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Google & Tesla Tank as Big Tech’s AI Spending Spree Rattles Markets · The Financial Exchange Show

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Speaker 2: Chuck Mike Tucker with you.
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Speaker 3: We're going to get right into it because, honestly, surprisingly
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Speaker 3: busy day for what I thought was gonna be pretty
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Speaker 3: quiet overall. But we got some real meat on Google's
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Speaker 3: bones that we're gonna pick at. And so let's start
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Speaker 3: right there. Alphabet, the company formerly known as Google, reported
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Speaker 3: earnings after the bell yesterday. The earnings were quite fine.
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Speaker 3: In fact, they were pretty darn good when you look
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Speaker 3: at the current quarter that they put out. Here's the
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Speaker 3: big thing that we saw from them. Earnings per share
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Speaker 3: came in a two eighty five versus two eighty nine expected.
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Speaker 3: Slight miss on earnings per share. No one's gonna really
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Speaker 3: quibble with that too much. Beat by about three percent
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Speaker 3: one hundred and twenty billion in revenue versus one hundred
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Speaker 3: and seventeen expected. Great love to see it. Google guided
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Speaker 3: their CAPEX for the year is going to be between
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Speaker 3: one hundred and ninety five billion to two hundred and
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Speaker 3: five billion. That's up from one eighty to one hundred
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Speaker 3: and ninety so about an eight to nine percent bump
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Speaker 3: in their capex projections for the year. And this is
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Speaker 3: in my opinion, where the problems start and end, and
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Speaker 3: why Google stock is off about seven percent today the
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Speaker 3: last time I checked. Let me pull it up again, Yes,
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Speaker 3: six and a half. Indeed, and here's the four and.
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Speaker 4: A quarter trillion dollar company keep in mind.
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Speaker 2: Yes, So here's the deal.
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Speaker 3: Do you know how what what the performance is for
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Speaker 3: Google stock so far a year to date?
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Speaker 5: No?
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Speaker 2: Hit me two percent? Got it? Two point two? Actually
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Speaker 2: I'm selling them a little bit short.
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Speaker 3: I don't want to do that. But here's the deal.
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Speaker 3: The people who buy and sell stock traders and investors,
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Speaker 3: if you will, they have largely given the hyperscalers a
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Speaker 3: pass because of all their spending, because the thought is, hey,
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Speaker 3: you got to spend money to make money, which Mark
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Speaker 3: Fandetti and I talked about yesterday and we said, the
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Speaker 3: interesting thing about Google is that Google actually does not
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Speaker 3: have to spend money to make money.
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Speaker 4: No, they make a whole bolt loin what was there?
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Speaker 2: Good?
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Speaker 4: Go ahead?
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Speaker 3: No, I have to I have to pay it off
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Speaker 3: because let me start again, Google does not actually have
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Speaker 3: to spend money to make money. Google makes money to
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Speaker 3: spend money. They've never had negative free cash flow, so
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Speaker 3: unlike you know businesses and you know that are like oh,
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Speaker 3: like we need to like do this and that, we
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Speaker 3: need to borrow and we need to issue equity and
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Speaker 3: this and that. You go back through and you look
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Speaker 3: at Google's free cash flow and it hasn't been negative
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Speaker 3: at all in the last ten years, number one, and
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Speaker 3: even going back to its startup, it pretty much never
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Speaker 3: has been negative. It's just they literally make money to
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Speaker 3: spend money. And that's very unique and very rare when
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Speaker 3: when you look at any company, but like, they're free
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Speaker 3: cash flow. I'm going back here, and on an annual basis,
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Speaker 3: dating back to two thousand and five when they iPod,
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Speaker 3: it's never been negative. It just went negative for a quarter.
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Speaker 3: And given what they're telling us about where their capex
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Speaker 3: is going, they're telling you it's gonna stay negative. Now
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Speaker 3: here's the interesting piece. Google's free cash flow is negative.
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Speaker 3: Their cash on hand, okay for you know, cash and
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Speaker 3: short term investments has actually gone up by around thirty
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Speaker 3: billion dollars in the last six months. How can those
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Speaker 3: things reconcile? You may ask, sell some stuff. Hey, they've
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Speaker 3: been issuing a bunch of debt and some equity and
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Speaker 3: up like that, and so okay, great, like that's that's
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Speaker 3: how if you look at free cash flow does not
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Speaker 3: include financing operations. It's just operating cash flow minus capex. Okay,
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Speaker 3: if you have this uh you know financing that's going on,
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Speaker 3: that's you know, raising cash for you. Yeah, like that's
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Speaker 3: how you reconcile these things. But what it does tell
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Speaker 3: you is that in order for Google to continue this
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Speaker 3: build out, they're gonna have to either issue more debt
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Speaker 3: or issue more equity because they don't. Google doesn't want
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Speaker 3: to see that one hundred and thirty billion dollar cash
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Speaker 3: pile turn into ten billion.
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Speaker 2: That would not be comfortable for them.
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Speaker 3: So I think you know what we are seeing here,
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Speaker 3: and this is evidenced by what is selling off today.
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Speaker 3: Google's down, you know, almost seven percent. Amazon's down for
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Speaker 3: Is that because people are suddenly like buying less Amazon
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Speaker 3: stuff today? No, it's no, they're a hyperscaler two, Meta
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Speaker 3: down three and a quarter. The one that is being
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Speaker 3: spared today is Microsoft, which is only down one to
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Speaker 3: quarter percent. And the only thing I can think of is, hey, Microsoft,
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Speaker 3: you know, like when when you look at it's product
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Speaker 3: mix and everything, maybe there's something unique there. They're not
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Speaker 3: doing quite as much capex as these other guys.
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Speaker 2: Maybe that lets.
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Speaker 3: Them off the hook, or maybe it's just like random
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Speaker 3: like I don't know, but your your big hyperscalers are
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Speaker 3: clearly being punished today. The piece that I think is
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Speaker 3: worth talking about also is I don't think any of
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Speaker 3: the ones I mentioned are going to change their capex
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Speaker 3: plans because of this, not because of a six percent,
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Speaker 3: so how often they're.
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Speaker 2: All in on it.
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Speaker 3: The one that I think you need to watch for
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Speaker 3: is is Oracle, because Oracle does not have the supplemental
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Speaker 3: business to get anywhere close to, you know, the level
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Speaker 3: of you know, self funding that these other companies have.
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Speaker 3: Even though these companies are free cash flow negative now,
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Speaker 3: they can still figure out how to manage because they
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Speaker 3: have you know, massive other revenues and they have levers
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Speaker 3: they can pull financing wise, Oracle's got two key problems.
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Speaker 3: Number One, they're a fraction of the size revenue wise
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Speaker 3: as any of these other companies. Number two, basically all
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Speaker 3: of their future revenue commitments on the data center side
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Speaker 3: are coming from open Ai, who has had a few
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Speaker 3: problems recently. Yeah, we'll talk about a few, isn't that,
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Speaker 3: you know, aside from you know, hacking another website accidentally
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Speaker 3: and you know, cutting their prices and things like that.
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Speaker 6: Everything's fine, by the way, on the Microsoft comment you made,
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Speaker 6: Microsoft stock was already down twenty percent over the.
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Speaker 4: Last twelve months.
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Speaker 6: Google's still up, Alphabet's still up a good sixty So
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Speaker 6: I think that could just be part of it.
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Speaker 4: The pricing on these companies are pretty different.
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Speaker 6: But yeah, this is all punishment for massive spending increases,
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Speaker 6: and it will be pretty interesting to find out. Like
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Speaker 6: you said, nobody wants to slow down this scaling game that.
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Speaker 4: They are all racing towards.
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Speaker 2: I do.
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Speaker 6: Sorry, Yeah, none of the companies want to slow down, Yes,
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Speaker 6: one of them. Some of them are going to be
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Speaker 6: forced to slow down, right at some point, one of
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Speaker 6: them is going to issue bonds and there's gonna be
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Speaker 6: no buyers. Yes, it's probably not gonna be Alphabet. It's
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Speaker 6: probably not going to be Microsoft or Meta because of
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Speaker 6: their business models. But someone's going to go out there
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Speaker 6: and trying to issue equity or issue debt and it's
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Speaker 6: going to be a ugly no taker's scenario, and then
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Speaker 6: they're going to be for us to say.
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Speaker 4: Yeah, we don't have the cash to spend on this anymore.
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Speaker 3: Can we talk about this as it relates to Oracle,
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Speaker 3: just as an example. Sure, so the way that in general,
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Speaker 3: there are a number of different ways, but one of
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Speaker 3: the ways that you can measure the credit worthiness of
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Speaker 3: a company is through credit default swaps. And if this
8:48
Speaker 3: is a term that sounds familiar to anyone listening, it's
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Speaker 3: because back in you know, two thousand and seven, two
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Speaker 3: thousand and eight, credit default swaps on banks were one
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Speaker 3: of the ways that people measured, hey, are they going
8:58
Speaker 3: to go under because of their sub prime problems. A
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Speaker 3: credit default swap is very simply, hey, how much will
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Speaker 3: you pay me for insurance that this company doesn't go
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Speaker 3: under in the next X period of time. So, if
9:12
Speaker 3: we look at five year credit default swaps on your
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Speaker 3: big hyperscalers, generally what you see for Amazon, Meta, Microsoft,
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Speaker 3: and Google those are the big four. The five year
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Speaker 3: credit default swaps are somewhere between forty seven and seventy
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Speaker 3: eight basis points, which means if you've got one hundred
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Speaker 3: thousand dollars in bonds of any of those companies, you
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Speaker 3: need to pay anywhere from like five hundred to seven
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Speaker 3: hundred and fifty dollars to ensure that very low insurance cost,
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Speaker 3: because you're pretty much saying those companies are going to
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Speaker 3: be able to pay their liabilities during that time. Oracle
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Speaker 3: over the in that same issue five year credit default
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Speaker 3: swaps two hundred and six basis points, three to four
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Speaker 3: times the cost of the other one. So number one,
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Speaker 3: you look at Oracle and you're like, Okay, they're being
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Speaker 3: viewed differently by the market. The other piece is that
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Speaker 3: when you look at the yields on Oracles debt, the
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Speaker 3: spread relative to comparable treasuries for all the other hyperscalers
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Speaker 3: is anywhere from like one hundred and fifty to two
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Speaker 3: hundred and twenty five basis points. Then you're gonna get
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Speaker 3: paid one and a half to two ish percent more
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Speaker 3: on debt from one of these hyperscalers compared to alone
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Speaker 3: from and this I'm looking at like long term, like
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Speaker 3: thirty year bonds, Oracles spread is three hundred and fifty
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Speaker 3: basis points, which makes it much closer to like getting
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Speaker 3: into like below investment grade range than the other guys.
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Speaker 3: So the interesting question that I think is worth asking
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Speaker 3: here is hey, like, at some point does a ratings
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Speaker 3: agency look at Oracles debt and is like, hey, you're
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Speaker 3: starting to trade more like junk than investment grain. Do
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Speaker 3: you get a downgrade and what does that do to this.
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Speaker 2: Whole complex then?
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Speaker 4: And what does it mean?
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Speaker 3: These are some of the questions that might need to
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Speaker 3: be asked in the next twelve to eighteen months. Let's
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Speaker 3: take a quick break when we come back. Anything else
11:14
Speaker 3: that we want to touch on.
11:15
Speaker 6: For the googs, they're fined a billion dollars by the EU.
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Speaker 2: Move on. Okay, let's take a quick break. When we
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Speaker 2: come back. We'll talk Tesla earnings from yesterday. Next.
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Speaker 3: So Google was only one of the two companies that
12:01
Speaker 3: reported earnings after the belly of so they actually there
12:04
Speaker 3: were a lot of companies that reported earrings after the belly.
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Speaker 4: They're only one.
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Speaker 6: Of two one plus trillion dollar companies that reported earnings.
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Speaker 3: Yes, no, no one gets excited about you know otis
12:14
Speaker 3: worldwide telling us about elevator sales except for elevator salesman. Yes,
12:20
Speaker 3: is it safe to say that their stock goes up
12:22
Speaker 3: and down? Let's talk about Tesla. Uh no, you can't
12:29
Speaker 3: do that. Right before we talk about Tesla, Tucker, Yeah,
12:32
Speaker 3: that's no good.
12:35
Speaker 2: There goes another one.
12:36
Speaker 3: So anyways, Tesla, what do we see from them that
12:40
Speaker 3: now has their stock down eleven oh, I'm sorry, thirteen
12:44
Speaker 3: percent in trading today.
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Speaker 6: So first off, there it was their first negative cash
12:48
Speaker 6: flow in two years. So they reported five point eight
12:52
Speaker 6: billion dollars in spending. Tell me if you see some
12:55
Speaker 6: themes here between companies massive increases in spending bringing flow down. Now,
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Speaker 6: Tesla's has a long drawn out history of being cash
13:04
Speaker 6: flow negative and unprofitable, so this is nothing new for
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Speaker 6: Tesla investors. But I think I don't know from listening
13:12
Speaker 6: to clips from the conference call, as well as reading
13:15
Speaker 6: through the earnings and what people are saying about it,
13:17
Speaker 6: you have this big degree of spending and no real
13:22
Speaker 6: payoff in the earnings call about you know, hey, these
13:25
Speaker 6: driverless taxis that you're rolling out, these robotics that you
13:29
Speaker 6: want to do, what's the status?
13:32
Speaker 4: Instead?
13:32
Speaker 6: You got, hey, we're gonna have star Link in cars
13:35
Speaker 6: and We're gonna have groc in some of our cars,
13:37
Speaker 6: which is great, except Tesla doesn't.
13:41
Speaker 4: Own those products.
13:41
Speaker 6: In fact, that sounds like it's going to be benefiting SpaceX,
13:44
Speaker 6: not Tesla. And so I think what investors got was
13:47
Speaker 6: a boatload of spending, some modest increase in sales, but
13:51
Speaker 6: you know, worst numbers here in the US, and no
13:54
Speaker 6: real payoff on what the timeline is for those investments
13:58
Speaker 6: to pay off.
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Speaker 3: Given some of the things that we're talked about on
14:02
Speaker 3: you know, the earnings call. Hey, like they an analyst,
14:06
Speaker 3: you know, specifically asked Musk at one point like are
14:08
Speaker 3: you considering merging Tesla and SpaceX right, and must basically
14:11
Speaker 3: say like, it's not an appropriate place like to talk
14:13
Speaker 3: about that, blah blah blah, but then shortly after went
14:16
Speaker 3: on to talk about well, like, you know, we could
14:18
Speaker 3: see ways that like this integrates with that and this
14:21
Speaker 3: and that, and so sure, I think it very much
14:23
Speaker 3: is something that they are thinking about.
14:26
Speaker 6: Yeah, which is tough to do when both companies are
14:28
Speaker 6: in free fault, get in free fault, but are not
14:31
Speaker 6: going terribly well recently.
14:32
Speaker 3: Can I raise a question for you about market psychology?
14:40
Speaker 3: I guess I can, ye I guess I can't sure.
14:44
Speaker 3: So since Tesla has been publican and more specifically for
14:48
Speaker 3: the last like five to six years, since it went
14:50
Speaker 3: parabolic in twenty twenty, yeah, is it, it's safe to
14:55
Speaker 3: say that investors haven't really cared about Tesla's financials, right, Like.
15:02
Speaker 6: But yes, but those financials haven't been on the brink
15:05
Speaker 6: of collapse like they were in twenty eighteen twenty nineteen.
15:07
Speaker 3: But like, even we've talked at length, the stock is
15:11
Speaker 3: not tethered to its valuation in any way, shape or form, agreed,
15:15
Speaker 3: It's just it's there's a huge Elon premium and that's fine.
15:20
Speaker 6: Since the company was made, it past the stage of
15:24
Speaker 6: will they go bankrupt in the next quarter, nobody's really
15:27
Speaker 6: cared about the.
15:27
Speaker 4: Financials, correct.
15:29
Speaker 3: So here's the question that I will raise, given that
15:33
Speaker 3: there's another Elon company that's now publicly traded, one that
15:38
Speaker 3: has far loftier revenue and profit goals. And forget about
15:43
Speaker 3: revenue and profit goals, just far loftier goals generally, No,
15:47
Speaker 3: but like who cares? What like companies like you know,
15:49
Speaker 3: speaking like like verbal goals are like instead you have
15:54
Speaker 3: animals being like, well we see this is like a
15:56
Speaker 3: three trillion dollar revenue company by twenty forty, It's like, well,
15:59
Speaker 3: what does that even mean?
16:00
Speaker 2: Like, given that there's.
16:03
Speaker 3: Now another Elon company that is trading on vibes, which
16:08
Speaker 3: there's nothing. Ultimately, every stock trades on vibes of some kind.
16:12
Speaker 3: It's just, you know, how tethered to you know, the
16:14
Speaker 3: vibes of fundamentals are you? I guess what I'm asking is,
16:20
Speaker 3: given that investors are now being asked to treat SpaceX as, Hey,
16:27
Speaker 3: trust me, we can grow into this, do you think
16:31
Speaker 3: there's any out there that are like I no longer
16:34
Speaker 3: have the patience for two holdings that behave that way.
16:39
Speaker 2: Like?
16:39
Speaker 3: Does it is there pressure on Tesla to be the
16:42
Speaker 3: grown up big brother now instead of still being what
16:45
Speaker 3: it's been for the last six years.
16:46
Speaker 6: I think that there is a group of people who
16:49
Speaker 6: are Elon, musk fanatics, fans, whatever you want to call them.
16:55
Speaker 6: But it is a limited group of people. It is
16:57
Speaker 6: not never expanding one. And so if you wanted to
17:00
Speaker 6: come to the argument of hey, there's just only so
17:03
Speaker 6: much appetite and so much money that those people have
17:05
Speaker 6: to buy Tesla tequila and to invest in forgot about
17:10
Speaker 6: this came up with me on vacation because my flamethrowers.
17:14
Speaker 6: My wife's uncle's brother is a Tesla fanatic and gifted
17:17
Speaker 6: him a bottle of tesla.
17:18
Speaker 2: Wife la uncle's brother.
17:20
Speaker 3: Correct, could just said friend wife's uncle. So your uncle
17:24
Speaker 3: in law's brother. Wait, wife's uncle's brother makes him still
17:28
Speaker 3: your wife's uncle.
17:29
Speaker 6: No, because uncle by marriage, So.
17:33
Speaker 3: So you're your uncle in law twice removed.
17:36
Speaker 6: Yeah, sure, gave him a bottle test aequille years ago
17:39
Speaker 6: and it's now worth like two grand on eBay. So
17:43
Speaker 6: there are those fanatics out there, but he does not
17:47
Speaker 6: seem to be growing his fanatic base. And in fact,
17:50
Speaker 6: while he might not have lost any of the fanatics,
17:52
Speaker 6: I think he's lost some people that were on the
17:54
Speaker 6: margins about Elon Musk and so yeah, I think you
17:58
Speaker 6: could argue, hey, there's just only so many dollars of
18:01
Speaker 6: Tesla fanatics to go around here.
18:04
Speaker 4: The counterpoint would be, you.
18:06
Speaker 6: Know, you made the point about like forget about what
18:09
Speaker 6: you know, the stated goals of the company. Well, frankly,
18:13
Speaker 6: if we're talking about companies that detach entirely from financial reality,
18:17
Speaker 6: then the stated goals of the company the only things
18:18
Speaker 6: that matter, right, Like the stated goal is about where
18:22
Speaker 6: I don't even.
18:22
Speaker 3: Know if they are though, you know, like I again,
18:26
Speaker 3: I literally think and I'm not saying this is wrong,
18:28
Speaker 3: Like it's been perfectly fine for at least like five
18:32
Speaker 3: or six years. I think the vast majority of Tesla
18:37
Speaker 3: investors bought the stock for two reasons. It went up
18:40
Speaker 3: in Elon Musk, Like forget about like stated goals, like
18:46
Speaker 3: you know, sure, like when when asked by a friend
18:48
Speaker 3: they might say, well, they're.
18:49
Speaker 2: Developing robots blah blah blah. Sure. Ultimately it comes back
18:53
Speaker 2: to two things.
18:53
Speaker 4: I trust Elon.
18:54
Speaker 3: The stock went up and Elon Musk. Now, eventually, if
18:58
Speaker 3: the stock goes down enough, like then enough people get
19:00
Speaker 3: upset and they're like, Okay, I can't do that anymore.
19:03
Speaker 3: But we've seen that, like Tesla shareholders are willing to
19:06
Speaker 3: ride significant volatility. Yeah, so we'll see how this goes.
19:11
Speaker 3: If it keeps up for a few quarters, one quarter
19:14
Speaker 3: in one move like this doesn't necessarily mean a change
19:17
Speaker 3: of direction. But if we see this for like two
19:20
Speaker 3: three quarters and it becomes a pattern, then I think
19:23
Speaker 3: there's something where you say, okay, is this is starting
19:25
Speaker 3: to influence you know, how people view these things and
19:28
Speaker 3: how it may move quick break when we come back.
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Speaker 1: Right here on the Financial Exchange Radio Network.
19:59
Speaker 7: Markets are well and negative territory with a sell off
20:02
Speaker 7: in tech as concerns about AI spending mounts. Rising oil
20:06
Speaker 7: prices and turmoil in the Middle East are also pressuring stocks.
20:10
Speaker 7: Right now, the Dow is down by one percent or
20:12
Speaker 7: five hundred and fifty one points, SMP five hundred down
20:15
Speaker 7: one point one percent or eighty six points lowered, NASDAK
20:19
Speaker 7: selling off five hundred and fifty points over two percent lower,
20:23
Speaker 7: Rush two thousand down by half a percent, Tenure treasureeled
20:26
Speaker 7: up five basis points at four point seven zero percent,
20:30
Speaker 7: and oil jumping five percent higher today trading a ninety
20:33
Speaker 7: one dollars a barrel, alphabet tumbling by seven percent after
20:37
Speaker 7: the tech GIMET raised its capital expenditures forecast to a
20:40
Speaker 7: range of one hundred and ninety five billion to two
20:43
Speaker 7: hundred and five billion dollars, leading to more worries over
20:46
Speaker 7: AI spending. Meanwhile, Tesla is sinking thirteen percent after the
20:51
Speaker 7: ev maker reported negative free cash flow of more than
20:54
Speaker 7: one billion dollars in the previous quarter amid significant spending
20:58
Speaker 7: on AI in robotics, IBM shares are edging higher after
21:01
Speaker 7: the tech firm misprofit and revenue expectations. This comes after
21:05
Speaker 7: IBM last week posted preliminary results that led to the
21:09
Speaker 7: biggest single day loss in the stock's history. American Airlines
21:13
Speaker 7: cut its full year earnings outlook as a result of
21:15
Speaker 7: higher fuel costs, sending that stock down by seven percent,
21:19
Speaker 7: and Intel shares are up by one percent ahead of
21:22
Speaker 7: its earnings report after today's closing bell. I'm Tucker Silva
21:27
Speaker 7: and that is Wall Street Watch.
21:30
Speaker 3: So yesterday in the evening, I don't know the exact time,
21:35
Speaker 3: but somewhere in the five to seven pm range, the Houthis,
21:41
Speaker 3: who control the western half of Yemen, targeted two tankers
21:47
Speaker 3: attempting to transit the Bob l Mandeb Strait, which is
21:51
Speaker 3: the straight at the bottom end of the Red Sea
21:54
Speaker 3: that connects it out into the Indian Ocean.
21:58
Speaker 2: And there were.
21:59
Speaker 3: You know, pictures and videos of these tankers on fire,
22:02
Speaker 3: so they actually hit them. It's been confirmed by multiple sources.
22:05
Speaker 3: Earlier this morning, two Chinese flag tankers were able to
22:10
Speaker 3: exit the straight.
22:12
Speaker 2: Again, we have to.
22:12
Speaker 3: Now specify because which straight We're dealing with two straits.
22:16
Speaker 3: Hormuz is the one that goes around like the tip
22:18
Speaker 3: of the Arabian Peninsula. Bob l Mondeb is the one
22:23
Speaker 3: that goes between kind of like West East Africa, you know,
22:28
Speaker 3: Somalia and Yemen on the other side of the Arabian Peninsula.
22:33
Speaker 3: So we got two straits, only one of which is
22:36
Speaker 3: actually straight. The other one is curved. I digress, you
22:42
Speaker 3: sure deal in any case, here's the problem. Bob al
22:45
Speaker 3: Mondeb has been used over the course of the last
22:48
Speaker 3: six months as a bypass by Saudi Arabia for an
22:53
Speaker 3: insane amount of oil. There's an East west oil pipeline
22:56
Speaker 3: that flows through Saudi Arabia and pre about three million
23:01
Speaker 3: barrels a day. We're flowing through it to a port
23:03
Speaker 3: called Yamboo that then oil is being exported out of.
23:07
Speaker 3: When the conflict you know, sparked up, uh, Saudi Araba said, okay,
23:12
Speaker 3: we've got capacity to up that flow by a few
23:14
Speaker 3: million additional barrels a day. Let's do that so we
23:17
Speaker 3: don't have to take too much production offline. So you
23:20
Speaker 3: end up with somewhere in the ballpark of like five
23:22
Speaker 3: to seven million barrels a day flowing through that pipeline.
23:26
Speaker 3: It's one of the reasons why oil prices didn't go
23:28
Speaker 3: as high as they could have in the spring. So
23:31
Speaker 3: the question now that is very valid is what is
23:35
Speaker 3: the Hohuthy's plan for how for basically what they plan
23:40
Speaker 3: to allow to exit via Bob Elmandeb And do they
23:44
Speaker 3: plan at some point to even target Saudi loading facilities
23:47
Speaker 3: in Yamboo that would potentially take more transportation offline. Because
23:53
Speaker 3: here here's the problem on this. If that production is reduced,
23:58
Speaker 3: then this makes the current escal where right now in
24:00
Speaker 3: the straight upform moves, there's nothing going through right now,
24:03
Speaker 3: like the satellite images from the last day basically show
24:07
Speaker 3: a couple ships making it their way through that there's
24:10
Speaker 3: nothing happening there. If Hormuz is offline and Bob al
24:14
Speaker 3: Mandeb is offline, then you end up with a situation
24:18
Speaker 3: that is more severe than the spring. And if we're
24:22
Speaker 3: being honest, oil markets are pricing that in not in
24:24
Speaker 3: the price of oil Brent CRUD right now is at
24:28
Speaker 3: one hundred dollars a barrel for the first time in
24:29
Speaker 3: a couple months. Uh, it was, you know, north of
24:32
Speaker 3: one point fifteen at one point. But where it is
24:35
Speaker 3: being priced in isn't what we call time spreads, and
24:39
Speaker 3: time spreads are exactly what they sound like. What's the
24:42
Speaker 3: difference in price now versus the difference in price somewhere
24:45
Speaker 3: later on the future's curve comparing price across time. Here's
24:49
Speaker 3: where we stand right now. September delivery on Brent is
24:52
Speaker 3: it that one hundred dollars and fifty eight cents. October's
24:55
Speaker 3: at ninety four to thirty four. What this means, Let's
24:57
Speaker 3: say that you're a seller of oil. If you're sitting
25:00
Speaker 3: on a million barrels of oil, if you commit to
25:02
Speaker 3: September delivery right now, you get an extra six million
25:05
Speaker 3: dollars versus delivering it in October. It is pulling oil
25:09
Speaker 3: out of storage because you will get paid for it.
25:14
Speaker 2: Today.
25:15
Speaker 3: These time spreads are the highest that we've seen, not
25:18
Speaker 3: quite They're at the same level that we saw in
25:21
Speaker 3: March and April, which indicates this is as tight of
25:24
Speaker 3: an oil market as we saw then, and that was
25:27
Speaker 3: the tightest one that we've basically ever seen. The additional
25:31
Speaker 3: problem with this.
25:32
Speaker 6: Is back in April, I don't have the numbers in
25:35
Speaker 6: front of me, Chuck, but I'm guessing you can confirm
25:37
Speaker 6: which one's the level of the strategic petroleum reserve in
25:40
Speaker 6: the United States. And then a number that nobody knows,
25:44
Speaker 6: which is how much oil China had in reserves back
25:47
Speaker 6: in April, both of which are going to be substantially
25:50
Speaker 6: lower today than where they were back in April.
25:52
Speaker 3: SPR at the beginning of the conflict was four hundred
25:55
Speaker 3: and fifteen million barrels today three hundred eleven. You've got
26:00
Speaker 3: in commercial stockpiles, commercial crude inventories. You are hang on,
26:06
Speaker 3: I gotta see which line is which? Okay, pink, is
26:10
Speaker 3: that green? We want the green one green. We had
26:13
Speaker 3: four hundred and thirty nine million barrels, were at four
26:15
Speaker 3: hundred and eleven right now on commercials. Commercials actually expanded
26:19
Speaker 3: a little bit up to four sixty five in the
26:21
Speaker 3: early days before, you know, dropping by fifty million. So
26:26
Speaker 3: again on the SPR conventional wisdom, as you can get
26:30
Speaker 3: down to somewhere between one hundred and fifty and two
26:32
Speaker 3: hundred and forty million barrels. Energy Secretary Wright was out
26:36
Speaker 3: two days ago saying, no, we can take it down
26:38
Speaker 3: to seventy. I did a little bit of research on this. Apparently,
26:41
Speaker 3: if you assume that some of the caverns are one
26:46
Speaker 3: time use only and you don't need to refill them,
26:49
Speaker 3: you can potentially get down to seventy million barrels.
26:52
Speaker 4: Got it.
26:53
Speaker 3: Like you physically won't be able to refill them because
26:55
Speaker 3: they would collapse. Is kind of the understanding that I got.
26:59
Speaker 3: So I'm not sure that we want to do that,
27:01
Speaker 3: But I found it interesting that he talked about that,
27:03
Speaker 3: because why would you be talking about needing to take
27:05
Speaker 3: the spr down to seventy if you thought this was
27:09
Speaker 3: just overdone and dusted.
27:11
Speaker 6: Well, you do it to try and stabilize energy markets,
27:14
Speaker 6: which is what the administration has been trying to do.
27:16
Speaker 3: For the YESI but like, you only do that if
27:18
Speaker 3: you think that like you need to, is kind of
27:20
Speaker 3: my point, I guess. So on the commercial side, remember,
27:24
Speaker 3: four hundred and eleven million barrels doesn't mean you can
27:26
Speaker 3: access all that one hundred and fifty million of its pipeline.
27:29
Speaker 3: Another one hundred to one hundred and fifty million is
27:31
Speaker 3: working inventory at refineries, and another fifty to sixty million
27:38
Speaker 3: is tank bottoms that you can't access because of the
27:40
Speaker 3: deliberate design of the tank, because the bottoms of the
27:42
Speaker 3: tank is where all the sediment of cruise and you
27:45
Speaker 3: don't want to try to sell oil that has sediment
27:48
Speaker 3: in it because that's not good for you know, well
27:51
Speaker 3: anything that needs no reputation. Well, do you ever sit
27:55
Speaker 3: there and say, man, I could really use some sand
27:57
Speaker 3: in my engine right now, Like no, you generally we don't.
28:00
Speaker 3: You'd prefer to avoid it, all else being equal. So
28:04
Speaker 3: I think where we sit is we're at the point
28:08
Speaker 3: where typically there's been some kind of announcement from the
28:12
Speaker 3: President along the lines of hey, like, you know, we're
28:15
Speaker 3: gonna restart negotiations and we're you know, ceasing operations as
28:18
Speaker 3: a result, it doesn't feel like we're heading there because
28:21
Speaker 3: the cadence is actually picking up and you're seeing you know,
28:23
Speaker 3: a wider target set that is, you know, being attacked
28:27
Speaker 3: by US forces in the last couple of days.
28:30
Speaker 2: But maybe we go in that direction.
28:32
Speaker 6: Yeah, I mean, the experience of the last five months
28:34
Speaker 6: has been exactly that you get to a breaking point
28:37
Speaker 6: on energy prices where the President becomes very uncomfortable, and
28:40
Speaker 6: you do see a pivot, even if it doesn't get
28:43
Speaker 6: confirmed by Iranians. You see a pivot in messaging from
28:46
Speaker 6: the president. Yes, the question is will we get that
28:48
Speaker 6: pivot or will we get more escalation because you know,
28:52
Speaker 6: you could see oil prices at one hundred and twenty
28:54
Speaker 6: bucks a barrel in days.
28:56
Speaker 3: The other question that I think is worth asking is like,
28:59
Speaker 3: what are the Iran think about that, like as as
29:02
Speaker 3: a concept, what generally when the President has you know,
29:06
Speaker 3: made overtures to Iran for think back to like either
29:10
Speaker 3: April or the memorandum of understanding in June, Iran said okay, like,
29:15
Speaker 3: we'll work with mediators.
29:17
Speaker 2: To get this done.
29:19
Speaker 3: Iran's now had in the latest one with the memorandum
29:21
Speaker 3: of understanding, the idea was okay, like we signed this,
29:26
Speaker 3: and clearly they were disagreement, Like even after the sign
29:28
Speaker 3: text it was okay, like we disagree on what these
29:30
Speaker 3: words actually mean. I'm not saying like either sides right
29:34
Speaker 3: or wrong. I'm just saying that they disagreed on like
29:36
Speaker 3: what free traffic through the Strait of Horror moves meant.
29:39
Speaker 3: The US clearly said No, this means like free traffic.
29:42
Speaker 3: Iran clearly said no, this means we're going to administer
29:45
Speaker 3: the thing. Obviously, Like that doesn't really seem to be
29:48
Speaker 3: a point in Iran's favor, but like, just put yourself
29:52
Speaker 3: in their shoes for a second. I'm not asking you
29:54
Speaker 3: to say they're right. I'm asking you just put yourself
29:56
Speaker 3: in their shoes. So Iran signs the deal and within
30:00
Speaker 3: three weeks it breaks down. Why would Iran, which has
30:04
Speaker 3: suffered for years under different sanctions and this and that
30:08
Speaker 3: they were promised you know this, and that there's gonna
30:10
Speaker 3: be a reconstruction fund and blah blah blah and all this. Okay,
30:15
Speaker 3: so that deal lasted three weeks. Why do you want
30:17
Speaker 3: us to sign another one with you?
30:18
Speaker 2: Now?
30:18
Speaker 3: Like, why why should we sign another with you if
30:21
Speaker 3: we're just gonna be back here three weeks from now again?
30:24
Speaker 6: Well, okay, so I have a very difficult time putting
30:27
Speaker 6: myself in Iranian.
30:28
Speaker 2: No, it's tough for all of us. But like I
30:31
Speaker 2: guess my.
30:31
Speaker 6: Answer would be twofold one. I do have some concern
30:36
Speaker 6: about the US beginning to strike very expensive infrastructure that
30:39
Speaker 6: I'm gonna need to rebuild, which is the threat that's
30:41
Speaker 6: underway right now. They've been doing that all year later, agreed,
30:44
Speaker 6: but you know that's sources to add up. And two
30:48
Speaker 6: I think more impactful. I don't know if I said
30:51
Speaker 6: A or one, but.
30:52
Speaker 4: Not fine too.
30:55
Speaker 6: The longer I do this, the less important my influences
30:59
Speaker 6: on the straight of hormous That is a reality that
31:01
Speaker 6: the Iranians understand, the globe understands. The more that I
31:03
Speaker 6: shut this down, the more legitimately every country out there
31:07
Speaker 6: is going to build infrastructure to avoid the straight of
31:09
Speaker 6: horror movies. So I've got a ton of leverage right now.
31:12
Speaker 6: How do I best utilize it? It's not keep this
31:15
Speaker 6: thing shut for another year?
31:17
Speaker 3: Well, I guess if my goal is to stop being
31:19
Speaker 3: bombed by the US, because that was your first one, Like, yep,
31:24
Speaker 3: the memorandum of understanding didn't stop that.
31:26
Speaker 2: Nope.
31:28
Speaker 3: So again, if if I'm I'm just putting myself in
31:32
Speaker 3: like their shoes, if the memorandum didn't stop it, then
31:37
Speaker 3: the logical thought process would be And again, remember this
31:40
Speaker 3: is a leadership group that A is fanatics and B
31:46
Speaker 3: have basically like committed to like a lot of suffering
31:49
Speaker 3: over the last you know, yeah, several decades in order
31:53
Speaker 3: to get to what they think is going to be,
31:55
Speaker 3: like something better fifty one hundred years from now. I
32:00
Speaker 3: didn't inflict enough pain, and so I need to inflict
32:04
Speaker 3: more pain before I bring the US back to the
32:06
Speaker 3: bargaining table. Yeah, because I need this to hold. I
32:10
Speaker 3: don't want to get bombed again. And I started getting
32:13
Speaker 3: bombed again shortly after the memorandum of understanding, which means
32:17
Speaker 3: I need to do more.
32:18
Speaker 2: I'm not saying that's right.
32:19
Speaker 3: I'm just saying I can, Like you can see that
32:21
Speaker 3: an easy line of thinking. Yep, So all this is
32:25
Speaker 3: prefaced to say I have no idea what's gonna actually happen.
32:28
Speaker 3: We could end up with another you know, ceasefire deal tomorrow,
32:32
Speaker 3: wouldn't really actually it would surprise me tomorrow. Usually we
32:36
Speaker 3: get the bad news on Fridays, Like, if we're being honest,
32:38
Speaker 3: the bad news usually comes on Fridays. Could there be
32:41
Speaker 3: like a cease fire announcement Monday or today?
32:43
Speaker 2: Like sure?
32:44
Speaker 3: Like maybe, Like, I have no idea, We'll see where
32:47
Speaker 3: things go. Let's take a quick break. When we return,
32:51
Speaker 3: let's talk a little bit about the FED.
32:53
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33:52
Speaker 3: FED Meeting is next Wednesday. And peace from Nick tim
33:55
Speaker 3: Morouse in the Wall Street Journal. Remember tim Morouse is
33:57
Speaker 3: basically the Fed Whisperer. If the Fed under Jay Powell
34:00
Speaker 3: ever wanted to say anything, they said it through Nick
34:03
Speaker 3: tim Morouse. Actually they would, they would speak themselves. But
34:06
Speaker 3: if they were in a quiet period and wanted to
34:08
Speaker 3: say something, you get the tim Morows piece that came out,
34:10
Speaker 3: and it would say what the Fed wanted you to hear.
34:13
Speaker 4: So question, is he writing this piece because he's no
34:15
Speaker 4: longer that mouthpiece and he's confused, or is he writing
34:18
Speaker 4: this piece because it's genuinely a confusing period.
34:20
Speaker 2: I don't know.
34:20
Speaker 3: It's it's probably a little bit of both, And so
34:23
Speaker 3: I think it's it's always important when reading a piece
34:26
Speaker 3: to understand who's writing it in the lens through which
34:28
Speaker 3: they're writing it from, because it informs how you read it.
34:32
Speaker 3: And I don't know if tim Morouse is on the
34:35
Speaker 3: outs with Worsh, on the ends with Worsh, or neither.
34:41
Speaker 3: And so I don't know if this is Worsh's perspective,
34:44
Speaker 3: Timorros's perspective, or the third possibility, maybe it's the perspective
34:49
Speaker 3: of other members of the Federal Reserve Open Market Committee,
34:52
Speaker 3: specifically mister Jerome Powell, who still sits on that committee.
34:57
Speaker 3: What if again, like I I don't know yet because
35:00
Speaker 3: it's only been a month, but we're going to figure
35:03
Speaker 3: out hey, is Timorro speaking for, you know, the FED
35:07
Speaker 3: as a whole. Is he speaking for himself, is he
35:09
Speaker 3: speaking for warsh or is he still speaking for Powell?
35:14
Speaker 6: I will acknowledge for a moment here that in you know,
35:17
Speaker 6: when looking at the odds of a action, typically when
35:20
Speaker 6: you're this close to a meeting, it's a little bit
35:22
Speaker 6: more certain, or at least it has been over the
35:24
Speaker 6: last decade, when you're this close to a meeting, what's
35:27
Speaker 6: likely to happen at the next meeting and the next
35:28
Speaker 6: meeting which occurs just six days from now, there's a
35:33
Speaker 6: sixty two percent likelihood, according to CME, of nothing happening,
35:37
Speaker 6: in a thirty eight percent chance of a rate hike.
35:39
Speaker 6: And that's again when we're this close, usually closer to
35:42
Speaker 6: ninety ten, if not more so. I think there is
35:45
Speaker 6: some confusion about this moment in time.
35:47
Speaker 4: Is I personally.
35:48
Speaker 6: Think that the single best thing that that worsh could
35:53
Speaker 6: do if he wants to lower interest rates later this
35:55
Speaker 6: year or early next year, would be to hike interest
35:57
Speaker 6: rates surprisingly at this meeting. If your goal is to
36:01
Speaker 6: get rates lower later than just acknowledge oil prices are
36:04
Speaker 6: heading up. Hike rates right now, nip it in the bud,
36:08
Speaker 6: and you know, let the markets react to that, and
36:13
Speaker 6: then it probably gives you that cover to be able
36:15
Speaker 6: to move things later. But I'll also point out that
36:19
Speaker 6: I'm not sure how inclined anyone at the FED is
36:22
Speaker 6: to have that type of volatility and rates, because we
36:25
Speaker 6: did very recently just cut rates by what three quarters
36:29
Speaker 6: of a percent in the second half of last year.
36:30
Speaker 3: Yeah, I mean it was it was almost a year ago. Now,
36:33
Speaker 3: you know, it was ten months. So I think there's
36:35
Speaker 3: been enough time that has passed where you could say, hey,
36:39
Speaker 3: we started that cutting cycle in September of last year.
36:42
Speaker 4: Yeap.
36:42
Speaker 3: The economy's changed, you know, in the three quarters since then.
36:46
Speaker 2: Okay.
36:46
Speaker 6: You know, like one thing that every FED president and
36:50
Speaker 6: member is hyper cognizant of is volatility and policy and volatility.
36:55
Speaker 4: And understanding of where rates are and are going to be.
36:57
Speaker 6: And that would defined the nineteen seventies a bunch of
37:00
Speaker 6: head fakes and confusion, and I don't think anybody wants
37:05
Speaker 6: that this time. So that they do move forward with it,
37:07
Speaker 6: they're going to well worsh She's probably gona have to
37:09
Speaker 6: talk a little bit more about it than he would
37:11
Speaker 6: like to.
37:11
Speaker 4: I would think.
37:13
Speaker 3: The single best thing that worsh could do is surprise
37:16
Speaker 3: the market with the hike next Wednesday. Not for markets,
37:21
Speaker 3: actually non, here's what you would see in markets, in
37:25
Speaker 3: my opinion. The initial move would be stocks down, rates up.
37:31
Speaker 3: Within a couple of days, it would be stocks up,
37:34
Speaker 3: rates down. Because here's the nasty truth about all of this.
37:41
Speaker 2: There are bonds in your stocks. There are bonds in
37:45
Speaker 2: your stocks.
37:46
Speaker 3: What I mean by that is, ultimately, the cost of
37:49
Speaker 3: financing through borrowing is what dictates every other cost out there. Yep,
37:54
Speaker 3: equity risk premiums are based on like everything comes from that.
37:57
Speaker 3: So if you ultimately want to have the best outcome
38:01
Speaker 3: for stocks, you do want lower rates, all else being equal,
38:05
Speaker 3: But the path to getting there might be having to
38:07
Speaker 3: prove that you're willing to hike in order to show
38:10
Speaker 3: that you're not gonna let inflation get out of control
38:12
Speaker 3: and rain in the long end of the curve. That way,
38:15
Speaker 3: let's take a quick break. When we come back in
38:17
Speaker 3: a bit. We got our two coming up.