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The $4 Trillion Question Threatening the AI Boom · The Financial Exchange Show

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1:04
Speaker 1: is The Financial Exchange with Chuck Zotta and Mike Armstrong.
1:11
Speaker 2: Chuck, Mike, and Ben. Oh, you caught it. With you.
1:15
Speaker 2: It was close.
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Speaker 3: Yeah, I almost did, but then I saw the... top
1:21
Speaker 3: half of the face of that handsome guy behind the board.
1:24
Speaker 4: And I said, hey, we usually can't see Tucker's top
1:27
Speaker 4: half of his face because he's too short.
1:29
Speaker 2: So it must be Ben. Correct. So it had to
1:31
Speaker 2: be Ben.
1:32
Speaker 3: And so if you're joining us today, you're probably asking, hey, man,
1:38
Speaker 3: what the heck happened yesterday?
1:39
Speaker 2: To which I respond.
1:42
Speaker 3: Golly, I don't know, but we can figure out a
1:45
Speaker 3: little bit of it. And so here's what we've got
1:47
Speaker 3: going on. There are two stories that are driving... There
1:52
Speaker 3: are actually, in my opinion right now, three stories that
1:54
Speaker 3: are driving markets. The biggest one is still AI. We're
1:59
Speaker 3: going to get to that in just a second. Number two,
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Speaker 3: in my opinion, is where we're going to start, which
2:06
Speaker 3: is what's going on with energy prices, which remain... high
2:12
Speaker 3: and are getting higher. And the third one is what's
2:19
Speaker 3: going on in France and with French debt, because that
2:23
Speaker 3: mattered yesterday, in my opinion, as well. And we'll discuss
2:26
Speaker 3: that as we go. Here's a quick thing, just because, again,
2:31
Speaker 3: we haven't really covered the French situation at all. My view,
2:34
Speaker 3: by and large, Europe is a mess, but they always
2:37
Speaker 3: end up figuring out the mess. And so I just,
2:41
Speaker 3: I don't get too excited there, but it can still
2:43
Speaker 3: produce some wiggles and some different asset classes. And I
2:45
Speaker 3: think we saw that yesterday in my opinion. So, uh,
2:50
Speaker 3: without further ado, let's get to talking about energy prices.
2:52
Speaker 3: Here's what we've got today. Uh, Brent crude is now, uh,
2:56
Speaker 3: North of 115 bucks a barrel. Uh, it's at one
2:59
Speaker 3: 1587 right now.
3:00
Speaker 4: 116 is where it was earlier, which is a six
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Speaker 4: month high on that benchmark.
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Speaker 3: Uh, We're basically knocking on the door of the highest
3:08
Speaker 3: oil prices that we've seen this year. West Texas Intermediate's
3:12
Speaker 3: at 102. The high that we got to on that
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Speaker 3: this year, I think we got to like 109 and change.
3:17
Speaker 3: I don't think we crossed 110, but I could be wrong.
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Speaker 4: What's the all-time high? 150?
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Speaker 3: Like 149, 150, somewhere in that ballpark. That was back
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Speaker 3: in 2008, actually, just before the financial crisis almost ended
3:30
Speaker 3: the world. Now we're on the verge of AI almost
3:35
Speaker 3: ending the world. So the more things change, the more
3:38
Speaker 3: they stay weird.
3:40
Speaker 5: Yeah.
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Speaker 2: In any case, we've got oil prices here that are
3:44
Speaker 2: moving up.
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Speaker 3: This is also happening on the product side where gas
3:48
Speaker 3: prices overnight up a couple cents, diesel up a couple
3:51
Speaker 3: cents as well. A lot of those bumps that we're
3:53
Speaker 3: seeing in those. Once again, concentrated in the Midwest route,
3:56
Speaker 3: which is having refinery problems at this Joliet Refinery. If
4:00
Speaker 3: you look at Michigan as an example, Michigan's a state
4:02
Speaker 3: in the Midwest. It's got two peninsulas, an upper and
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Speaker 3: a lower.
4:07
Speaker 1: And.
4:10
Speaker 3: Mitten.
4:11
Speaker 2: Yeah, one's kind of like a mitten.
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Speaker 4: Let's just keep describing mitten.
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Speaker 3: One's a mitten, the other's kind of like half of
4:16
Speaker 3: a crow. And so, actually, kind of a full crow
4:21
Speaker 3: if you turn it.
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Speaker 2: Full sideways. But in any case, Michigan yesterday, gas prices
4:27
Speaker 2: rose 16 cents.
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Speaker 1: That's a lot.
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Speaker 3: Diesel, up 5 cents. The reason why is these inventories
4:34
Speaker 3: are so low. Again, no one's running out of these things.
4:38
Speaker 3: So I want to be clear. We're not running out
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Speaker 3: of diesel or gas. But inventories are tight enough that
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Speaker 3: when there's a disruption... People come in and they bid
4:48
Speaker 3: this stuff up because they want to make sure they
4:50
Speaker 3: can get their hands on it. And there is only
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Speaker 3: so much of it to go around. And so the
4:54
Speaker 3: price can move really explosively with small disruptions. This Joliet
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Speaker 3: facility that was doing some flaring yesterday, you're talking like
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Speaker 3: 50 to 100,000 barrels a day of product that were
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Speaker 3: potentially disrupted. That's not a ton, but it just shows
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Speaker 3: you how tight these inventories are and how quickly price
5:12
Speaker 3: can move based on these things.
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Speaker 2: So.
5:16
Speaker 3: Oil's really tight. You've got a Wall Street Journal piece.
5:19
Speaker 3: Iran threatens wider strikes on economic and civilian targets if U.S. attacks,
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Speaker 3: to which I say, not who cares, but... What else
5:28
Speaker 3: is new? Like, okay, like, got it. There's so much
5:33
Speaker 3: chatter back and forth where one day it's, oh, we're
5:36
Speaker 3: threatening these, the next it's, well, we'd really like a
5:38
Speaker 3: diplomatic solution. And it's like, guys, filter out the noise.
5:42
Speaker 3: Don't pay attention to what anyone's saying. Pay attention to
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Speaker 3: what's actually happening. And I have some data on this
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Speaker 3: that speaks to it.
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Speaker 4: While you look up that data, Chuck, is it the
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Speaker 4: words or the action that's moving oil up to plus
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Speaker 4: percent today?
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Speaker 2: It's the action. We're numb to the words at this point.
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Speaker 5: I am.
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Speaker 3: Earlier this week, we had more Pakistani rumors of peace deal.
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Speaker 3: And it moved oil like 50 cents for 10 minutes.
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Speaker 3: The market is not falling for these head fakes in
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Speaker 3: either direction anymore. So on the energy side of things,
6:18
Speaker 3: in terms of how tight things are, I looked at
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Speaker 3: the EIA data this week, and we got some updated data.
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Speaker 3: Crude oil stocks, commercial crude stocks, are now at 412
6:29
Speaker 3: million barrels.
6:32
Speaker 2: Of inventory.
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Speaker 3: This is actually not horribly different from... previous years. It's
6:39
Speaker 3: down a couple percentage points, but it's not like crazy. It's,
6:44
Speaker 3: you know, we're down like 10 million barrels compared to
6:46
Speaker 3: a year ago. So about two and a half percent
6:49
Speaker 3: fewer barrels. But here's the thing is it's all relative
6:53
Speaker 3: in terms of, okay, the only reason that we are
6:56
Speaker 3: there is because we already did like 170 million barrel
6:59
Speaker 3: release from the SPR. The SPR is not at tank bottoms,
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Speaker 3: but is at kind of a dodgy place and can't
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Speaker 3: even get bids on.
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Speaker 2: An additional 40 million barrel release.
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Speaker 3: And so you now, in the last four weeks, have
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Speaker 3: seen a 3.47 million barrel per week draw on U.S.
7:19
Speaker 3: crude inventories, about 14 million barrels over that time. The
7:25
Speaker 3: place where we run into problems, minimum operational inventory levels,
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Speaker 3: is somewhere between 350 and 370 million barrels. We don't
7:34
Speaker 3: know where because we've never been there. This accounts for
7:36
Speaker 3: pipeline capacity, tank bottoms, working inventory. You go and you
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Speaker 3: do the math and you get there. If we look
7:43
Speaker 3: at the last month and what we've seen, we will
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Speaker 3: reach the high end of that minimum inventory level in
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Speaker 3: minimum operational inventory level on January 9th and the low
7:54
Speaker 3: end on February 18th. So it's saying, hey, there could
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Speaker 3: be a problem in like three to four months if
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Speaker 3: we move at that pace. If we move at the
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Speaker 3: pace of the last two weeks, which is a 5.8
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Speaker 3: million barrel per week draw, then it becomes problematic between
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Speaker 3: December 6th and December 30th. Anywhere from like six to
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Speaker 3: ten weeks out. So the point that I make here
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Speaker 3: is what markets are concerned about is, hey, the trend
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Speaker 3: is not good in the last month. even with flows
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Speaker 3: that you're getting out of Hormuz. And so what's going
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Speaker 3: to be the picture, and where do we get the
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Speaker 3: crude from going forward?
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Speaker 2: Yeah, it's not so much a sentiment question. No, no.
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Speaker 2: It's a commodity.
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Speaker 3: No one is speculating on oil in any size to
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Speaker 3: the top side, because all the people who did that
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Speaker 3: have either, A, made profits and took them very early
8:50
Speaker 3: in the year and ran away, or, or B, got
8:53
Speaker 3: bludgeoned over the head repeatedly by different jawbones, you know,
8:58
Speaker 3: by the Trump administration over the course of the summer,
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Speaker 3: which worked fantastically to keep the price of oil lower
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Speaker 3: than it otherwise would have been.
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Speaker 4: Yeah, we got lucky this summer. Oil prices came down
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Speaker 4: a bit, demand, people just didn't drive quite as much
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Speaker 4: as they normally do this summer, and so We got
9:16
Speaker 4: lucky in a few ways this summer, but that's seemingly
9:18
Speaker 4: coming to roost here as we enter into the winter season.
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Speaker 3: And, you know, again, just if you want like a
9:24
Speaker 3: local number on this, the one that we get concerned
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Speaker 3: about here in the Northeast is distillate stocks, you know,
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Speaker 3: diesel and home heating oil, because we heat our homes
9:33
Speaker 3: with home heating oil. At least about 25 percent of
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Speaker 3: us do here in the Northeast. And diesel obviously is,
9:39
Speaker 3: you know, important for just, you know, big, heavy transportation,
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Speaker 3: getting around and building stuff and all the cool stuff
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Speaker 3: that you do.
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Speaker 2: Here's the deal.
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Speaker 3: From 2021 through 2025, at this point in the year,
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Speaker 3: we had about 29 million barrels of almost 30 million
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Speaker 3: barrels of diesel, of distillates of you know, various different
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Speaker 3: kinds in inventory at this.
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Speaker 1: Point in the year.
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Speaker 4: Nationally or regionally?
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Speaker 2: Regionally. Right now we're at 21.
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Speaker 3: You know, you're talking like 30% lower inventories on diesel,
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Speaker 3: which is why diesel is near all-time highs. Mm-hmm. So
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Speaker 3: this is kind of what we're seeing here. We'll see
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Speaker 3: how things develop again. I don't think that there's like,
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Speaker 3: I want to be clear, never in this am I
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Speaker 3: saying that you're going to have, you know, any kind
10:24
Speaker 3: of widespread shortages in the US or even, you know,
10:27
Speaker 3: sporadic ones. But the mechanism by which we avoid those
10:30
Speaker 3: is higher price. And there's very much the potential for
10:33
Speaker 3: higher price in the coming months still. Let's take a
10:36
Speaker 3: quick break. When we come back, let's talk a little
10:39
Speaker 3: bit about what we are seeing in bonds and also
10:43
Speaker 3: how is what's going on in AI related to what
10:46
Speaker 3: we're seeing in bonds.
10:47
Speaker 2: We'll discuss next.
10:48
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11:56
Speaker 3: Mike, we got a couple pieces from Bloomberg here. I
11:59
Speaker 3: just want to read the headlines first. Treasury's AI link
12:01
Speaker 3: shows sharp shift as haven trade returns. And this other one,
12:06
Speaker 3: AI tech fears push global credit spreads to 17 month high.
12:11
Speaker 3: So how the heck is the development of artificial intelligence
12:16
Speaker 3: data centers impacting the corporate credit spreads, and treasury yields.
12:23
Speaker 3: And the answer is, well, the reason why treasury yields
12:25
Speaker 3: were blowing out to the top side, the reason why
12:28
Speaker 3: the 10-year went from 4.5 to 5.25 in a span
12:32
Speaker 3: of a couple months.
12:34
Speaker 2: Wasn't because of inflation concerns.
12:35
Speaker 3: It was actually, if you looked at the pricing on it,
12:37
Speaker 3: it was all a real rate story saying, hey, the
12:41
Speaker 3: 10-year is pricing in stronger economic growth. So if you
12:45
Speaker 3: now in the last couple weeks have questions about AI
12:48
Speaker 3: capex and whether that's sustainable or not, it reasons then that, hey,
12:54
Speaker 3: if the main driver of marginal economic growth in the U.S.
12:58
Speaker 3: is potentially having some concerns about whether it can continue,
13:02
Speaker 3: then investors are going to say, OK, we don't need
13:04
Speaker 3: to price treasuries the way we were previously. And so
13:07
Speaker 3: those rates can be a little bit lower because the
13:10
Speaker 3: growth rate is not projected to be as high.
13:13
Speaker 2: Where....
13:16
Speaker 4: I guess the question is, where does this start digging
13:18
Speaker 4: in or not? Because we've seen a few of these,
13:21
Speaker 4: I guess, head fakes on sentiment around data center construction
13:24
Speaker 4: and the AI payoff. And I don't think there's anything
13:28
Speaker 4: unique about this one so far as I can tell
13:32
Speaker 4: that couldn't be reversed from some other sentiment shift. I
13:35
Speaker 4: can't even count how many doubts we've had about this.
13:38
Speaker 4: But I do think you saw it yesterday, right? We
13:40
Speaker 4: saw in a few different places, you know, Meta's stock
13:43
Speaker 4: getting hammered. on their plan to issue more equity. Tesla's
13:48
Speaker 4: not exactly being rewarded, but I guess rewarded in comparison
13:52
Speaker 4: to Meta anyway on release of their earnings and the
13:54
Speaker 4: lack of further build-out, chip stocks getting hammered.
13:58
Speaker 2: Let me tell you what's different.
14:01
Speaker 5: Yeah.
14:02
Speaker 3: The previous times that we've had different concerns about AI,
14:08
Speaker 3: and there have been a few of them. Again, it's
14:10
Speaker 3: not like we've just gone.
14:11
Speaker 2: Through the last....
14:14
Speaker 3: Four years with no hiccups or wiggles around the AI trade. Remember,
14:20
Speaker 3: this all kicked off at the start of 2023, and
14:23
Speaker 3: there were concerns in late 23. There were concerns towards
14:29
Speaker 3: the end of 24 into 25. There were concerns earlier
14:32
Speaker 3: this year, and each of them were kind of unique.
14:35
Speaker 3: This is the first one that is specifically related to
14:42
Speaker 3: where's the money going to come from? Where's the capital
14:45
Speaker 3: going to come from in order to fund this? Because
14:50
Speaker 3: the scale is now getting to the point where it's like, okay, like, sure.
14:55
Speaker 3: You guys, you know, want to, uh, you know, you
14:59
Speaker 3: guys want to build, I'm trying to just get the
15:01
Speaker 3: numbers up from the last, here we go. Uh, You
15:05
Speaker 3: guys want to go from $ 150 billion in CapEx in
15:10
Speaker 3: 2023 to $ 225 billion in 2024. Okay, that's an extra
15:17
Speaker 3: $ 70 billion on the margins. Microsoft, Google, Meta, Amazon, you
15:20
Speaker 3: guys have enough cash flow to figure this out.
15:22
Speaker 1: Great.
15:23
Speaker 3: And then you want to go up to, you know,
15:25
Speaker 3: last year, I think we went up to like, I
15:28
Speaker 3: think it ended up being like $ 550 to $ 575 billion
15:29
Speaker 3: or like $ 580 billion. okay, like, this is starting to
15:35
Speaker 3: get uncomfortable, but you guys can do this. And then
15:37
Speaker 3: this year, you know, it's like 800 billion to, you know,
15:40
Speaker 3: 900 billion. And it's like, okay, like, even with this, remember,
15:44
Speaker 3: Google did.
15:45
Speaker 2: An $ 80.
15:46
Speaker 3: Billion equity raise earlier this year. There have been multiple
15:50
Speaker 3: debt raises by Microsoft, Meta, Amazon, like a bunch of
15:56
Speaker 3: debt raises. SpaceX freaking went public. Remember, like, I know
16:00
Speaker 3: people are like, oh, but that was for space.
16:02
Speaker 2: No, you people.
16:03
Speaker 3: It's not for space. SpaceX's actual space-related revenue is 10%
16:08
Speaker 3: of the company. So, like, they didn't need $ 90 billion
16:12
Speaker 3: to go build rockets. They needed $ 90 billion to go
16:14
Speaker 3: build data centers, because if you actually look at where
16:16
Speaker 3: the revenue's coming from in the last quarter, about 50%
16:20
Speaker 3: of it's from data centers, about 30-40% is from Starlink,
16:24
Speaker 3: and the rest is actual space launch operations. So, they're not, like, again,
16:29
Speaker 3: SpaceX raised $ 90 billion to go build data centers.
16:32
Speaker 1: Mm-hmm.
16:32
Speaker 2: So, like, you've seen the scale of this.
16:34
Speaker 3: And now you're saying, hey, we've got to do another
16:37
Speaker 3: $ 4 trillion of this over the next three years?
16:40
Speaker 2: Who's got it?
16:43
Speaker 3: Where's the money going to come from? We'll be covering
16:45
Speaker 3: it later, but maybe Warren Buffett. And this is the
16:48
Speaker 3: part that is different. Well, look, even Uncle Warren does
16:51
Speaker 3: not have $ 4 trillion. No, he's not got that much
16:55
Speaker 3: cash on the sidelines. This is the question that's now
16:57
Speaker 3: being asked that's a fundamentally different one, and this is
17:01
Speaker 3: not one that we can answer today. It's not one
17:03
Speaker 3: that we can answer tomorrow. This is going to take
17:06
Speaker 3: the next 18 months to play out, because the entire
17:09
Speaker 3: question rests on, hey, are you going to be able
17:15
Speaker 3: to find enough demand such that when all this new
17:18
Speaker 3: capacity comes online, you can still charge the rates that
17:22
Speaker 3: you're charging.
17:24
Speaker 3: For these GPUs, all these computer chips that are in there,
17:28
Speaker 3: can you continue to see, you know, rates not equal
17:32
Speaker 3: to where they are? Again, you expect them to decline
17:34
Speaker 3: over time. They've actually been increasing crazily over the course
17:37
Speaker 3: of this year, which has been the really interesting thing.
17:39
Speaker 3: But hey, once you bring all this additional capacity online,
17:43
Speaker 3: what's going to happen to the rental rates? Because the
17:45
Speaker 3: token rates, the input, the unit of input or output
17:48
Speaker 3: from these models is called a token. Those rates have
17:52
Speaker 3: been falling precipitously at the same time that the rental
17:55
Speaker 3: rates have been increasing. And so it's clear that there's
17:59
Speaker 3: still a computing shortage. But at what point does that
18:03
Speaker 3: stop is the question.
18:05
Speaker 4: So that has been the question that we've been asking, Chuck.
18:08
Speaker 4: But what if we never get there?
18:10
Speaker 3: Then it's good.
18:13
Speaker 2: Then you win.
18:14
Speaker 4: The question that we're asking now is not, will the
18:17
Speaker 4: demand show up? The question that we're asking this week is,
18:21
Speaker 4: will there be enough cash to create the supply?
18:24
Speaker 2: Right? I know that's two sides of the same question.
18:27
Speaker 3: But it's really, will the demand show up quickly enough
18:31
Speaker 3: to continue to justify putting the CapEx in? Because here's
18:34
Speaker 3: the thing. If you see that demand is still through
18:38
Speaker 3: the roof six months from now, you're like, I'll find
18:41
Speaker 3: the money because you look at the IRRs that these
18:43
Speaker 3: chips are generating right now, if you're renting them out,
18:46
Speaker 3: and they're insane.
18:47
Speaker 2: Like, they're crazy.
18:48
Speaker 3: Like, make no mistake, like, right now, if you can
18:51
Speaker 3: continue to charge these rental rates on chips, they're nuts.
18:56
Speaker 3: The rates of return are absolutely insane. But this is
19:01
Speaker 3: also with, like, okay, you know, people always make the case, like, well,
19:05
Speaker 3: it's only, like, half a million Americans right now that
19:07
Speaker 3: are really heavily using AI.
19:09
Speaker 2: Imagine what everyone else does. Well, everyone else isn't going to.
19:12
Speaker 3: Not the way those people, like, People don't just sit
19:14
Speaker 3: down for a weekend to, like, vibe code apps. It's
19:19
Speaker 3: not what they do. They go to their kids' soccer
19:21
Speaker 3: games and stuff like that. So, like, you've got to understand,
19:25
Speaker 3: there's power users and then there's normal users. Most of
19:27
Speaker 3: us are not going to be the power users.
19:29
Speaker 4: Should we take a quick break, grab our accordions and
19:31
Speaker 4: riot masks, and then head to France after this?
19:33
Speaker 2: Ah, oui! Quick break. Wall Street Watch is next.
19:39
Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
19:43
Speaker 1: Breaking business news is always first, right here on the
19:47
Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch,
19:52
Speaker 1: tracking the stocks, the data, and the headlines driving markets
19:56
Speaker 1: so far today, right here on the Financial Exchange Radio Network.
20:00
Speaker 5: Well, stocks are retreating again today. The Dow Jones is
20:02
Speaker 5: off 762 points, or 1.44%. S & P 500 is
20:04
Speaker 5: down 50%. A little over 41 points, or just over
20:09
Speaker 5: half a percent. And the NASDAQ is down 34 points,
20:13
Speaker 5: or just a little bit over one-tenth.
20:15
Speaker 1: Of a percent.
20:17
Speaker 2: Oil prices are on the rise, up 2.95%.
20:19
Speaker 5: Oil is now over $ 102. Brent crude is up 2.5%,
20:20
Speaker 5: over $ 115. Gold is off by 1.4%, while silver is
20:21
Speaker 5: down by nearly 3%. Meanwhile, Moderna shares are down 1.5%
20:38
Speaker 5: this morning after falling 25% on Thursday following a leak
20:41
Speaker 5: of partial data on its closely watched cancer vaccine developed
20:46
Speaker 5: with Merck. Both stocks faltered, even though the full data,
20:50
Speaker 5: which was released Thursday, appeared meaningful for patients and positive
20:54
Speaker 5: relative to Wall Street expectations. Shares of AT & T
20:57
Speaker 5: have dropped 5%, T-Mobile fell 4%, while Verizon decreased 2.9%
21:02
Speaker 5: on a Bloomberg News report that SpaceX... is in private
21:06
Speaker 5: talks to lease 80,000 cell towers. SpaceX is attempting to
21:10
Speaker 5: build the fourth nationwide wireless carrier by combining its Starlink
21:13
Speaker 5: direct-to-device network with ground infrastructure. Meanwhile, SpaceX shares are up 2.3%
21:21
Speaker 5: after getting a boost on an upgrade from Wall Street.
21:25
Speaker 5: Philip Capital doubled upgrade the shares to buy from sell,
21:28
Speaker 5: raising its price target all the way to $ 250 from $ 75. 00.
21:33
Speaker 5: citing surprising gains for its AI business. And finally, Bloom
21:36
Speaker 5: Energy shares are down 11% after the energy technology solutions
21:40
Speaker 5: provider for data centers reported third quarter earnings late Thursday.
21:44
Speaker 5: Despite beating on the top and bottom line and raising
21:46
Speaker 5: its full year 2026 earnings per share guidance, what stirred
21:50
Speaker 5: fear among investors was the reported negative free cash flow
21:55
Speaker 5: for the quarter. I am Ben Kitchen and that was
21:57
Speaker 5: Wall Street Watch.
21:58
Speaker 2: Ben, do you mind taking us over to France, please,
22:02
Speaker 2: if you will?
22:11
Speaker 4: This is special.
22:12
Speaker 2: Yes, it is very special. You have now arrived at...
22:17
Speaker 2: There's that accordion. You have now arrived at Chuck's house
22:21
Speaker 2: of baguettes.
22:21
Speaker 4: Uh-huh, yeah.
22:23
Speaker 3: And in our farm village, we have many baguettes, but
22:27
Speaker 3: not many cows.
22:28
Speaker 4: Wow.
22:29
Speaker 2: Because, you see, we eat the cows.
22:31
Speaker 1: Yes.
22:32
Speaker 2: All of them. Got it. Recently, we have been having
22:36
Speaker 2: problems in Paris. Paris, if you will.
22:39
Speaker 3: Hmm. We've had riots and protests. Protesters using wine for
22:45
Speaker 3: things you would never use wine for. Things you should
22:48
Speaker 3: never use wine for.
22:53
Speaker 2: Keep sticking with it. You got it. But that is
22:56
Speaker 2: not why the French bonds are selling off. I love
22:58
Speaker 2: encouraging you to do these things. No, why not?
23:01
Speaker 3: No, the French bonds are selling off because of political concerns.
23:04
Speaker 1: Uh-huh.
23:05
Speaker 3: Yep.
23:05
Speaker 2: Like, who's going to be the next person in the Louvre? No,
23:09
Speaker 2: not the Louvre. Versailles. No, they don't go there either anymore.
23:13
Speaker 3: No.
23:14
Speaker 2: They do not know where the French president lives. Somewhere
23:18
Speaker 2: in France, I would imagine. In any case, next year
23:23
Speaker 2: there will be French elections. Elections. Elections. Either one.
23:29
Speaker 3: They happen in April or April, as you know them.
23:33
Speaker 3: And here's the thing about the French elections. We have
23:36
Speaker 3: very bad fiscal situation.
23:38
Speaker 2: Very, very bad.
23:41
Speaker 3: And normally, you are able to find a party or
23:45
Speaker 3: a coalition that can run your government to be able
23:47
Speaker 3: to address these. Uh-huh. With these riots taking place, we
23:52
Speaker 3: don't know if we will have a president and an
23:55
Speaker 3: assembly who can agree on anything.
23:58
Speaker 2: And as such, no one wants to buy our bonds. None.
24:03
Speaker 3: No.
24:03
Speaker 1: Okay.
24:05
Speaker 3: And so this is driving capital away from France, and
24:08
Speaker 3: I believe affecting other markets as well.
24:11
Speaker 4: Who determines which accents you're allowed to do without offending
24:14
Speaker 4: people versus offending people?
24:17
Speaker 2: Not the French. It's an interesting question, right?
24:20
Speaker 5: You're pretty comfortable doing European accents. Anything outside of that,
24:24
Speaker 5: stay away from it. At least on the radio.
24:27
Speaker 2: Thank you, Ben. So here's the deal.
24:29
Speaker 3: French bonds have been selling off to the point now
24:32
Speaker 3: where if you look at the yields.
24:34
Speaker 2: On them, which... I urge you not to do. All right,
24:37
Speaker 2: you can give this up now. I'll let you go.
24:40
Speaker 2: It's done? Okay. So here's the deal.
24:43
Speaker 3: When you take a look at French bonds right now,
24:45
Speaker 3: 10-year French Treasury is at 5.04%. As of right now, U.S.
24:51
Speaker 3: 10-year Treasury, 4.99%. We have not seen U.S. yields on
24:55
Speaker 3: the 10-year below French ones in quite some time. mostly
24:58
Speaker 3: because the French economic situation has just been bad. The
25:01
Speaker 3: economy's been slow, and as such, you've had really, really
25:05
Speaker 3: low French yields for a while because investors are happy
25:08
Speaker 3: to earn a lower rate of return there because growth
25:11
Speaker 3: prospects aren't that good in France. What's happening now with
25:14
Speaker 3: French bonds is not that you're seeing... It's the exact opposite, actually,
25:18
Speaker 3: of what you're seeing in the U.S. U.S. yields rose
25:21
Speaker 3: over the last couple months because growth prospects have been better.
25:25
Speaker 3: We see this if you decompose it into real yields.
25:28
Speaker 3: and inflation expectations. On the other hand, with France, there
25:33
Speaker 3: is no move up in real yields that's happening. It's
25:37
Speaker 3: basically just all risk premium that's being priced in here.
25:40
Speaker 3: And so as such, you have this capital that is
25:44
Speaker 3: just moving out of France because they just don't want
25:46
Speaker 3: the political risk associated with potentially a divided French government
25:50
Speaker 3: that can't address any of the issues that have been
25:53
Speaker 3: building for quite some time.
25:55
Speaker 4: Such as pensions and just an economic scenario that can't
26:00
Speaker 4: really feasibly pay for itself over the course of the
26:03
Speaker 4: next few decades. And so if they don't agree, then
26:08
Speaker 4: precisely what's going to happen here? I don't think anybody
26:10
Speaker 4: has a firm grasp, but they're worried about a debt crisis.
26:14
Speaker 3: And so, again, I'm very much of the belief that, look,
26:18
Speaker 3: the European economy over the last 15 to 20 years
26:21
Speaker 3: has generally been pretty bad. But they always figure out
26:24
Speaker 3: how to muddle through these things. Again, very much when
26:28
Speaker 3: it comes to Europe, I am of the belief, like,
26:30
Speaker 3: nothing ever happens. Like, people get nervous about something. Draghi
26:35
Speaker 3: comes in and says, you know, we'll do whatever it takes. And, okay, like,
26:38
Speaker 3: we've put that to bed. Like, this is just kind
26:40
Speaker 3: of how things go over there.
26:41
Speaker 2: When was the Greek debt crisis?
26:43
Speaker 1: Like, 13?
26:43
Speaker 3: 2011. Okay.
26:43
Speaker 1: Yeah.
26:45
Speaker 3: It lasted for two years. So it started in 2011.
26:48
Speaker 3: But back then we were worried about Grexit and Italy
26:50
Speaker 3: even like Portugal away and like all the other things
26:54
Speaker 3: that could have happened.
26:55
Speaker 2: But none of them did.
26:57
Speaker 3: So I think that in looking at this, my view
27:02
Speaker 3: is I don't know if there's anything useful that you
27:04
Speaker 3: can do with this in the long term because I
27:06
Speaker 3: think they'll figure it out.
27:07
Speaker 2: Like that's been the conventional wisdom.
27:09
Speaker 3: But here's the thing. When we talk about global markets,
27:13
Speaker 3: part of what we saw yesterday with U.S. yields coming
27:15
Speaker 3: down as much as they did, remember the 10-year U.S.
27:18
Speaker 3: Treasury came down to, what was it, 17, 18 basis
27:21
Speaker 3: points yesterday? Part of that, in my opinion, was investors
27:26
Speaker 3: just pulling money out of France and being like, we
27:28
Speaker 3: need to get somewhere else that's safer.
27:30
Speaker 4: Pop it into the U.S. in the short term. Pretty
27:33
Speaker 4: tough to dissect there. What is AI concerned versus French
27:36
Speaker 4: debt concerned?
27:37
Speaker 1: Right.
27:37
Speaker 2: So there's some of that.
27:38
Speaker 3: The other piece that you have on this is everyone
27:41
Speaker 3: and their grandmother has been positioning over the last month
27:43
Speaker 3: or so for yields to continue moving up. And so
27:47
Speaker 3: as soon as they start coming down, you get all
27:48
Speaker 3: these hedge funds that start saying, hey, we can't be
27:51
Speaker 3: short rates anymore. We've got to be long. And so
27:53
Speaker 3: they're swinging back. So you try to decompose a move
27:56
Speaker 3: like yesterday where you see it was a 19 basis
27:59
Speaker 3: point move. in the 10-year treasury. It's not one of
28:02
Speaker 3: these things. It's all these working in concert together. And
28:06
Speaker 3: this also, by the way, plays into, hey, rates down,
28:09
Speaker 3: but inflation expectations staying the same. Normally, that would mean
28:13
Speaker 3: that gold catches a bid. Gold did not catch a
28:16
Speaker 3: bid yesterday. Gold fell almost 3%.
28:19
Speaker 5: Why?
28:20
Speaker 3: Remember, gold's priced in dollars, but investors anywhere can sell it.
28:23
Speaker 3: First of all, you've got a broad market sell-off happening.
28:25
Speaker 3: So when that correlations strengthen... And so everything starts to sell.
28:31
Speaker 3: But also you might have investors overseas, you know, French
28:34
Speaker 3: investors where rates are going up saying, great, like our
28:37
Speaker 3: rates are going up. We've got to like unload this
28:39
Speaker 3: gold now because rates are going up. And so that
28:41
Speaker 3: puts pressure on it even in the U.S. So you've
28:44
Speaker 3: got all these different things that are, you know, kind
28:48
Speaker 3: of moving here. And this gets you to like what
28:51
Speaker 3: equities are doing today, where again, like now everyone who
28:53
Speaker 3: won yesterday is off sides. The Dow is off 800 points.
28:57
Speaker 3: The S & P is down 20, but the NASDAQ
28:58
Speaker 3: is in the green. So it's just like these type
29:02
Speaker 3: of internal market rotations that are getting more and more violent,
29:07
Speaker 3: these aren't healthy.
29:08
Speaker 2: No.
29:09
Speaker 3: If you're just going back and forth between what worked
29:11
Speaker 3: on one day to what didn't work, no one knows
29:16
Speaker 3: what to do with their money right now.
29:18
Speaker 2: No one knows what to do.
29:20
Speaker 4: I hear people describe the markets as volatile, and it
29:23
Speaker 4: really depends how you define it because... The S &
29:25
Speaker 4: P 500, I can't really look at as having been
29:28
Speaker 4: volatile this year, but under the surface, it's been outrageous.
29:32
Speaker 2: Yes, like if you want to like just.
29:34
Speaker 4: The average hasn't, but the components have.
29:36
Speaker 3: Just just as an example of this uh right now
29:39
Speaker 3: if you look over the last 90 days uh realized
29:43
Speaker 3: volatility in the s & p 500 i'm sorry 60
29:45
Speaker 3: trading days realized volatility which is basically three months so
29:49
Speaker 3: the last quarter realized volatility which is okay like on
29:52
Speaker 3: an annual year like you know annualized so like what
29:55
Speaker 3: what kind of volatility are you seeing is 10.9 percent
29:59
Speaker 3: which to give you a point of comparison, the historical
30:03
Speaker 3: average for 60-day vol is like 16 and change. So
30:08
Speaker 3: this has been like pretty calm. Now, granted, all of
30:11
Speaker 3: those numbers are exacerbated. They're all influenced by outstanding events
30:19
Speaker 3: that happen. I would say generally for 60-day vol, you're
30:22
Speaker 3: probably looking at like 12 or 13, but you're still
30:25
Speaker 3: running like, 25% below normal volatility for the last 60
30:29
Speaker 3: days at the index level. But under the surface, the
30:33
Speaker 3: Philly Semiconductor Index fell 20% in a span of like
30:36
Speaker 3: eight trading days this month. And so if you own semiconductors,
30:39
Speaker 3: you're just like, what happened?
30:42
Speaker 4: You know?
30:43
Speaker 3: So it's just, it's a very volatile market under the surface.
30:48
Speaker 3: But these rotations are helping to keep the market afloat.
30:51
Speaker 3: The question is, hey, if the AI leg actually goes...
30:55
Speaker 3: I don't know what else is out there to really
30:58
Speaker 3: keep markets afloat more broadly. I'm not saying that things
31:02
Speaker 3: fall apart, but it might be like, okay, AI-related stocks
31:06
Speaker 3: have to decline, as an example, 30%, but the S
31:10
Speaker 3: & P goes down 10% because everything else tries to
31:13
Speaker 3: keep it afloat, and that's just how it works. So
31:15
Speaker 3: this is kind of just where we are in markets
31:18
Speaker 3: at the moment. Let's take a quick break. When we return,
31:23
Speaker 3: we're not going back to France. I think that we're
31:25
Speaker 3: good there for a little bit. Let's talk a little
31:29
Speaker 3: bit about.
31:32
Speaker 2: What do we want to do? We covered that yesterday
31:35
Speaker 2: a little bit, didn't we?
31:37
Speaker 4: We did.
31:38
Speaker 2: It's a big enough story. We'll talk more about agents
31:40
Speaker 2: in the banking system next.
31:42
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32:16
Speaker 4: I know we just turned over into the fourth quarter here,
32:19
Speaker 4: but we are going to be rapidly heading into the
32:21
Speaker 4: end of the year.
32:24
Speaker 2: As we.
32:25
Speaker 4: closed in on Halloween, then before we know it, Thanksgiving,
32:28
Speaker 4: and then the Christmas holidays. If you are sitting here
32:33
Speaker 4: and looking at your investment portfolio and have benefited greatly
32:37
Speaker 4: from the massive surge in bull markets over the course
32:40
Speaker 4: of the last few years, and if you are growing
32:44
Speaker 4: concerned about your financial strategy for the future, I would
32:48
Speaker 4: urge you to not wait. We all know that things
32:51
Speaker 4: get busy. I know that there is a lot of
32:54
Speaker 4: general nervousness that always occurs this time of year, but,
32:58
Speaker 4: you know, it's a midterm election season. We have one
33:01
Speaker 4: of the strongest bull markets that we have seen in history,
33:05
Speaker 4: all predicated on a brand new technology that a large
33:08
Speaker 4: portion of the population doesn't fully understand. I think all
33:11
Speaker 4: of that can lead to excitement and anxiety about how
33:15
Speaker 4: somebody's positioned, especially if they are on the latter half
33:18
Speaker 4: of their career. If you have those questions, if you
33:21
Speaker 4: have those concerns, I urge you, to not bury your
33:24
Speaker 4: head in the sand, but take action and learn more
33:27
Speaker 4: about what an investment, what a financial advisor can do
33:30
Speaker 4: for you. If you have those questions, Armstrong Advisory Group
33:34
Speaker 4: offers free consultations throughout New England, in person, throughout the country.
33:39
Speaker 4: And we would urge you to book a time for
33:42
Speaker 4: us to chat, understand what it is you're doing, and
33:45
Speaker 4: give you the full scope of what could come next.
33:50
Speaker 4: Because There's always going to be a next, and it's
33:54
Speaker 4: not always going to be positive. And checking how you
33:58
Speaker 4: are set up for that, positioned for it, and prepared
34:00
Speaker 4: for it is incredibly important, especially if you're in that
34:04
Speaker 4: latter half, second half of your career. The phone number
34:07
Speaker 4: for a free consultation, 800-393-4001. You can book time for
34:12
Speaker 4: us to call you back at armstrongadvisory.com.
34:15
Speaker 2: But that number again, 800-393-4001.
34:19
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
34:22
Speaker 1: registered investment advisor. Nothing in the ad or in any
34:24
Speaker 1: Armstrong guide is specific financial, legal, or tax advice. Consult
34:27
Speaker 1: your own financial, tax, and estate planning advisors before making
34:30
Speaker 1: any investment decisions. Armstrong may contact you to offer investment
34:33
Speaker 1: advisory services.
34:35
Speaker 3: Mike, we talked yesterday about the Axios report about... unvetted
34:40
Speaker 3: AI agents making their way into people's accounts at banks. Uh,
34:46
Speaker 3: to this point, I believe again, that the story at
34:49
Speaker 3: least is not talking about, uh, into other people's accounts,
34:52
Speaker 3: but rather their own accounts, but maybe just not directly
34:56
Speaker 3: following their instructions.
34:58
Speaker 2: Uh, What else do we want to talk about on this?
35:01
Speaker 3: Because this is a big one going forward when it
35:02
Speaker 3: comes to AI and the safety and security of the
35:06
Speaker 3: financial system.
35:07
Speaker 4: Yeah, look, I think there's this aspect of it, and
35:10
Speaker 4: clearly the banking sector is worried about it. There's probably
35:15
Speaker 4: federal regulations that exist around the banking sector as to
35:19
Speaker 4: who is authorized to access money. bank accounts, just like
35:25
Speaker 4: there is in the investment industry, right? I mean, if
35:27
Speaker 4: you want to provide investment advice as a profession, whether
35:32
Speaker 4: you are a computer algorithm, an AI agent, or a
35:35
Speaker 4: human being, you're supposed to register with certain authorities. And
35:38
Speaker 4: so I think everyone is a bit nervous about this access.
35:42
Speaker 4: What I keep coming back to is We do not
35:46
Speaker 4: have any established liability for the companies that are designing
35:50
Speaker 4: these things. And every time I hear about a process
35:53
Speaker 4: to regulate them, I just continue to think it falls flat.
35:57
Speaker 4: And the thought that I had most recently, and this
36:03
Speaker 4: would dramatically slow down the development of these things, Chuck,
36:08
Speaker 4: but you and I work in the investment industry, and
36:12
Speaker 4: we are defined by a fiduciary obligation.
36:15
Speaker 2: Sure.
36:17
Speaker 4: And I wonder if there's some version of a requirement
36:19
Speaker 4: of a fiduciary obligation of AI agents to their owners.
36:24
Speaker 4: I don't mean that the AI agents would have any
36:27
Speaker 4: ability to adhere to that, but it would create a framework,
36:31
Speaker 4: I guess, for liability for the companies that design them
36:33
Speaker 4: in cases where these things go off the rails and
36:38
Speaker 4: do something that would harm their owner. Again, This doesn't
36:43
Speaker 4: prevent them from ending the world, but in the case
36:45
Speaker 4: where it goes off the rails and depletes your bank
36:50
Speaker 4: account or something like that.
36:51
Speaker 3: Let's look at some specifics. Let's say that AI makes
36:56
Speaker 3: a purchase.
36:56
Speaker 2: That you don't want it to make. Who should be
37:02
Speaker 2: at fault there?
37:04
Speaker 4: I tend to think the individual who's authorized it to
37:06
Speaker 4: make that purchase.
37:08
Speaker 3: Let's say that AI sends money from you to someone
37:11
Speaker 3: else without... Consent. Who's liable there?
37:16
Speaker 4: That seems a bit more like the AI agent.
37:19
Speaker 3: Why is it different if it's sending money to someone
37:21
Speaker 3: as opposed to sending money to buy a good from
37:24
Speaker 3: someone or something?
37:25
Speaker 4: One seems like a misinterpretation. The other seems like a
37:28
Speaker 4: violation of what should be built-in rules, I guess.
37:34
Speaker 3: But you see how this gets to a gray area
37:36
Speaker 3: very quickly. It's like, okay, so if you're sending money
37:39
Speaker 3: to someone to buy something... The agent shouldn't be responsible,
37:43
Speaker 3: but if you're just sending money for nothing in return,
37:45
Speaker 3: then it should. These are the questions that we're going
37:49
Speaker 3: to have to reckon with, and I don't have the
37:51
Speaker 3: answers right now because I have a job and some kids,
37:55
Speaker 3: and so I haven't been able to think through the
37:58
Speaker 3: legal implications of different types of actions from AI bots
38:02
Speaker 3: on the banking system.
38:04
Speaker 2: But, like, this is the stuff that someone at, like, J.P.
38:08
Speaker 3: Morgan and Bank of America needs to be doing all day,
38:11
Speaker 3: every day, preferably lots of someones who are actual people,
38:14
Speaker 3: not AI agents.
38:16
Speaker 2: Quick break. Hour 2 is coming up in a bit.