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Wall Street CEOs warn of pullback risks · The Financial Exchange Show

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Speaker 2: with Mike Armstrong and Mark Vanderdy.
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Speaker 3: Good morning, Happy Tuesday, Welcome back to the Financial Exchange.
1:14
Speaker 3: It's Mike, Mark and Tucker with you here, and we've
1:16
Speaker 3: got another week of earnings.
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Speaker 4: No behemoths reporting this week.
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Speaker 3: We got Pallunteer yesterday which is making some moves and
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Speaker 3: some short calls.
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Speaker 4: We have AMD going.
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Speaker 3: Today after the bell, Shopify Uber reported before the bell today.
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Speaker 3: Tomorrow we've got some more between Toyota and Nova, Nordisk
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Speaker 3: and McDonald's all going tomorrow. Thursday, we've got Astrazenka, Kanako,
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Speaker 3: Parkerhannafin Again, no massive names here Airbnb.
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Speaker 4: But I think what might.
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Speaker 3: Be interesting is some tells here on the state of
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Speaker 3: the US consumer. We've seen and we will cover many
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Speaker 3: stories today about that K shaped economy, where the spending
1:57
Speaker 3: is coming from, where it's not. We've got some warnings
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Speaker 3: about private credit and where it seeped its tentacles into
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Speaker 3: from ubs and others. But I want to start off
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Speaker 3: with a few pieces about this market generally today, because
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Speaker 3: you have more than one Wall Street CEO flagging high
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Speaker 3: market valuations and pullback risk, and I find the information
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Speaker 3: both useless but worth talking about. I guess, so first
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Speaker 3: things first, why is it useless. Wall Street CEOs have
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Speaker 3: said that investors should brace for an equity market drop
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Speaker 3: of more than ten percent in the next twelve to
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Speaker 3: twenty four months.
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Speaker 4: Okay, so could.
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Speaker 3: You tell me Mark, I don't know off the top
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Speaker 3: of my head, but I would be very interested to hear,
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Speaker 3: and it'd probably be pretty easy for us to pull.
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Speaker 3: If you did a rolling twenty four month period, what
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Speaker 3: percentage of them have a stock market correction of ten
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Speaker 3: percent or more. I'd be willing to bet it's something
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Speaker 3: like one in three. So not exactly a bold call
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Speaker 3: to say that sometime in the next twenty four months
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Speaker 3: you should expect a pullback of ten percent or more
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Speaker 3: when we have valuations where they are. I'm sure you're
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Speaker 3: gonna go do that. Wait until after the break, because
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Speaker 3: I don't want to hear you doing that for the
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Speaker 3: next five minutes. But again, not exactly a not exactly
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Speaker 3: a bold claim here. When CEOs are saying, hey, prep
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Speaker 3: for a ten percent market pullback, these things happen.
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Speaker 4: Five percent market pullbacks happen, I would guess every other year.
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Speaker 3: A bear market happens every five years, so a ten
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Speaker 3: percent pullback is nothing. So I don't think that's terribly useful.
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Speaker 3: But here's what I do think is worth mentioning, is
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Speaker 3: that there seems to be a bit of more focus
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Speaker 3: on the high flying valuations of AI companies specifically. The
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Speaker 3: other big news that you have on this front today
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Speaker 3: is Michael Burry of the big short fame, coming out
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Speaker 3: and putting short bets on Palanteer as well as Nvidia.
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Speaker 3: And I'm not going to say that this is terribly
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Speaker 3: useful information either, because I don't know how many times
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Speaker 3: Michael Berry has tried to short a specific theme and
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Speaker 3: has been wrong about it over the course the last
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Speaker 3: fifteen years, but he's been famously wrong about several of
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Speaker 3: them over the course the last fifteen years. So I
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Speaker 3: don't think that that in and of itself is of interest.
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Speaker 3: But I do think you're starting to see the beginnings
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Speaker 3: of some form of sentiment shift when it comes to
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Speaker 3: at least some folks on the massive AI trade and
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Speaker 3: the appreciation of stocks that we have seen so far
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Speaker 3: this year and over the course of the last few
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Speaker 3: Am I full of it? Am I full of boloney?
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Speaker 3: Do you detect the same thing? Or are we starting
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Speaker 3: to actually see some of the sentiment shifting it's.
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Speaker 5: Being reported more widely, I'd say prominent investors who make
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Speaker 5: money by betting against the consensus, and the consensus is
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Speaker 5: whatever's embodied in the current price of something.
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Speaker 3: Headlines are, you know, catchy, But can we actually talk
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Speaker 3: about that for a minute when we talk about the
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Speaker 3: big short. You know, for anybody that hasn't seen the movie,
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Speaker 3: who hasn't studied the crisis, what exactly does it mean
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Speaker 3: when Michael Burry is going out and betting against Nvidia
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Speaker 3: and Palenteer. There's technically a few ways to do it,
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Speaker 3: But what do we mean when we talk about somebody
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Speaker 3: shorting a stock.
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Speaker 5: Yeah, the simplest way to think about it is, if
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Speaker 5: you thought the price was something off, something was going
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Speaker 5: to fall, you'd want to sell it today with a
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Speaker 5: promise to buy it back in the future at a
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Speaker 5: lower price.
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Speaker 3: So some people if they were worrying, though, if some
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Speaker 3: people were worried about a stock price going down, they
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Speaker 3: might just sell it and remove.
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Speaker 4: All of it.
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Speaker 5: You actually want to you want to capitalize, You want that,
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Speaker 5: you want to turn that reduction in price into capital appreciation.
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Speaker 5: And the way you do one way to do that,
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Speaker 5: as you say, is by engaging in so called shorting,
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Speaker 5: which a lot of so called hedge funds do. You
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Speaker 5: may not have access to them in your four one kit.
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Speaker 5: You probably wouldn't want it. They're a little too speculative,
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Speaker 5: a little too high risk. But you're if you have
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Speaker 5: a pension, for example, some of the managers, not many
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Speaker 5: backing those payments you get every month, do employee strategies
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Speaker 5: like use like like shorting, as well as using leverage
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Speaker 5: and derivatives. And we call those unconstrained investors hedge funds.
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Speaker 5: This is how they make money, very unlike the large
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Speaker 5: cap US stock fund you own in your four to
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Speaker 5: one day plan, which is probably an S and P
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Speaker 5: five hundred index or benchmarked to that leading US company
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Speaker 5: Bellweather a metric.
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Speaker 3: So here is I guess how I would summarize what
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Speaker 3: I think we're reading and seeing right now. Still a
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Speaker 3: tremendous amount of excitement over Ai and the spending that's coming.
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Speaker 3: Tremendous amount of excitement still about every move that open
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Speaker 3: Ai makes. Just yesterday, Amazon announce that deal with them
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Speaker 3: their stock for again, a nearly three trillion dollar company
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Speaker 3: on a deal with open Ai shot the stock up
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Speaker 3: at one point nearly five percent.
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Speaker 4: I don't think it closed quite that high.
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Speaker 3: So it is not to debate that there is still
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Speaker 3: excitement about artificial intelligence, the chips that are going to
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Speaker 3: be needed, the computing power that's going to be needed,
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Speaker 3: in the electricity that's going to be needed to power
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Speaker 3: all of it is still a driving market force. What
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Speaker 3: I am hearing and reading a little bit more into
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Speaker 3: is more scrutiny coming about when the payoff is. Palenteer,
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Speaker 3: for example, reported earnings yesterday, their stocks down more than
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Speaker 3: seven and a half percent. We'll talk about that a
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Speaker 3: little bit more. You have Michael Berry shorting a couple stocks.
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Speaker 3: You have Wall Street CEOs talking about the frothiness of markets.
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Speaker 3: While I don't find any of those predictions to be
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Speaker 3: terribly indicative of where things go, I do take it
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Speaker 3: all to me that investors going forward are getting to
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Speaker 3: be a little bit They're going to start potentially scrutinizing
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Speaker 3: the spend and the payoff more than they have over
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Speaker 3: the last couple of years. I guess is where I
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Speaker 3: am leading to. Only time will tell, but I think
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Speaker 3: that's where I'm getting to. It's not to say that
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Speaker 3: that spending will disappoint, it's just to say that, I
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Speaker 3: think investors are getting a little bit more, their antennas
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Speaker 3: are perking up a little bit more. When it comes
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Speaker 3: to hey, if these dollars are going to be spent,
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Speaker 3: when is the payoff going to come?
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Speaker 4: And what's going to look like?
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Speaker 5: Well, Vidia is what doubled in the past few months
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Speaker 5: stock price?
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Speaker 4: Isn't that right?
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Speaker 5: Since like May or April or am I thinking of
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Speaker 5: the wrong time?
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Speaker 6: I can tell you past six months up seventy eight percent?
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Speaker 4: Okay, so my it has doubled since April it doubled? Okay?
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Speaker 5: Have has the growth potential of this technology doubled in
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Speaker 5: the past several months? I think the answer to that is, well.
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Speaker 4: We don't.
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Speaker 3: As Jensen Wong, yes, yeah, Well ask everybody else if yeah.
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Speaker 5: One of the problems with this phenomenon is that it's
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Speaker 5: biggest cheer and this is always the case, but it's
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Speaker 5: biggest cheerleaders are also paid to be cheerleader. Yes, so
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Speaker 5: you can't trust them, no disrespect. I'm sure he believes
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Speaker 5: what he says. The same is true of Michael Burry
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Speaker 5: and others who have taken who are now making bets
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Speaker 5: that a stock price will fall.
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Speaker 4: He will directly profit and is very public about it.
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Speaker 5: As everything that these folks say on CNBC or whatever
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Speaker 5: it consists of talking up their book, as the expression goes,
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Speaker 5: where the book. Your book is just what you own
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Speaker 5: in finance, and if you're talking it up, all that
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Speaker 5: self explanatory. So you can't really trust him. Agreed, Not
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Speaker 5: because they're inherently untrustworthy, but because they're biased. They can't
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Speaker 5: help it.
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Speaker 4: Agreed. Let's take quick break when we come back.
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Speaker 3: The only other thing, the other thing that we've been
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Speaker 3: talking about predominantly on the show other than artificial intelligence,
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Speaker 3: has been private credit. And I felt like a bit
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Speaker 3: of a broken record over the last couple of months
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Speaker 3: when our points weren't being repeated. They finally are, They're
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Speaker 3: finally getting a little bit more attention from Wall.
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Speaker 4: Street and others.
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Speaker 3: So we're gonna be talking private credits and just where
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Speaker 3: those risks might be standing these days in the overall economy.
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Speaker 4: That's next here on the Financial Exchange.
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Speaker 2: This is your home for the most comprehensive coverage of
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Speaker 2: the economy and the trends on Wall Street.
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Speaker 1: This is the Financial Exchange Radio Network.
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Speaker 2: Text does six one seven twenty six two one three
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Speaker 4: Just fair warning here. I might have to sneeze during
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Speaker 4: this segment. I can feel it coming on. I just
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Speaker 4: want to give everybody a once to get the sun.
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Speaker 4: Can't control it.
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Speaker 3: I want to talk about private credit, and I don't
11:31
Speaker 3: think we need to define it at length again, but
11:34
Speaker 3: everyone here listening is probably heard in some way of
11:36
Speaker 3: private equity.
11:37
Speaker 4: Private credit is.
11:38
Speaker 3: A similar phenomenon on the loan side of things rather
11:41
Speaker 3: than the investment side of things. Therefore, several months now
11:45
Speaker 3: have started to be cracks in the foundation. We started
11:48
Speaker 3: talking about this well ahead of this, but mainly because
11:51
Speaker 3: in my personal experience, every time I've gone to any
11:55
Speaker 3: sort of investment or financial conference, the profession in the
12:00
Speaker 3: room have either been pushing private credit and private equity
12:04
Speaker 3: as an investment option for professional money managers, or those
12:09
Speaker 3: professional money managers have been asking questions about the segment,
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Speaker 3: its opacity, its growth, and you know, potential problems with it,
12:18
Speaker 3: and so for years in that universe, to me, it's
12:21
Speaker 3: been front and center, but not really reported on much.
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Speaker 3: This year, finally we started to see some cracks in
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Speaker 3: the foundation.
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Speaker 4: I think you can call them.
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Speaker 3: To summarize, we had the bankruptcy of Tricolor, which you
12:35
Speaker 3: know has been some allegations of fraud there when it
12:39
Speaker 3: comes to how they packaged their loans together. They were
12:43
Speaker 3: a subprime auto lender. First Brands filed for bankruptcy. Have
12:48
Speaker 3: there been allegations of fraud. I think there have been
12:49
Speaker 3: allegation of the fraud First Brands as well in terms
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Speaker 3: of off balance sheet financing and things along those lines.
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Speaker 3: You then had a the owner of two very unknown
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Speaker 3: telecom companies being alleged fraud from Blackrock, And now we
13:08
Speaker 3: have Zion's Bankcorp. Taking losses on loans to a California
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Speaker 3: real estate investors who they've accused of fraud. And what
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Speaker 3: you have here again for well known cases here that
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Speaker 3: we've reported on now of alleged fraud of companies or
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Speaker 3: individuals who have taken money from private credit companies. That's
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Speaker 3: all we know so far. Several of them have had
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Speaker 3: to declare bankruptcy as part of all of this. But
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Speaker 3: I think what I'm comfortable saying is every time that
13:42
Speaker 3: money becomes loose, there's usually fraud attached to it. I
13:46
Speaker 3: don't think this is unique to private credit. If you
13:50
Speaker 3: want some examples of this, go look at the number
13:53
Speaker 3: of people that went to jail after the Paycheck Protection
13:55
Speaker 3: Program rolled out. People that saw very easy money to
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Speaker 3: find and filed false claims for employees that they didn't
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Speaker 3: have and then were eventually put in prison or had
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Speaker 3: to pay the money back. When money is easy to
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Speaker 3: come by and there's not a whole lot of diligence,
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Speaker 3: fraud exists. The question mark that I can't answer, is
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Speaker 3: how much more is there out there and beyond the
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Speaker 3: fraud If the money was this easy to get and
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Speaker 3: there were just very few checks and balances on these
14:26
Speaker 3: companies in terms of what they were borrowing and what
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Speaker 3: they were using as collateral for those loans.
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Speaker 4: How much fraud is there?
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Speaker 3: And then how much just unsustainable debt is there that's
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Speaker 3: been taken out for businesses that couldn't ever really afford
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Speaker 3: the repayment of it.
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Speaker 4: So that's question number one.
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Speaker 3: The question number two is if there is a systemic
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Speaker 3: problem there, where does it filter through the US economy?
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Speaker 4: Where are the real problems?
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Speaker 3: Where is this systemic too big to fail risk when
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Speaker 3: it comes to all this stuff? And I don't have
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Speaker 3: a firm answer there, but UBS is pointing out one
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Speaker 3: segment of the market, which is the insurance market, and
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Speaker 3: their specific exposure to this type of.
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Speaker 5: Thing could be they don't own a lot of private
15:12
Speaker 5: is a percentage of their okay insurance companies a general
15:16
Speaker 5: accounts or like seventy percent fixed income, So it's like
15:18
Speaker 5: the it's it's like the opposite of your maybe four
15:22
Speaker 5: or one K, or opposite of a pension fund. We
15:24
Speaker 5: would think of an insurance company as being very conservatively,
15:27
Speaker 5: but what I did.
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Speaker 3: What I consider in that seventy percent with Yeah, private
15:31
Speaker 3: credits considered fixed income, right yea.
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Speaker 5: Yeah, absolutely, Yeah, these are these are loans. A bond
15:36
Speaker 5: is just a loan, So yeah, private credits part of that.
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Speaker 5: It's it's a much bigger part of it than it
15:41
Speaker 5: was twenty years ago. Most of them diligence, and diligence
15:44
Speaker 5: is a fancy way of saying, investigate, do your homework on.
15:46
Speaker 5: Most of them diligence their own deals. Insurance companies have
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Speaker 5: a lot of people doing private credit deals, just out
15:54
Speaker 5: there in the field, looking for people who need looking
15:57
Speaker 5: for credit worthy borrowers who might offer a higher rate
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Speaker 5: of return than what you can get in public markets. Again,
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Speaker 5: insurance companies, if you just think of them as a
16:04
Speaker 5: big bond portfolio that they will use the income on
16:07
Speaker 5: which they will use to pay your claim if you
16:09
Speaker 5: have to file it. That's a basic sketch of their
16:12
Speaker 5: business model what private credit offers them. See, professional investors
16:17
Speaker 5: think about portfolio construction totally differently than individuals do. Most
16:22
Speaker 5: of you listening to this are like, can I make
16:24
Speaker 5: money off this or not? Should I buy this willok
16:26
Speaker 5: gollup more than Tesla because I was also looking at Tesla.
16:28
Speaker 5: Not the way professionals construct portfolios. They look for imperfectly
16:32
Speaker 5: correlated things that zig one other things zag asset classes.
16:36
Speaker 5: Private credit is one of them, so imperfectly correlated. Fancy
16:39
Speaker 5: way of saying. Again, this zigs when the market zags. Great,
16:42
Speaker 5: it diversifies me. And it's got higher yields than interest
16:47
Speaker 5: rates than publicly traded bonds. Because they're not liquid, there's
16:51
Speaker 5: no market for them, and because they're risk ear they
16:53
Speaker 5: may not even be rated in many cases. That's why
16:56
Speaker 5: you have to go out and du due diligence yourself.
16:58
Speaker 5: So institutions are a vast majority of this market. It
17:02
Speaker 5: is probably not an appropriate market for retail investors unless
17:05
Speaker 5: you buy something that is professionally managed. And if you
17:08
Speaker 5: are buying something professionally managed, it has to be liquid,
17:11
Speaker 5: which means you give up some of what makes private
17:13
Speaker 5: credit special. So I'm getting off on a little bit
17:15
Speaker 5: of a tangent here, I guess.
17:16
Speaker 3: But it's helpful to understand the context of it, because, yeah,
17:19
Speaker 3: buy and large, it's not owned by individual investors.
17:22
Speaker 5: I mean very indirectly. Mike again, your insurance company has it,
17:26
Speaker 5: your pension fund has it. They own it for diversifications.
17:30
Speaker 5: It's far from It's not a small part, but it's
17:33
Speaker 5: not a big part either of their overall portfolio. But
17:35
Speaker 5: that's not to say if there are if there is
17:38
Speaker 5: a little bit of turmoil and private credit, it might
17:41
Speaker 5: not have knock on effects that say, take out a
17:43
Speaker 5: bank because that bank was exposed indirectly. For say a
17:48
Speaker 5: bank made a loan to Goldman Sachs. A couple of
17:50
Speaker 5: Goldman Sacks private credit funds go down and they can't
17:55
Speaker 5: pay that loan back. That that's not a really good example,
17:57
Speaker 5: but you get the sense of knock on effects. You
18:00
Speaker 5: were a big hedge fund, you had some private credit.
18:02
Speaker 5: That's taking your portfolio down. You gotta sell other stuff,
18:05
Speaker 5: more liquid stuff. That's when it hits the broader stock market,
18:08
Speaker 5: for example.
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Speaker 3: So here is the claim from UBS's chairman, whose name
18:13
Speaker 3: is Colem Kelleher quote in two thousand and seven, subprime
18:18
Speaker 3: was all about rating agency arbitrage. What you see now
18:21
Speaker 3: is a massive growth in small rating agencies ticking the
18:24
Speaker 3: box of compliance of investment, meaning the insurance companies are
18:27
Speaker 3: hiring small rating agent.
18:29
Speaker 4: You do have to.
18:29
Speaker 5: Yeah, you do have to do that at some point.
18:31
Speaker 5: It's just it's too hard to diligence these because it's
18:35
Speaker 5: so labor intentsive. It's too hard to do this using
18:37
Speaker 5: in house staff.
18:37
Speaker 1: Yeah.
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Speaker 3: And so the follow on to all that is the
18:41
Speaker 3: claim from Bloomberg here that insurance companies generally have ramped
18:47
Speaker 3: up their private debt investments over the past few years,
18:49
Speaker 3: allocating close to one third of their five point six
18:52
Speaker 3: trillion in assets to the sector last year. Okay, okay,
18:58
Speaker 3: you know that's that's an interesting number. It might be
19:01
Speaker 3: enough to cause a problem, but that is what this
19:03
Speaker 3: one individual is calling you out as a key risk
19:05
Speaker 3: of Hey, the insurance companies are not properly or may
19:09
Speaker 3: not be properly rating this stuff, and if it blows up,
19:12
Speaker 3: then that some of them are going to blow up.
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Speaker 5: But you don't have to sell them all under distressed conditions.
19:16
Speaker 5: You can hold those until the term is up. We
19:19
Speaker 5: can talk about this more on the other side if
19:20
Speaker 5: you want me to elaborate, but let's.
19:22
Speaker 4: Say a quick break.
19:22
Speaker 3: Wall Street Watch is coming up next, and then we'll
19:25
Speaker 3: wrap up our thoughts on the auto sector and private
19:27
Speaker 3: credit when we do return.
19:40
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19:43
Speaker 2: TFFE show. Breaking business news is always first right here
19:47
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19:48
Speaker 1: Exchange Radio Network. Time now for Wall Street.
19:53
Speaker 2: Watch a complete look at what's moving market so far
19:56
Speaker 2: today right here on the Financial Exchange Radio Network.
20:00
Speaker 6: Selling off this morning, driven by losses in the tech
20:02
Speaker 6: sector as worries increase about high valuations of AI stocks.
20:07
Speaker 6: Right now, the Dow is down by two tenths of
20:10
Speaker 6: one percent, or at eight eighty nine points, SMP five
20:13
Speaker 6: hundreds down about six tenths of one percent or thirty
20:16
Speaker 6: nine points. NASDAC down about one percent lower two hundred
20:20
Speaker 6: and thirty two points, Russell two thousands down three quarters
20:23
Speaker 6: of a percent. Tenure Treasure reeled down two basis points
20:26
Speaker 6: at four point zero eighty three percent. In crude oil
20:30
Speaker 6: down about eight tens of one percent, trading at sixty
20:33
Speaker 6: dollars in fifty four cents a barrel. Palenteer among the
20:37
Speaker 6: biggest AI losers on the day due to concerns over
20:40
Speaker 6: the stocks high valuation. Despite the data analytics company posting
20:44
Speaker 6: another quarter of record revenue, Palenteer also raised its current
20:48
Speaker 6: quarter in full year revenue guidance. Furthermore, renowned big short
20:52
Speaker 6: investor Michael Burry revealed a short position of both Palenteer
20:57
Speaker 6: and Nvidia. Palenteer is now down just over five percent. Meanwhile,
21:02
Speaker 6: Uber logged a higher quarterly profit and revenue, saying users
21:05
Speaker 6: took twenty two percent more trips than a year ago. However,
21:08
Speaker 6: the stock is retreating six percent after the ride sharing
21:13
Speaker 6: and delivery company offered an ebit a range that's slightly disappointed. Elsewhere,
21:18
Speaker 6: Young Brand's posted stronger than expected third quarter earnings and
21:22
Speaker 6: revenue growth, driven by strong demand for Taco Bell and
21:24
Speaker 6: improved US sales for KFC. However, the bigger news might
21:29
Speaker 6: be the restaurant's company A company's announcement that it plans
21:33
Speaker 6: to review strategic options for struggling Pizza Hut, including a
21:37
Speaker 6: possible sale of all or parts of the brand. Yum
21:40
Speaker 6: is up by six percent. Spotify shares down modestly after
21:45
Speaker 6: the music streaming platform b third quarter of revenue expectations.
21:48
Speaker 6: The companies reported active users during the quarter. All also
21:52
Speaker 6: beat forecasts. Surrepti Therapeutics tanking twenty eight percent after the
21:56
Speaker 6: biotech companies said results from a year long trial of
21:59
Speaker 6: two therapies for rare muscle wasting illness fell short of
22:04
Speaker 6: statistical significance, and after today's closing, bell A MD will
22:09
Speaker 6: post their third quarter earnings. I'm Tucker Silva and that
22:12
Speaker 6: is Wall Street watch Mark.
22:14
Speaker 3: We were talking before about the private credit space, and
22:18
Speaker 3: before we get into this specific issue that we're talking about,
22:20
Speaker 3: I want to make clear what people.
22:23
Speaker 4: May or may not be worried about.
22:25
Speaker 3: But when we talk about packaging of loans and whether
22:30
Speaker 3: diligence was done properly, I want to bring people back
22:34
Speaker 3: to the lead up of the Great Financial Crisis.
22:36
Speaker 5: You don't even bring up packaging of stuff here.
22:38
Speaker 3: Yeah, I mean, just plain and simple when you talk
22:41
Speaker 3: about the Great Financial Crisis, what you heard and what
22:43
Speaker 3: you saw on famous movies that I think most people,
22:46
Speaker 3: a lot of people have seen is that there was
22:49
Speaker 3: no real underwriting for who could get a loan back
22:52
Speaker 3: in the lead up to the Great Financial Crisis.
22:53
Speaker 5: Yeah, we're talking here about mortgages.
22:55
Speaker 4: On mortgages, not business loans. But we're talking mortgages here.
22:58
Speaker 3: Where you know there's that famous what's the Steve Krell
23:03
Speaker 3: is that the big short does it Corell movie?
23:06
Speaker 6: Are you talking about, Michael Berry?
23:08
Speaker 4: I'm talking about Yeah, Steve right.
23:11
Speaker 3: Yeah, there's that famous scene that I just always lists
23:14
Speaker 3: in my head where he's talking to the mortgage brokers
23:16
Speaker 3: and they're like, oh, yeah, my banks don't verify any
23:19
Speaker 3: of this stuff. We just tell them to put down
23:21
Speaker 3: whatever they want on the application.
23:22
Speaker 5: This isn't that egregious, Mike, It's not.
23:24
Speaker 4: It is not that egregious. It is different.
23:27
Speaker 3: I think what has people spooked is that in these
23:31
Speaker 3: four instances of alleged fraud, the even giant companies like
23:37
Speaker 3: black Rock, who people associate with good diligence and and
23:42
Speaker 3: uh some degree of caution, apparently missed some allegations of fraud.
23:47
Speaker 4: Here a lot of these.
23:48
Speaker 5: Giving example from the last job I had before I
23:50
Speaker 5: came to work for sure, I wasn't underwriting these loans.
23:53
Speaker 5: I was on the assid I was. I'm a generalist, right,
23:55
Speaker 5: That's how I get out of answering any question. Yeah,
23:57
Speaker 5: I'm a generalist. It's not really my area. But we'd
24:00
Speaker 5: sit through presentations on the latest deals and I'd pretend
24:03
Speaker 5: to be following along. But these are loans. So a
24:06
Speaker 5: big insurance company will go out and make a loan
24:07
Speaker 5: to someone, say who owns real estate, and they say
24:11
Speaker 5: what's occupancy, Oh, it's ninety eight percent. And is everybody
24:14
Speaker 5: paying their rent on time?
24:15
Speaker 4: Yes?
24:15
Speaker 1: They are?
24:16
Speaker 5: How exactly now, they have a good track record. They
24:18
Speaker 5: borrowed from us before they paid, They repaid their loan
24:21
Speaker 5: on time. It worked out for everybody.
24:22
Speaker 2: Yep.
24:23
Speaker 1: How do I verify?
24:24
Speaker 5: Do I go out and do I knock on every
24:26
Speaker 5: door in the apartment building that's going to be collateral
24:28
Speaker 5: for the loan? Then I'm making think about how Now
24:30
Speaker 5: I'm not excusing sloppy underwriting. I'm simply saying that it
24:34
Speaker 5: is very labor intensive. And as markets get frothier, and
24:37
Speaker 5: I think you made this point last segment, and it
24:39
Speaker 5: is the key point. Markets get frothy. That pushes yields down.
24:44
Speaker 5: Everybody's piling into something. It pushes, whether it's a stock
24:47
Speaker 5: or a bond.
24:47
Speaker 4: Why is market's getting frothy? Push yields pushes prices up.
24:50
Speaker 5: Yield is just income divided by price. So frothy markets
24:54
Speaker 5: push up the denominator price. That drives your yield down. Yep,
24:57
Speaker 5: so you reach four yield, That's where that express comes from.
25:00
Speaker 5: Everybody's got to do it. I have a return target
25:02
Speaker 5: as an insurance company. I have to keep paying claims
25:05
Speaker 5: at the estimated rate. I have a rate of return
25:08
Speaker 5: target as a pension fund. It's based on actuarial projections
25:12
Speaker 5: and other considerations. When markets get expensive, I have to
25:16
Speaker 5: reach for yield to meet my goals.
25:18
Speaker 4: So it's that.
25:19
Speaker 5: General environment that results in what in retrospect seem like
25:24
Speaker 5: egregious abuses and instances of fraud. There will be more fraud,
25:30
Speaker 5: There will be books written about this period.
25:32
Speaker 4: People.
25:33
Speaker 5: Maybe we'll go to jail. It's almost an inevitable byproduct
25:37
Speaker 5: of the messy process of getting capital to its highest
25:41
Speaker 5: and best use that for most of us is just
25:43
Speaker 5: embodied in the stock market that we look at every day.
25:46
Speaker 5: You don't see the ugliness under the hood of the
25:48
Speaker 5: stock market. There's a lot of tumult to arrive at
25:52
Speaker 5: the price that we see. For example, that average that
25:57
Speaker 5: we see embodied in stock prices, that was a little
26:00
Speaker 5: bit of a digression.
26:01
Speaker 3: So the similarities between now and then, I don't think
26:05
Speaker 3: are all that great. I think that the we think
26:07
Speaker 3: that the underwriting was better than it was back in
26:09
Speaker 3: the mid two thousands when it came to mortgages.
26:12
Speaker 5: We yeah, nobody thinks there's a problem there right, you
26:14
Speaker 5: haven't heard.
26:15
Speaker 3: I don't think so, because banks aren't that stupid. I
26:19
Speaker 3: think Okay, I'm not sure we should go that far.
26:23
Speaker 3: They were that stupid back in the early two thousands,
26:25
Speaker 3: So maybe.
26:26
Speaker 5: We're not going to make the same mistakes fifteen, I
26:28
Speaker 5: mean the exact same mistakes fifteen.
26:31
Speaker 3: Okay, the repackaging of those loans into something that's credit worthy.
26:38
Speaker 4: I don't feel like you know that until after the fact.
26:40
Speaker 5: But that's not even That's not even what's happening here.
26:42
Speaker 5: It's that you got to farm out some of your
26:44
Speaker 5: dude so called do deal. And I'm sorry for continue
26:46
Speaker 5: to use that phrase, but it's the easiest way to
26:48
Speaker 5: summarize all the homeworks.
26:49
Speaker 3: Knocking on the doors, not full in the customers, and
26:51
Speaker 3: seeing if there's that place.
26:53
Speaker 5: Really rented out like you told us before we give
26:55
Speaker 5: you a five million dollar loan, Is that place really
26:57
Speaker 5: rented at ninety eight percent? Uh so, yeah, that's hard
27:01
Speaker 5: to do. Sometimes you hire a third party to do it,
27:02
Speaker 5: and what if they're sloppy, They've got ten other jobs lined.
27:05
Speaker 4: Up that day.
27:06
Speaker 3: Risk does not disappear from the system after eight What
27:11
Speaker 3: happened is regulations came in and said, hey, banks, you
27:16
Speaker 3: sucked at doing this. You misled regulators, you didn't do
27:21
Speaker 3: a good job, you didn't have good standards, and we
27:24
Speaker 3: had to come bail you out because if we let
27:25
Speaker 3: you fail, who's going to sink the entire financial system.
27:27
Speaker 3: So banks, you aren't allowed to do this type of
27:30
Speaker 3: stuff anymore. That does not mean that nobody does risky
27:34
Speaker 3: loans anymore. It just means that it goes elsewhere. And
27:37
Speaker 3: that's what we saw post Grade financial crisis is the
27:41
Speaker 3: banks are no longer doing this. It is now on
27:43
Speaker 3: somebody else's shoulders. And so risk doesn't get removed from
27:46
Speaker 3: a system, It simply migrates elsewhere. And where it's migrated
27:49
Speaker 3: is to these private credit Some of it has migrated
27:52
Speaker 3: to this private credit space. And whether or not is
27:56
Speaker 3: big enough or risky enough to blow up in their faces,
27:59
Speaker 3: or maybe they genuinely are better at managing risk and
28:03
Speaker 3: issuing loans to credit worthy companies and individuals and it's
28:08
Speaker 3: not going to blow up in time.
28:09
Speaker 5: Now, there will be a lot of blow ups. The
28:10
Speaker 5: hope is that they'll be because the risk has been
28:14
Speaker 5: diffused spread over a larger number of investors. The idea
28:19
Speaker 5: is that it will be contained. I don't know if
28:21
Speaker 5: that ends up being the case. We'll know in a
28:23
Speaker 5: couple of years.
28:23
Speaker 4: Yep. Let's take a quick break. When we come back.
28:26
Speaker 3: Dan Griggs from Motion First Bank joining us next to
28:29
Speaker 3: talk about the Boston region economy, state of things from
28:33
Speaker 3: the banker's eyes.
28:34
Speaker 4: That's next. Here on the Financial Exchange.
28:36
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29:06
Speaker 3: Joining us now is Dan Griggs is the president of
29:09
Speaker 3: Ocean First Banks Boston Region and join us now to
29:12
Speaker 3: talk about the national and regional economy.
29:13
Speaker 4: Dan, thanks for coming on, appreciate it.
29:16
Speaker 7: Hi, Mike, good to be back. Thank you.
29:17
Speaker 3: So, if you don't mind, I want to start off
29:19
Speaker 3: with the state of employment nationally and then you know,
29:23
Speaker 3: get your feel for the Boston area as well. And
29:26
Speaker 3: I'm focused here because a it's supposed to be a
29:29
Speaker 3: jobs week, we won't be getting that due to the
29:31
Speaker 3: government shutdown would be my well, I think there's no
29:33
Speaker 3: way we get it because they couldn't have measured the data.
29:36
Speaker 3: With this Friday coming and going, we will now be
29:39
Speaker 3: two weeks, two months behind on collection of unemployment data.
29:44
Speaker 3: And so I'm sure you and then every you know,
29:47
Speaker 3: every economist out there, especially at the Federal Reserve, is
29:49
Speaker 3: trying to cobble together data. In Massachusetts, we had an
29:54
Speaker 3: unemployment rate of four point one percent, which matched the
29:57
Speaker 3: national situation back in December. Since then, nationally hit four
30:02
Speaker 3: to three. In August, Massachusetts hit four eight. Does the
30:07
Speaker 3: Massachusetts unemployment scenario feel weak to you right now when
30:11
Speaker 3: you talk to the businesses that you serve.
30:14
Speaker 7: It doesn't. It doesn't. I think hiring We were just
30:18
Speaker 7: out of the manufacturer last week and they're finding it
30:22
Speaker 7: easier to hire. But they're hiring because business is good,
30:27
Speaker 7: So it doesn't. It feels okay, not like there's a crisis.
30:32
Speaker 7: And I'd say too, the you know, the job market
30:37
Speaker 7: is still solid but cooling. In the FED when they
30:40
Speaker 7: made their decision, if you go to the minutes, they
30:43
Speaker 7: cided the weakening job market alongside potential housing market deterioration
30:48
Speaker 7: for the reason. So what they're balancing are those two
30:52
Speaker 7: things against inflation, and really felt, in my opinion, the
30:56
Speaker 7: risk to employment are real and likely outweigh short term
31:00
Speaker 7: concern regarding inflation.
31:02
Speaker 3: If there's been a theme at least from you know,
31:05
Speaker 3: the politics this year, I feel like obviously tariffs has
31:08
Speaker 3: been a focus, but generally government funding across the board
31:12
Speaker 3: has been under pressure. And I know, you know, the
31:14
Speaker 3: Boston area, especially with you know, high tech and biotech
31:21
Speaker 3: reliant on some of that government funding. Are you hearing
31:23
Speaker 3: from any of that place, you know, the lab space
31:26
Speaker 3: I think of just the tremendous amount of growth over
31:28
Speaker 3: the last decade. Are we seeing some pressure on either
31:30
Speaker 3: the owners of those buildings or the lab space generally
31:33
Speaker 3: in Massachusetts?
31:35
Speaker 7: Well, I think three things on on kind of the
31:41
Speaker 7: office building market is is you know flight to quality,
31:44
Speaker 7: So the A and B buildings are getting the tenants. Overall,
31:47
Speaker 7: it's about twenty percent vacancy. There is some office to
31:51
Speaker 7: REZI conversion with the current you know, city administration. And
31:55
Speaker 7: the life science is we just overbuilt lab space, so
32:00
Speaker 7: there is a huge vacancy there. But the life sciences
32:03
Speaker 7: companies are they're doing okay. It's just they're not expanding
32:07
Speaker 7: and there was a lot of building on spec So yeah,
32:10
Speaker 7: that's hurt right.
32:10
Speaker 3: Now, Mike, we're now in today. You got to be
32:14
Speaker 3: thirty five or thirty four of the government shut down.
32:17
Speaker 3: As that continues, where do you see the risks cropping
32:20
Speaker 3: up for businesses in the region.
32:23
Speaker 7: I really think the holiday outlook, staffing and consumer spending habits,
32:27
Speaker 7: and then travel the fifth carries over into Thanksgiving. You know,
32:32
Speaker 7: I really think the government shutdown, on how long it goes,
32:35
Speaker 7: is a bigger driver of the next sped Open Market
32:39
Speaker 7: Committee in December, more so than anything else. If it's settled,
32:43
Speaker 7: you know, sooner than than you know, it's okay. I'll
32:46
Speaker 7: give you an example. I was traveled. I traveled yesterday
32:48
Speaker 7: to an airport. This the the terminal I went to
32:54
Speaker 7: generally had five lines. They were down to three. So
32:57
Speaker 7: it's just taking a little more time. But everything works fine.
33:01
Speaker 7: But if as it continues and they're not being paid,
33:04
Speaker 7: it's you know, it might be tough for travel during
33:07
Speaker 7: particularly the thanksgetting Giving holiday season, and that will affect
33:10
Speaker 7: the economy.
33:12
Speaker 3: Lawyers for the Trump administration are going to the Supreme
33:14
Speaker 3: Court tomorrow for opening arguments in the case on the
33:18
Speaker 3: use of tariffs in twenty twenty five. What's been your
33:23
Speaker 3: experience in dealing with your clients that are subject to them,
33:27
Speaker 3: how have they fared through this, and what's on your
33:30
Speaker 3: mind as we head into the last quarter of the
33:32
Speaker 3: e as we're readily in the last quarter of the
33:34
Speaker 3: year when it comes to the subject of tariffs.
33:37
Speaker 7: Yeah, I just feel like it's a little bit of
33:39
Speaker 7: old news. You know. I'll go back to some comments
33:42
Speaker 7: that made earlier with you, is that it's really the
33:45
Speaker 7: price of an item. If you're buying an item for
33:49
Speaker 7: fifteen twenty bucks, you're probably still going to buy that item.
33:53
Speaker 7: If you're buying a big ticket item, that might have
33:56
Speaker 7: a bigger effect. So that's kind of the place where
33:59
Speaker 7: it will hit it. And then of course with the
34:01
Speaker 7: US and China, the Green Dicks and the tariff truce,
34:04
Speaker 7: they're working their way through it. Our businesses since the
34:08
Speaker 7: last time the administration did tariffs, you know, they they
34:12
Speaker 7: it was harder for them to adjust prices. They've been
34:15
Speaker 7: had an easier time to adjust prices this time around again.
34:19
Speaker 3: Dan Griggs, the president of Ocean First Banks Boston Region. Dan,
34:22
Speaker 3: before I let you go just any any last thoughts
34:24
Speaker 3: when you look at on the horizon of the biggest
34:27
Speaker 3: opportunities and biggest threats to this economy right now.
34:31
Speaker 7: I you know, he kinomy feels okay, Mike, it really does.
34:36
Speaker 7: The threats are you know, where the job unemployment goes.
34:39
Speaker 7: That's the biggest threat. It is, plain and simple, the
34:42
Speaker 7: biggest threat.
34:44
Speaker 3: Dan Griggs, ocean First Bank, President of Ocean First Banks
34:47
Speaker 3: Boston Region, join us today to talk about the state
34:49
Speaker 3: of the national and regional economy. Dan, thanks so much
34:52
Speaker 3: for joining us. Appreciate it and we'll talk again soon.
34:55
Speaker 7: Sounds good, Mike, Thank you very much.
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36:13
Speaker 3: As I mentioned, the Trump administration's lawyers are heading to
36:17
Speaker 3: the US Supreme Court to argue their case on tariffs.
36:21
Speaker 3: Through August, the government had collected around ninety billion dollars
36:24
Speaker 3: from tariffs. The administration had told the court that it
36:27
Speaker 3: expects to have collected between seven hundred and fifty billion
36:30
Speaker 3: and one trillion dollars in tariffs by next June. As
36:33
Speaker 3: these things truly ramp up, I have no idea how
36:36
Speaker 3: realistic that projection is, but as we head there, I
36:40
Speaker 3: guess two important questions, does anyone have a real sense
36:43
Speaker 3: of which direction this goes? And what if these tariffs?
36:47
Speaker 3: What happens if these tariffs actually do get overruled by
36:49
Speaker 3: the Supreme Court? That would be I think an immense
36:53
Speaker 3: web of complexity if that were to happen.
36:56
Speaker 5: So if you're interested in this subject, I'll direct you
36:59
Speaker 5: to the brief filed by eminent economists and researchers. A
37:05
Speaker 5: brief is something that an interested party can file so
37:07
Speaker 5: that the justices, the Supreme Court justices can can better
37:10
Speaker 5: acquaint themselves with the economic in this case issues. If
37:14
Speaker 5: you want to understand whether or not tariffs are response
37:17
Speaker 5: to an emergency, what tariffs are supposed to do, what
37:21
Speaker 5: they can't do, I would just read that I'm sorry
37:23
Speaker 5: to like no no you to helps point people in another direction. Here,
37:26
Speaker 5: Walls Street Journal Excuse Me has an excellent editorial on
37:30
Speaker 5: the subject today. They go through the history of tariffs,
37:34
Speaker 5: starting with Congress increasingly delegating tariff powers to the president.
37:39
Speaker 5: Those have always been limited, though, which is of course
37:41
Speaker 5: the main question here. Wall Street Journal is pro free trade.
37:44
Speaker 5: They're free market generally publication. They do a good job
37:47
Speaker 5: of laying out the issues.
37:49
Speaker 3: The answer to me, I have no idea which way
37:52
Speaker 3: the Supreme Courts in a rule, I would think they
37:54
Speaker 3: continue to defer to the administration. But the complexity involved
38:01
Speaker 3: if the courts, if the courts forced them to repay
38:03
Speaker 3: those tariffs, it would be pretty unprecedented in terms of
38:06
Speaker 3: the complexity of doing so.
38:08
Speaker 5: When you didn't ask. Look, there's this easy scootion your
38:10
Speaker 5: miket's get Congress to vote on this stuff.
38:12
Speaker 4: Make it law right quick break.
38:14
Speaker 3: A lot more to cover than the second hour. The
38:16
Speaker 3: financial exchange will be right back