not
23:45
Speaker 2: in favor of it. The Mayor of Boston is pushing
23:48
Speaker 2: for it. But let's just think through some practicalities. So
23:51
Speaker 2: have friends that owned an apartment in Boston moved out
23:56
Speaker 2: to the suburbs, continue to rent the apartment in Boston,
23:59
Speaker 2: so they would be subject to this rent control law.
24:02
Speaker 2: Fantastic tenants that they love, They have not raised rent
24:05
Speaker 2: on them for five years. Those tenants do a lot
24:08
Speaker 2: of upkeep on the apartment. They love having the tenants
24:12
Speaker 2: in there, and just have not raised it to market
24:14
Speaker 2: rent for several years in hopes of keeping the tenant
24:17
Speaker 2: in the apartment. Under this rent control law, the tenant
24:23
Speaker 2: leaves for some other reason, the owner of this apartment
24:27
Speaker 2: cannot raise rents to market rate now right they are
24:30
Speaker 2: locked in because they chose to not raise rent on
24:33
Speaker 2: this person, they are now locked into a lower rent.
24:36
Speaker 2: So if I am a landlord in this now many
24:39
Speaker 2: landlords already do this. But if I'm a landlord in
24:41
Speaker 2: one of these scenarios, and maybe I'm just a small
24:44
Speaker 2: owner who again likes to find attractive tenants who attractors
24:48
Speaker 2: the wrong word there, likes to find tenants who are
24:50
Speaker 2: not a pain in the rear end and are really
24:53
Speaker 2: pay on time and do everything. I have very little
24:56
Speaker 2: incentive to keep their rent low because I know that
24:58
Speaker 2: if I lose that tenant, I'm going to be capped
25:01
Speaker 2: in terms of how much I can raise the rent. Furthermore,
25:05
Speaker 2: maybe it's been a decade and I need to get
25:07
Speaker 2: in there and you know, change out some of the appliances,
25:11
Speaker 2: you know, do the landlord special repaint the thing, put
25:14
Speaker 2: in some new tile in the kitchen. I have no
25:18
Speaker 2: ability to raise the rent by improving the property. So
25:21
Speaker 2: if I if I, you know, take out a wall
25:24
Speaker 2: and you know, expand the kitchen and then put up
25:27
Speaker 2: a new bedroom, I have no ability, seemingly under this rule,
25:31
Speaker 2: to raise the rent at all. So, as we've seen
25:34
Speaker 2: in rent controlled areas like New York City, what happens
25:37
Speaker 2: to the properties. They generally deteriorate because landlords are capped
25:41
Speaker 2: in terms of how much they can raise the rent. Therefore,
25:44
Speaker 2: they don't do anything to the buildings, and there's this
25:46
Speaker 2: constant battle between landlord and tenant to maintain the property,
25:50
Speaker 2: and the landlords are unwilling to do so because they
25:53
Speaker 2: can't recoup the cost of putting money into it. So
25:56
Speaker 2: there's just some practical problems with the Massachusetts thing. Here's
26:02
Speaker 2: the reality you put in rent control. The only thing
26:05
Speaker 2: that happens is a shortage. There will be a shortage
26:08
Speaker 2: of apartments available for rent because nobody's going to be
26:11
Speaker 2: willing to develop new properties because I ultimately, whether it's
26:14
Speaker 2: a ten year exemption or not, anyone who is thinking
26:19
Speaker 2: about building knows, Okay, I can build this thing, and yeah,
26:24
Speaker 2: I'm good for a decade, but ten years out, I
26:26
Speaker 2: have no ability to raise rent anymore. And so why
26:29
Speaker 2: am I going to build here when I can deploy
26:31
Speaker 2: my capital elsewhere? Is there anything? I mean, it seems
26:35
Speaker 2: like such a simple obvious solution to me. Boston, Cambridge,
26:40
Speaker 2: Somerville all outlawed rent control based on exactly these factors.
26:44
Speaker 2: A few decades ago. This would overturn that and put
26:47
Speaker 2: in a statewide rent control law. And it is just
26:51
Speaker 2: so brutally obvious to me what is likely to happen
26:54
Speaker 2: in these scenarios. And I'm also relatively convinced that if
26:58
Speaker 2: it gets on the ballot, we will pass it. Mass
27:00
Speaker 2: jusets anything I've missed on the subject of rent control.
27:03
Speaker 3: Now that was pretty exhaustive. Just remember prices or signals,
27:07
Speaker 3: whether it's the interest rate you pay on your credit card,
27:10
Speaker 3: or wages or whatever. They're all prices in one form
27:12
Speaker 3: or another. Interest rates or prices too. They price the future.
27:15
Speaker 3: And when government steps in and caps or otherwise interferes
27:21
Speaker 3: with that mechanism, markets don't know how to allocate resources.
27:25
Speaker 2: Rents are not so high in Massachusetts because all the
27:28
Speaker 2: landlords get together in a in a backdoor meeting and
27:33
Speaker 2: peg rents at the highest level they can by colluding. Like,
27:37
Speaker 2: that's not the cause between this. Rents are so high
27:39
Speaker 2: in Massachusetts because wages are high and people want to
27:41
Speaker 2: live here, and because we don't let anyone build anything
27:44
Speaker 2: bigger than like three stories anywhere in the state. So yeah,
27:48
Speaker 2: rents are really high in the Commonwealth of Massachusetts. We
27:51
Speaker 2: have some of the highest wages in the country. We
27:53
Speaker 2: have some of the highest housing costs in the country.
27:54
Speaker 2: We have very limited space and therefore rents are quite high.
27:58
Speaker 2: It is not something the government needs to step in
28:01
Speaker 2: and fix by fixing prices.
28:04
Speaker 3: It's just a bat Like interest rate caps on credit
28:06
Speaker 3: cards are also a bad idea. The result will be
28:08
Speaker 3: rationing of credit in that case. The result in this
28:12
Speaker 3: case will be lower quality supply and rationing. How do
28:16
Speaker 3: I How do I know that? Well, because anyone who's
28:18
Speaker 3: ever looked at rent control exercises, including recently in the
28:21
Speaker 3: Twin Cities out in the Midwest, Yeah, has found indeed
28:25
Speaker 3: that you drive.
28:26
Speaker 2: I can think of almost no better control experiment than
28:31
Speaker 2: if you.
28:31
Speaker 3: Get a natural Yeah, I mean a natural experiment is
28:33
Speaker 3: exactly what it sounds like. It's when two otherwise identical
28:37
Speaker 3: groups of people like you split up Korea in the
28:39
Speaker 3: North and South. Let one adopt communism, the other some
28:43
Speaker 3: version of capitalism, and then see who's wealthier. Well, the
28:46
Speaker 3: verdicts in on that there are plenty of examples along
28:50
Speaker 3: the lines, is that I just gave rent control is
28:52
Speaker 3: one in which you rarely get natural experiments, But we
28:55
Speaker 3: did last year and the results were conclusive, fairly conclusive.
28:59
Speaker 3: In fact, rents actually went up in the rent controlled
29:02
Speaker 3: more than they did in the non rent controlled subject
29:05
Speaker 3: in that experiment.
29:06
Speaker 2: Yeah again, Yeah, Minnesota, twin cities you had Saint Paul
29:09
Speaker 2: and Minneapolis, one enacting rent control, the other not. Permits
29:14
Speaker 2: for new construction rose in the non rent controlled area
29:17
Speaker 2: whereas they did not in the rent controlleds. I mean,
29:20
Speaker 2: it's so brutally obvious what happens in these scenarios that
29:24
Speaker 2: I really hope we're smart enough to vote this down
29:27
Speaker 2: if it does indeed get on the ballot. But like
29:29
Speaker 2: I said, I suspect it will get on the ballot,
29:32
Speaker 2: and I suspect that Massachusetts will vote the way it
29:36
Speaker 2: usually does on subjects like this. So time will tell,
29:39
Speaker 2: but be prepared for that one. And again, it's worth
29:44
Speaker 2: mentioning because it has spillover effects for other you know,
29:46
Speaker 2: even if you don't live and own property in Massachusetts,
29:49
Speaker 2: it has spillover effects for all of them.
29:50
Speaker 3: Yeah, I think, Look, people listening to this show, they're
29:53
Speaker 3: probably a little bit more entrepreneurial. They have more economic
29:58
Speaker 3: sense than to support. My guess is seventy eighty percent
30:00
Speaker 3: of the people listening to this show will not vote
30:03
Speaker 3: for rent control because otherwise you wouldn't be listening to
30:05
Speaker 3: a money show. Sure, right, So maybe talk to someone
30:08
Speaker 3: who's on the fence and explain what might Just explain
30:12
Speaker 3: how it restricts supply, prevents investments in new supply, and
30:16
Speaker 3: won't accomplish whatever it is the advocates of this referendum
30:21
Speaker 3: item seek to accomplish. If it's just fairness, well there
30:24
Speaker 3: are better ways to do that, like, oh God forbid,
30:26
Speaker 3: we cut taxes. Never gonna happen. I understand that.
30:29
Speaker 2: Let's take a quick break. When we come back, speaking
30:32
Speaker 2: of price increases, Wall Street Journal reporting that companies are
30:35
Speaker 2: jacking up prices again, we'll be covering that next Financial Exchange.
30:39
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31:00
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31:19
Speaker 2: The break is over, companies are jacking up prices again,
31:23
Speaker 2: while Street Journal goes on to say the companies from
31:25
Speaker 2: Levi Strauss to McCormick the spice maker, say they're raising
31:28
Speaker 2: prices early this year on items from blue jeans to spices,
31:32
Speaker 2: to housewares and industrial products. The narrative here is that
31:38
Speaker 2: a whole bunch of companies out there have been absorbing
31:41
Speaker 2: price shocks from tariffs as well as some other high
31:46
Speaker 2: employer costs. Health insurance costs just went through the roof
31:50
Speaker 2: again in twenty twenty six. I think I think the
31:53
Speaker 2: average increase for employer provided health insurance was more than
31:57
Speaker 2: ten percent year over year. Some big price shocks that
32:00
Speaker 2: are you know, companies are experiencing. And the narrative here
32:03
Speaker 2: is that, hey, we've held off for long enough, we're
32:06
Speaker 2: not getting the relief on the supply side that we needed,
32:09
Speaker 2: and we're going to have to raise prices. I'm not
32:13
Speaker 2: pooh pooing that narrative. I'm just not sure I have
32:15
Speaker 2: the evidence needed to actually support it right. What I'd
32:18
Speaker 2: be looking for here is, hey, did you see a
32:22
Speaker 2: noticeable decline in profit margins among consumer product companies in
32:27
Speaker 2: twenty twenty five, and I'm just I'm not convinced that.
32:30
Speaker 2: I'm sure that was the case in some areas where yeah,
32:33
Speaker 2: consumer products like Levi, Strauss and McCormick absorbed the price
32:36
Speaker 2: shocks and didn't raise prices, But I'm not sure we're
32:40
Speaker 2: seeing that across the board. And likewise, I'm unsure that
32:42
Speaker 2: we're going to see a general inflation uptick across the
32:45
Speaker 2: board based on this narrative of companies finally passing along
32:50
Speaker 2: the increased costs. Some areas, yes, I'm sure, some areas not.
32:55
Speaker 2: I'm just My point is, I'm not sure that this
32:58
Speaker 2: actually works into a substantially higher inflation rate, for instance, which.
33:02
Speaker 3: Is what people well, it may not because other prices
33:04
Speaker 3: may be moving down for different reasons. So one of
33:07
Speaker 3: the interesting phenomena of twenty twenty five is that tariffs
33:12
Speaker 3: went up, like you said, and inflation did not go up,
33:15
Speaker 3: but it remained elevated. So it's possible that some prices
33:19
Speaker 3: went up but others, like energy went down. We kind
33:22
Speaker 3: of got lucky and offset some of that effect. It's
33:24
Speaker 3: possible too that firms just didn't raise prices, they worked
33:28
Speaker 3: out their old inventory, or they just ate it. And
33:33
Speaker 3: resigned to reduced margins at some point, though, if firms
33:36
Speaker 3: pushed through. I think Chuck said last week something the
33:39
Speaker 3: effective inflation happens when companies raise prices. And that's true
33:44
Speaker 3: because some companies raise prices, others keep their prices the same,
33:48
Speaker 3: and the result is the average price goes up over
33:50
Speaker 3: the long term. Though, like more than several quarters, only
33:54
Speaker 3: an increase in the money supply in excess of only
33:58
Speaker 3: too much demand as a result of the FED increasing
34:01
Speaker 3: the money supply too much can cause persistent inflation.
34:05
Speaker 2: So otherwise you just can't afford it at some point.
34:09
Speaker 3: Because there are relative prices, and then there's the price level.
34:12
Speaker 3: Relative prices are hamburgers per sneaker or you know something
34:15
Speaker 3: like that, whatever two goods you want to trade off.
34:18
Speaker 3: It's actually but so in the short term price of
34:21
Speaker 3: one can go up, the price the other one doesn't drop.
34:23
Speaker 3: So the overall price level CPI as we measure it,
34:26
Speaker 3: or whatever your favorite indicator is, goes up in the
34:29
Speaker 3: long run, though when all prices adjust, changes in relative
34:33
Speaker 3: prices are just that they don't translate into inflation. Persistent
34:38
Speaker 3: inflation again requires the FED to sort of misread the
34:41
Speaker 3: state of the economy.
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35:55
Speaker 2: The House and Senate past bills addressing America's housing shortage
35:58
Speaker 2: those need to be now reconcised before heading to the President.
36:01
Speaker 2: When I first read this piece, I expected it to
36:03
Speaker 2: be chock full of just very bad and dumb ideas,
36:07
Speaker 2: because we've seen a lot of them floated to address
36:09
Speaker 2: the housing crisis, Massachusetts rent control being one of them,
36:13
Speaker 2: mortgage rate caps, and all sorts of other policies being others.
36:16
Speaker 2: But honestly, when I look at the details of this
36:19
Speaker 2: in terms of the headlines, I don't have much to
36:21
Speaker 2: take issue with. So one of the items in here
36:24
Speaker 2: would be just pushing cities to build. How they do
36:27
Speaker 2: that would be authorizing a program whereby certain cities who
36:31
Speaker 2: are behind in housing production could lose out on federal
36:34
Speaker 2: funding if they don't incentivize more building. So basically, remove
36:40
Speaker 2: restrictions around buildings so that more building can take place,
36:43
Speaker 2: or otherwise some of your federal funds are going to
36:45
Speaker 2: be potentially eliminated or threatened under this bill. Streamlining environmental
36:51
Speaker 2: reviews so that they do not take so long. I
36:54
Speaker 2: don't know exactly how that works and how much control
36:57
Speaker 2: the federal government would have over this, but trying to
37:00
Speaker 2: push for faster stuff, they're removing restrictions when it comes
37:04
Speaker 2: to manufactured and modular homes, so right now this is
37:08
Speaker 2: news to me. But apparently when you build a manufactured home,
37:12
Speaker 2: you have to have a permanent chassis, meaning the building
37:15
Speaker 2: can actually be moved, and builders are saying, look, this
37:18
Speaker 2: is completely unnecessary. In twenty twenty six, we're building modular
37:21
Speaker 2: homes that are designed to stay there for the life
37:23
Speaker 2: of the home. We don't need this thing in here,
37:25
Speaker 2: which I don't know, but seems like somebody did some
37:29
Speaker 2: research there. And then expanding mortgage access. I'm not sure
37:33
Speaker 2: how they're going to incentivize banks to promote more mortgages
37:37
Speaker 2: for smaller loans in the tune of one hundred and
37:40
Speaker 2: fifty grand that tend to be not very profitable for
37:43
Speaker 2: big banks to issue, But that's what's in here. I'm
37:47
Speaker 2: just again relieved that some of the more expensive and
37:54
Speaker 2: I frankly think dumber ideas around housing were left out
37:57
Speaker 2: of this. And all of this seems to me is
38:00
Speaker 2: deregulation in housing, which I think a lot of people
38:02
Speaker 2: have been pushing for all the time we have for
38:05
Speaker 2: this hour, will be right back, though a lot more
38:07
Speaker 2: to cover in the second hour. The financial exchange markets
38:10
Speaker 2: remaining in negative territory with the NAZAC leading the way down.
38:13
Speaker 2: We'll be right back in full market recap in the
38:16
Speaker 2: second hour