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What is the biggest risk to financial institutions? · The Financial Exchange Show

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  Speaker 1: Zada and Mike Armstrong.
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  Speaker 2: Chuck, Mike and Tucker with you, and as we kick
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  Speaker 2: things off today, we got some additional economic data in
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  Speaker 2: the form of retail sales data for the month of December.
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  Speaker 2: We also did get some jobless claims data. Mike, which
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  Speaker 2: one of those do you want to start with?
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  Speaker 3: I think the retail sales number. If I recall, there
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  Speaker 3: was some big holiday going on in December, so that
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  Speaker 3: seems like an important one to cover.
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  Speaker 2: Yes, the festiv his shopping season was obviously quite busy
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  Speaker 2: this year, and what we saw retail sales for the
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  Speaker 2: month of December one point four percent month over month.
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  Speaker 2: The estimate was between point five and point six, so
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  Speaker 2: you missed on the headline there. Excluding autos came in
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  Speaker 2: at point four, which was right in line with expectations.
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  Speaker 2: So this kind of got back to what we had
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  Speaker 2: said in December about the November data, where remember there's
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  Speaker 2: this big jump in auto sale and we're like, hey,
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  Speaker 2: this is probably due to people trying to front run tariffs,
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  Speaker 2: because auto sales aren't going to increase this quickly, you know,
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  Speaker 2: each year, for each month forever. They just they can't
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  Speaker 2: do that. And sure enough, that's that's kind of what
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  Speaker 2: we saw here, where yeah, there was a slow down
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  Speaker 2: month over month in the pace of auto sales growth.
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  Speaker 2: It still is growing, but just not as quickly as
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  Speaker 2: it had the prior month, and so as a result,
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  Speaker 2: you came in with a more muted number on this
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  Speaker 2: side of things, and so overall a pretty healthy retail
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  Speaker 2: sales number. There's nothing that I think is particularly concerning
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  Speaker 2: in here. The only thing that I think you could
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  Speaker 2: designate as concerning, in my opinion two small things one
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  Speaker 2: building material and garden supply stores. So basically your home
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  Speaker 2: depot's lows and things like that two percent monthly decline.
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  Speaker 2: And this comes on the back of obviously, look, you've
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  Speaker 2: had a right an interest rate, so you wonder is
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  Speaker 2: that affecting, you know, potential renovations and construction. But the
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  Speaker 2: other thing that's a little bit strange there is Look,
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  Speaker 2: in no, I'm sorry, in September and October you had
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  Speaker 2: two big hurricanes that went through the southeastern part of
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  Speaker 2: the United States, and two months after you're now already
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  Speaker 2: seeing a decline in building material sales. Like that's that's
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  Speaker 2: not really a great sign, given that you're probably getting
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  Speaker 2: a tailwind in the southern part of the country from
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  Speaker 2: rebuilding and stuff like that that's taking place. I know
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  Speaker 2: it takes time obviously for you know, if you're if
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  Speaker 2: you have to demolish a home, you don't go and
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  Speaker 2: buy all the stuff right away.
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  Speaker 4: But hey, if you're not demolishing a whole home.
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  Speaker 2: But just repairing you know, drywall or this and that, okay,
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  Speaker 2: like you want to get into that stuff within a
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  Speaker 2: month or two. And and so that numbers one that
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  Speaker 2: I look at and say, yeah, you could have you know,
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  Speaker 2: a real drag from housing if rates stay high.
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  Speaker 5: Sure.
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  Speaker 2: The other the other piece is, hey, this is all
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  Speaker 2: still pre potential tariff and so a lot of these
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  Speaker 2: categories still could be boosted by people or companies trying
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  Speaker 2: to front run tariffs that may be in place within
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  Speaker 2: the next week or so. We don't know the details yet,
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  Speaker 2: And so how do we see this evolve as we
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  Speaker 2: get into the January February March data, I think is
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  Speaker 2: an open question, but one that is a question not
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  Speaker 2: something where you're like, oh, this is going to be bad.
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  Speaker 4: It's more, hey, what does this mean? Right?
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  Speaker 3: Yeah, it does need to continue. Maybe there is weather patterns,
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  Speaker 3: maybe there's other stuff. Going on in December that dragged
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  Speaker 3: that down food services and drinking places with the other
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  Speaker 3: category that was negative, along with health and personal care,
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  Speaker 3: So again there could be seasonality to all this.
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  Speaker 5: The other number that was rised upward.
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  Speaker 3: On the other hand, the November data bumped up I
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  Speaker 3: don't remember where it came out initially, but bumped up
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  Speaker 3: to a zero point eight percent total growth number. So
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  Speaker 3: for the year, retail sales twenty twenty four compared to
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  Speaker 3: twenty twenty three came in at a solid clip of
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  Speaker 3: three percent. But keep in mind these aren't inflation adjusted, correct,
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  Speaker 3: so we've got inflation running close, so that retail sales
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  Speaker 3: up three percent for the year, not a massive increasing.
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  Speaker 2: Are you up to three percent number? I'm seeing three nine?
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  Speaker 2: Are you seeing three nine? I'm seeing three nine year
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  Speaker 2: over year.
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  Speaker 3: Yeah, I'll double check my data. I saw total retail
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  Speaker 3: and food services total percentage change. Oh sorry, I'm looking
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  Speaker 3: at the twenty twenty three percentage change, not the twenty
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  Speaker 3: twenty four I think. But in either case, three point
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  Speaker 3: nine percent bump that is considerably better than three When
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  Speaker 3: what would you have full year inflation running for twenty
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  Speaker 3: twenty twenty twenty.
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  Speaker 2: Four CPI had it at you're talking headline inflation. We
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  Speaker 2: came in at two nine. I believe it is right,
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  Speaker 2: so let me check. I want to make sure I
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  Speaker 2: give you the right number. Yeah, two nine.
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  Speaker 3: Pretty solid bump up in overall total sales for the
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  Speaker 3: year of a good one percent once adjusted for inflation.
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  Speaker 2: So some good numbers there. Again, I think these numbers
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  Speaker 2: are fine. They don't indicate concern either way on me
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  Speaker 2: in terms of the economy slowing too much nor overheating.
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  Speaker 2: I think that this is just fine, like it's it's
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  Speaker 2: it's lovely. If we take a look at what we
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  Speaker 2: saw for the jobless claims numbers, initial jobless claims came
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  Speaker 2: in at two hundred and seventeen thousand for the week,
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  Speaker 2: slight bump up from two hundred and three thousand, but
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  Speaker 2: that two oh three is probably unsustainably low. The excuse
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  Speaker 2: me I had to sneeze the continuing jobless claims numbers
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  Speaker 2: coming in with a slight dip of about eight thousand
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  Speaker 2: to one point eighty five to nine million. But the
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  Speaker 2: interesting thing is, year over year, we are still seeing
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  Speaker 2: a modest acceleration in continuing claims. So even though they
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  Speaker 2: dropped you know, in the short term, the year over
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  Speaker 2: year numbers are still higher than what we would like
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  Speaker 2: to see because you don't want to see claims increasing
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  Speaker 2: year over year. That indicates more people on unemployment obviously,
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  Speaker 2: So again, nothing that's hugely concerning here.
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  Speaker 4: I think this is absolutely fine.
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  Speaker 2: It is something where you look at and you say, yeah,
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  Speaker 2: there's some stuff around the edges that you'd like to
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  Speaker 2: clean up, But overall, I don't think there's anything in
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  Speaker 2: this data that suggests any meaningful problem.
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  Speaker 5: Now.
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  Speaker 3: Now it feeds into an error that we have talked
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  Speaker 3: at length about though, which is a job market that
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  Speaker 3: has become a bit stagnant, especially for those in certain
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  Speaker 3: industries that were unable to find work. Over the course
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  Speaker 3: of twenty twenty four, that portion of people that are
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  Speaker 3: unemployed for over six months continues to bump up and
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  Speaker 3: not showing its way in the unemployment rate. Not mass
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  Speaker 3: layoffs that we're hearing about, but some hesitance. At least,
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  Speaker 3: there was some hesitance on part of employers of dramatically
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  Speaker 3: adding headcount, especially in the second half of last year.
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  Speaker 3: We'll see that that could shift in twenty twenty five.
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  Speaker 3: New administration, new sets of rules who knows, we will,
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  Speaker 3: we will have to monitor it.
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  Speaker 2: So this all dovetails into the fact that hey, in
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  Speaker 2: four days new president taking office in the White House,
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  Speaker 2: Donald Trump, going to have his second time in office.
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  Speaker 2: And clearly when we look at the proposals that have
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  Speaker 2: been out there from the Trump campaign soon to be
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  Speaker 2: the Trump administration, there are a whole bunch of potential
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  Speaker 2: big changes that could be happening, especially as it relates
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  Speaker 2: to the prices that Americans pay for different goods because
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  Speaker 2: of the potential imposition of tariffs in you know, any
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  Speaker 2: number of ways. And so I think this is going
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  Speaker 2: to be one of the questions this year, which is
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  Speaker 2: again two very simple questions. Number one, what tariffs actually
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  Speaker 2: get implemented? Number two, what impact do they actually have
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  Speaker 2: on prices? Then that I don't know that we can
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  Speaker 2: say anything much more than that, but this is, you know,
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  Speaker 2: potentially going to be something that is a real driver
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  Speaker 2: of inflationary concerns. The labor market no longer really is.
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  Speaker 2: It's it's not something where, at least as far as
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  Speaker 2: I can tell, you're not looking at the labor market
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  Speaker 2: now being like, gee, that's the potentially driving inflation and
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  Speaker 2: we're basically back to pre pandemic labor market.
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  Speaker 4: Levels of activity.
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  Speaker 2: And so I think as such, you kind of look
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  Speaker 2: at the picture and you say, yeah, there's still some
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  Speaker 2: background inflation that's higher than you'd like to see. But
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  Speaker 2: the question for this year is going to be do
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  Speaker 2: you see any meaningful shift up or down in that
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  Speaker 2: level of inflation, and how much of it is due
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  Speaker 2: to policy shifts from the incoming administration?
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  Speaker 4: Right?
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  Speaker 3: Yeah, In the short term, the only thing that could
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  Speaker 3: be that driver of higher inflation would be the terriffs.
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  Speaker 3: As far as I'm concerned, you could, over the course
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  Speaker 3: of the next few years, see some effect of lower
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  Speaker 3: taxes benefiting some Americans, putting extra cash in their pocket
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  Speaker 3: and increasing their willingness to spend. I wouldn't deny that,
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  Speaker 3: but you won't see that show up in all likelihood
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  Speaker 3: very quickly. And so if we start to see tariffs
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  Speaker 3: implement it, it is a all important question, Right, do
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  Speaker 3: they go with the gradual ratcheted up method, in which
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  Speaker 3: case it takes a while for them to show up
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  Speaker 3: in pricing, or is it a flat, big bump on
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  Speaker 3: every imported good coming into the United States. As you know,
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  Speaker 3: it sounds like I'm being dramatic, but that was absolutely
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  Speaker 3: mentioned on the campaign trail, and we don't honestly know
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  Speaker 3: which direction it might go over the course in the
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  Speaker 3: next few months, but we will soon.
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  Speaker 4: Let's take a quick break here.
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  Speaker 2: When we come back, we'll talk about what we're seeing
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  Speaker 2: from big bank earnings. We've continued to get more and
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  Speaker 2: more reporting, and now I think we have enough that
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  Speaker 2: we can, you know, kind of give a fairly conclusive
• 10:25
  Speaker 2: report on the sector, at least for you know, those
• 10:28
  Speaker 2: of you who are not, you know, banking industry analysts.
• 10:30
  Speaker 2: If you are, you probably know way more than we do,
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  Speaker 2: So you know, banking industry analysts, feel free to tune
• 10:36
  Speaker 2: out during the next segment. But for everyone else, we'll
• 10:38
  Speaker 2: tell you what banks are saying about the state of
• 10:40
  Speaker 2: the US economy.
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  Speaker 1: Tankst US six one, seven, three, six, two, thirteen eighty five.
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  Speaker 1: today on break looking business news all morning. Loan Base
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  Speaker 2: All right, Mike so we've been through the bank earnings
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  Speaker 2: cycle at this point, and at least we're mostly through.
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  Speaker 2: There's still a couple more to come, I think, but
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  Speaker 2: we've been through the vast majority. JP, Morgan Wells, Fargo, Goldman, Sachs,
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  Speaker 2: and City reporting yesterday today we had Bank of America,
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  Speaker 2: Morgan Stanley, p and c US Bankcorp. Out there and
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  Speaker 2: this piece from the New York Times. The headline is
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  Speaker 2: it's a good slash great time to be a big bank,
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  Speaker 2: and then you kind of go through it and it
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  Speaker 2: basically says, look, the banks are not seeing any major
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  Speaker 2: signs of concern that are out there, and I think
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  Speaker 2: that's true. But the general tenor of what I have
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  Speaker 2: gotten is, hey, we're not seeing any deterioration in our
• 11:54
  Speaker 2: loan portfolios. We're not seeing any major cause for concern.
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  Speaker 2: We think that, you know, deal making activity may pick
• 12:00
  Speaker 2: up in the next year and help investment banking, but
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  Speaker 2: loan growth is running very low single digits, and so
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  Speaker 2: we're not really growing our business that quickly, and so
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  Speaker 2: I think that right now, my message on the banks
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  Speaker 2: is they kind of look like the job market to
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  Speaker 2: a certain extent, where you're not really seeing any huge problems,
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  Speaker 2: but everything's just kind of stagnant. It's like it's fine,
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  Speaker 2: but you're not really doing much in either direction.
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  Speaker 4: Is that fair or is that too pessimistic in my opinion?
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  Speaker 3: Well, I think that might be a fair assessment of
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  Speaker 3: a smaller bank that derives the majority of its revenue
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  Speaker 3: from loan growth. But remember that that's not JP Morgan,
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  Speaker 3: that's not Goldmen Sacks these companies. The reasons they are
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  Speaker 3: benefiting so much has a lot to do with things
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  Speaker 3: like portfolio loans where they are seeing some activity like
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  Speaker 3: investment banking revenue. Goldman Sachs in particular talked about they're
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  Speaker 3: the massive growth they've seen in loan generation for smaller,
• 13:00
  Speaker 3: less credit worthy companies. The SMP Global Banks Index, it's
• 13:06
  Speaker 3: up about six and a quarter percent so far in January,
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  Speaker 3: just kick off the year, as these banks have been
• 13:12
  Speaker 3: reporting earnings.
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  Speaker 5: And so I would agree with you.
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  Speaker 3: Right, if you're a smaller regional bank that makes a
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  Speaker 3: lot of their money on issuing car loans and mortgages,
• 13:20
  Speaker 3: doesn't look great out there. If you're a giant investment
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  Speaker 3: bank with your own investment management arm, trading arm, and
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  Speaker 3: you derive a lot of income from lining up loans
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  Speaker 3: like Goldman Sachs. Then you're in a pretty good spot.
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  Speaker 3: And then that leads me to a question, Chuck for you.
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  Speaker 3: I mean, Goldman Sachs, as quoted in this article, saw
• 13:41
  Speaker 3: fourth quarter profit of four billion and fourteen billion for
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  Speaker 3: twenty twenty four. Particularly seeing success connecting risky companies looking
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  Speaker 3: for money to clients willing to lend it. That speaks
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  Speaker 3: to me to be private credit. And I feel like
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  Speaker 3: I've been reading a lot here and there about private
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  Speaker 3: credit and just the state of it, which is probably
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  Speaker 3: not something that everyone has right front and center in
• 14:04
  Speaker 3: there in their investment portfolios.
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  Speaker 5: But what are you hearing about the private credit space?
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  Speaker 3: Because it has been a massive growth engine for large
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  Speaker 3: banks and other financial institutions over the last decade.
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  Speaker 2: It hasn't And really it's the other financial institutions because banks,
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  Speaker 2: banks actually in some cases are the ones that are
• 14:21
  Speaker 2: being hurt by this, because lenders are going outside of
• 14:24
  Speaker 2: the traditional banking system of rather, borrowers are going outside
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  Speaker 2: the traditional banking system.
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  Speaker 5: Goldman might line up the loan, but they don't actually
• 14:30
  Speaker 5: issue it.
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  Speaker 2: Yeah, let's talk about what private credit is. So in
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  Speaker 2: the past a couple of different things. Let's say that
• 14:36
  Speaker 2: you're a small company and you need to borrow ten
• 14:38
  Speaker 2: million dollars.
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  Speaker 4: Which it might be like, Chuck, that's a huge amount
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  Speaker 4: of money.
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  Speaker 2: It is for a person, but for a company that
• 14:43
  Speaker 2: might be you know, still a very small company. I mean,
• 14:45
  Speaker 2: Microsoft bars ten billion dollars. This is you know, again
• 14:49
  Speaker 2: one fraction of the size of it. So you might say, okay,
• 14:52
  Speaker 2: I want ten million dollars, and historically you'd go to
• 14:56
  Speaker 2: your bank that you had a relationship with, they'd underwrite
• 14:59
  Speaker 2: the loan and so on and so forth. The other
• 15:01
  Speaker 2: thing that you would typically see is okay, we're a
• 15:05
  Speaker 2: little bit bigger and we need you know, one hundred
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  Speaker 2: million dollars. Hey, we're gonna do you know, a bond
• 15:12
  Speaker 2: offering through a bank that underwrites it. And then we
• 15:16
  Speaker 2: have bonds that are out there that get you know,
• 15:17
  Speaker 2: traded in the bond market. What has happened instead in
• 15:21
  Speaker 2: recent years is the emergence of what is called private credit,
• 15:25
  Speaker 2: where it's basically it's not going through the standard loan
• 15:29
  Speaker 2: underwriting process through a bank or other you know, or
• 15:33
  Speaker 2: that type of financial institution. Instead, what you are seeing is,
• 15:37
  Speaker 2: rather than a company placing a bond. You simply have
• 15:40
  Speaker 2: an entity that comes by and says, hey, we've got
• 15:43
  Speaker 2: a bunch of money and we will lend it to you.
• 15:45
  Speaker 2: It's not a bank that's doing this. It's specifically like
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  Speaker 2: a private credit fund. And a couple things end up
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  Speaker 2: happening as a result of this one. It depends on
• 15:57
  Speaker 2: the specific loans and things like that, but in general
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  Speaker 2: you might find that you're able to get better terms
• 16:03
  Speaker 2: through doing this than you could through the bond market.
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  Speaker 2: So that's what's attracted, you know, potential borrowers to it,
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  Speaker 2: but also for those who are lending, what they found is, hey,
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  Speaker 2: we can raise money from a bunch of wealthy people
• 16:15
  Speaker 2: and you know, effectively try to deliver them yields that
• 16:18
  Speaker 2: are higher than the bond market still and in doing
• 16:21
  Speaker 2: so it's kind of a win win situation. Is the
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  Speaker 2: way that it is generally discussed. Now, A couple of
• 16:28
  Speaker 2: things end up happening as a result of this. The
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  Speaker 2: first is that many of the loans that are underwritten
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  Speaker 2: this way through the private credit market, they end up
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  Speaker 2: being held just by that one entity. So let's say
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  Speaker 2: that you're, you know, a two billion dollar private credit fund,
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  Speaker 2: and you lend someone one hundred million dollars. Normally that
• 16:47
  Speaker 2: would trade out on the bond market. It'd be something
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  Speaker 2: that's just out there and floating around. Today it's just
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  Speaker 2: held by one company. On one hand, that's good because
• 16:55
  Speaker 2: if there are problems with the company, you can say, Okay,
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  Speaker 2: you know, we need to renegotiate, and there's someone who's
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  Speaker 2: holding you know, all of our loan and we can
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  Speaker 2: renegotiate with them instead of having to negotiate with a
• 17:05
  Speaker 2: bunch of different creditors. Great like, it could be easier
• 17:07
  Speaker 2: and you could get you know, again, better resolution to
• 17:10
  Speaker 2: what's going on. The downside to that is, let's say
• 17:13
  Speaker 2: that you are an investor in that private credit fund.
• 17:16
  Speaker 2: You have no idea that there's any problem because the
• 17:19
  Speaker 2: bond is not trading freely on the bond market, so
• 17:22
  Speaker 2: it's it's much more opaque.
• 17:24
  Speaker 3: I would assume none of the credit rating agencies are
• 17:26
  Speaker 3: putting any sort of.
• 17:27
  Speaker 2: Judgment on this, so they're not raiding this stuff because
• 17:30
  Speaker 2: it's not being traded. They don't they don't need to
• 17:31
  Speaker 2: in order to underwrite it. So I think what we
• 17:34
  Speaker 2: end up with is a system that to this point,
• 17:37
  Speaker 2: if we're being honest, has delivered really good returns to
• 17:40
  Speaker 2: investors in general, and has provided the capital that's needed
• 17:45
  Speaker 2: for businesses that need them. The downside is that we
• 17:48
  Speaker 2: don't have as much information about what's going on with
• 17:51
  Speaker 2: these loans because they're all, you know, privately held, and
• 17:54
  Speaker 2: we don't even know how big this overall market is.
• 17:57
  Speaker 2: The estimates that I've seen are anywhere from a trillion
• 17:59
  Speaker 2: dollars to six or seven trillions, so there's a wide
• 18:03
  Speaker 2: range of you know, how much is even in here
• 18:06
  Speaker 2: because we don't really know. And the other piece on
• 18:09
  Speaker 2: this is if you look at who's the most yield
• 18:12
  Speaker 2: hungry right now, it is insurance companies. And the reason
• 18:16
  Speaker 2: why is that insurance companies, if you think about how
• 18:18
  Speaker 2: they work. We all pay money into an insurance company,
• 18:21
  Speaker 2: and they know they have to pay out claims later on,
• 18:23
  Speaker 2: and so what they want is something that is relatively
• 18:26
  Speaker 2: stable but pays interest, which is why historically they've bought
• 18:29
  Speaker 2: bonds in insurance company general accounts. As insurance companies have,
• 18:34
  Speaker 2: you know, had to struggle in recent years with profitability,
• 18:38
  Speaker 2: what you've ended up with is they've been trying to
• 18:40
  Speaker 2: reach for yield through private credit instruments and things like that,
• 18:44
  Speaker 2: and so one of the big risks that is out
• 18:46
  Speaker 2: there in the financial system, in my opinion, is if
• 18:49
  Speaker 2: the private credit market starts to blow up at some point.
• 18:53
  Speaker 2: Insurance companies are right on the front lines of you know,
• 18:56
  Speaker 2: who's most heavily invested in these in a lot of
• 18:59
  Speaker 2: cases and given the potential for you know, high claims
• 19:02
  Speaker 2: see California right now, it is a significant risk that
• 19:06
  Speaker 2: you have problems in the insurance market related to a
• 19:09
  Speaker 2: combination of private credit and higher claims in the future.
• 19:13
  Speaker 3: It's again, it's different, but it rhymes with you think
• 19:18
  Speaker 3: about the movies you've watched about the Great Financial Crisis
• 19:20
  Speaker 3: and banks saying they don't really understand the risk that
• 19:24
  Speaker 3: they own with you.
• 19:26
  Speaker 4: Know, mass and stuff.
• 19:29
  Speaker 5: It's different, but it rhymes with it.
• 19:31
  Speaker 2: So this is what's uh again, just something else that's
• 19:33
  Speaker 2: out there a little bit, uh. I know, we get
• 19:35
  Speaker 2: a little dense there, but we'll pull it back. We
• 19:37
  Speaker 2: got Wall Street Watch coming right after this.
• 19:41
  Speaker 1: Like us on Facebook and follow us on Twitter at
• 19:44
  Speaker 1: TFE show. Breaking business news is always first right here
• 19:48
  Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
• 19:53
  Speaker 1: Street Watch, a complete look at what's moving market so
• 19:56
  Speaker 1: far today right here on the Financial Exchange Radio network.
• 20:00
  Speaker 6: Following yesterday's big rally driven by a CPI inflation reading
• 20:04
  Speaker 6: that met expectations and strong bank earnings, markets today are
• 20:08
  Speaker 6: dipping into negative territory this morning. Investors are digesting the
• 20:13
  Speaker 6: December retail sales report, where retail sales climb zero point
• 20:17
  Speaker 6: four percent, shorter vestimates of zero point six percent. Right now,
• 20:21
  Speaker 6: the Dow is off by seventy one points, SMP five
• 20:25
  Speaker 6: hundred is down a tenth of a percent or six points,
• 20:28
  Speaker 6: and the Nasdaq down by three tenths of a percent
• 20:31
  Speaker 6: or fifty seven points. Russell two thousand is off by
• 20:33
  Speaker 6: about a quarter percent, Tenure Treasure Sealed is down by
• 20:37
  Speaker 6: one basis point at four point six four percent, and
• 20:40
  Speaker 6: crude oil down by one percent today trading just above
• 20:44
  Speaker 6: seventy nine dollars a barrel. More bank earning streaming in
• 20:48
  Speaker 6: this morning from Bank of America and Morgan Stanley, both
• 20:51
  Speaker 6: beating fourth quarter expectations, similar to other banks that reported yesterday.
• 20:56
  Speaker 6: Morgan Stanley up by two and a half percent, while
• 20:58
  Speaker 6: Bank of America shares are flat. Meanwhile, United Health reported
• 21:02
  Speaker 6: weaker than expected fourth quarter revenue. However, earnings did Beach
• 21:06
  Speaker 6: Street forecast that stock down by four percent. Elsewhere, Target
• 21:10
  Speaker 6: shares down by over three percent after the retailer he
• 21:13
  Speaker 6: did it's fourth quarter sales guidance and also expects comparable
• 21:16
  Speaker 6: store sales to increase one and a half percent. And
• 21:20
  Speaker 6: Taiwan Semiconductor posted a record quarter driven by ai and
• 21:24
  Speaker 6: said it expected growth to continue. That stock up by
• 21:28
  Speaker 6: five percent, while several other chip makers are also seeing
• 21:30
  Speaker 6: gains in reaction to the company's results. I'm Tucker Silvan.
• 21:35
  Speaker 6: That's Wall Street Watch, Mike.
• 21:37
  Speaker 2: Let's talk a little bit about the US housing market.
• 21:40
  Speaker 2: Piece in the Wall Street Journal. It's titled Wall Street Things.
• 21:43
  Speaker 2: US homes are overpriced. The subheader housing could be overvalued
• 21:47
  Speaker 2: by anywhere from ten to thirty five percent based on
• 21:50
  Speaker 2: how investors are acting. What exactly are they basing those
• 21:54
  Speaker 2: headlines on here.
• 21:55
  Speaker 3: Yeah, So there's a couple of companies that they looked
• 21:56
  Speaker 3: at here, Invitation Homes this is a publicly traded company,
• 22:01
  Speaker 3: as well as American Homes for Rent.
• 22:03
  Speaker 5: And what they found is, look, if you take a.
• 22:05
  Speaker 3: Look at the value of their properties on the open market,
• 22:10
  Speaker 3: and you know what similar homes are going for today
• 22:14
  Speaker 3: compared to their stock price, they find a discount between
• 22:16
  Speaker 3: twenty to thirty five percent on public markets. And so
• 22:20
  Speaker 3: that's what they are insinuating here, is that, hey, investors
• 22:24
  Speaker 3: seem to be rather pessimistic about I guess the future
• 22:28
  Speaker 3: value of these homes or you know, where they see
• 22:31
  Speaker 3: the market going compared to what homes are selling for
• 22:35
  Speaker 3: on the open market today in those same markets.
• 22:39
  Speaker 2: Other data that I think you can look at on
• 22:40
  Speaker 2: this and we'll get into, you know, whether or not
• 22:42
  Speaker 2: this is an appropriate way to figure out, you know,
• 22:44
  Speaker 2: what these assets are actually valued at. I'll quote here
• 22:47
  Speaker 2: Wall Street landlords are notably quiet at the moment. In
• 22:50
  Speaker 2: the third quarter of twenty twenty four, large institutional investors
• 22:54
  Speaker 2: that already own more than a thousand properties were behind
• 22:58
  Speaker 2: zero point three percent of all US home purchases, based
• 23:01
  Speaker 2: on data from John Burns's Research and consulting strip out
• 23:05
  Speaker 2: the second and third quarter of twenty twenty, when COVID
• 23:06
  Speaker 2: lockdowns effectively froze housing transactions and big investors home purchasing
• 23:11
  Speaker 2: activity has dropped to its lowest share in seven years.
• 23:15
  Speaker 2: So the good news, we can get past the talking
• 23:18
  Speaker 2: point that it is large institutional investors. That's driving up
• 23:21
  Speaker 2: the cost of housing because not really buying it anymore. Now,
• 23:28
  Speaker 2: what do we see in terms of like where home
• 23:30
  Speaker 2: prices go. Because I don't think it's fair to read
• 23:33
  Speaker 2: this piece, and this is kind of how it's written,
• 23:35
  Speaker 2: which I don't think is clear. I don't think it's
• 23:38
  Speaker 2: fair to read this piece and go, oh, gee, is
• 23:40
  Speaker 2: the value of my home going to drop ten to
• 23:43
  Speaker 2: thirty five percent. I don't think that that is necessarily
• 23:47
  Speaker 2: what this means, even if it's kind of insinuating that.
• 23:52
  Speaker 2: I think part of this is it's very much a
• 23:55
  Speaker 2: regional market still. And if you take a look at
• 23:59
  Speaker 2: the South, the Eastern party of the United States, in
• 24:01
  Speaker 2: particular Florida, where you have inventory levels that are now
• 24:05
  Speaker 2: above pre pandemic levels, you are seeing home prices falling
• 24:09
  Speaker 2: there throughout basically the entire state. If you take a
• 24:13
  Speaker 2: look at parts of Texas, most notably Austin, where a
• 24:15
  Speaker 2: lot of people move back right, you know after twenty twenty,
• 24:18
  Speaker 2: in twenty one and twenty two, you are also seeing
• 24:21
  Speaker 2: prices falling there. There are a number of metros throughout
• 24:24
  Speaker 2: the country that are seeing prices that are meaningfully off
• 24:29
  Speaker 2: of their peaks like this. This is something that is
• 24:34
  Speaker 2: you know, happening in a number of these areas. It's
• 24:36
  Speaker 2: not happening everywhere, but it's it's definitely happening, happening in
• 24:41
  Speaker 2: a number of different places if you look at.
• 24:43
  Speaker 4: You know where they are.
• 24:44
  Speaker 2: I have this here in terms of and this is
• 24:46
  Speaker 2: data from case Show or Home Price Index Austin, Texas
• 24:51
  Speaker 2: as I noted down thirteen percent from its peak in
• 24:54
  Speaker 2: terms of pricing. Put to Gordon down eleven percent, Cape
• 24:57
  Speaker 2: Coral Fort Myers down seven point eight. Lake Charles, Louisiana
• 25:01
  Speaker 2: down six point eight, Sarasota Bradenton down four point three,
• 25:04
  Speaker 2: Okaala down four point three, New Orleans down three five,
• 25:08
  Speaker 2: Varo Beach, Florida down three to three, Santa Cruz, California,
• 25:12
  Speaker 2: down three to one. The village is down two nine.
• 25:15
  Speaker 2: And this is as of you know, a couple months ago.
• 25:18
  Speaker 2: So I think that the message that I have on
• 25:22
  Speaker 2: this is, look, once inventory recovers back to those pre
• 25:26
  Speaker 2: pandemic levels, prices can't hold up because there just aren't
• 25:30
  Speaker 2: enough buyers to clear the market. At these prices, at
• 25:33
  Speaker 2: these interest rates, yeah seven and at these home insurance
• 25:36
  Speaker 2: premiums now you know, that's the other part that you
• 25:38
  Speaker 2: have to remember on this home insurance premiums are way
• 25:41
  Speaker 2: up too. So I think once you get back to
• 25:44
  Speaker 2: pre pandemic levels of inventory, there's absolutely a case that
• 25:48
  Speaker 2: home prices need to fall in order to clear that inventory.
• 25:51
  Speaker 2: How far, I don't really know. It's going to depend
• 25:53
  Speaker 2: on the market and you know how much prices ran up,
• 25:56
  Speaker 2: you know beforehand. But I think that that's a fair statement.
• 26:00
  Speaker 2: The thing is, it is not something where we are
• 26:04
  Speaker 2: seeing uniform inventory levels on a state by state basis,
• 26:09
  Speaker 2: in particular the Northeast where our show is based. I
• 26:12
  Speaker 2: know we've got people that listen to us all over
• 26:13
  Speaker 2: the country, but the Northeast where our show is based,
• 26:18
  Speaker 2: as inventory levels that for most of it are anywhere
• 26:20
  Speaker 2: between like fifty and seventy percent of pre pandemic levels
• 26:23
  Speaker 2: still except for Connecticut, except for Connecticut, which is still
• 26:26
  Speaker 2: in the twenties. So like, Connecticut only has a quarter
• 26:28
  Speaker 2: as much inventory right now as pre pandemic. It's You're
• 26:31
  Speaker 2: not going to wake up three months from now and
• 26:33
  Speaker 2: be like, gee, Connecticut's got all this inventory.
• 26:35
  Speaker 4: Look what's going on with pricing?
• 26:36
  Speaker 5: So can somebody in Connecticut tell me what is going
• 26:39
  Speaker 5: on there?
• 26:39
  Speaker 4: I still don't.
• 26:40
  Speaker 3: I know a ton of New Yorkers moved to southern
• 26:41
  Speaker 3: Connecticut during COVID, but that happened all across the country,
• 26:45
  Speaker 3: and the rest of the country has recovered their housing stock.
• 26:48
  Speaker 3: You mentioned these numbers, Jacks. I'm going to quote from
• 26:50
  Speaker 3: the Saint Louis Federal Reserve here in terms of their
• 26:53
  Speaker 3: own data. Across the United States, in December, the total
• 26:56
  Speaker 3: active listing count, which would include both multi and single
• 27:00
  Speaker 3: family homes, was sitting at eighty four point three percent
• 27:03
  Speaker 3: of December twenty nineteen, So right before COVID compared to
• 27:07
  Speaker 3: today eighty four point three percent of the homes for
• 27:10
  Speaker 3: sale nationally Florida nearly one hundred and seventeen percent, So
• 27:13
  Speaker 3: a big uptick an inventory there in Florida compared to
• 27:16
  Speaker 3: pre COVID Connecticut twenty seven point six. So I continue
• 27:21
  Speaker 3: to scratch my head at Florida at Connecticut and say,
• 27:24
  Speaker 3: I have genuinely no idea what's going on there.
• 27:27
  Speaker 2: So I do think this is one of the stories
• 27:30
  Speaker 2: for this year that bears watching. Because home price if
• 27:33
  Speaker 2: you look at you know, your your big home price indices,
• 27:36
  Speaker 2: the FHFA and Case Shiller. Again, they have these little
• 27:40
  Speaker 2: divergences that pop up, you know, over periods of a
• 27:42
  Speaker 2: couple months or so, but they're now showing that over
• 27:44
  Speaker 2: the last twelve months. And this is data through I
• 27:46
  Speaker 2: think November. I don't think we have the December data
• 27:49
  Speaker 2: on it yet, but through November.
• 27:52
  Speaker 4: Let me just make sure that that's accurate.
• 27:56
  Speaker 2: Bah bah okay, Yes, it's through November. And and so
• 28:00
  Speaker 2: when you look at the no, actually sorry, it's only
• 28:04
  Speaker 2: through October because it takes a while to compile this stuff.
• 28:07
  Speaker 2: So it's only through October so far. But from October
• 28:10
  Speaker 2: of twenty three to October of twenty four, Kase Shower
• 28:14
  Speaker 2: twenty City Index is saying home prices went up four
• 28:16
  Speaker 2: point two six percent in the US FHFA Housing Price Index,
• 28:21
  Speaker 2: saying they went up four four five, So four and
• 28:23
  Speaker 2: a quarter to four and a half. It's kind of
• 28:25
  Speaker 2: what you're seeing. I think there's a good chance that
• 28:28
  Speaker 2: this year because inventories are still expected to build with
• 28:31
  Speaker 2: higher interest rates. And again Mike and I have talked
• 28:34
  Speaker 2: about the only way that you get rates getting back
• 28:36
  Speaker 2: below six is probably with a recession. So you don't
• 28:39
  Speaker 2: really want that because that means nothing goods happening with
• 28:41
  Speaker 2: home prices either. I think there's a reasonable case to
• 28:45
  Speaker 2: be made that you might see pretty close to zero
• 28:48
  Speaker 2: percent home price appreciation nationally, even though pockets of the
• 28:52
  Speaker 2: country where inventory is low might continue to move up,
• 28:56
  Speaker 2: you know, single digits in some of those areas.
• 28:59
  Speaker 4: Does that seem reason?
• 29:00
  Speaker 5: It does.
• 29:00
  Speaker 3: Yeah, And it's going to be this big divergence. And
• 29:03
  Speaker 3: but it is explainable, it is logical. But like you
• 29:08
  Speaker 3: have to just wait and see what happens with mortgage
• 29:10
  Speaker 3: rates too, And that's that's a tough one to predict,
• 29:12
  Speaker 3: it is it.
• 29:14
  Speaker 2: There's a lot of uncertainty there. And the other piece is,
• 29:17
  Speaker 2: look when it comes to new construction. Remember there are
• 29:20
  Speaker 2: questions about what's going to happen with new home construction
• 29:22
  Speaker 2: costs as well. A lot of the timber that gets
• 29:24
  Speaker 2: used there is imported. A lot of the other things
• 29:28
  Speaker 2: that go into homes, like how much PVC piping gets
• 29:32
  Speaker 2: made in the United States.
• 29:35
  Speaker 4: Guessing it's I'm guessing it's not a lot.
• 29:37
  Speaker 2: I'm just I'm gonna look it up right now just
• 29:40
  Speaker 2: to see where it's mostly made. But it's it's something
• 29:45
  Speaker 2: where a lot of the stuff that goes into building
• 29:48
  Speaker 2: a home is not necessarily made.
• 29:50
  Speaker 4: Here here we go.
• 29:51
  Speaker 2: Where are the biggest PVC manufacturers in the world by revenue?
• 29:55
  Speaker 2: The number one, Mike, Do you know who makes the
• 29:56
  Speaker 2: most PVC piping in the world?
• 29:59
  Speaker 5: Is it not China?
• 30:00
  Speaker 4: It is It's it's a company called KEM China.
• 30:03
  Speaker 2: So they are the biggest PVC manufacturer in the world
• 30:05
  Speaker 2: for most of plastics based out of Taiwan.
• 30:08
  Speaker 4: DuPont actually is a big one based in the US.
• 30:10
  Speaker 2: But then you've got LG Chemical out of South Korea,
• 30:13
  Speaker 2: Shinetsu Chemical out of Tokyo. So out of your top five,
• 30:16
  Speaker 2: one is in the US. You then have you know,
• 30:18
  Speaker 2: a couple other smaller ones that are there, but their
• 30:21
  Speaker 2: fraction to the size is the bigger ones. So I
• 30:23
  Speaker 2: think this all is continuing to point to hey, until
• 30:27
  Speaker 2: we start to get policy certainty as soon as next week.
• 30:32
  Speaker 2: There's there's a lot that we don't know about twenty
• 30:35
  Speaker 2: twenty five yet, and we're gonna have to wait and
• 30:37
  Speaker 2: see how a lot of this stuff plays out, because
• 30:40
  Speaker 2: the potential policy shifts are big enough that they can
• 30:43
  Speaker 2: affect all these things. In my opinion, I know that's
• 30:46
  Speaker 2: kind of a boring answer, but.
• 30:47
  Speaker 5: No, that's reason true to.
• 30:49
  Speaker 4: Take a quick break here.
• 30:50
  Speaker 2: When we come back, we'll talk a little bit about
• 30:52
  Speaker 2: the MBTA in Massachusetts, what they are saying about, how
• 30:57
  Speaker 2: they are going to continue to try to improve service
• 30:59
  Speaker 2: going forward. And also Massachusetts, remember you've got the MBTA Act,
• 31:05
  Speaker 2: the NBTA Communities Act, which is requiring more housing to
• 31:09
  Speaker 2: be built in areas served by the MBTA. We'll talk
• 31:13
  Speaker 2: about how one town recently voted in order to try
• 31:17
  Speaker 2: to deal with that.
• 31:19
  Speaker 1: This is your home for the most comprehensive coverage of
• 31:22
  Speaker 1: the economy and the trends on Wall Street. This is
• 31:25
  Speaker 1: the Financial Exchange Radio Network. Find daily interviews and full
• 31:29
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• 31:33
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• 31:35
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• 31:39
  Speaker 1: Radio Network.
• 31:46
  Speaker 4: All right, Mike.
• 31:47
  Speaker 2: So, the MBTA, the Massachusetts Transit Authority. They run the
• 31:52
  Speaker 2: They run the trains and the buses in Massachusetts. Most
• 31:56
  Speaker 2: people don't realize that the bus system is actually the
• 31:58
  Speaker 2: workhorse of the MBTA, care far more people than the trains.
• 32:01
  Speaker 2: But that's neither here nor there. In any case, it
• 32:03
  Speaker 2: has been pretty badly run organization for for quite some time.
• 32:08
  Speaker 2: But when did Philip Ng come on board? There was it?
• 32:11
  Speaker 4: Was it last year? Was a year and a half ago? Yeah,
• 32:14
  Speaker 4: maybe maybe like a year and a half somewhere in
• 32:16
  Speaker 4: the last two years.
• 32:17
  Speaker 2: He came on board and has a ton of experience
• 32:20
  Speaker 2: in transportation systems and really has made some progress in
• 32:23
  Speaker 2: dealing with one of the biggest problems, which is just
• 32:26
  Speaker 2: the state of immediate disrepair that was causing like all
• 32:31
  Speaker 2: these slow zones throughout the subway system. And they've done
• 32:34
  Speaker 2: a fantastic job cleaning it up to the point where
• 32:36
  Speaker 2: I think their expectation now is that most of the
• 32:39
  Speaker 2: slow zones will be removed I think all of them
• 32:42
  Speaker 2: by either late this summer early this fall.
• 32:44
  Speaker 3: April of twenty twenty three, by the way, Okay, so
• 32:48
  Speaker 3: so about two years ago.
• 32:49
  Speaker 4: Closing it on two years.
• 32:51
  Speaker 2: And the big thing is that Ng has restored some
• 32:54
  Speaker 2: credibility to the institution, even though he's only been there
• 32:58
  Speaker 2: for a short period of time. Before then we're constantly like, Okay,
• 33:01
  Speaker 2: they're promising this and it's not going to happen, But
• 33:04
  Speaker 2: it does seem like he's made some progress. The question
• 33:07
  Speaker 2: is going to be Okay, you still have this huge
• 33:09
  Speaker 2: maintenance backlog of things that you need to address.
• 33:13
  Speaker 4: How do you.
• 33:14
  Speaker 2: Develop a credible plan to do that? And b Ang
• 33:17
  Speaker 2: is someone who is not the youngest I think, is
• 33:21
  Speaker 2: how I will put it. He is, I believe wikipediasm
• 33:25
  Speaker 2: LISTA is between age sixty two and sixty three. So
• 33:27
  Speaker 2: he's not going to be there forever. This is not
• 33:29
  Speaker 2: going to be you know, a twenty year stewardship. It's
• 33:32
  Speaker 2: probably going to be you know, five, six, seven years,
• 33:34
  Speaker 2: is I think reasonable? How in that time do you
• 33:38
  Speaker 2: build the culture of accountability such that when he does
• 33:41
  Speaker 2: retire or move on to somewhere else, you have people
• 33:45
  Speaker 2: in place that follow the template he's laid out in
• 33:49
  Speaker 2: order to continue the improvement and not just backslide. Those
• 33:52
  Speaker 2: are the two questions that I think are out there.
• 33:54
  Speaker 4: That's it.
• 33:54
  Speaker 3: I think, you know, residents seem to be giving him
• 33:57
  Speaker 3: a lot of credit. Did you see his is dubbed
• 34:00
  Speaker 3: nickname in December No no train Daddy yang Ooh.
• 34:05
  Speaker 5: That's good, pretty solid.
• 34:07
  Speaker 4: That's good.
• 34:08
  Speaker 6: I like that the calendar has turned and the cold
• 34:12
  Speaker 6: is here to stay, so now's the perfect time to
• 34:14
  Speaker 6: plan that getaway to the US. Virgin Islands Act now
• 34:17
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• 35:10
  Speaker 2: In January of twenty one, the Massachusetts legislature passed the
• 35:13
  Speaker 2: MBTA Communities Act and basically what it specifies is for
• 35:16
  Speaker 2: the one hundred and seventy seven towns and cities that
• 35:19
  Speaker 2: are served by the MBTA, they have to establish at
• 35:23
  Speaker 2: least one district of quote reasonable size where multifamily housing
• 35:27
  Speaker 2: is permitted. And it's based on the size of the
• 35:29
  Speaker 2: town or city as to how much they have to
• 35:33
  Speaker 2: actually end up permitting. Towns that don't permit enough or
• 35:37
  Speaker 2: don't allow for the proper permitting are going to lose
• 35:41
  Speaker 2: funding from the state as a result.
• 35:44
  Speaker 3: Has that been clear what kind of funding gets lost?
• 35:46
  Speaker 3: I found it rather opique what the actual punishments were.
• 35:49
  Speaker 2: Yeah, the general text is, you know, local infrastructure funding,
• 35:54
  Speaker 2: but it's it could in theory be discretionary local aid
• 35:58
  Speaker 2: as well.
• 35:59
  Speaker 4: Yeah.
• 35:59
  Speaker 2: So Needum, which is a town that is again I'm
• 36:03
  Speaker 2: just saying this because we have listeners who you know,
• 36:04
  Speaker 2: might be out of state. Needham's a town that is
• 36:07
  Speaker 2: about twenty five minutes from Boston, maybe twenty minutes from Boston,
• 36:12
  Speaker 2: and is you know, kind of right on the cusp
• 36:14
  Speaker 2: of I think where you go from more urban construction
• 36:19
  Speaker 2: with you know, more multifamily towards more traditional suburban single
• 36:24
  Speaker 2: family construction.
• 36:25
  Speaker 3: We're particularly familiar with it because our show is broadcast
• 36:27
  Speaker 3: from the town of Needham, serviced by I believe three
• 36:31
  Speaker 3: commuter real community excuse me, four commuter rail stations right
• 36:35
  Speaker 3: in the town.
• 36:36
  Speaker 2: And so they had a vote earlier this week on
• 36:40
  Speaker 2: a proposal that was put into place last year for
• 36:43
  Speaker 2: them to satisfy the MBTA Communities Act. The vote that
• 36:47
  Speaker 2: they had this week effectively said no, we don't want
• 36:50
  Speaker 2: to follow through with a plan that could potentially permit
• 36:53
  Speaker 2: up to three thousand additional units of housing, which was
• 36:57
  Speaker 2: about double what was, you know, required by the state,
• 37:00
  Speaker 2: even though again, just because you may be able to
• 37:02
  Speaker 2: permit that, it doesn't mean that you necessarily would.
• 37:05
  Speaker 4: Yep, So you go from here.
• 37:07
  Speaker 3: So the proposal that was put into place would have
• 37:10
  Speaker 3: allowed zoning for up to three two hundred and ninety
• 37:13
  Speaker 3: six units. They're only required to do one thy seven
• 37:16
  Speaker 3: hundred and eighty four units. They have it looks like
• 37:21
  Speaker 3: until February to potentially redo it, maybe as late as
• 37:25
  Speaker 3: May from what I'm reading now. I'm a resident, so
• 37:28
  Speaker 3: I've been particularly close to this one as well, and
• 37:32
  Speaker 3: there has been just almost hilarious levels of fighting and
• 37:36
  Speaker 3: anger about all of this. But yeah, it pushed back
• 37:40
  Speaker 3: again in this you know again it's slightly different because
• 37:43
  Speaker 3: the proposal was to over comply with the law compared
• 37:46
  Speaker 3: to some other towns that don't even want to comply
• 37:48
  Speaker 3: with the base law. But it still remains a question
• 37:50
  Speaker 3: as to whether or not the town of Needham will
• 37:52
  Speaker 3: even comply with the baseline of the law, and then
• 37:54
  Speaker 3: what the punishment would be from the state if they
• 37:57
  Speaker 3: refuse to. So back to the in terms of what
• 38:01
  Speaker 3: is going to be come up with next.
• 38:03
  Speaker 4: Still more to come on the financial exchange.
• 38:05
  Speaker 2: We're gonna do a quick little break here, but our
• 38:09
  Speaker 2: two is coming up in just a little bits.