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Chip Stocks Slide as AI Spending Doubts Grow · The Financial Exchange Show

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Speaker 2: Good morning, and welcome back here to the Financial Exchange.
1:15
Speaker 2: On a busy week, a huge earnings week, a big
1:19
Speaker 2: FED meeting week. We've got other economic data points out
1:22
Speaker 2: as well, but the big news remains focused on these
1:27
Speaker 2: big earnings calls and also how semiconductors have been performing
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Speaker 2: this week, which the answer, big hint here is not
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Speaker 2: terribly well. On a few different stories that we have
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Speaker 2: to cover here. The Korean market overnight was in shambles,
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Speaker 2: down a good ten percent. We'll cover that in What's
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Speaker 2: driving Korean markets in particular, not a market that frankly,
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Speaker 2: was talked about much prior to twenty twenty five. We've
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Speaker 2: got markets here in the US and mixed territory as
1:56
Speaker 2: we open up the show with the Dow up about
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Speaker 2: three quarters of percent while the ASDAC is down by
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Speaker 2: about one percent, which kind of perfectly defines what's driving
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Speaker 2: markets today, which is tech concern about AI chip valuations.
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Speaker 3: In particular.
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Speaker 2: The Philadelphia Semiconductor sector index is down a good five
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Speaker 2: percent in early trading today, so that is going to
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Speaker 2: be I think a driving force right now. But what
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Speaker 2: we are seeing, like I said, overnight, we saw this
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Speaker 2: chip route deep, and I think there were two big
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Speaker 2: stories that came to pass yesterday that had investors somewhat
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Speaker 2: spooked here. The first one had to do with Nvidia
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Speaker 2: and open Ai, a little tie up that seemed rather circular,
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Speaker 2: and we talked about it on the program yesterday. But yeah,
2:48
Speaker 2: but why don't you go ahead here with with what
2:51
Speaker 2: we saw yesterday between open ai, the maker of chat
2:54
Speaker 2: GPT and in Nvidia, the designer of the highest end
2:59
Speaker 2: set conductors that are going into every AI model out there.
3:03
Speaker 3: So what we have.
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Speaker 4: Here in terms of the AI space at the moment
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Speaker 4: where in Nvidia has been the greatest benefactor of everything
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Speaker 4: that's gone on the last few years. Their chips have
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Speaker 4: been integral into the building out of AI. And there
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Speaker 4: continues to be a constraint on computing, so companies like
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Speaker 4: OpenAI can't get enough of computing resources, and so as
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Speaker 4: a result of that, they have been scouring all.
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Speaker 3: Over the world to look for.
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Speaker 4: More places to put data centers. And what we saw
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Speaker 4: from the news yesterday was that in Nvidia has been
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Speaker 4: in talks to potentially guarantee financing for a lease of
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Speaker 4: a ten gigawat data center that would be about fifty
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Speaker 4: miles south of Columbus, Ohio. Just to give folks a
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Speaker 4: sense of Scott you know, size and scale. Ten gigawatts
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Speaker 4: is about equivalent to what the electricity consumed by eight
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Speaker 4: million households in this country. So it is it is enormous. Yeah,
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Speaker 4: it's just really big. All everything that we're going to
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Speaker 4: talk about here is big in terms of dollar amounts
4:06
Speaker 4: and size and scale. So in Vidia has basically been
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Speaker 4: like the equivalent to you backing your sun or daughter's rent,
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Speaker 4: the guarantee behind it that hey, if my son or
4:17
Speaker 4: daughter can't pay this, you know, exorbitant rent in New
4:20
Speaker 4: York or wherever it may be, we got you the
4:22
Speaker 4: parent with deeper pockets. Think of Nvidia of like that
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Speaker 4: situation here. They have deep pockets because they are generating
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Speaker 4: tremendous amounts of free cash shlow. They have very high
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Speaker 4: margins that they operate under. What's concerning about this agreement,
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Speaker 4: and there are numerous of other examples like this where
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Speaker 4: Nvidia has been growing their revenue at just an absolutely
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Speaker 4: astounding pace and the reason why they were for a
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Speaker 4: moment the largest company in the world. I think over
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Speaker 4: the course of the last week, Apple has taken over
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Speaker 4: that spot again, is because they've been able to grow
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Speaker 4: revenue seventy percent year over year one hundred percent year
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Speaker 4: of year. In order to justify the valuations that they're
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Speaker 4: at today, they need to have that revenue continue to grow,
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Speaker 4: and a lot of projections have them slowing down in
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Speaker 4: the future because as these data centers continue to get
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Speaker 4: built out, they won't be able to sell as many chips.
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Speaker 4: This is a way for Nvidia to be able to
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Speaker 4: continue to sell chips is by basically kind of using
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Speaker 4: its financial balance sheet that is a real significant war
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Speaker 4: chest to backstop some of its biggest customers. Open AD
5:23
Speaker 4: being one of them. The concerns that you have here
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Speaker 4: with all of these agreements, and this is just one
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Speaker 4: of them the markets focus on, there are just dozens
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Speaker 4: of examples of these, is that if anything happens to
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Speaker 4: open AI, a company that is generating about twenty billion
5:38
Speaker 4: in revenue, has a valuation of about eight hundred and
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Speaker 4: fifty billion, but is burning through billions of dollars of
5:44
Speaker 4: year losing money. Then you have in Vidia that not
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Speaker 4: only is potentially an agreement to backstop this leasing agreement
5:52
Speaker 4: for two hundred and fifty billion they're hoping that they're
5:55
Speaker 4: going to get three hundred and fifty billion of revenue
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Speaker 4: from all the chips that would go into this data center. Oh,
6:00
Speaker 4: by the way, they've also invested thirty billion in an
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Speaker 4: equity stake in open Ai. It just starts to snowball
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Speaker 4: really quickly. You're basically leveraging the bet on this AI
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Speaker 4: ecosystem that if anything goes wrong for open ai, you
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Speaker 4: and I may think, oh, that's a probably hell company
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Speaker 4: that's not going to have an impact on my portfolio
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Speaker 4: within my holdings, not anymore. I mean, it's just gone
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Speaker 4: so entrenched.
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Speaker 2: That yeah, and videos using its credit worthiness to backstop
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Speaker 2: open Ai. Plenty of big publicly traded companies have big
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Speaker 2: stakes in open ai and other network deals here, and
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Speaker 2: so yeah, I think that the piece there that spooked
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Speaker 2: investors a bit is you are inexorably tying these two
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Speaker 2: companies together. Therefore, their successes their failures are being tied
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Speaker 2: together here in a way that didn't exist previously, or
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Speaker 2: existed to some degree, but not this third. You know,
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Speaker 2: before it was just hey, you might lose some of
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Speaker 2: the purchasing of one of your biggest customers. Now it's
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Speaker 2: if you lose that purchasing because they're not doing well.
6:58
Speaker 2: Your balance sheet is also in trouble because you're backing
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Speaker 2: their debt. The other piece, though, that you know, kind
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Speaker 2: of went over my head over the weekend was this
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Speaker 2: new Chinese company CXMT, and I think that.
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Speaker 3: Did rattle markets a little bit too.
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Speaker 2: Not not because anybody has any degree of certainty that
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Speaker 2: this you know, twenty sixteen founded company is going to
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Speaker 2: be ultimately incredibly good at putting together you know, RAM
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Speaker 2: chips for the AI servers.
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Speaker 3: But one thing that.
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Speaker 2: Has held true with Chinese companies over the years is
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Speaker 2: that when the Chinese government and Chinese industry decides that
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Speaker 2: they want to get into a.
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Speaker 3: Space, they tend to remove all the profit from that space.
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Speaker 2: But I they don't have the ability to go and
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Speaker 2: literally remove the profit. But what they do is they
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Speaker 2: tend to oversupply a mar market with these products and
8:01
Speaker 2: bring down the profit margins so significantly that nobody else
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Speaker 2: can compete. And we've seen this across all sorts of industries,
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Speaker 2: solar panels, electric vehicles, all sorts of rare earth goods.
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Speaker 1: Right.
8:15
Speaker 2: The reason we were talking about last year why the
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Speaker 2: Chinese have a throttle on rare earth materials is not
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Speaker 2: because you can only find them in China.
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Speaker 3: It's just that.
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Speaker 2: Their government and their leadership has decided that they want
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Speaker 2: to be a critical supplier of it, and so they
8:33
Speaker 2: have sank every other competitor in the industry because they
8:36
Speaker 2: know they can put them out of business and get
8:38
Speaker 2: market share.
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Speaker 3: And so.
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Speaker 2: We don't know with certainty that China is viewing the
8:44
Speaker 2: chip sector the same way, but they've made pretty big
8:47
Speaker 2: strides in their AI models.
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Speaker 3: They too want to develop this stuff pretty quickly.
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Speaker 2: And I think many people are out there looking at
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Speaker 2: this and saying, hey, if the Chinese government puts the
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Speaker 2: full backing and weight of their power behind this and
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Speaker 2: you know, allows banks to make under you know, under
9:05
Speaker 2: market interest rate loans and backs in the same way
9:08
Speaker 2: they have some other strategic industries like the auto industry,
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Speaker 2: what does this mean for cutting edge chip designers, RAM manufacturers,
9:16
Speaker 2: micro you know, all of these companies that are getting
9:19
Speaker 2: absolutely walloped today when you take a look at you know,
9:22
Speaker 2: the semiconductor names as a whole right in videos down
9:26
Speaker 2: one and a third, Broadcoms down two, a m d
9:29
Speaker 2: s down, nine intels down, eight microns down, ten and
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Speaker 2: a half. You have these companies taking a big, big
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Speaker 2: step back here after what was a truly tremendous first
9:41
Speaker 2: half of the year. And by the way, you know
9:43
Speaker 2: that also applies to all of the equipment suppliers to
9:46
Speaker 2: the semi conductor index, right, so LAMB Research, applied Materials,
9:51
Speaker 2: all of these getting absolutely whacked in early trading here.
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Speaker 4: You know, I'm not intimately familiar with with you know,
9:57
Speaker 4: CMXT and it's or c XM and its memory capabilities,
10:02
Speaker 4: but in general, from what I've understood about the memory
10:05
Speaker 4: space with all the US players is that it's relatively
10:10
Speaker 4: constrained in terms of how much supply that you can
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Speaker 4: bring on over a period of time. This is an
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Speaker 4: incredibly sophisticated, a capital intensive process in order to bring
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Speaker 4: on more memory capacity. So while always the market is
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Speaker 4: trying to look forward in subsequent years to assess the
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Speaker 4: profitability of the es khannix or the microns of the world,
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Speaker 4: I have a degree of skepticism as to how much
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Speaker 4: supply they will be able to flood the market with.
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Speaker 4: But it points to, regardless of my skepticism, the trading
10:44
Speaker 4: activity that we're seeing, the volatility points to everyone's trepidation
10:48
Speaker 4: in this sector in general. The reason why, I mean
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Speaker 4: the amount of volatility Mike on a daily basis that
10:55
Speaker 4: we see from the semiconductor indicy is just incredible. It
10:58
Speaker 4: seems like every day it has to move five or
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Speaker 4: six percent in one direction or another. And so that
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Speaker 4: is really what we're seeing with investors is that they
11:09
Speaker 4: just don't know how to assess these looming risks. Where
11:13
Speaker 4: I might mention that I have skepticism on this particular risk,
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Speaker 4: the market is always been just for the last chase
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Speaker 4: three four months, it seems like really in a concern state.
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Speaker 2: Let's take a quick break. When we come back. We
11:29
Speaker 2: mentioned what was going on in Korean markets. I want
11:32
Speaker 2: to bring it back up because there is general semiconductor
11:35
Speaker 2: concern and then there is the Korean stock market, which
11:38
Speaker 2: is a bit of a different beast in this moment
11:40
Speaker 2: in time.
11:40
Speaker 3: Quick break, we'll be talking about that next. On the Financial.
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Speaker 2: So we have heard more and more pieces over the
12:35
Speaker 2: last few years bemoaning the concentration risk of the s
12:38
Speaker 2: and P five hundred these days, Paul, and to be fair,
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Speaker 2: you go take a look at the top ten names,
12:43
Speaker 2: and almost all of them are either benefiting dramatically from
12:48
Speaker 2: the AI trade and sales of things like semiconductors, or
12:52
Speaker 2: spending dramatically on the AI investment through data center buildouts.
12:58
Speaker 2: And really the only ones on the top ten that
13:00
Speaker 2: aren't doing so all that much are Apple and Berkshire,
13:04
Speaker 2: and even there it seems to be an insinuation that
13:08
Speaker 2: they will spend or Berkshire Hathaway has made some investments
13:11
Speaker 2: in the space, So you know, that's that's something. When
13:15
Speaker 2: we talk about the Korean costby index, though, we're talking
13:18
Speaker 2: about a very different type of concentration risk because Samsung
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Speaker 2: Electronics and sk Heinex make up about fifty percent of
13:28
Speaker 2: the overall index, So it's you know, if you're gonna
13:32
Speaker 2: talk about the cost by index, you're pretty much saying, hey,
13:35
Speaker 2: sk Heinex and Samsung, what did they do yesterday? And
13:38
Speaker 2: that will tell you what the index really did because
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Speaker 2: it is all those companies, right. Hyundai, for example, a
13:44
Speaker 2: very household name, makes up one and a half percent
13:47
Speaker 2: of the index, So nothing compared to these overall companies. Yesterday,
13:51
Speaker 2: this index was down a good ten percent, and so
13:54
Speaker 2: you take a look at that and you wonder, okay,
13:57
Speaker 2: is that really comparable to US markets? The answer is clearly,
14:00
Speaker 2: because it's so hyper concentrated in these tech companies. The
14:03
Speaker 2: other piece, though, that I just found not entertaining but
14:08
Speaker 2: rather scary.
14:09
Speaker 3: The amount of retail trader leverage in this market has
14:15
Speaker 3: been written about quite a bit over the course of
14:17
Speaker 3: the last month. In July, for example, there were one
14:21
Speaker 3: point two million retail margin calls for the month of
14:25
Speaker 3: month of July. So margin call, if you're not familiar,
14:29
Speaker 3: You can use your portfolio to borrow money from a
14:35
Speaker 3: investment custodian of some sort or another, and they will
14:39
Speaker 3: put a limitation on how much you're allowed to borrow,
14:42
Speaker 3: and they will also put a limitation on how far
14:44
Speaker 3: your portfolio is allowed to fall before they will just
14:48
Speaker 3: sell your stocks or tell you you need to deposit
14:50
Speaker 3: more money in order to prevent those stocks from being sold,
14:53
Speaker 3: because they basically don't want to lose their shirt on
14:57
Speaker 3: holding a loan.
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Speaker 2: A loan for fifty one thousand dollars on a portfolio
15:01
Speaker 2: that's suddenly worth thirty that's not terribly a good place
15:04
Speaker 2: to be. There's only like ten million or thirteen million
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Speaker 2: retail traders in Korea in the first place, so we're
15:11
Speaker 2: talking about a huge portion of retail traders that got
15:14
Speaker 2: margin calls in the month of July. And again, I
15:19
Speaker 2: think while these companies have been massive beneficiaries of all
15:24
Speaker 2: of this spend from both Chinese and US companies trying
15:28
Speaker 2: to build out this entire process, you just have to
15:33
Speaker 2: take a step back and say, Okay, when an index,
15:38
Speaker 2: I just want to pull the numbers here, so I'm
15:40
Speaker 2: not speaking out of turn. When an index goes from
15:44
Speaker 2: forty three hundred in January to the high of nine
15:49
Speaker 2: thousand by June, yeah, you have to be prepared for
15:54
Speaker 2: it then to now collapse back to six thousand dollars,
15:58
Speaker 2: six thousand dollar dollars. This is an index, but six
16:00
Speaker 2: thousand by late July. That that's what we have seen
16:03
Speaker 2: out of the COSTPI and what we have seen out
16:05
Speaker 2: of a lot of these semiconductory companies. Yeah, you doubled
16:08
Speaker 2: in the course of a few months, and I don't
16:12
Speaker 2: think investors are questioning whether or not you'll still have sales.
16:15
Speaker 2: They're merely questioning whether or not your company is worth
16:18
Speaker 2: what they paid for it back in June.
16:20
Speaker 4: Yeah, it's definitely a valuation case that you have here
16:23
Speaker 4: that is being sorted out on a daily basis with
16:26
Speaker 4: the market. Where from everything that we've seen in terms
16:31
Speaker 4: of the amount of capex that these big hyperscalers are
16:34
Speaker 4: willing to dish out, and we'll get a little bit
16:37
Speaker 4: more clarity on that. I believe Meta is reporting earnings
16:40
Speaker 4: this week, but in the past we've seen the hyper
16:43
Speaker 4: seros continuing to spend.
16:45
Speaker 2: So Meta, Microsoft, Amazon, all will have something to say
16:48
Speaker 2: about that. They're all reporting this week, Apple two, but
16:50
Speaker 2: they're not spending the same way these other guys are.
16:52
Speaker 4: Right, But Google had its stock had taken a hit.
16:54
Speaker 4: I believe that was last week from increasing their capax
16:57
Speaker 4: up to two hundred and five billion, I think on
16:59
Speaker 4: the high end for this year. So continue to sort
17:02
Speaker 4: of reinforce this idea that they're going to spend, so
17:05
Speaker 4: the earnings are going to be there from these companies,
17:08
Speaker 4: because that's backward looking. And then from a forward looking basis,
17:11
Speaker 4: it seems like the momentum continues there for these hyperscillers
17:15
Speaker 4: to continue to spend. But the frigility that we're seeing
17:19
Speaker 4: is a reflection of the fact that this has been
17:21
Speaker 4: a really crowded trade this year. It's been the biggest
17:24
Speaker 4: story in markets. I think easily there's not really another
17:29
Speaker 4: case that you can make beyond this, And every single
17:32
Speaker 4: day it seems like investors are trying to assess whether
17:36
Speaker 4: they should take some of their profits, and you continue
17:39
Speaker 4: to see the swing, the sea sawing of prices.
17:41
Speaker 2: I guess what I find interesting, and I try not
17:44
Speaker 2: to allow my own opinion to inject too much in
17:47
Speaker 2: terms of, you know, what I'm reading in overall sentiment,
17:51
Speaker 2: But more and more I hear investors stating more publicly
17:56
Speaker 2: that they think that this may result in a market
17:58
Speaker 2: bubble that pops at something. I think that is a
18:00
Speaker 2: more commonly held belief than it was a couple of
18:03
Speaker 2: years ago. But I'll tell you, I have a tough
18:07
Speaker 2: time putting together the dominoes falling of the semiconductor stocks,
18:13
Speaker 2: the companies that are making all of these sales falling
18:18
Speaker 2: apart before the pivot happens, from the big spenders, because again,
18:23
Speaker 2: what we heard from Alphabet was that they are continuing
18:26
Speaker 2: to accelerate their spending and they intend to do more.
18:28
Speaker 3: Of that next year.
18:30
Speaker 2: I suspect that this week we're going to hear the
18:32
Speaker 2: same from Meta, from Amazon, from Microsoft as well. And frankly,
18:37
Speaker 2: the returns that these players are seeing on developing these
18:40
Speaker 2: data centers are still really good, even with the high
18:42
Speaker 2: prices they're paying to semiconductors. And so I do believe
18:46
Speaker 2: that that gravy train flips at some point, but I
18:50
Speaker 2: don't really see any signs of it yet, and so
18:53
Speaker 2: that's to me, the interesting point is that the semiconductor
18:56
Speaker 2: stocks are getting whacked already without even a turnaround and
19:00
Speaker 2: the spending plans of the big giant.
19:03
Speaker 3: Builders, the hyperscalers.
19:06
Speaker 2: At some point, I think the hyperscalers are going to
19:08
Speaker 2: get some feedback from investors that they can't keep doing.
19:10
Speaker 3: What they're doing.
19:11
Speaker 2: But so far, it hasn't been the case, and yet
19:13
Speaker 2: the semiconductor stocks are taking a hit, so maybe it's
19:16
Speaker 2: just another cooling off period. These stocks are defined by
19:19
Speaker 2: volatility as a feature, not a bug. But it's been
19:23
Speaker 2: a pretty compelling drop for the last month or two
19:26
Speaker 2: out of chip stocks. Quick break Wall Street Watch coming
19:29
Speaker 2: up next.
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19:54
Speaker 1: markets so far today right here on the Financial Exchange
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Speaker 1: Radio netwok.
19:59
Speaker 5: Markets are mixed. The chip selloff deepens over AI spending worries.
20:04
Speaker 5: Right now, the Dow is up three quarters of percent
20:07
Speaker 5: or three hundred and eighty four points, HRSMP five hundred
20:10
Speaker 5: down over a tenth of percent or eleven points lowered,
20:13
Speaker 5: Nasdaq selling off over one percent or two hundred and
20:16
Speaker 5: sixty three points lower, RUSS two thousand down about three
20:19
Speaker 5: quarters of a percent. Ten You're treasure reeled down two
20:21
Speaker 5: basis points at four point sixty one percent. In Oil
20:25
Speaker 5: down about one and a half percent, trading at eighty
20:27
Speaker 5: one dollars a barrel overseas both Samsung and sk hignex
20:31
Speaker 5: plunge more than thirteen percent amid the chip sell off,
20:34
Speaker 5: US listed shares of sk hignex plunging nine percent, while
20:38
Speaker 5: other chip makers including AMD, Micron, and Intel are seeing
20:42
Speaker 5: substantial losses as well. Memory stock sand disk also getting
20:46
Speaker 5: hammered by fourteen percent. Meanwhile, Boeing is up four percent
20:50
Speaker 5: despite the aircraft maker posting a wider than expected loss
20:54
Speaker 5: for the second quarter, where Boeing said its long delayed
20:56
Speaker 5: Air Force One program weighed on results. Elsewhere, Sloomberger is
21:00
Speaker 5: reporting that Visa will eliminate about twenty six hundred jobs.
21:04
Speaker 5: Visa will report quarterly results after today's closing bell. Coca
21:08
Speaker 5: Cola beat earnings expectations and embrased it's full year outlook,
21:13
Speaker 5: as the beverage grants Giant saw a strong demand for
21:15
Speaker 5: its drenth that stock up by seven percent, and Apple
21:19
Speaker 5: has surpassed a market valuation of five trillion dollars for
21:22
Speaker 5: the first time. Separately, the tech Tran announced a new
21:25
Speaker 5: leasing program with Klarna that allows customers to pay monthly
21:29
Speaker 5: for devices and then return, upgrade, or buy them. I'm
21:34
Speaker 5: Tucker Silvan that is Wall Street Watch well.
21:36
Speaker 3: In addition to all the semiconductor of news.
21:38
Speaker 2: As Tucker mentioned, Apple crossing the five trillion dollar threshold.
21:42
Speaker 2: As we have seen this rotation out of AI heavy
21:46
Speaker 2: stocks and into those who are not so much.
21:50
Speaker 3: Apple will be.
21:51
Speaker 2: Reporting earnings on Thursday after the bell, along with Amazon, MasterCard, Shell,
21:57
Speaker 2: Anheuser Busch all reporting before the bell on Thursday. Before
22:02
Speaker 2: them though Wednesday, Microsoft and Meta will be reporting earnings
22:07
Speaker 2: after the bell. A bunch of others as well, But
22:09
Speaker 2: those are the these, those are the big boys who
22:12
Speaker 2: will be reporting on just how big their AI spend was,
22:17
Speaker 2: and you know, facing the same tough questions that Alphabet
22:20
Speaker 2: and Tesla did last week in terms of their cap X.
22:24
Speaker 2: In addition to all the earnings reports though this week,
22:27
Speaker 2: while we were getting retail inventories, some consumer confidence data
22:32
Speaker 2: this morning, the the big announcement will be the two
22:35
Speaker 2: pm decision tomorrow on interest rates and then followed by
22:39
Speaker 2: the two thirty pm press conference from our boy, Kevin Walsh.
22:46
Speaker 3: There we go, Kevin, Kevin, keV. Thank you. What is
22:53
Speaker 3: unique about this meeting?
22:57
Speaker 2: Yes, new Ish Fed Reserve president, a federal Reserve president
23:02
Speaker 2: who wants to shake up how the entire committee works,
23:07
Speaker 2: measures things, looks at different data points, communicates with the public.
23:10
Speaker 3: All of that is pretty unique.
23:12
Speaker 2: What is especially unique, though, is the fact that we
23:14
Speaker 2: are one day out from the announcement and markets don't
23:18
Speaker 2: seem to know what's going to happen. There's currently being
23:21
Speaker 2: priced in a sixty eight and a half percent chance
23:23
Speaker 2: of no move in interest rates and a thirty one
23:26
Speaker 2: and a half percent chance of a twenty five basis
23:28
Speaker 2: point hike in interest rates. I've talked about before, a
23:32
Speaker 2: single quarter of a percent move in interest rates does
23:36
Speaker 2: not affect really anything in the real world in terms
23:39
Speaker 2: of borrowing costs or anything else, but it would send
23:42
Speaker 2: a pretty big signal two markets, two investors, and two
23:47
Speaker 2: pretty much everyone in the monetary world that hey, yeah,
23:51
Speaker 2: we are serious about inflation and we are moving with
23:54
Speaker 2: this hike.
23:57
Speaker 3: In this direction.
23:58
Speaker 2: Here, I tend to think it's not going to happen,
24:00
Speaker 2: but it would be a meaningful statement to make about
24:03
Speaker 2: the seriousness of the threat of inflation to this economy.
24:06
Speaker 1: Right.
24:06
Speaker 4: This is the first time in since I've really been
24:09
Speaker 4: doing the show and been covering these FED meetings so
24:12
Speaker 4: consistently that I feel like there is this uncertainty in
24:16
Speaker 4: the air MIC. It seems like oftentimes we went into
24:18
Speaker 4: these meetings with almost full assurance as to what was
24:23
Speaker 4: going to occur. And this is part of the new
24:25
Speaker 4: regime with Kevin Warsh's that there is going to be
24:28
Speaker 4: a lot less transparency, a lot less sort of posturing
24:32
Speaker 4: as to where they think interest rates are going to go.
24:35
Speaker 4: The idea of a hike like you mentioned, would it
24:38
Speaker 4: have a significant economic impact, No, probably be relatively muted.
24:42
Speaker 4: But the sentiment shift alone, or the shift in the
24:47
Speaker 4: way that the Federal Reserve is going to move, if
24:50
Speaker 4: they were to come out with a surprise hike tomorrow,
24:54
Speaker 4: would I feel, really shake up markets quite a bit
24:57
Speaker 4: because markets are consistently looking for certainty, and any sort
25:02
Speaker 4: of absence of that, perhaps from a surprise notice tomorrow
25:07
Speaker 4: of a hike, would really shake things up a bit.
25:10
Speaker 4: So it has been the first time I can remember
25:13
Speaker 4: that I will be really a little bit more locked
25:17
Speaker 4: in on what the result of this decision is going
25:19
Speaker 4: to be, because oftentimes you could sort of put it
25:21
Speaker 4: on in the back and look later in the afternoon
25:24
Speaker 4: to see the impact on markets. But it seems like
25:26
Speaker 4: there is going to be a lot more scrutiny on
25:29
Speaker 4: this one coming up.
25:29
Speaker 3: Yeah, it looks like it.
25:31
Speaker 2: And it also seems like Kevin Warsh is getting some
25:35
Speaker 2: of that family fight that he was looking for. This
25:38
Speaker 2: is a term he's used a few times now to say, Hey,
25:40
Speaker 2: I want to shake things up. I want us to
25:42
Speaker 2: have disagreements in the Federal Reserve. Remember that he is
25:45
Speaker 2: not the decision maker when it comes to interest rates.
25:48
Speaker 2: While he might be the mouthpiece, he's not the decision maker,
25:51
Speaker 2: and it is voted on by a committee of different individuals.
25:56
Speaker 2: And Kevin Worsh has made public that he wants to
25:58
Speaker 2: have more heated exchange, more debates about the right way
26:02
Speaker 2: of measuring things. The way he was summarized by Nick
26:06
Speaker 2: Timmeros from the Journal is he wants them to abandon
26:09
Speaker 2: the intellectual habits of an economics profession. He thinks led
26:13
Speaker 2: it astray one of the one of the things that
26:17
Speaker 2: we've been kind of wondering. So, Nick Timmeros, you've maybe
26:19
Speaker 2: heard us mention his name before.
26:21
Speaker 3: He's a writer for the Wall Street Journal.
26:23
Speaker 2: And for the last decade or so he has been
26:27
Speaker 2: the inside scoop at the FED Real He's clearly been
26:31
Speaker 2: the person that if not Jerome Powell himself, then other
26:36
Speaker 2: members of the FED went to when they wanted to
26:38
Speaker 2: convey a message to.
26:39
Speaker 3: Markets in the general public.
26:41
Speaker 2: He got the call, and he printed a newspaper story
26:44
Speaker 2: about that call. What's interesting to me, We've wondered, Hey,
26:49
Speaker 2: is he still going to be that relied upon source
26:54
Speaker 2: with Walsh like he might be. He might not be.
26:56
Speaker 2: We don't really know yet. This article that was written
26:59
Speaker 2: today he makes me think he might not be. Well,
27:03
Speaker 2: it gave me the sense that it was an article
27:05
Speaker 2: very much with inside stories.
27:07
Speaker 4: Right, Well, that's what I was gonna say, that dinner
27:09
Speaker 4: conversation things seems very insider baseball.
27:11
Speaker 2: Precisely, it seemed very insider baseball. But it seemed to
27:15
Speaker 2: come from the perspective of everyone but Worsh when I
27:20
Speaker 2: was reading it, right, it seemed to come from the
27:22
Speaker 2: perspective of all the people that were disagreeing with warsh
27:26
Speaker 2: Waller making the point about, hey, you know, this is
27:28
Speaker 2: all pointless, and others. I did not get the perspective that, hey,
27:34
Speaker 2: you know, Kevin Worsh sat down before an interview about
27:36
Speaker 2: all this and was really getting his points across with
27:40
Speaker 2: this piece, and so I just do wonder, hey, he
27:44
Speaker 2: might still have the inside scoop. He clearly still has
27:46
Speaker 2: enough connections to, you know, tell the public what happened
27:49
Speaker 2: at this dinner among the fourteen or fifteen people that
27:51
Speaker 2: attended it.
27:52
Speaker 3: It's unclear to me.
27:53
Speaker 2: That he has the ear of the president of the
27:59
Speaker 2: Federal or Board of Governors. Kevin Wosh, who I don't know,
28:03
Speaker 2: didn't seem to really come across in this piece, so
28:06
Speaker 2: we will see.
28:06
Speaker 3: It's tough to tell.
28:07
Speaker 2: From one article whether or not Worsh is, you know,
28:10
Speaker 2: using him in the same way that others did.
28:12
Speaker 3: But I'm just not entirely convinced that this is the
28:16
Speaker 3: perspective of Worsh.
28:17
Speaker 4: It wouldn it would run really counter to what Worsh
28:19
Speaker 4: wants to be about, which is keeping his mouth shut,
28:22
Speaker 4: keeping his mouth shut. So if he's you know, whispering
28:25
Speaker 4: sweet nothings into a Wall Street Journal reporter's ear, that
28:28
Speaker 4: would run counter And I think the phrasing was used
28:31
Speaker 4: in this piece by Nick tim Rose of tight lip
28:33
Speaker 4: that you know, Worsh has been really tight lipped in
28:35
Speaker 4: terms of the way he he've viewsed things, and he
28:38
Speaker 4: Timros is going to be much more likely to get
28:40
Speaker 4: dissenting feedback from perhaps Waller and others, or Waller's associates,
28:45
Speaker 4: and it seems like that's where the information that he
28:47
Speaker 4: has has been gleaned from is from these dissenters.
28:51
Speaker 2: Which also raises the question to me, if you're saying
28:56
Speaker 2: that we're going to be a tight lipped FED, but
28:57
Speaker 2: all of your other governors are talking to Tim Ros,
29:00
Speaker 2: that really illustract journal doesn't matter, right, Like, I will
29:04
Speaker 2: say that, you know, it is unique that we're not
29:06
Speaker 2: really sure what's going to happen in this next meeting,
29:08
Speaker 2: and so I'm thinking that that may be a result
29:14
Speaker 2: of Worsh's new policies, but it may also just be that,
29:18
Speaker 2: you know, we know exactly what the FED is going
29:20
Speaker 2: to be doing because we're still getting the opinions of
29:22
Speaker 2: the other twelve voting members.
29:24
Speaker 4: It's just going to have to come from different backchannels. Right.
29:26
Speaker 4: Usually it's more often done through speeches that the members
29:30
Speaker 4: are giving at various locations, but perhaps now it's more
29:33
Speaker 4: through these sort of Wall Street Journal pieces or snippets
29:39
Speaker 4: here and there that the reporters are gathering. But it
29:44
Speaker 4: does seem like he is very intent on shifting some
29:48
Speaker 4: of the projections and again this is all to be
29:51
Speaker 4: debated over the course of the foreseeable future here, but
29:54
Speaker 4: it does seem like he wants to lessen some of
29:57
Speaker 4: the commentary from them, So maybe it's back channels instead
29:59
Speaker 4: that we get information.
30:00
Speaker 2: So again two pm we will have that interest rate decision.
30:03
Speaker 2: Two thirty pm will be the press conference where reporters
30:07
Speaker 2: probably won't get a lot of their questions answered. Right now,
30:11
Speaker 2: markets pricing and no action on that Fed Funds target
30:15
Speaker 2: benchmark interest rate.
30:16
Speaker 3: In terms of what we're seeing in mortgage markets.
30:19
Speaker 2: Which is the main place that we look at the
30:22
Speaker 2: effect of interest rates, the thirty year fixed rate mortgage
30:26
Speaker 2: according to Mortgage News Daily, still sitting around six point
30:29
Speaker 2: eight percent. That's with interest rates having fallen for the
30:34
Speaker 2: last few days with oil prices cooling off.
30:37
Speaker 3: So let's take a quick break.
30:38
Speaker 2: When we come back, I do want to talk a
30:39
Speaker 2: little bit more about interest rates, housing market, etc.
30:42
Speaker 3: Next, on the Financial Exchange.
30:44
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31:55
Speaker 2: Well, it's been four or five days now of no
32:00
Speaker 2: strikes on Iran by the United States or by Iran
32:05
Speaker 2: on neighboring countries targeting US military bases. As such, oil
32:09
Speaker 2: prices have continued to fall over the course of the
32:12
Speaker 2: last few days. We now have the West Texas Crew
32:14
Speaker 2: benchmark down another one and a half percent today after
32:18
Speaker 2: being down a good five percent yesterday to eighty one
32:21
Speaker 2: dollars thirty three cents per barrel. It's not moving gasoline
32:25
Speaker 2: prices much. We are still sitting at basically four to
32:29
Speaker 2: ten per gallon on the triple A national average for
32:33
Speaker 2: gasoline prices. As we've talked about, this is actually pretty
32:39
Speaker 2: logical in terms of what we are seeing here. While
32:43
Speaker 2: some oil has been able to move from the Strait,
32:46
Speaker 2: you still have pretty much all the refining capacity in
32:49
Speaker 2: the area offline. You have Russian refining capacity being taken
32:53
Speaker 2: off line by the Ukrainian war, and you have Chinese
32:57
Speaker 2: refining capacity that is taking a hit because they have
33:00
Speaker 2: been importing a lot less oil over the course of
33:02
Speaker 2: the last several months. And so gas prices does not
33:06
Speaker 2: appear to be just greedy gas station owners that it's
33:09
Speaker 2: in fact a difficulty in finding refined product.
33:12
Speaker 3: Nonetheless, this is I think to me, probably the.
33:16
Speaker 2: Big reason we don't see any move in interest rates
33:19
Speaker 2: from the Federal Reserve. Were I Kevin worsh I would
33:24
Speaker 2: not be reading too much into any ceasefires but what
33:27
Speaker 2: we did get was a lower June CPI because of
33:31
Speaker 2: reduced oil prices, and once again, while a lot of
33:34
Speaker 2: volatility and oil prices, no insinuation from markets right now
33:37
Speaker 2: that we are going to be facing shortages in the
33:39
Speaker 2: very near term due to this conflict. So again, were
33:44
Speaker 2: I in the shoes of Kevin Walsh, I think that
33:47
Speaker 2: I would be more inclined to raise rates and get
33:49
Speaker 2: everyone to take me seriously because of it. But I
33:52
Speaker 2: think there's enough justification here for keeping them lower that
33:56
Speaker 2: that's what we're more likely to see.
33:57
Speaker 4: Yeah, you could likely do a bit of a middle
34:00
Speaker 4: ground approach there, which has been mentioned in several of
34:03
Speaker 4: the news publications that we read prior to the show,
34:07
Speaker 4: of not raising rates at tomorrow's meeting, but really making
34:12
Speaker 4: as strong insinuations as Kevin Horsh is willing to that September,
34:18
Speaker 4: They're really going to be on the table, and that's
34:20
Speaker 4: the way that the futures are pricing at the moment.
34:23
Speaker 2: We want to talk a bit about the starter home
34:26
Speaker 2: in this country, which is seemingly existing less and less.
34:31
Speaker 2: I don't know what would we even define the price
34:34
Speaker 2: point for a starting home.
34:36
Speaker 3: In Greater New England. I know that's a big range.
34:40
Speaker 2: But if you're going to be close to a metro area,
34:42
Speaker 2: in metro area in New England, I would think that
34:46
Speaker 2: a starter home, even in the cheapest markets, is in
34:51
Speaker 2: that four hundred and fifty to five hundred thousand. I
34:55
Speaker 2: think if you were to be in a suburb of
34:57
Speaker 2: Providence or a suburb of Manchester, you might be able
35:00
Speaker 2: to pull something like that off. If you're in a
35:03
Speaker 2: suburb of Greater Boston, then you might be more in
35:06
Speaker 2: the six to eight hundred thousand range for that starter home.
35:09
Speaker 2: And the problem remains that the idea of the starter
35:17
Speaker 2: single family home is kind of a thing of the
35:21
Speaker 2: past these days. It's not getting built by and large,
35:26
Speaker 2: and it's exceedingly hard to find when they do become
35:29
Speaker 2: available because of all the competition for them these days.
35:32
Speaker 4: Yeah, the single family home market of existing inventory, like
35:36
Speaker 4: you're pointing out, at that starter level, has decreased significantly.
35:40
Speaker 4: And just to give some some numbers on kind of
35:42
Speaker 4: what we're kicking around here Greater Boston area, I'm starting
35:46
Speaker 4: at the highest for a single family home median is
35:49
Speaker 4: about a million bucks. In terms of what it looks.
35:52
Speaker 2: Like for the median single family home purchase Greater Boston
35:56
Speaker 2: is a million dollars exactly.
35:57
Speaker 4: Then you start to go into broadening out to the
35:59
Speaker 4: state of Masastachusetts, you're talking about six twenty five in
36:02
Speaker 4: terms of the median sales price. Going out to New Hampshire,
36:05
Speaker 4: you're at about five hundred and seventy five thousand, and
36:08
Speaker 4: so that just gives you a bit of the range.
36:10
Speaker 4: If you look at the national average, it's anywhere from
36:13
Speaker 4: four to four hundred and forty thousand. Barons defines a
36:16
Speaker 4: starter home as eighty five percent of the median sales
36:21
Speaker 4: price for the country. So if we extrapolate that to
36:25
Speaker 4: some of the numbers that we're seeing here, it actually
36:27
Speaker 4: is a little bit closer that you could be in
36:29
Speaker 4: that four fifty range if you're talking about New Lampshire. Yeah, exactly.
36:34
Speaker 4: So where we sit is that in terms of the
36:38
Speaker 4: starter home, it seems like those are coming more often
36:41
Speaker 4: from home builders in the Sunbelt in some other areas.
36:43
Speaker 4: It's really not unique to our New England area where
36:46
Speaker 4: some listeners may be. But if you look at dhr
36:49
Speaker 4: Horn there a big home builder. They have said that
36:52
Speaker 4: sixty five percent of the mortgage originations for the new
36:55
Speaker 4: homes that they're building are coming from that demographic of
36:58
Speaker 4: the first time buyers, but less of a market. And
37:02
Speaker 4: to be clear, that new home buyers market just in
37:05
Speaker 4: general makes up a very small percentage of the home
37:08
Speaker 4: market excel itself in terms of transaction volume. Usually it's
37:12
Speaker 4: your buying existing home, and there's just less of those
37:15
Speaker 4: existing homes out there in that starter home market for
37:19
Speaker 4: people to buy.
37:19
Speaker 2: It's also just not terribly profit for home profitable for
37:22
Speaker 2: home builders to build these things, you know, like, especially
37:28
Speaker 2: especially here in New England where land is scarce. If
37:31
Speaker 2: you get your hands on a ten to fifteen thousand
37:34
Speaker 2: square foot lot and you're trying to decide what to
37:37
Speaker 2: do with it, the incentives are all stacked up to
37:40
Speaker 2: build a five bedroom, four bath home that you might
37:44
Speaker 2: be able to sell for over a million dollars because
37:46
Speaker 2: the cost to build it and the cost of the
37:48
Speaker 2: land is just the all in cost is not that
37:52
Speaker 2: much greater than building your three bedroom, two bass starter home.
37:56
Speaker 4: Right and in the constraints of labor two.
37:58
Speaker 2: In those areas where land is constrained, the starter home
38:01
Speaker 2: is now a condo. That's just kind of the state
38:04
Speaker 2: of things these days.
38:05
Speaker 3: Let's take a quick break.
38:07
Speaker 2: A lot more to cover in the second hour of
38:09
Speaker 2: the Financial Exchange.
38:09
Speaker 3: We'll be right back