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Big Tech Earnings Expose a Fragile AI Trade · The Financial Exchange Show

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1:03
Speaker 1: This is the Financial Exchange with Chuck Zada and Mike Armstrong.
1:11
Speaker 2: Hope y'all had a great weekend. It's Chuck, Mike, and
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Speaker 2: Tucker with you here on the Financial Exchange, and we
1:20
Speaker 2: kick things off with what is kind of a familiar
1:23
Speaker 2: on Monday to us at this point, in that the
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Speaker 2: United States has paused attacks, the President deciding to hold
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Speaker 2: off on additional attacks on Iran, citing progress made with negotiating.
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Speaker 2: Iran has subsequently denied that there's been any progress and
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Speaker 2: said we're not planning on negotiating. Pakistan has confirmed there's
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Speaker 2: no negotiations happening in the next twenty four hours in
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Speaker 2: Islam about at least. So this is and again, so
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Speaker 2: here's the thing. I've gotten to the point where I
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Speaker 2: have to keep a calendar. I have a separate Google
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Speaker 2: calendar that I write in every day that just tracks
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Speaker 2: what's happening in the Middle East. Yeah, because I've.
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Speaker 3: Ever seen that scene from Always Sonny where Charlie's trying
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Speaker 3: to connect all these pictures using string.
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Speaker 4: It's what his office looks like these days.
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Speaker 2: It's like it's messy. And here's what we have actually,
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Speaker 2: as it relates to this.
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Speaker 1: War and the.
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Speaker 2: Attempts to end it for good, there have been nine
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Speaker 2: to this nine times. We've seen this happen.
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Speaker 4: Nine time there it is.
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Speaker 2: Thank you, I appreciate that. And starting on March twenty third,
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Speaker 2: the president earlier in that we had oh yes, the
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Speaker 2: timer scenes fired up too. We're traveling back in time.
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Speaker 2: About four and a half months to March twenty third,
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Speaker 2: the President postponed announced attacks on Iran's power grids, citing
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Speaker 2: quote very good and productive negotiations got it March twenty six,
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Speaker 2: three days later, extended that deadline for negotiations by another
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Speaker 2: ten days, saying that negotiations were going well. April seventh
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Speaker 2: two week ceasefire to try to conclude the ten point plan.
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Speaker 2: April twenty first extended the ceasefire indefinitely after mediators requested
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Speaker 2: more time. May eighteenth held off on major strike because
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Speaker 2: quote serious negotiations were underway. June eleventh canceled strikes hours
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Speaker 2: after threatening to hit Iran very hard, claiming and negotiating breakthrough.
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Speaker 2: June seventeenth, we did have the memorandum of understanding signed
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Speaker 2: for a sixty day negotiating period. July twenty seventh. During
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Speaker 2: that sixty day negotiating period, paused bombing campaign to give
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Speaker 2: diplomacy another chance that was last weekend and now today
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Speaker 2: canceling a planned attack after Iran reportedly agreeing to negotiations.
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Speaker 3: So obviously, the way you've run through that calendar of events, Chuck,
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Speaker 3: it makes it sound as though we're just in a
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Speaker 3: constant state of good news here. Obviously, the parts that
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Speaker 3: are unmentioned is that every time in between there was
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Speaker 3: defined by a bunch of missiles and additional strikes and
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Speaker 3: drones being sent in either direction.
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Speaker 2: Yeah, so I think where I stand at this point.
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Speaker 2: I think that again, if if you're looking at this
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Speaker 2: in terms of like what it means for the oil market,
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Speaker 2: my answerest I have no idea, and oil is uninvestable
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Speaker 2: at this point because everyone's paying attention to it. It is,
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Speaker 2: you know, clearly something where just about every major government
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Speaker 2: in the world is trying to keep the price low.
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Speaker 2: At some point, if we continue down this path, the
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Speaker 2: price either has to go up or you have to
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Speaker 2: end up with shortages. But I don't know which one's
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Speaker 2: going to be preferred by, you know, depending on which
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Speaker 2: country you talk to. And it's unclear to me that
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Speaker 2: when it comes to you know, any kind of lasting
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Speaker 2: document or lasting piece that we're at the point now
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Speaker 2: where that can be reached. I hope we are, but
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Speaker 2: we've just been through this enough times that I just
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Speaker 2: don't know that there's anything different about this point in
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Speaker 2: the cycle from where we were at previous ones other
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Speaker 2: than hey, we've worked further through the supplies of oil
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Speaker 2: that we have, the inventories that we have both domestically
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Speaker 2: and overseas, and that means that there is less margin
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Speaker 2: for air. Just as an example, you take a look
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Speaker 2: at US crude oil inventories commercial ones. The last week
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Speaker 2: declined by seven or two weeks ago. We don't have
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Speaker 2: last week's data yet. To climb by seven point two
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Speaker 2: million barrels, spr to climb by three point eight that's
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Speaker 2: an eleven million barrel draw down in US crude that
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Speaker 2: you had last week. If you look at where US
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Speaker 2: crude inventories are overall right now relative to pre war,
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Speaker 2: and again, these are things that as a generalist didn't
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Speaker 2: used to track, but now you kind of have to.
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Speaker 2: Crude oil stocks before the war were at around eight
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Speaker 2: hundred and fifty million barrels there at seven hundred and twelve.
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Speaker 2: Today it's one hundred and one hundred and forty two
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Speaker 2: million barrel decline. And remember, a decent chunk of that,
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Speaker 2: somewhere between three point fifty and three hundred and ninety
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Speaker 2: million barrels is not, you know, accessible, because it's either
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Speaker 2: in pipelines and you need to push oil in one
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Speaker 2: end in order to get it out the other, or
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Speaker 2: it's tank bottoms that are sludgy and contaminated in this
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Speaker 2: and that. And so you know, good chunk of that
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Speaker 2: is not accessible. Of the three hundred million that you
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Speaker 2: know is probably still accessible, decent chunk of that's in
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Speaker 2: the SPR, And you don't know how much you can
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Speaker 2: actually get out of there because we've never emptied the
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Speaker 2: SPR lower than it is today, right, Like, it could
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Speaker 2: be that you can take these things all the way
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Speaker 2: down to you know, another two hundred and fifty million
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Speaker 2: barrels of oil out of the ground. It could be
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Speaker 2: that you can only do another sixty, Like, we don't know.
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Speaker 2: There might be some people that you think they do,
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Speaker 2: but no one knows for sure on this because we've
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Speaker 2: literally never done it before. Yeah, once the ESPR was
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Speaker 2: filled in the nineteen eighties, we've never been this low before.
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Speaker 4: Right, which is.
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Speaker 3: Why I think you can assume that nobody does know,
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Speaker 3: because if somebody had a real firm idea of what
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Speaker 3: this meant, you wouldn't see oil prices flipping back and
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Speaker 3: forth within a thirty percent range on an almost weekly
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Speaker 3: basis now, So nobody knows anything when it comes to
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Speaker 3: this stuff.
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Speaker 4: There.
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Speaker 3: If we continue on this path, they are almost certainly
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Speaker 3: problems with shortages. We're gonna be talking about Japan later
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Speaker 3: and what the US did there. Part of that was
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Speaker 3: energy related. There's a lot of things that are heading
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Speaker 3: towards problematic places should this current path be continued upon.
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Speaker 2: So that's what we've got going on in energy markets.
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Speaker 2: We'll see how things develop again. I hope that we
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Speaker 2: can get to something that's more lasting, but you know,
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Speaker 2: having been going down this road for you know, five
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Speaker 2: plus months now, it'll be you know, six at the
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Speaker 2: end of August. If we if we get there, it's
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Speaker 2: just a question of, like, I don't know what has
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Speaker 2: changed now that's going to make this round of negotiations
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Speaker 2: be the one that gets things done relative to previous
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Speaker 2: ones that you know, didn't produce any lasting piece in
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Speaker 2: the region. Right.
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Speaker 3: But at the same time, I don't think we will
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Speaker 3: be in a perpetual war with Iran. But boy, go
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Speaker 3: take a look at our recent history in Iran, and
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Speaker 3: it's not sorry in the Middle East, and it has
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Speaker 3: not exactly been anything that quickly resolves.
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Speaker 4: So yeah, I.
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Speaker 2: Don't know where we're going to go on this. We'll
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Speaker 2: just have to see. Let's see, We've got a piece
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Speaker 2: from the Wall Street Journal that I want to get
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Speaker 2: to after we take a quick break here. Last week,
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Speaker 2: we got a bunch of tech earnings we're going to
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Speaker 2: talk about now that we've had, you know, a few
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Speaker 2: days to digest a little bit what the picture looks
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Speaker 2: like for those companies going forward. Some had good earnings reports,
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Speaker 2: some had bad. What does it mean for the sector
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Speaker 2: as a whole. We'll discuss after.
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9:38
Speaker 2: Peace to Wall Street Journal, Big tech earnings are sending
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Speaker 2: valuations in opposite directions. Michael, which valuations are going in
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Speaker 2: which directions? Well, I think up down now is down? Up? No,
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Speaker 2: not quite.
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Speaker 3: But one thing that was pretty unique was last week
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Speaker 3: we had earnings reports. Let me get them all, right,
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Speaker 3: Meta Al, Amazon, Apple, and Microsoft, those the big four
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Speaker 3: that we got reports on each of them after the
10:09
Speaker 3: day after or the morning after they reported their earnings,
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Speaker 3: depending on what time they reported, saw single day price
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Speaker 3: moves on their stock that were out or above nine
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Speaker 3: percent one way or another.
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Speaker 2: Large.
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Speaker 3: That is not I think the one thing I feel
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Speaker 3: comfortable saying is that that's not indicative of a very
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Speaker 3: healthy market when you have, forget about a trillion dollar
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Speaker 3: companies just the you know, four of the ten largest
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Speaker 3: companies in the world swinging by double digits on earning surprises. Vega,
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Speaker 3: that's fair, that's that's just, you know something I feel
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Speaker 3: relatively comfortable. You don't love to see it, No, And
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Speaker 3: I don't think a normal mark environment would indicate to
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Speaker 3: us that the earnings were that fantastic or that terrible,
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Speaker 3: but rather that the market recently, with semiconductors do what
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Speaker 3: they've done and other tech related companies doing what they've done,
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Speaker 3: have has.
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Speaker 4: Lunched to a lot of general volatility.
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Speaker 2: I guess part of it is, like I don't even
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Speaker 2: know what to do with some of this stuff. I mean,
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Speaker 2: so Meta we talked about last week, they were down
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Speaker 2: what like eight percent after their earnings I think like
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Speaker 2: seven to eight somewhere in that ballpark. Okay, Meta's up
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Speaker 2: six percent today, right, Like what does this even mean?
11:26
Speaker 2: Like what are we even doing here? Like did we
11:29
Speaker 2: all just like go away over the weekend and we're like,
11:32
Speaker 2: you know what, maybe Zuckerberg does know what he's doing.
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Speaker 2: I think I could actually buy that Zuck Like, yeah,
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Speaker 2: is that what we did over the weekend?
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Speaker 3: No, again, that's the stuff that just seems a little
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Speaker 3: bit unhealthy. Remember, this is not some puny little company
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Speaker 3: that nobody pays attention to.
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Speaker 2: No, it's like the biggest social media company on the planet.
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Speaker 2: It's if if you don't have an opinion about Meta,
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Speaker 2: then you're doing it wrong.
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Speaker 3: Now, maybe I'm wrong. Maybe the news is so big
12:08
Speaker 3: that it's justifiable. I mean we're talking about how many
12:12
Speaker 3: of those, I mean, three of the major companies that
12:17
Speaker 3: are you know, in the top ten space suddenly going
12:20
Speaker 3: cash flow negative for the first time in a long time.
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Speaker 3: For some of them the first time ever. For others, Meta,
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Speaker 3: Alphabet and Amazon, I believe are all heading towards cash
12:32
Speaker 3: flow negative in the not so distant future. So, like,
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Speaker 3: you know, maybe it is so unprecedented that some volatility
12:39
Speaker 3: and some swings in their stock prices are justified, but boy,
12:45
Speaker 3: it just seems like an unhealthy underlying market. And the
12:47
Speaker 3: surprising part about all of this, right, you know, semiconductors,
12:51
Speaker 3: how much got wiped out of those that stock price
12:53
Speaker 3: in the month of June alone, Like it's on a
12:56
Speaker 3: whole lot of dollars got wiped out one of the
13:00
Speaker 3: biggest sectors in the overall market or subsectors, and yet
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Speaker 3: the S and P five hundred was pretty much flat.
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Speaker 3: And investors are really saying, hey, we have concerns about
13:09
Speaker 3: specific areas in the market, but we don't want to
13:11
Speaker 3: go stash it in cash.
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Speaker 4: We want to go put it somewhere else in the
13:14
Speaker 4: market that we deem a better value.
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Speaker 2: Well, and I think this makes sense because let's talk
13:21
Speaker 2: about GDP a little bit. When we look at GDP,
13:24
Speaker 2: there are two different ways that you can measure The
13:29
Speaker 2: one that we typically cover when we say, like, hey,
13:31
Speaker 2: GDP increased by one point five percent last quarter like
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Speaker 2: we did last week. That is real GDP, so accounting
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Speaker 2: for the inflation that's measured in the deflator, that's part
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Speaker 2: of the GDP calculation. The other one that we have
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Speaker 2: is what we call nominal GDP, which is, hey, if
13:49
Speaker 2: there is no inflation, what are we seeing from nominal GDP?
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Speaker 2: And to give you a sense of why we do
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Speaker 2: one and not the other, uh, let's uh, let's look
14:03
Speaker 2: at uh, let's look at the nineteen seventies. Tucker. Can
14:07
Speaker 2: you fire up the old, uh, the good old time
14:11
Speaker 2: machine again twice in the first half hour. I know
14:13
Speaker 2: we got to give it a little bit of juice.
14:16
Speaker 2: So I want to go back to h Q Q
14:19
Speaker 2: two of nineteen seventy four. I remember it well. I
14:22
Speaker 2: was not yet an embryo, but nevertheless I remember it
14:27
Speaker 2: quite well. It was a lovely spring in uh in
14:32
Speaker 2: the United States with nominal GDP running eight point two percent, sure,
14:38
Speaker 2: eight point two percent nominal GDP and Q two of
14:40
Speaker 2: seventy four. Do you know what real GDP was accounting
14:43
Speaker 2: for inflation? Michael, No, negative point two percent, because inflation was,
14:48
Speaker 2: as they say, wicked high. It was. It was just brutal. Uh.
14:53
Speaker 2: If we go forward again to the lovely start of
14:58
Speaker 2: the nineteen eighties, Q three of eighteen eighty one, nominal
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Speaker 2: GDP is running fourteen point one percent, real GDP four
15:08
Speaker 2: point two three, so positive, like very positive still, but
15:12
Speaker 2: like a huge chunk was eaten up by inflation. Now,
15:15
Speaker 2: let's compare this to what I think most people alive
15:18
Speaker 2: would say. It was probably the best economy of their lives,
15:21
Speaker 2: the late nineteen nineties, the tech bubble. Not just like
15:24
Speaker 2: the economy, but everything was cool. It was the possibilities
15:27
Speaker 2: were endless. War is over forever. You know, all of
15:31
Speaker 2: us are going to be one hundred and fifty neons in.
15:34
Speaker 2: We had we had yet to meet the Backstreet boys,
15:37
Speaker 2: like all this was like as sure we had just
15:39
Speaker 2: met them. Jeort's were cool, you had unlimited cargo pants
15:44
Speaker 2: pockets like everything was good in the late nineteen nineties.
15:47
Speaker 2: The Beetle was back.
15:50
Speaker 4: Yeah, the PT Cruiser.
15:52
Speaker 2: Got invented, which was something we all you know regret. Listen,
15:56
Speaker 2: it is what it is. Late nineteen nineties real GDP
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Speaker 2: six point two percent. That's lower than both the numbers
16:02
Speaker 2: I gave you from the seventies and eighties. I'm sorry.
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Speaker 2: That was nominal GDP real GDP four point seven to
16:09
Speaker 2: two higher than either of those numbers. Less of that
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Speaker 2: GDP growth was being eaten up by inflation, which is
16:15
Speaker 2: why the real one matter, and that's why it felt
16:17
Speaker 2: so good. It was the everything was just growing like
16:20
Speaker 2: we were. We were just like weeds with like the
16:23
Speaker 2: first sun of summer on our backs.
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Speaker 5: It was.
16:25
Speaker 2: It was great.
16:26
Speaker 3: I'm gonna bring us back for a moment because we
16:28
Speaker 3: started talking about this, because I was saying that people
16:30
Speaker 3: are not jumping ship out of the stock marketing.
16:33
Speaker 2: To cast Yes, but I had to finish shit.
16:35
Speaker 4: I appreciate that.
16:35
Speaker 2: So here's the deal. Real GDP for the last twelve
16:39
Speaker 2: months now is running about two point one percent. Okay,
16:43
Speaker 2: nominals at six two five. Here's the thing. If you
16:47
Speaker 2: like look at this just from an inflation perspective, the
16:52
Speaker 2: message that you get is okay, like, there's higher inflation
16:55
Speaker 2: than I want, and that can drive bond yields up,
16:57
Speaker 2: which we're seeing. But it's also so hey, if the
17:00
Speaker 2: Fed's not gonna do anything to stop inflation, if all
17:03
Speaker 2: they're gonna keep doing is saying inflation's too high, and
17:06
Speaker 2: we remain committed to price stability, but we're not hiking rates,
17:10
Speaker 2: then okay, as long as prices are going to go up,
17:14
Speaker 2: Sure I still want to own risk assets because all
17:17
Speaker 2: else being equal, if a company goes from pricing its
17:21
Speaker 2: product at one hundred dollars to one hundred and five
17:23
Speaker 2: and its profit goes from a dollar to a dollar five,
17:28
Speaker 2: well it's making more profit, and so I still want
17:30
Speaker 2: to own that asset. The reason why inflation is usually
17:33
Speaker 2: bad for risk assets is because central banks come in
17:36
Speaker 2: they're like, no, get rid of the inflation, and it
17:38
Speaker 2: slows the economy and kills profits. So if central banks
17:43
Speaker 2: aren't going to do that, which is kind of an
17:46
Speaker 2: evidence for a while now, like this is not a
17:48
Speaker 2: Kevin Worst thing, this is not a J. Powell thing,
17:51
Speaker 2: this is a both of them thing since twenty twenty two. Well,
17:56
Speaker 2: if you're not actually gonna do anything about it, then
17:59
Speaker 2: sure give me the risk assets and I'll just rotate
18:01
Speaker 2: between all of them. Now, at some point this becomes
18:04
Speaker 2: painful because eventually we say enough is enough, where the
18:06
Speaker 2: economy slows from some other mid.
18:08
Speaker 4: Carousel does stop at some point.
18:10
Speaker 2: But like, I get the logic behind it. Sure, Like
18:13
Speaker 2: if you're gonna let inflation run hot, Okay, you're gonna
18:16
Speaker 2: have to pay me more on those long term bonds, fine,
18:19
Speaker 2: But why am I gonna rotate out of equities until
18:21
Speaker 2: you know it's proven that something's actually slowing the irnings
18:24
Speaker 2: growth rate. I'm not going to And I think that's
18:27
Speaker 2: kind of what investors are doing right now.
18:29
Speaker 4: Yeah.
18:29
Speaker 3: Yeah, I mean, if one of the biggest concerns you
18:32
Speaker 3: have as an investor right now is inflation, then being
18:37
Speaker 3: somewhere other than stocks is pretty tough to justify.
18:40
Speaker 4: And I think it's fairly clear that the.
18:42
Speaker 3: Investment community, based on what we saw last week after
18:45
Speaker 3: Kevin Warsh's speech, is pretty concerned.
18:48
Speaker 2: About inflation a little bit. And you know, we'll see
18:51
Speaker 2: how bonds go. Today. We're seeing a little bit of
18:53
Speaker 2: money flowing back in that direction, so maybe that sell
18:55
Speaker 2: off and bonds got overextended. Today's just one day, so
18:59
Speaker 2: you know, take all this with a grain of salt,
19:01
Speaker 2: but we'll see how the situation evolves going forward. Because honestly,
19:07
Speaker 2: like worsh is new on the job, and reviews of
19:11
Speaker 2: his first press conference pretty good, the second one pretty
19:14
Speaker 2: bad if you average him just right, But you know,
19:16
Speaker 2: we'll have to see how he actually does on the job.
19:19
Speaker 2: I'm not willing to say he's the best or write
19:20
Speaker 2: him off yet. You got to see how he does
19:22
Speaker 2: when actually pushed by a test, and he hasn't been
19:25
Speaker 2: tested yet. Let's take a quick break. We got Wall
19:28
Speaker 2: Street Watch next.
19:38
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19:45
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19:54
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19:57
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19:58
Speaker 5: Markets well and to pause territory to begin the week
20:01
Speaker 5: with oil prices falling after the US called off strikes
20:04
Speaker 5: and Iran to continue talks. Right now, the Dow is
20:08
Speaker 5: up over one percent or six hundred points higher. SMP
20:12
Speaker 5: five hundred also are up over one percent, seventy nine
20:14
Speaker 5: points higher. NASDAC up nearly one and a half percent
20:17
Speaker 5: or three hundred and seventy points higher. Russell two thousands
20:20
Speaker 5: up one and a half percent ten. Your treasureel is
20:23
Speaker 5: down six basis points at four point six eight percent.
20:27
Speaker 5: In oil down six and a half percent trading it's
20:29
Speaker 5: seventy nine dollars a barrel. According to the Financial Times,
20:33
Speaker 5: UK drug maker ast Resenica is in talks to combine
20:36
Speaker 5: with US rival Bristol Myers squib and, a deal that
20:39
Speaker 5: would create one of the world's biggest pharmaceutical groups, valued
20:42
Speaker 5: nearly four hundred billion dollars. However, talks could still fall apart.
20:47
Speaker 5: Ast Resenica down by eight percent, while Bristol Myers is
20:51
Speaker 5: off by one percent. Meanwhile, Amazon is building on Friday's
20:55
Speaker 5: fifteen percent rally after its impressive earnings report. The stock
20:59
Speaker 5: is up another today and has officially surpassed three trillion
21:03
Speaker 5: dollars in market valuation, joining Apple, Microsoft, Nvidia in alphabet Elsewhere,
21:08
Speaker 5: Ali Baba up by four percent after the Chinese company
21:12
Speaker 5: unveiled a new AI model that is set to be
21:15
Speaker 5: released next week. And after today's closing bill, we'll see
21:19
Speaker 5: earnings from pall Andeer. I'm Tucker Silva and that is
21:24
Speaker 5: a Wall Street watch.
21:27
Speaker 2: So over the weekend. I think it was originally reported
21:30
Speaker 2: by The New York Times and has subsequently been confirmed
21:35
Speaker 2: by the Wall Street Journal. Kevin Worsh floated to colleagues
21:41
Speaker 2: at the FED the prospect of holding fewer than eight
21:45
Speaker 2: Federal Reserve Open Market Committee meetings.
21:48
Speaker 3: So right now they are every six weeks. This would
21:50
Speaker 3: bring them to every eight weeks instead.
21:53
Speaker 2: Well, we don't know. We don't know how many meetings
21:56
Speaker 2: he wants to cut things to.
21:59
Speaker 3: I thought he was talking about cutting them to six
22:01
Speaker 3: meetings or was he just talking about cutting them.
22:02
Speaker 2: I haven't seen, so I haven't seen anything that suggests
22:07
Speaker 2: that it's I thought it was just like fewer.
22:09
Speaker 4: Yeah, I might I might have made that up, or
22:11
Speaker 4: it might have heard it.
22:12
Speaker 2: Said they had some discussions where six was mentioned, but
22:14
Speaker 2: I don't know that like that came from him. So
22:17
Speaker 2: a couple things, because like you think through this and
22:20
Speaker 2: you just there are a few different levels to work
22:24
Speaker 2: at on this. The first is, there's nothing to say
22:27
Speaker 2: that eight Federal Reserve meetings in a year is the
22:30
Speaker 2: right number to have. It might be the one that
22:32
Speaker 2: we're accustomed to having, but it doesn't have to be
22:36
Speaker 2: the right one. There's nothing to say that you shouldn't
22:38
Speaker 2: have a monthly meeting. Sure, there's nothing to say you
22:40
Speaker 2: shouldn't have a quarterly meeting. There's nothing to say, hey,
22:43
Speaker 2: maybe we just meet every six months since most of
22:45
Speaker 2: the time we're not doing anything anyways. I mean, they're
22:48
Speaker 2: doing stuff, but they're not like actively changing policy typically yep.
22:53
Speaker 2: So I think that openness on this is worth considering,
22:58
Speaker 2: just because again I I don't know that eight is
23:01
Speaker 2: the number that you need to have. Having said that,
23:06
Speaker 2: and this is a big Having said that, what I
23:08
Speaker 2: find really interesting is this is not something that worst
23:13
Speaker 2: leaked publicly. This is something that all the people who
23:18
Speaker 2: are in the room with or at least a few
23:20
Speaker 2: of them at least three based on the New York
23:22
Speaker 2: Times reporting, basically went right to the Times and we're like, Yo,
23:27
Speaker 2: this guy is thinking about changing like the schedule pretty
23:31
Speaker 2: much saying like they're freaked out about it.
23:33
Speaker 3: He is definitely getting that family fight that he wanted,
23:36
Speaker 3: so a few different things to pretty cut throat.
23:40
Speaker 2: So part of the reporting from New York Times was
23:42
Speaker 2: that he floated this and then said I want you
23:44
Speaker 2: to come talk to me individually, which also means, okay,
23:48
Speaker 2: I want to find the people that don't want this
23:50
Speaker 2: and then put all the pressure of the group on
23:52
Speaker 2: them in order to pick them off one by one.
23:54
Speaker 4: Sure.
23:55
Speaker 2: So it's very clear that the dynamics with in the
24:00
Speaker 2: Open Market Committee are a little tense right now with
24:03
Speaker 2: some pretty significant disagreements.
24:06
Speaker 3: Yep, and you saw that, I mean without even hearing
24:09
Speaker 3: about this fight. The fact that three voting members dissented
24:14
Speaker 3: at the most recent meeting, all in one direction is
24:18
Speaker 3: the you know, is not unheard of, but is very rare.
24:22
Speaker 2: Yep. So the eight meeting schedule that we have goes
24:26
Speaker 2: back to nineteen eighty one, so we got forty five
24:28
Speaker 2: years there. That FED is required to meet at least
24:30
Speaker 2: four times a year. We do know that, so you
24:32
Speaker 2: can't do semi annually. But you can also have at
24:37
Speaker 2: least three members that call a meeting at any point
24:39
Speaker 2: where they want to. So even if you only met
24:41
Speaker 2: four times a year, you can always have someone say, hey,
24:43
Speaker 2: let's let's have a meeting. You know, three people get
24:45
Speaker 2: together and say let's have a meeting. But then you
24:47
Speaker 2: risk spooking the market if you're having a meeting where
24:49
Speaker 2: one wasn't previously scheduled, which I think is why the
24:52
Speaker 2: eight is reasonable. Is normally, aside from true crises two
24:56
Speaker 2: thousand and eight, twenty twenty, you generally don't see actions
25:02
Speaker 2: between meetings because things are fine enough.
25:05
Speaker 3: As an example of this earlier this year, J Powell, Yeah, Powell,
25:11
Speaker 3: and Bestent I think had the meeting about AI or
25:13
Speaker 3: was that or was that.
25:16
Speaker 4: Warship at that point, I think it was Powell.
25:18
Speaker 2: Was this like the myth tho stuff? Yeah, so again,
25:21
Speaker 2: but that was a FED meeting. I know that wasn't
25:22
Speaker 2: a FED meeting.
25:23
Speaker 3: But the mere fact that Powell and Bessent met together
25:27
Speaker 3: to do something on it was on planned basis, was
25:32
Speaker 3: enough to spook people quite significantly. You and I included,
25:34
Speaker 3: like those two don't usually get together, especially in unplanned meetings.
25:38
Speaker 4: What's going on?
25:39
Speaker 3: So yeah, voting members getting together and talking on meetings
25:43
Speaker 3: when it's not already preplanned can spook markets.
25:46
Speaker 2: So I think that, you know, trying The big takeaway
25:51
Speaker 2: that I have is at the risk of making this
25:57
Speaker 2: the most dramatic season of the Fed Bachelor ever. I
26:04
Speaker 2: think there's a real power struggle at the FED. Yeah,
26:07
Speaker 2: and it's gonna end one of two ways. Either Worsh
26:11
Speaker 2: is going to completely lose the committee or he's going
26:15
Speaker 2: to end up bringing them to heal to. Whatever he
26:19
Speaker 2: invests in are hand in hand in this in terms
26:21
Speaker 2: of like good cop bad copy, like they are absolutely
26:24
Speaker 2: you know, trying to figure out how to manage this
26:27
Speaker 2: and it's a real question as to whether Warsh is
26:33
Speaker 2: going to be able to get people on board, because
26:36
Speaker 2: it sure seems like he's not afraid of, you know,
26:39
Speaker 2: kicking any hornet's nests there, and that's something that can
26:44
Speaker 2: play badly because look, there are pretty entrenched people at
26:49
Speaker 2: the FED who want to do things a certain way.
26:52
Speaker 2: And I'm not saying that way is right or wrong.
26:55
Speaker 2: I'm just saying, hey, it's if you try to change
26:59
Speaker 2: too much too quickly, you might not be able to
27:01
Speaker 2: change anything.
27:02
Speaker 3: That's kind of where I go, you might find and
27:04
Speaker 3: I think Kevin worsh does find the state of things
27:08
Speaker 3: in financial markets because of the fed's actions over the
27:12
Speaker 3: last fifteen years, to be a bad thing. He does
27:15
Speaker 3: not like that hedge funds and bond traders claw to
27:19
Speaker 3: every single word and feel as though they're protected by
27:23
Speaker 3: the FED in between meetings, and so I think he
27:26
Speaker 3: doesn't like that.
27:27
Speaker 4: He wants to change that.
27:28
Speaker 3: The problem, as I see it, is he's trying to
27:32
Speaker 3: change all that amidst a pretty high inflation environment. And
27:39
Speaker 3: immediately following was you know, kind of one of the
27:43
Speaker 3: worst press conferences we've seen from a FED chair in sometime. Yeah, like,
27:47
Speaker 3: you know, in terms of the market reaction, I don't
27:51
Speaker 3: even remember Powell having one like that. I suppose in
27:53
Speaker 3: hindsight back in twenty twenty two when he decided to
27:57
Speaker 3: not move on rates because of the war in Ukraine.
27:59
Speaker 3: Like we took away from that saying, wow, that was
28:01
Speaker 3: a big mistake, But at the moment, nobody reacted. Here
28:04
Speaker 3: in the moment, markets reacted pretty heavily to what he said,
28:08
Speaker 3: and they they reacted in a way that stated they
28:11
Speaker 3: don't have.
28:12
Speaker 4: Confidence in what he's doing.
28:13
Speaker 3: And so it's just a you know, it's a bit
28:16
Speaker 3: of a gamble to go and change things up as
28:19
Speaker 3: much as there that could lead to and probably has
28:21
Speaker 3: already led to more volatility in markets.
28:24
Speaker 2: In the Bloomy Berg from Claudia sam who was an
28:29
Speaker 2: inventor of the Psalm rule, and we've talked about her
28:31
Speaker 2: quite a bit over the last couple of years, it's
28:35
Speaker 2: titled the FED needs to start listening to normal people.
28:39
Speaker 2: What does some propose here? And who are these normal people?
28:42
Speaker 2: And where do we find the Michael? Where do we
28:44
Speaker 2: find the normies? Soon?
28:48
Speaker 3: Because it ain't here what she's calling for our people
28:53
Speaker 3: outside of the pure financial and economics profession to serve
28:58
Speaker 3: on more of these committees, and the committee she's talking
29:01
Speaker 3: about are all of these you know, research committees that
29:04
Speaker 3: Kevin Walsh has started up on all the different parts
29:08
Speaker 3: of looking at the FED. And she points out that,
29:12
Speaker 3: you know, hey, it doesn't have anybody from the labor
29:16
Speaker 3: organizations or what she defines as regular people.
29:19
Speaker 4: I'm not really sure who are the regular people in
29:23
Speaker 4: this scenario.
29:24
Speaker 3: I guess it's just people outside of the economics or
29:27
Speaker 3: financial services profession. But I'm not entirely sure that I
29:35
Speaker 3: can agree with her on this. Like I've kind of
29:37
Speaker 3: bemoaned the fact that we don't have a PhD economist
29:40
Speaker 3: heading the FED for two times in a row now,
29:43
Speaker 3: and to say that we should have members of labor
29:47
Speaker 3: organizations representing the FED on its policy, I'm not sure
29:52
Speaker 3: it makes a ton of sense to me.
29:55
Speaker 2: I go back and forth on a lot of this
29:57
Speaker 2: stuff here, because on one hand, I do understand that
30:01
Speaker 2: if you become you know, too cloistered away and just
30:04
Speaker 2: looking at spreadsheets, you don't understand the impact that those
30:07
Speaker 2: spreadsheets are having on actual people. And by having you know, broader,
30:11
Speaker 2: you know, representation from different experiences, you can gain a
30:15
Speaker 2: better understanding of, you know, how these are affecting things
30:18
Speaker 2: on a day to day basis instead of just.
30:20
Speaker 4: Broadly I agree there, you know.
30:23
Speaker 3: Counterpoint to me would be, let's say you had based
30:26
Speaker 3: your federal reserve policy on what people are saying about
30:31
Speaker 3: how they feel about the economy recently. You would have
30:34
Speaker 3: gone for the last five years in the completely wrong
30:36
Speaker 3: direction with your own policy. You would have cut interest
30:39
Speaker 3: rates dramatically, leading to more inflation because what the regular
30:44
Speaker 3: quote unquote people are saying about things right now is
30:46
Speaker 3: that everything sucks and has sucked worse than ever in
30:49
Speaker 3: history for the last five years.
30:52
Speaker 4: So I'm just not sure what to do with that information.
30:55
Speaker 2: Well, and this gets another thing, which is just feel
31:00
Speaker 2: like we spend so much time like reaching to find
31:03
Speaker 2: people who represent our views that we don't often think like, hey,
31:07
Speaker 2: is this person qualified to like understand what they're actually
31:13
Speaker 2: dealing with on see social media? You know. It's it's
31:16
Speaker 2: just like, it's it's hard, and I don't have any
31:18
Speaker 2: good answers on this because I understand, like, yeah, of
31:20
Speaker 2: course you want people who you agree with like to
31:24
Speaker 2: be like in positions where they can make decisions because
31:28
Speaker 2: most of us. None of us really know. We're all
31:32
Speaker 2: going through this life trying to figure it out. But
31:34
Speaker 2: we all like to think that we have a decent
31:35
Speaker 2: handle on a few things, and so we like to
31:39
Speaker 2: see people who might agree with a few things, you know,
31:41
Speaker 2: representing us in different facets of life and in different organizations.
31:45
Speaker 2: So I get that, but I'm just not sure how
31:49
Speaker 2: to reconcile that with the fact that, in technical terms,
31:55
Speaker 2: managing monetary policy is hard.
31:58
Speaker 5: Yo.
31:58
Speaker 2: As J. Powell once said, let's take a quick break.
32:02
Speaker 2: When we come back. We're talking a lot about the FED. Here,
32:04
Speaker 2: I want to talk about the US Treasury. Next.
32:07
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33:13
Speaker 2: Mike. You ever know anyone who works in financial markets?
33:17
Speaker 1: Yeah?
33:18
Speaker 4: Yeah, plenty of people.
33:19
Speaker 2: You know, people who like trade financial markets, traders if
33:24
Speaker 2: you will.
33:24
Speaker 4: Yeah.
33:25
Speaker 2: When they, you know, decide to trade something, do they
33:31
Speaker 2: like call it by a very like proper noun? Do
33:34
Speaker 2: they say, like, you know what, Let's say that someone's
33:38
Speaker 2: like talking to like their buddy, do they say, hey,
33:41
Speaker 2: go and pick up you know. No, there's still buy
33:44
Speaker 2: one hundred shares of Microsoft Corporation.
33:46
Speaker 3: There's acronyms for everything, to the point you wouldn't understand
33:49
Speaker 3: what's being said on a trading floor. Correct, So most
33:52
Speaker 3: as trading floors don't really exist in the same way
33:54
Speaker 3: that they used to.
33:55
Speaker 2: But no but they're still the acrony. So Scott Bessent
33:58
Speaker 2: is no dummy. He's pretty smart dude. And last Friday
34:04
Speaker 2: he was at a meeting. I forget exactly where it was.
34:08
Speaker 2: Was it at Camp David or it was somewhere like not,
34:10
Speaker 2: It wasn't it the White House. It was some big
34:12
Speaker 2: meeting with a bunch of other White House officials and
34:16
Speaker 2: happened to be in view of a bunch of press
34:20
Speaker 2: reporters and press photographers, and some enterprising young photographer took
34:24
Speaker 2: a picture of the sheet that was in front of
34:27
Speaker 2: Scott Besson's placard, his name card on the desk, thank you,
34:31
Speaker 2: and it said to do by Japanese yen parentheses JP
34:37
Speaker 2: y five to ten bill. So this is something that
34:42
Speaker 2: smart people who know financial markets don't do. And so
34:47
Speaker 2: it makes it increasingly obvious that this was planted, that hey, like,
34:50
Speaker 2: the US wants to be involved in this, because if
34:53
Speaker 2: you were actually doing this and you knew what you
34:56
Speaker 2: were talking about, and I not as a four X trader,
34:58
Speaker 2: but even I know this, it would be okay. Remember
35:02
Speaker 2: right now, if you are looking at here's the way
35:06
Speaker 2: it works. If you're looking at currency pairs, USDJPY means
35:10
Speaker 2: Japanese yen per dollar. Okay, So what you would actually
35:15
Speaker 2: be doing if you bought US d jpy as you'd
35:18
Speaker 2: be buying that saying okay, I'm thinking that's gonna go up,
35:20
Speaker 2: meaning more en per dollar. So that's not what you
35:22
Speaker 2: would do. What you would do, okay if you wanted
35:25
Speaker 2: to actually buy yen and sell dollars is you would
35:29
Speaker 2: basically say, okay, buy jpy USD and like go off
35:33
Speaker 2: that way, Like that's how you would do it. Sure,
35:35
Speaker 2: So Scott Besson wouldn't just write buy Japanese yen because
35:39
Speaker 2: like you don't need to specify as the Japanese yend,
35:41
Speaker 2: like what other yen are you going to be buying?
35:44
Speaker 2: I'm sure there might even be another yen currency somewhere
35:47
Speaker 2: in the world, but the treasure sector wouldn't be talking.
35:50
Speaker 2: It's not one that Beson cares about. But it did
35:53
Speaker 2: become confirmed after this because naturally people started asking, and
35:56
Speaker 2: you know, the Treasury said, yes, we're we're planning on,
35:59
Speaker 2: you know, helping to stay dul intervention in the exchange
36:03
Speaker 2: rate between the yen and the dollar because it's gone
36:05
Speaker 2: too far in one direction. This by the way is
36:08
Speaker 2: not entirely surprising because ever since before Bessent became Treasury Secretary,
36:14
Speaker 2: he had talked about, Hey, I think the yen has
36:16
Speaker 2: gotten too weak, and I don't want to see that continue.
36:20
Speaker 2: So it's not surprising that at some point the Treasury
36:23
Speaker 2: under Bessant decided to get involved. I think it's perfectly reasonable.
36:27
Speaker 2: The question that is worth asking is is it going
36:32
Speaker 2: to work? And what are the implications if it either
36:34
Speaker 2: does or doesn't. If it doesn't work, meaning that the
36:38
Speaker 2: yen continues to weaken, the implication is, hey, you don't
36:41
Speaker 2: have a big enough bazouka, and that means that you're
36:44
Speaker 2: going to continue to see all kinds of slippage in
36:47
Speaker 2: the Japanese economy because it continues to get more expensive
36:50
Speaker 2: to buy oil.
36:51
Speaker 3: This is kind of an important factor we talked about
36:53
Speaker 3: energy earlier. Japan is buying all of the oil in
36:56
Speaker 3: US dollars if they have to, because everybody does, and
37:00
Speaker 3: if your currency is falling against the dollar, it's making
37:02
Speaker 3: that critical import even more expensive at a time that
37:05
Speaker 3: it's already expensive and experiencing shortages.
37:07
Speaker 2: So you run into problems there. If it does work,
37:09
Speaker 2: you've got a couple other problems. Then you're saying, Okay,
37:12
Speaker 2: now you're gonna have more flows into the Japanese economy strengthens.
37:17
Speaker 2: That potentially drives long term bond yields up there, which
37:20
Speaker 2: makes bond sell off elsewhere in the world. The other
37:24
Speaker 2: piece that you have to worry about is one of
37:26
Speaker 2: the We saw this back in August of twenty four.
37:29
Speaker 2: One of the most powerful trades in the world is
37:33
Speaker 2: the carry trade between Japan and the US. Hey, if
37:36
Speaker 2: you can borrow cheaply in Japan and buy US assets
37:41
Speaker 2: as the yen depreciates and you don't have to pay much,
37:44
Speaker 2: great you can make good returns as a Japanese investor.
37:47
Speaker 2: If that reverses and investors pull money from US assets
37:50
Speaker 2: to get back into Japanese currencies, you can have a
37:53
Speaker 2: violent unwind of that, like we saw back in August
37:56
Speaker 2: of twenty four. So there's no right answer on this.
37:59
Speaker 2: It's one of these where it's like, hey, there's four things,
38:02
Speaker 2: and you can have like two or three of them,
38:04
Speaker 2: but not all four. This is how you have to
38:07
Speaker 2: work through this situation and what it means. It's gonna
38:11
Speaker 2: be interesting to see how it plays in the next
38:12
Speaker 2: month or so. And if it holds quick break here
38:15
Speaker 2: we got hour two coming up in a little bit