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Treasury Yields Reach Their Highest Level in Nearly 20 Years · The Financial Exchange Show

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Speaker 1: is The Financial Exchange with Mike Armstrong and Mark Vandetti.
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Speaker 2: Good morning. Happy Tuesday.
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Speaker 3: Welcome back to The Financial Exchange. It's Mike, Mark, and
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Speaker 3: Tucker with you on a Tuesday ahead of a Fed
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Speaker 3: rate decision Wednesday. They will begin their two-day meeting today.
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Speaker 3: Press conference tomorrow at 2.30 p.m.
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Speaker 2: Led by Kevin Warsh.
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Speaker 3: And we'll be talking a lot about that upcoming meeting.
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Speaker 3: I'm interested in your take, but I think this is
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Speaker 3: one of the more exciting, potentially dramatic, and maybe impactful
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Speaker 3: meetings that we've had in a few years. So we
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Speaker 3: will see. The last meeting had three dissents. which is
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Speaker 3: the second largest number of dissents we've ever seen. So
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Speaker 3: clearly some disagreement among the policymakers about what to do next,
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Speaker 3: and we will see if that comes out tomorrow afternoon.
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Speaker 3: We've got yields on the 10-year Treasury spiking again up
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Speaker 3: to 5%, or just slightly over it. We've got Scott Bassett,
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Speaker 3: Treasury Secretary, is going to be testifying in front of Congress.
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Speaker 3: In equity markets, Once again, to start the day selling
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Speaker 3: off a bit. So but let's start with the bond market,
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Speaker 3: because as we've been saying for the last few weeks,
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Speaker 3: that's where the excitement has been happening. It's not so
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Speaker 3: much in the stock market, although it has been a
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Speaker 3: little bit weak so far in September. It's been the
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Speaker 3: excitement from the bond market and then also energy markets,
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Speaker 3: neither of which in a positive excitement way, but exciting nonetheless.
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Speaker 3: So Yields at 7%, Mark. Where were you the last time? Sorry,
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Speaker 3: yields at 5%, not 7%. I was going to say,
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Speaker 3: what happened this morning?
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Speaker 2: Mortgage rates at 7%. I've got to keep my numbers straight.
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Speaker 2: I mean, where were you the last time we had
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Speaker 2: the 10-year Treasury at 5%? It's been a couple of decades.
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Speaker 4: Where was I? I was probably in the Midwest doing
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Speaker 4: a meeting. So I'm much happier today.
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Speaker 2: Yeah.
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Speaker 3: It has been since right before the great financial crisis
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Speaker 3: kind of imploded on itself that we last saw yields
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Speaker 3: this high.
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Speaker 4: I was probably telling a board of trustees rates will
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Speaker 4: not breach 4.75%. Damn it. That's probably what I was
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Speaker 4: doing at the time. That's why I'm here now.
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Speaker 2: Mortgage-backed securities. Don't worry about those.
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Speaker 4: The subprime crisis will be contained. Let's move on.
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Speaker 2: Housing prices don't go down.
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Speaker 3: Yeah.
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Speaker 2: That's what everybody in the financial.
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Speaker 4: Industry was saying back in 2007. That's why they grounded
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Speaker 4: me in Needham. Yeah. Not a great interest rate forecaster.
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Speaker 2: So a few things.
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Speaker 3: First, there is nothing magical about 5%. There is no
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Speaker 3: stated law in physics or economics that says once rates
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Speaker 3: break 5% on the 10-year treasury, watch out because everything
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Speaker 3: comes crashing down subsequently. But help people understand, help me understand...
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Speaker 3: You know, why rates moving from where were we six
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Speaker 3: months ago?
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Speaker 2: Four point two percent, I think.
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Speaker 4: They're up about a full percentage point on the 10
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Speaker 4: year and thus.
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Speaker 2: A little bit more than that on the 30 year mortgage.
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Speaker 1: Yeah.
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Speaker 3: So since the breakout of war in Iran, rates are
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Speaker 3: up about a percentage point.
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Speaker 2: So that's led mortgage rates higher, everything higher.
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Speaker 1: But what?
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Speaker 2: What sort of drag does that have on the economy,
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Speaker 2: on stock prices?
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Speaker 4: Well, look, it's not necessarily bad if it is because
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Speaker 4: people expect growth to be higher, and frequently that's why
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Speaker 4: interest rates go up. It's a reflection of a good thing.
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Speaker 4: It does also break growth as loan markets adjust, supply
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Speaker 4: and demand adjust. Rates are a reflection of demand for.
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Speaker 2: Capital.
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Speaker 4: So it's not necessarily a bad thing. It could be
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Speaker 4: that AI investment is pushing up rates. It could also
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Speaker 4: be that rates are going up for bad reasons, inflation expectations,
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Speaker 4: and we can tease those out to a degree. They're
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Speaker 4: partly responsible, partly, for the rise in the 10-year treasury
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Speaker 4: that we're talking about. The other component is what a
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Speaker 4: researcher would call, a finance person more generally, would call
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Speaker 4: real rates going up. That's the portion of the rise
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Speaker 4: that we were talking about, the one percentage point rise,
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Speaker 4: that's not attributable to expected inflation going up. And that
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Speaker 4: could be rising because people are worried about, say, government deficits.
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Speaker 4: Fiscal policy is probably the biggest driver. But AI is
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Speaker 4: probably a close second right now. This is an almost
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Speaker 4: unprecedented investment boom that we're living through. So the negative
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Speaker 4: to rates going up is that, well, they act as
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Speaker 4: a drag. on investment, on housing, on everything.
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Speaker 2: People frequently mix this. There's a positive, too, though. Go ahead.
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Speaker 3: Yeah, you don't see this as frequently as I do,
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Speaker 3: but when I tell people, you've lost money in bonds
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Speaker 3: this year because rates are up. They scratch their head
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Speaker 3: a little bit, but I thought that rates going up
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Speaker 3: was good for me. Let's drag that out a little bit,
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Speaker 3: that relationship between existing bond investors, new bond investors.
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Speaker 4: Okay, so slightly different subject, but sure. There's this inverse,
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Speaker 4: if you like, or negative, more intuitively, relationship between the
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Speaker 4: price of a security, any security, and its yield. Because
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Speaker 4: yield is just a fraction. It's a quotient.
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Speaker 3: How much is the security paying me in dividends or
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Speaker 3: interest versus.
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Speaker 4: What's it worth? If a bond has a face value
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Speaker 4: of $ 100 and its coupon is $ 5... Face value is $ 100.
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Speaker 4: Coupon is $ 5. The yield is just the quotient, 5
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Speaker 4: divided by 100, which is 0.05, which is 5%.
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Speaker 2: That's easy math. I like that.
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Speaker 3: Right?
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Speaker 1: Yeah.
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Speaker 4: What happens if the price goes up? If the denominator,
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Speaker 4: if you can picture this fraction in your head, if
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Speaker 4: that goes up from 100 to 105?
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Speaker 2: Now I can't do the math in my head.
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Speaker 4: Well, the thing on the bottom is bigger.
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Speaker 3: Yeah.
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Speaker 4: So you're dividing into a bigger number, so the fraction
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Speaker 4: is smaller. The yield has gone down.
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Speaker 2: Yeah.
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Speaker 4: That's it.
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Speaker 2: That's all you need to know.
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Speaker 4: Well, yeah, we're oversimplifying, but that's okay. So there's the mechanics.
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Speaker 4: So when my bond price goes up, my yield goes down.
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Speaker 4: Should I freak out? My income just went down. Well, no,
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Speaker 4: but you had some capital appreciation. Similarly, if that bond
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Speaker 4: went from 100 to 95, the quotient, I'm being a
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Speaker 4: little fifth grade technical here, the quotient, 5 divided by 95,
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Speaker 4: goes up. So yeah, you see that loss on your statement,
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Speaker 4: but your income, your yield went up. That's why we
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Speaker 4: look at total return of a bond over a period
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Speaker 4: of a year or longer.
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Speaker 3: So plain and simple, if you owned a bond at
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Speaker 3: the beginning of this year, it's worth less than it
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Speaker 3: was probably.
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Speaker 2: Compared to now because... Well, any number of reasons could
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Speaker 2: be because.
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Speaker 3: But because the price fell and the yield went up,
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Speaker 3: plain and simple, that is what has.
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Speaker 4: Happened so far this year. One way to think about it, Michael,
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Speaker 4: is that over time you make that, and I'm not
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Speaker 4: going to guarantee this, but in theory, the optimist maybe
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Speaker 4: would say, well, over time you make that up. So
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Speaker 4: if you invest in the Bloomberg... aggregate in, I was
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Speaker 4: going to say Barclays. It used to be Barclays. It
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Speaker 4: used to be Lehman Brothers, for Pete's sake. But anyway.
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Speaker 2: We don't say that name anymore.
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Speaker 4: If you invest in, yeah, those poor bastards. If you
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Speaker 4: invest in a diversified bond fund in year four, I
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Speaker 4: want to, sorry, Tucker, if I, no.
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Speaker 1: Okay, good.
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Speaker 4: Poor bastards.
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Speaker 2: You can say it the first way, not the second way.
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Speaker 2: Don't rub it in, Mark.
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Speaker 4: Oh, it's the emphasis. It's the emphasis. So if you
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Speaker 4: invest in the Bloomberg aggregate, well, I'm only on a
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Speaker 4: couple times a month, so I could say it four
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Speaker 4: times today. The Bloomberg aggregate's down about a percent and
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Speaker 4: a half this year. So you're looking at your 401k.
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Speaker 4: You're anchored a winward there. Your insurance is down a
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Speaker 4: percent and a half. Understandably, people say, well, what's going
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Speaker 4: on here? You said I own that for safety. It
8:47
Speaker 4: doesn't look too safe to me, and it didn't look
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Speaker 4: too safe in 2022, and it didn't look too safe. Well, okay,
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Speaker 4: I could carry on, but you get the point. Occasionally,
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Speaker 4: bonds do lose money. Bonds, look, they may be in
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Speaker 4: for a rough patch here if inflation is spiraling out
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Speaker 4: of control is not the right phrase because that's probably
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Speaker 4: not going to happen. If inflation creeps up over the
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Speaker 4: next decade, several quarters. It's going to be a rough
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Speaker 4: several quarters for fixed income. At some point, of course,
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Speaker 4: that will reverse. There's no long-term trend in interest rates.
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Speaker 2: Let's take a quick break.
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Speaker 3: When we come back, as I've said, the exciting stuff
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Speaker 3: happening right now is in the bond market. We need
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Speaker 3: to spend more time here because we've just walked through
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Speaker 3: what it practically means for investors, the potential causes behind it.
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Speaker 3: But what happens next is Very interesting to me. And
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Speaker 3: the commentary from Besson about growing our way out of it.
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Speaker 3: All of these things still revolve around the bond market.
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Speaker 2: We're going to take a quick break.
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Speaker 3: More on interest rates, mortgage rates, what it means for
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Speaker 3: you next on the Financial Exchange.
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Speaker 3: Mark, I wasn't sure where I wanted to go next,
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Speaker 3: but given the hilarity that is ensuing on Scott Besson's,
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Speaker 3: the U.S. Treasury Secretary's testimony in front of Congress right
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Speaker 3: now with just Iran war protester after Iran war protester
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Speaker 3: being hauled out of the press conference, I think we
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Speaker 3: should turn to some of his recent comments, not so
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Speaker 3: much about sanctions on Iran and what's going on there,
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Speaker 3: but this commentary about deficits and and the United States
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Speaker 3: Debt Challenge.
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Speaker 2: Which is right in the Treasury Secretary's wheelhouse. It's their job.
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Speaker 5: Sorry, Mike.
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Speaker 3: It is linked to the previous conversation about interest rates. So,
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Speaker 3: first things first, I am not of the belief that
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Speaker 3: the reason interest rates have climbed by a percentage point
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Speaker 3: since the outbreak of war is.
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Speaker 2: Due to the deficit.
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Speaker 4: Why don't you believe that?
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Speaker 5: Uh.
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Speaker 3: Because the deficit did not immediately grow at the start
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Speaker 3: of the Iran war. It's been rising and crossing unbearable
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Speaker 3: thresholds for quite some time. I think that it could
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Speaker 3: be a factor in what is increasing deficits. But I
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Speaker 3: think that anybody saying, oh, yeah, the only reason that
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Speaker 3: yields are at 5% right now is because deficits are
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Speaker 3: out of control. I think that's disingenuous. So let's start there.
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Speaker 3: It's probably a culmination of different things, including... interest rate concerns,
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Speaker 3: growth from the AI sector. Sorry, I meant inflation concerns,
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Speaker 3: not interest rate concerns. And a litany of other factors
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Speaker 3: going into what is contributing to higher yields. When we
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Speaker 3: express the government's debt or deficits, go ahead.
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Speaker 4: I've got to say, I mean, if everybody's worried about it,
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Speaker 4: it could be the psychological, it could be the narrative
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Speaker 4: driving it. What could be? Rising deficits potentially. being the
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Speaker 4: main driver of rising rates, real rates. That's a key distinction,
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Speaker 4: real rates. If everybody suddenly starts to worry about it
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Speaker 4: and rates are going up, it could be the driver
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Speaker 4: just for psychological reasons. It becomes a self-fulfilling prophecy.
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Speaker 2: Yes. And I believe that someday it probably will be
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Speaker 2: a driver of it. Excuse me.
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Speaker 3: I don't really see any noticeable difference about people's concerns
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Speaker 3: about deficits today compared to two years ago.
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Speaker 4: Yeah, but everybody's talking about it. Everybody listening has probably
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Speaker 4: heard that argument in the past week, much like everybody
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Speaker 4: listening has heard the argument that AI might be driving
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Speaker 4: it too. So both could be. Normally, I'd say what
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Speaker 4: you're saying. I'd kind of downplay it. Well, they always
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Speaker 4: bring that up. But the level of alarm over our
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Speaker 4: fiscal situation, and it's warranted, by the way. Train wreck
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Speaker 4: doesn't begin to describe the fiscal carnage. that we're likely
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Speaker 4: to experience. We're being so reckless right now. And the proposals,
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Speaker 4: like $ 5, 000 dividend checks, whatever you want to call them,
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Speaker 4: they're just getting sillier. Nobody wants to do anything about
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Speaker 4: the deficit. It's getting worse. We've got $ 40 trillion in debt,
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Speaker 4: a little less than that held by the public. At
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Speaker 4: some point, it's got to be pushing interest rates up.
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Speaker 4: Don't tell me it's not. If you're telling me it's not,
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Speaker 4: you're telling me the laws of supply and demand don't
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Speaker 4: matter in debt. I'm not saying you. To someone who
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Speaker 4: would counter that with something dismissive, Well, of course it's
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Speaker 4: got to matter. The supply of treasuries matters.
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Speaker 2: Of course.
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Speaker 4: For interest rates.
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Speaker 3: So, yeah, my only argument would be that the proximate
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Speaker 3: cause of the interest rate increase in the last six
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Speaker 3: months is very likely not only increasing deficits.
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Speaker 2: Probably not. It seems unlikely.
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Speaker 4: But it does seem like the.
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Speaker 4: Well, go ahead. I've already.
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Speaker 2: Go ahead.
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Speaker 4: No, I'd just be repeating myself.
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Speaker 2: Please go ahead.
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Speaker 3: Regardless, it's clear that Scott Besant, whose job is to
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Speaker 3: fund the nation's deficits, is concerned about it and has
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Speaker 3: some comments out this week about.
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Speaker 2: growing our way out of the U.S. debt. Oh, my God.
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Speaker 4: You're concerned? You run everything. You've got Congress. You've got
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Speaker 4: the White House. Cut spending like you said you would do.
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Speaker 4: Don't make some fanciful promise about we're going to grow
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Speaker 4: our way out of it. That's the fat guy saying,
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Speaker 4: I'm going to get taller.
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Speaker 2: So when we talk about government debt, I know— That.
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Speaker 4: Line was supposed to be funnier.
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Speaker 3: We report on $ 40 trillion worth of national debt that
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Speaker 3: we surpassed recently. But most of the time when we
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Speaker 3: talk about deficits, Mark, we're expressing them as a percentage
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Speaker 3: of GDP, right?
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Speaker 2: We're talking about how this year.
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Speaker 4: Because that's what matters, yeah.
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Speaker 3: This year we are running an annual deficit that's approximately
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Speaker 3: 6% of our nation's GDP. And that has only really
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Speaker 3: been seen other times in history during periods like World
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Speaker 3: War II and other.
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Speaker 4: Periods of time. 1930s, people think, ooh, New Deal, big spender.
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Speaker 4: The deficit is a percentage of GDP or what they
15:16
Speaker 4: are today. That's the only peacetime interval, and you could
15:20
Speaker 4: argue that wasn't really peacetime. We were gearing up for
15:23
Speaker 4: something big, and everybody pretty much knew it was coming. Yeah, 1930s, wartime,
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Speaker 4: and now.
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Speaker 2: Only other time that that's been the case.
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Speaker 4: In peacetime.
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Speaker 3: So the argument, which I agree is completely disingenuous and silly,
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Speaker 3: is coming from the Treasury Secretary that hey, there's two
15:40
Speaker 3: ways to fix this problem.
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Speaker 2: And I agree.
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Speaker 3: There are two ways to hypothetically fix any ratio. You
15:45
Speaker 3: can fix the numerator or you can fix the denominator. Unfortunately,
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Speaker 3: Besson is arguing that we should fix the denominator here
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Speaker 3: and grow our economy large enough that the spending won't
15:59
Speaker 3: be a problem anymore.
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Speaker 4: Yeah, Besson needs to be fired. He's got no credibility.
16:03
Speaker 4: He does. He's challenging markets. They're saying, okay, fine, and
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Speaker 4: proving him wrong. That's a preposterous statement. One you can't control,
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Speaker 4: the other you can control. You can't really do much
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Speaker 4: about economic growth in the short term. It's the product.
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Speaker 4: Long term, slightly more so with good policy, but the...
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Speaker 4: fruits don't take effect for years, maybe decades. You can't
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Speaker 4: do anything about to use the way you framed it,
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Speaker 4: which is great, I think. You can't do anything about
16:29
Speaker 4: the denominator in the short-term GDP. You can rein spending it.
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Speaker 4: So he's waxing on about things that are totally outside
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Speaker 4: of his control in the short-term and proposing some fantasy
16:44
Speaker 4: about increasing growth and, oh, that'll fix it. Oh, thanks,
16:47
Speaker 4: like I couldn't have thought of that. Again, it's the
16:49
Speaker 4: fat guy saying, saying i'm gonna grow a few inches
16:51
Speaker 4: that i won't be overweight again it's it's it's preposterous
16:56
Speaker 4: he's he's a drift right now it's getting embarrassing.
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Speaker 2: The the uh... distressing part to me is that.
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Speaker 3: Time after time we've seen promises to rein in government
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Speaker 3: spending And it's just not happening.
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Speaker 4: Do it then. You run Treasury. You had both houses
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Speaker 4: of Congress.
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Speaker 2: What's stopping you?
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Speaker 3: I'm not going to lay that at the blame of Besant.
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Speaker 3: I'm going to lay that at the blame of.
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Speaker 2: Leadership? Leadership, yeah, generally. I'm going to blame that at the.
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Speaker 4: But he's the president's chief advisor. I believe the president
17:25
Speaker 4: wants to cut spending. I really do. He just gets sidetracked.
17:29
Speaker 4: But with airhead advice like this and zero leadership challenging
17:33
Speaker 4: the markets, I am the house. And the next day,
17:35
Speaker 4: somebody burning that house down... Markets don't believe this guy,
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Speaker 4: and the president's apparently getting lousy advice from him.
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Speaker 3: By the way, what Mark is talking about here is
17:44
Speaker 3: that when rates were rising, and they have been for
17:48
Speaker 3: the last.
17:48
Speaker 4: I think he was talking about the yen, actually.
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Speaker 5: Okay.
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Speaker 3: Regardless, what he has recently said is that Treasury is
17:55
Speaker 3: going to enact policy to try and control longer-term interest
17:58
Speaker 3: rates because Treasury is worried— about the interest rate on
18:02
Speaker 3: things like mortgages, which just yesterday climbed to 7.17% and
18:07
Speaker 3: is probably approaching 7.2% on the 30-year mortgage. So what
18:12
Speaker 3: Treasury went out and did is said, hey, we can
18:14
Speaker 3: issue all sorts of bonds. We're going to do the
18:16
Speaker 3: same thing that other administrations have done previously, which is
18:19
Speaker 3: issue more short-term debt and buy some of that long-term
18:22
Speaker 3: debt to try and bring down those yields.
18:24
Speaker 2: And Mark, what happened?
18:27
Speaker 4: The market said, no, that's actually not what's.
18:29
Speaker 2: Going to happen. Investors basically said, we don't buy it.
18:34
Speaker 3: We don't believe that you're going to have any real
18:36
Speaker 3: power here to do anything. And while the yields fell
18:39
Speaker 3: for like six hours, immediately they just bounced back in
18:43
Speaker 3: the other direction. And this thing got right away from
18:46
Speaker 3: Treasury Secretary Besant. So I think that in reality, he
18:51
Speaker 3: was hoping to be able to talk down markets and
18:53
Speaker 3: he failed to do so. And, you know, Mark wants
18:56
Speaker 3: to fire him over it. I'm not sure that the
18:57
Speaker 3: president will agree.
18:59
Speaker 2: But it's very clear to me that— But over.
19:00
Speaker 4: That and the out-of-control fiscal situation. So I'm sorry, Mike,
19:03
Speaker 4: but this is bigger than that to me.
19:07
Speaker 1: Sorry.
19:09
Speaker 2: Yeah, his record is based on the out-of-control fiscal situation.
19:12
Speaker 2: He's floundering.
19:12
Speaker 4: Oh, we'll just grow our way out of it. Oh, thanks.
19:14
Speaker 4: I could have never thought of that.
19:16
Speaker 2: Great.
19:17
Speaker 3: Nonetheless, for a litany of different concerns, rates continuing to
19:21
Speaker 3: move up. And, yeah, for all of us, it means higher,
19:25
Speaker 3: higher costs to borrow— and no real solution seemingly on
19:29
Speaker 3: the horizon. We've got to take a quick break. When
19:31
Speaker 3: we come back, Full Market Recap is next with Wall
19:34
Speaker 3: Street Watch.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFE Show. Breaking business news is always first, right here
19:48
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:53
Speaker 1: Street Watch. Tracking the stocks, the data, and the headlines
19:56
Speaker 1: driving markets so far today, right here on the Financial
19:59
Speaker 1: Exchange Radio Network.
20:02
Speaker 5: Markets seeing another modest sell-off today after Wall Street witnessed
20:05
Speaker 5: the 10-year Treasury yield climbing to its highest level since
20:09
Speaker 5: 2007 as a potential interest rate hike looms at the
20:12
Speaker 5: conclusion of the Fed's meeting tomorrow afternoon. Right now, the
20:16
Speaker 5: Dow is down 1% or 514 points lower. S &
20:17
Speaker 5: P 500 off about half a percent or 36 points off.
20:19
Speaker 5: NASDAQ is down two-thirds of a percent or 168 points lower.
20:23
Speaker 5: Russell 2000 is down about two-thirds of a percent. 10-year
20:31
Speaker 5: treasury yield is not loading for me at the moment.
20:35
Speaker 5: I don't know. We'll find out. 5.01?
20:38
Speaker 4: 5.01.
20:39
Speaker 5: You heard it here first. Crude oil is up 2%,
20:44
Speaker 5: trading at $ 103 a barrel. Brent is right around $ 108.
20:50
Speaker 5: Energy companies continuing to see their stocks steadily climb along
20:53
Speaker 5: with oil prices climbing. Halliburton, Occidental Petroleum, and Marathon are
20:58
Speaker 5: all up anywhere between 1.2%. Meanwhile, Dave & Buster's tanking
21:03
Speaker 5: 15% after the company's second quarter results disappointed elsewhere. Innova
21:08
Speaker 5: International stock is tumbling 25% after the online provider of
21:13
Speaker 5: loans and credit services said it is withdrawing its regulatory
21:16
Speaker 5: applications for the proposed acquisition of Grasshopper, Bancorp, and crypto
21:22
Speaker 5: stocks including Coinbase, Robinhood, and Strategy are down anywhere between
21:26
Speaker 5: 4% and 6% after Bitcoin slid to $ 76, 000. I'm Tucker Silva.
21:34
Speaker 5: That is Wall Street Watch.
21:36
Speaker 3: Mark, tomorrow at 2 p.m., we'll have an interest rate
21:39
Speaker 3: decision on our hands from the Federal Reserve. 2.30 p.m.,
21:42
Speaker 3: we'll be getting the press conference. I don't like to
21:46
Speaker 3: over-dramatize these things, but I do think that this is
21:49
Speaker 3: a very impactful Fed meeting and rate decision point. You've
21:55
Speaker 3: got Diesel prices going through the roof.
21:58
Speaker 2: You've got inflation.
21:59
Speaker 3: Expectations seemingly ticking up in part because of that. The
22:04
Speaker 3: long-term interest rate situation is kind of blowing out, and
22:09
Speaker 3: we haven't had a Fed meeting since Besant attempted to
22:13
Speaker 3: put some controls on those longer-term rates. And I have
22:18
Speaker 3: a bunch of questions, but obviously you also have a
22:20
Speaker 3: setup here where the president's hand-picked person might need to
22:25
Speaker 3: do the exact opposite of what the president is calling
22:27
Speaker 3: for all over social media right now. So I think
22:29
Speaker 3: all of those set up for a pretty dramatic potential
22:34
Speaker 3: meeting here with a lot of dissents, potentially, again, or
22:39
Speaker 3: a lot of disagreement outside of the Fed if they
22:41
Speaker 3: end up raising rates. Here's what I find interesting. And
22:49
Speaker 3: It's more of a question mark, but there's a currently
22:53
Speaker 3: priced in 93% chance, 92.7% chance of a rate hike
22:57
Speaker 3: at this next meeting. We've talked at length about how
22:59
Speaker 3: none of us here believe that a single rate hike
23:01
Speaker 3: decision or rate cut decision is all that impactful to
23:04
Speaker 3: the long-term economy. That's not what I'm focusing on. But
23:09
Speaker 3: markets are very clearly pricing in a rate hike. We talked,
23:13
Speaker 3: Chuck and I did yesterday, about what would be the
23:16
Speaker 3: likely outcome if they did not hike rates.
23:20
Speaker 4: Well, you'll probably lose control of the long end, which
23:23
Speaker 4: is why he's going to hike. So that seems to
23:25
Speaker 4: be the consensus. That would be my guess.
23:27
Speaker 2: Talk about losing control of the long end.
23:29
Speaker 4: That's the sole focus right now of policymakers is, as
23:36
Speaker 4: Besson's failed efforts over the past few weeks have sort
23:39
Speaker 4: of demonstrated, that the government is worried about longer-term interest rates.
23:44
Speaker 4: They're worried about its impact on the deficit and debt.
23:47
Speaker 4: They're worried about its impact on the economy, if If Warsh,
23:51
Speaker 4: excuse me, two very different people, if Warsh fails to
23:56
Speaker 4: allay concerns about the Fed's resolution and fortitude, resolve, excuse me,
24:04
Speaker 4: resolution is not the right word, resolve, in squashing inflation,
24:09
Speaker 4: it will increase inflation expectations and further increase long-term interest rates.
24:12
Speaker 4: That's why they pretty much have to increase their short-term
24:16
Speaker 4: rate tomorrow.
24:17
Speaker 2: So again, the thinking here is pretty logical, right?
24:20
Speaker 3: If I am considering buying a 10-year bond and I
24:23
Speaker 3: am worried that the Fed is not fundamentally serious about
24:26
Speaker 3: crushing inflation, then I'm not going to want that bond
24:29
Speaker 3: because it's going to pay me back in non-inflation-adjusted dollars.
24:33
Speaker 3: And so I'm going to demand a higher yield on
24:36
Speaker 3: that bond by offering a lower price for it.
24:38
Speaker 2: So plain and simple, that's the concern. My question was this.
24:42
Speaker 3: Let's say they do raise rates tomorrow and Warsh talks
24:46
Speaker 3: tough on inflation, and ignores the president's calls for lower
24:49
Speaker 3: interest rates, and does exactly what he's supposed to do,
24:54
Speaker 3: and still doesn't get control.
24:55
Speaker 2: Over the long end of the curve. That would be
24:57
Speaker 2: very interesting to me.
24:58
Speaker 4: There are a few different, it's like a three-part play tomorrow.
25:01
Speaker 4: They're going to make the decision and issue the release.
25:03
Speaker 4: That's Act 1.
25:04
Speaker 2: 2 p.m.
25:05
Speaker 4: That's Act 1. And it's not going to tell us anything.
25:08
Speaker 4: Presumably they're going to hike, and the press release, because
25:11
Speaker 4: his press releases have been pretty spare, is going to
25:14
Speaker 4: say we just hiked.
25:15
Speaker 2: Yep.
25:15
Speaker 1: Okay?
25:17
Speaker 4: Act two is the SEP, the Summary of Economic Rejections,
25:21
Speaker 4: which I believe comes out tomorrow. And people parse that
25:23
Speaker 4: for views about what interest rates will do over the
25:26
Speaker 4: next few quarters based on the responses of policymakers. So
25:30
Speaker 4: that's act two in tomorrow's little play. And then we've
25:32
Speaker 4: got the press conference. So there are three, presumably there
25:35
Speaker 4: aren't going to be any surprises in act one. We
25:37
Speaker 4: all know that's going to unfold, I think.
25:38
Speaker 2: I think so.
25:39
Speaker 4: He has to raise, I think, short-term interest rates. To
25:41
Speaker 4: your point, it's not going to be, it won't, Monetary
25:45
Speaker 4: policy doesn't work for several quarters anyway, and a quarter
25:50
Speaker 4: percentage point increase isn't material, probably. Act II could be
25:54
Speaker 4: a little bit more interesting. There's some doves, some hawks.
25:58
Speaker 4: By doves, I mean they put more emphasis on unemployment
26:00
Speaker 4: than inflation, and hawks do the opposite.
26:04
Speaker 2: Act III.
26:05
Speaker 4: when he gives his remarks he may try to temper
26:08
Speaker 4: concerns the church of interests are gonna go up by
26:10
Speaker 4: a lot maybe to placate the president maybe not i
26:13
Speaker 4: don't know and i have faith in in in warsha's
26:15
Speaker 4: ability to handle this because i like him but that's
26:17
Speaker 4: just my bias the real fraught part the perilous part
26:22
Speaker 4: is to me act three of tomorrow's react.
26:24
Speaker 2: Conference Where he could lose.
26:26
Speaker 4: I don't think Warsh can win tomorrow, and it's not
26:28
Speaker 4: his fault. I'll defend him in advance. No matter what
26:32
Speaker 4: the outcome.
26:32
Speaker 2: I will defend his future failure.
26:34
Speaker 4: Whatever the outcome, he did a terrific job tomorrow. Because
26:39
Speaker 4: I like the guy. I don't think he can win.
26:41
Speaker 4: I think he either loses control of the long end
26:44
Speaker 4: by not tightening, which he won't allow to happen, I
26:47
Speaker 4: don't think, because he understands how.
26:52
Speaker 4: To what degree everybody is expecting. I mean, it's a
26:55
Speaker 4: 90 plus percent probability cannot be disappointed. You run a
27:00
Speaker 4: real risk of losing control of things if you don't
27:02
Speaker 4: meet that expectation. He knows that. The real risk is
27:05
Speaker 4: that he tries to temper it a little bit in
27:07
Speaker 4: the press conference by saying, we're going to wait and see.
27:09
Speaker 4: Right now, we don't anticipate. He's not going to. I
27:11
Speaker 4: don't think he'll show his hand. And that in and
27:14
Speaker 4: of itself might be So I think there's like an
27:19
Speaker 4: 80% chance you see a sharp spike in longer-term rates
27:23
Speaker 4: tomorrow no matter what Warsh does. I don't think he
27:26
Speaker 4: can win, and I also don't think it's his fault because.
27:28
Speaker 2: He inherited this mess.
27:30
Speaker 3: Yeah, I think the only way that he can successfully
27:34
Speaker 3: gain control of the long end of the curve is
27:36
Speaker 3: by being very detailed in his plans to hike rates further,
27:39
Speaker 3: and he's already said he doesn't want to do that.
27:41
Speaker 4: I think the Treasury Secretary has put him in an
27:43
Speaker 4: untenable position.
27:44
Speaker 3: Hmm.
27:45
Speaker 4: And these are both trump appointees so i'm not really
27:47
Speaker 4: against the administration here uh.
27:48
Speaker 2: uh.
27:49
Speaker 3: uh.
27:50
Speaker 4: my preferences i think yeah well i i think the
27:53
Speaker 4: president's getting bad advice from treasury he's also listening to
27:56
Speaker 4: wars to the president's credit and i think he should
27:58
Speaker 4: listen to wars more frequently i guess is one way
28:01
Speaker 4: to put it i don't think wars can win tomorrow uh.
28:05
Speaker 3: so we'll see like i said uh... A single rate
28:09
Speaker 3: decision is not the most important piece. What is the
28:11
Speaker 3: most important piece of tomorrow's press conference, in my opinion
28:14
Speaker 3: at least, is does the Fed successfully convince mostly bond investors,
28:20
Speaker 3: mostly investors generally, because the average person doesn't listen to
28:23
Speaker 3: what Warsh says. They don't even catch the highlight reel.
28:27
Speaker 3: This is a message tailored to bond investors who are
28:32
Speaker 3: interested or disinterested in buying U.S. government debt. Are you
28:36
Speaker 3: successful in convincing them that you are in fact serious
28:39
Speaker 3: about combating inflation.
28:40
Speaker 4: They may not care. Tomorrow could be telling in another way.
28:44
Speaker 4: They may not care about inflation. This is going to
28:48
Speaker 4: sound strange. They may believe that monetary policy will eventually,
28:52
Speaker 4: because it can and because Vorch is a hawk in
28:55
Speaker 4: his bones. I base that on his 20-year public record
29:00
Speaker 4: where he always talks about inflation and never talks about
29:02
Speaker 4: the other stuff. they may believe he will get inflation
29:06
Speaker 4: under control. The concern here might truly be the fiscal situation,
29:09
Speaker 4: something we were talking about in the last segment, which
29:12
Speaker 4: is not under Warsh's control. That's Besson's department, and he's
29:15
Speaker 4: failing miserably in that department.
29:17
Speaker 3: And that would be the piece that's telling to me, right?
29:19
Speaker 3: If Warsh does all the right things in Act 1, 2,
29:23
Speaker 3: and 3, the release of the interest rate decision, the SEP,
29:26
Speaker 3: and then the press conference, not all of which are
29:28
Speaker 3: under his control, I recognize.
29:30
Speaker 2: He's not a one-man committee. It's a committee of 12.
29:32
Speaker 3: But let's say they knock the cover off the ball
29:34
Speaker 3: in all of these and then rates still move upwards.
29:37
Speaker 3: Then that is telling of something else outside the control
29:40
Speaker 3: of Warsh. And that will be pretty fascinating to me.
29:44
Speaker 2: Markets are continuing their move downwards.
29:47
Speaker 3: We've got the Dow now nearly off a full percentage point,
29:50
Speaker 3: 490 points. We're going to take a quick break. When
29:53
Speaker 3: we come back, I'm done with Fed talk. I do
29:56
Speaker 3: need to get back to energy markets and what we
29:58
Speaker 3: are seeing there.
29:59
Speaker 2: Quick break. Diesel prices are next on the Financial Exchange.
30:04
Speaker 1: Remember, you can watch the show live every day on
30:07
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30:10
Speaker 1: news all morning long, plus a full archive of all
30:13
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30:16
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30:21
Speaker 1: Fed decisions to market moves, watch The Financial Exchange live
30:25
Speaker 1: on X. This is The Financial Exchange.
30:38
Speaker 3: We got a top-notch text. You can text the show
30:40
Speaker 3: at 617-362-1385. But text in, to be fair, the way
30:46
Speaker 3: I stopped being a fat guy was by growing several
30:49
Speaker 3: inches in height while keeping the same weight. Admittedly, though,
30:52
Speaker 3: I started doing that in fourth grade, so there was
30:54
Speaker 3: a reasonable expectation of a large amount of growth.
30:57
Speaker 2: So very good point.
30:58
Speaker 3: Yeah, if we were having this argument around the time
31:01
Speaker 3: of the Civil War, I might be willing to buy
31:03
Speaker 3: the growth out of debt problems. But, you know, given
31:07
Speaker 3: where we are today as a country, it seems a
31:09
Speaker 3: little bit less viable.
31:10
Speaker 4: Well, you can't control growth. Yeah, that is awesome. Sorry,
31:15
Speaker 4: I wasn't thinking about nine-year-olds when I made that statement.
31:19
Speaker 4: But think about how... Think about how empty that statement is. Oh,
31:23
Speaker 4: we'll just grow our way out of it.
31:25
Speaker 1: Okay.
31:27
Speaker 4: What are your growth proposals? Well, we're going to cut
31:29
Speaker 4: some regulation. All for it, by the way. I think
31:31
Speaker 4: that's great. Well, we're going to cut taxes. Well, if
31:33
Speaker 4: you don't cut spending and if those taxes aren't directed
31:37
Speaker 4: toward growing the supply side of the economy, getting more
31:39
Speaker 4: people into the labor force, getting businesses to invest more.
31:43
Speaker 1: No, you're not going to.
31:44
Speaker 2: Grow your way out of it. It's silly.
31:45
Speaker 3: The deregulation of AI seems to be the main play there, right?
31:48
Speaker 3: Either you grow your way out of it via AI...
31:52
Speaker 3: Or AI ends the world and deficits don't matter anyway.
31:55
Speaker 4: Is a half a percentage point higher GDP growth worth
31:59
Speaker 4: it if there's a 10% chance that it could kill
32:02
Speaker 4: us all?
32:02
Speaker 2: Kills humanity as we know it.
32:04
Speaker 4: Are these people thinking? No, seriously. Well, we're going to
32:07
Speaker 4: get higher GDP for five years and then it's going
32:10
Speaker 4: to kill us. So say the people working on this,
32:13
Speaker 4: by the way.
32:14
Speaker 2: Well, what do they know anyway?
32:16
Speaker 4: Right, yeah. But think about, I mean, have we collected,
32:20
Speaker 4: has leadership now, has it lost its mind and does
32:24
Speaker 4: it not realize it? The president just seems to be
32:26
Speaker 4: getting terrible advice on so many different fronts right now, except,
32:30
Speaker 4: of course, from Kevin Warsh.
32:33
Speaker 3: When we take a look around at other issues facing us,
32:36
Speaker 3: a little bit more, what's the word I am looking for?
32:43
Speaker 2: Something that's a little.
32:43
Speaker 3: Bit easier to wrap my head around than the potential
32:46
Speaker 3: end of the world via artificial intelligence would be the
32:50
Speaker 3: cost that it's going to be to heat my home
32:52
Speaker 3: this winter. The price now of a gallon of diesel
32:56
Speaker 3: is sitting at $ 6. 27 per gallon, according to AAA on
33:01
Speaker 3: the national average. More and more, we are now having
33:05
Speaker 3: oil executives coming forward. It's tough for me to measure
33:09
Speaker 3: this because Oil executives have been warning us about the
33:12
Speaker 3: real lack of supply of fuel since about May of
33:15
Speaker 3: this year. But more frequently now, we are getting them
33:19
Speaker 3: coming forward saying, not only is this a problem, but
33:21
Speaker 3: there will not be a solution anytime in the not
33:24
Speaker 3: so distant future. And so the more I read into this,
33:28
Speaker 3: and I have no interest in trying to put together
33:31
Speaker 3: a price estimate for home heating oil or gasoline, but
33:35
Speaker 3: clearly the diesel situation is is the concern of these folks.
33:41
Speaker 3: And the more that I'm reading from the experts, more
33:44
Speaker 3: and more of them are calling for, hey, $ 7, $ 8
33:49
Speaker 3: is not out of the question for the national average
33:52
Speaker 3: on diesel prices in the United States.
33:54
Speaker 4: Yeah, and because diesel demand is not really sensitive to
33:59
Speaker 4: its price, people are going to fill up their oil tank,
34:01
Speaker 4: as you and I have just done, no matter what
34:03
Speaker 4: it costs. Yeah. It's going to crimp spending elsewhere. Yeah.
34:07
Speaker 3: So gasoline is a different story here. When we were
34:09
Speaker 3: interviewing Tom Closa from Gulf.
34:13
Speaker 2: Yes.
34:13
Speaker 4: Yeah.
34:13
Speaker 3: From Gulf Oil last two weeks ago, he pointed out that, hey,
34:17
Speaker 3: we just consumers managed through this this summer.
34:20
Speaker 2: They ended up cutting their.
34:22
Speaker 3: Travel plans, and we saw gasoline consumption really tail off
34:26
Speaker 3: this summer.
34:26
Speaker 4: You can drive less, you can get a smaller car,
34:28
Speaker 4: you can't get a smaller house.
34:30
Speaker 3: You can't run your combine on a different fuel, and
34:34
Speaker 3: you cannot just load all of the perishable goods onto
34:39
Speaker 3: a train instead of a diesel-powered truck.
34:42
Speaker 2: It just doesn't work that.
34:43
Speaker 4: No trains run on diesel, too?
34:44
Speaker 1: Many?
34:45
Speaker 2: I have no clue.
34:45
Speaker 4: I'm sorry, I know you were just making stuff up,
34:47
Speaker 4: but I think they do.
34:48
Speaker 2: Yeah, probably.
34:49
Speaker 3: And so we are heading to this again, this very
34:53
Speaker 3: inelastic demand curve with a very serious lack of supply.
34:59
Speaker 3: And so what that probably means here is not shortages,
35:02
Speaker 3: but it does mean shortages in other parts of the
35:04
Speaker 3: world where.
35:04
Speaker 4: They can't afford it. No, it's like the opposite of
35:06
Speaker 4: a shortage. You can get it, but you're going to
35:08
Speaker 4: have to pay $ 10 a gallon. Yeah, shortages like government
35:12
Speaker 4: caps it, and then they ration, and you can only
35:14
Speaker 4: tank up if your license plate ends with an even number.
35:18
Speaker 2: Yeah, that's not what we're going to get.
35:19
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35:22
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36:30
Speaker 3: I have to cover this genius piece from the New
36:32
Speaker 3: York Times. Mark, do you know why cheap used cars
36:35
Speaker 3: are so hard to find?
36:36
Speaker 4: Because they're scarce?
36:39
Speaker 3: Because they don't make cheap new cars. So you can't
36:42
Speaker 3: get a cheap used one because.
36:44
Speaker 4: There are no cheap used ones. I kind of got
36:45
Speaker 4: it right.
36:46
Speaker 3: They're scarce because there's like three models that you can
36:50
Speaker 3: purchase as a new vehicle that are under $ 30, 000. So yeah,
36:54
Speaker 3: you're not going to find a used car under $ 20, 000.
36:58
Speaker 3: They spend five pages going through all of this.
37:00
Speaker 2: I don't know what.
37:01
Speaker 4: Details you need.
37:01
Speaker 2: I guess I should read it.
37:02
Speaker 4: I kind of got the answer wrong.
37:03
Speaker 2: But yeah.
37:03
Speaker 3: Yeah. Three-year-old cars priced under $ 20, 000 are increasingly rare. Just
37:11
Speaker 3: one in nine now fit that criteria.
37:12
Speaker 2: So, yes, scarcity.
37:14
Speaker 3: That's down from about half back in 2019. And, again,
37:19
Speaker 3: is anybody confused here? Cars are really expensive. Most of
37:24
Speaker 3: that is not a tariff or other decision. Some of
37:27
Speaker 3: it is, like inflation has contributed to higher vehicle prices.
37:30
Speaker 4: Well, if we let Chinese EVs in, for example.
37:32
Speaker 2: That would do it, too.
37:35
Speaker 3: So we do block a whole bunch of very cheap
37:37
Speaker 3: Chinese cars. I think that's reasonable and justifiable.
37:41
Speaker 2: Others don't. I agree that it's a topic that should
37:45
Speaker 2: be debated.
37:46
Speaker 3: But the reason there are no cheap used cars is
37:49
Speaker 3: because there are no cheap new cars. And most of
37:51
Speaker 3: that has to do with our decision-making processes. The only
37:54
Speaker 3: new cars that are selling in good numbers and profitable
37:57
Speaker 3: for the companies are the giant SUVs that are pretty
38:00
Speaker 3: darn expensive to make. So yeah, there's no Cheap used
38:03
Speaker 3: vehicles out there. And I don't need a whole lot
38:07
Speaker 3: of pages to explain it. There's no cheap anything anymore.
38:11
Speaker 2: Quick break. A lot more to cover in the second
38:13
Speaker 2: hour of the Financial Exchange. We'll be right back.