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Fed Faces Inflation Test as AI Spending Doubts Grow · The Financial Exchange Show

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Speaker 2: Good morning, Happy Tuesday, and welcome back to the Financial Exchange.
1:18
Speaker 2: It's Mike, Mark and Tucker with you on a Tuesday
1:21
Speaker 2: where we've got equity markets rebounding a bit after a
1:24
Speaker 2: slight sell off yesterday. But the bigger picture when it
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Speaker 2: comes to stocks is while the S and P five
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Speaker 2: hundred itself has been remarkably flat over the last couple
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Speaker 2: of months, we are now sitting at seventy four seventy
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Speaker 2: four to eighty, let's call it on the S and
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Speaker 2: P five hundred, which is just about precisely where we
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Speaker 2: were back on May fifteenth of this year. So really
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Speaker 2: no movement for the last couple of months as investors
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Speaker 2: are digesting what are quite high prices on stocks, combined
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Speaker 2: with risks out of the Iran war in questions about
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Speaker 2: the continued day I trade. But we do have stocks
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Speaker 2: rebounding a little bit today and then earnings that we'll
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Speaker 2: be rolling out for the next couple of weeks. The
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Speaker 2: next big heavy hitter comes tomorrow after the bell, with
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Speaker 2: both Alphabet and Tesla reporting earnings after the close. Plenty
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Speaker 2: of others going this week as well. We had Novardes
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Speaker 2: Schwab Dana Hurl report earnings. This morning, we will have
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Speaker 2: Philip Morris, Geve or Nova Texas Instruments, IBM all reporting, Intel, RTX,
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Speaker 2: T Mobile, Thermo Fisher. So not that they aren't also
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Speaker 2: important to markets. But when we talk about a company
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Speaker 2: like raytheon sorry RTX now since they combined with United Tech,
2:39
Speaker 2: you know, two hundred and sixty billion dollar market cap
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Speaker 2: is nothing to sneeze at. But with Alphabet now being
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Speaker 2: nearly four and a quarter trillion, it's not going to
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Speaker 2: move markets in the same way. Next week we have
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Speaker 2: an even stronger kickoff in the earnings department, in addition
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Speaker 2: to a Federal Reserve meeting and interest rate announce meant
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Speaker 2: But next week after the clothes on Wednesday, we'll be
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Speaker 2: hearing from Microsoft and Meta as well as Apple and Amazon.
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Speaker 2: So a very heavy hitting week next week. While markets
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Speaker 2: themselves overall S and P five hundred relatively flat for
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Speaker 2: the last couple of months, the individual components underneath the
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Speaker 2: hood have not been terribly flat.
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Speaker 3: In fact, they've been quite volatile when you look at.
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Speaker 2: Single stock volatility, and so this earning season may make
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Speaker 2: quite a difference depending on how one invests these days.
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Speaker 2: But the overall question I think when it comes to markets.
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Speaker 2: I know we're going to talk about what I would
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Speaker 2: consider distractions today with tariff announcements, renewed hostilities in the
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Speaker 2: Middle East. The question that seems to really matter at
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Speaker 2: this moment in time is are the companies that are
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Speaker 2: pouring this much money into AI seeing any return on
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Speaker 2: investment on that spend? And I'm not sure that that
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Speaker 2: answer that question is going to matter this quarter, but
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Speaker 2: it's clearly what investors in the S and P five
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Speaker 2: hundred are asking, not even the S and P GLO
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Speaker 2: are asking themselves, because not only is the US stock
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Speaker 2: market tied to this stuff, but the Korean market, the
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Speaker 2: Chinese market, and just about every market globally other than
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Speaker 2: maybe Europe is pretty tied to how well or poorly
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Speaker 2: these investments pay off.
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Speaker 4: Yeah, as an investor, I don't care about last quarters
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Speaker 4: earnings or even the last years to the extent that
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Speaker 4: they're predictive and their usefulness and forecasting is actually pretty weak.
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Speaker 4: But to the extent that I may think we're going
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Speaker 4: to talk about GM in a little bit now, sure
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Speaker 4: not an AI stock, not yet, anyway they.
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Speaker 2: Might want to be or tried so I'll say with
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Speaker 2: the G or just turn to GM, right.
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Speaker 4: I guess my point is I care not about when
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Speaker 4: you're buying any asset past performance. We all know it's
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Speaker 4: not predictive. That little disclaimer that appears on advertisements, and
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Speaker 4: that's there for legal reasons. It could also be there
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Speaker 4: for statistical reasons. Earnings don't correlate well with future earnings,
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Speaker 4: and the reason for that of courses that the economies
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Speaker 4: twists and turns are unpredictable. This AI investing frenzy will
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Speaker 4: come to a screeching halt in the event of a recession. Yes,
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Speaker 4: it'll reverse quickly, and presumably so will the fortunes of
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Speaker 4: those the fortunes of the stocks of those companies longer term.
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Speaker 4: Will it pay off depends on what you mean by
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Speaker 4: pay These are all bigger questions than we're going to
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Speaker 4: try to answer in this segment. Will they pay off
5:26
Speaker 4: for the companies making the investments today is really the
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Speaker 4: question for investors today, not so much.
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Speaker 3: Go ahead and history would say no, Yeah, if.
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Speaker 4: You look at past revolutions radio in the twenties, electronics
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Speaker 4: in the sixties.
5:40
Speaker 5: And you can go farther back than that.
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Speaker 4: If you're like railroads and canals. Over excitement is followed
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Speaker 4: by overinvestment and oversaturation and destructive competition and defaults and retrenchment.
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Speaker 4: These things still change the face of the economy. As
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Speaker 4: Ai I was going to say, undets are I'm slamming
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Speaker 4: the table. I don't even feel that strongly about this.
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Speaker 4: As Ai undoubtedly will according to the experts, But it
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Speaker 4: doesn't mean that today's leading firms will be the winners
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Speaker 4: of tomorrow.
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Speaker 3: That's the critical piece, right.
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Speaker 2: It's not that the technology isn't incredible, It's not that
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Speaker 2: it won't change the world. It's not that there won't
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Speaker 2: make work different for all of us. It's very simply
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Speaker 2: that history has proven that the companies that lead the
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Speaker 2: way an investment and are treated as winners in the
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Speaker 2: early stages are not often the same companies that end
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Speaker 2: up being the big owners and capitalizers on the new technology.
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Speaker 3: And most certainly even those that do.
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Speaker 2: End up continuing and being dominant in that space, not
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Speaker 2: all of them end up being dominant.
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Speaker 5: And only if you can.
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Speaker 4: By the nature of it, it's a capital little intensive business. Sure,
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Speaker 4: so there will be only a few winners, and the
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Speaker 4: irony and it's kind of a perverse one is that
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Speaker 4: everybody's got to over invest today. That shows the seeds
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Speaker 4: of the demise of at least a few of them.
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Speaker 2: We've got stocks up in early trading, as I mentioned,
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Speaker 2: we've also got oil prices moving higher on continued tensions
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Speaker 2: between the United States and Iran as well as surrounding areas.
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Speaker 2: Oil price is up to eighty five dollars per barrel,
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Speaker 2: now up another two and a quarter percent this morning,
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Speaker 2: as we enter the tenth day of hostilities re escalating
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Speaker 2: in Iran.
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Speaker 3: Not only do we have Iran who is.
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Speaker 2: We keep using the word blockading the straight of horror moves.
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Speaker 2: I don't know that that's an accurate term for it,
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Speaker 2: but I don't think we have another word for it.
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Speaker 3: There is no physical vessel.
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Speaker 2: Blockade, but when you can use tiny drones that are
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Speaker 2: very difficult to defend against to strike any vessel in
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Speaker 2: the strait, you've effectively stopped traffic. So we're calling it
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Speaker 2: a blockade and has been so far pretty successful. In addition,
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Speaker 2: back to Huthi's on Mondays said that they would be
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Speaker 2: imposing a maritime blockade on Saudi Arabia. The big story
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Speaker 2: here being that Saudi is one of the largest second
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Speaker 2: largest oil producer in the world, maybe have been rerouting
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Speaker 2: a lot of their oil flows through the Red Sea.
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Speaker 2: Should the Umeny's should should the Houthis and Yemen be
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Speaker 2: successful in blockading here, then we just have another supply
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Speaker 2: of energy that goes offline, or if not goes offline entirely,
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Speaker 2: then gets uh then gets decreased pretty substantially. And one
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Speaker 2: of the questions that has been risen, you know, we
8:39
Speaker 2: saw oil prices come way down, why didn't we see
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Speaker 2: gasoline and diesel prices come down with it? And the
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Speaker 2: answer isn't all that complicated. But the answer is that
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Speaker 2: Russian energy infrastructure has been largely taken offline due to
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Speaker 2: the escalations in Ukraine and to the point where the
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Speaker 2: Russians are no longer x supporting refined products. The Chinese,
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Speaker 2: who have been decreasing their purchases of crude oil, are
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Speaker 2: therefore exporting a lot less refined product as well. You've
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Speaker 2: got several refineries throughout the Middle East that are either
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Speaker 2: offline or not able to export. And then you've got
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Speaker 2: the threat now of this new waterway being threatened, and
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Speaker 2: so therefore, yeah, theological price move is upwards for the
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Speaker 2: time being, and we are right back to where we
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Speaker 2: were a few months ago.
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Speaker 3: Of Hey, we.
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Speaker 2: Can probably navigate this for a few weeks or months,
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Speaker 2: but should it take an extraordinarily long period of time,
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Speaker 2: then the idea of shortages and prices back in the
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Speaker 2: hundreds on crude oil is perfectly rational if we end
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Speaker 2: up on that path.
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Speaker 4: Yeah, I mean, the day to day on this stuff
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Speaker 4: is just bewildering. I've almost given up trying to keep track.
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Speaker 4: The names are unfamiliar, the players are acting on age
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Speaker 4: old animosities toward one another. To me, the larger point
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Speaker 4: here is that things are going to be more expensive
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Speaker 4: for a while. Oil and its derivatives, chemicals, et cetera,
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Speaker 4: shipping generally, if things are diverted, that's going to put
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Speaker 4: pressure on supply chains elsewhere.
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Speaker 5: All this stuff that we're.
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Speaker 4: Hearing every day, the constantly changing news flow, it all
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Speaker 4: to me just screams inflation. Now, that doesn't mean double
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Speaker 4: digit inflation. It doesn't even mean a few percentage points
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Speaker 4: higher than we're at today, roughly three and a half percent.
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Speaker 4: If you just use the year over a year on
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Speaker 4: CPI inflation, it just means elevated inflation. Now, part of
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Speaker 4: that depends on how the FED responds something we'll talk
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Speaker 4: about gut.
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Speaker 5: No, no, oh, okay, sorry. So you know, if.
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Speaker 4: You're overwhelmed as I am by the detail. Are we
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Speaker 4: in a ceasefire? We're not in a cease fire. Who's
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Speaker 4: fire and missiles at? Who are the whoties involved? Or
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Speaker 4: who these involved? I don't even know how to pronounce it. Okay,
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Speaker 4: it's a mess over there. It's been a mess over
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Speaker 4: there my whole adult life. Right now, it's just a
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Speaker 4: mess that's on fire. If and until that, until that
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Speaker 4: fire goes out, and it may not, it's just going
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Speaker 4: to keep elevated. It's going to keep upward pressure on
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Speaker 4: prices through its through its impact on.
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Speaker 5: I'll just say, I'll just call it supply chains.
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Speaker 3: Yeah.
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Speaker 2: I think that's my base case, right, is that all
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Speaker 2: of this leads to higher energy prices, higher costs generally
11:30
Speaker 2: because shipping costs are up, insurance costs to and sure
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Speaker 2: those vessels are up, and anything that travels through the
11:36
Speaker 2: Middle East generally is at an additional threat, and it
11:38
Speaker 2: just costs more to do all of this. That's kind
11:41
Speaker 2: of the base cases I think about it, which leads
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Speaker 2: to potentially, like you mentioned, higher mortgage rates, higher auto
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Speaker 2: loan rates, higher everything that consumers face. The worst case
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Speaker 2: scenario is different, right, The worst case scenario is more
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Speaker 2: recession causing in the short term, which would be shortages
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Speaker 2: of actual product. And we got there in some countries
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Speaker 2: earlier this spring. I don't know how likely that is,
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Speaker 2: but to me, that's the bigger threat than the inflation
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Speaker 2: part would be. Oh, yeah, not only are we seeing this,
12:09
Speaker 2: but oh, in fact, we're seeing supply chain issues for
12:11
Speaker 2: all sorts of products because certain countries can't get energy
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Speaker 2: products into their nation.
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Speaker 3: Yeah. I feel we're not there now.
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Speaker 4: Yeah, it seems unlikely to tip the US economy into recession.
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Speaker 4: It's very hard to get to that. And I know
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Speaker 4: you're not saying that. It could make a recession obviously
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Speaker 4: a lot worse like some of the supply chain some
12:27
Speaker 4: of the energy shock challenges that we experience during the
12:30
Speaker 4: nineteen seventies.
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Speaker 2: I was going to say, yeah, you don't have to
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Speaker 2: go that far back in history to see a very
12:34
Speaker 2: similar parallel here.
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Speaker 3: Let's take a quick break. When we come back.
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Speaker 2: I do want to talk about General motors who released
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Speaker 2: their earnings and had a bit to say about where
12:42
Speaker 2: their sales are going and how they're succeeding.
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Speaker 3: That's next here on the Financial Exchange.
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13:37
Speaker 2: All of the automakers I feel like have changed their
13:40
Speaker 2: business models a little bit since COVID and General Motors
13:42
Speaker 2: is speaking to that a little bit. In this most
13:44
Speaker 2: recent earnings it stalks up a little bit in early
13:48
Speaker 2: trading today, up about three and a half percent. For
13:52
Speaker 2: the year, it's basically flat, although they did see a
13:54
Speaker 2: big boost in stock price at the end of last year,
13:57
Speaker 2: so up a good fifty percent. Look at the last
14:00
Speaker 2: twelve months, so General Motors doing just fine.
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Speaker 3: Where they're seeing success, no surprise.
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Speaker 2: You've heard us talk about pretty much every US automaker
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Speaker 2: in this same fashion.
14:11
Speaker 3: Trucks, big SUVs.
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Speaker 2: They are able to charge huge prices and we seem
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Speaker 2: to have an almost endless appetite for those giant trucks
14:21
Speaker 2: and SUVs, and that's where they make a huge profit margin.
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Speaker 2: So they are doing just fine in that space. The
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Speaker 2: piece that I said about, you know, changing their business
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Speaker 2: model a little bit is they are pretty intentionally keeping inventory.
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Speaker 3: Levels quite low. They are.
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Speaker 2: I think we've all experienced this. I don't know Bill
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Speaker 2: you did, actually you bought a car what two years ago?
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Speaker 2: Tucker you February. Did you both experience this effect of Okay, yeah,
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Speaker 2: I can't just walk on the lot and demand whatever
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Speaker 2: vehicle and whatever color I want. Have to search around
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Speaker 2: a little bit more. Because that's been my experience in
15:04
Speaker 2: the two cars shoot. I've had to buy three cars
15:07
Speaker 2: in the last six years due to accidents.
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Speaker 6: So mine was due to an accident as well, So
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Speaker 6: I was kind of hard pressed against time, but I
15:14
Speaker 6: was lucky to find one pretty quick.
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Speaker 3: But you did experience that feeling of a shortage.
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Speaker 2: I've definitely experienced that with the minivan that I purchased,
15:23
Speaker 2: the Honda Civic that I purchased in twenty twenty one,
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Speaker 2: and then less so with the most recent car I
15:29
Speaker 2: purchased because it's electric and there seems to be plenty
15:32
Speaker 2: of those to go around. But this creation of an
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Speaker 2: artificial feeling of shortages seems to be working quite well
15:41
Speaker 2: for the automakers, and they do it especially on their
15:44
Speaker 2: best selling vehicles, So the highest trim levels of their pickups,
15:47
Speaker 2: the highest trim levels of their Cadillac and Chevy SUVs,
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Speaker 2: they generally produce pretty few of them, and for that
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Speaker 2: reason they're able to create this.
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Speaker 3: Sense of shortage.
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Speaker 2: The dealerships probably don't love it, but they're willing to
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Speaker 2: put up with it, and it's helping GM's earnings seemingly
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Speaker 2: quite a bit. Just earnings before interest and taxes this
16:11
Speaker 2: year is going to range between fourteen and sixteen billion.
16:15
Speaker 2: That's above their previous forecast of thirteen and a half
16:18
Speaker 2: to fifteen and a half. Obviously, not an easy business
16:22
Speaker 2: to make money in, and they're pretty much only competitive
16:25
Speaker 2: here in the United States because China has started to
16:28
Speaker 2: corner most other auto markets, but they're doing quite well
16:33
Speaker 2: here in the US.
16:34
Speaker 5: I don't know many investments.
16:35
Speaker 4: In my day job, I talked to people that manage
16:38
Speaker 4: money for firms like the one that we work for,
16:41
Speaker 4: and I've never known an investment manager that they have
16:46
Speaker 4: analysts that cover automotives coincident with their with their coverage
16:52
Speaker 4: assignments of other consumer discretionary stocks. But none that have
16:56
Speaker 4: ever all to say, none that I've ever owned them
16:58
Speaker 4: or been excited about them.
17:00
Speaker 3: They're terrible businesses.
17:01
Speaker 4: Yeah, so that's why I have a hard time coming
17:03
Speaker 4: up with anything interesting.
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Speaker 2: I think the most interesting that I have to say
17:07
Speaker 2: about the US auto manufacturers uh Ford GM are entirely
17:13
Speaker 2: rely like, entirely reliant on giant trucks and suv gas
17:18
Speaker 2: guzzling cars that aren't terribly fuel efficient, and so I
17:22
Speaker 2: feel like the most intelligent thing I have to say
17:23
Speaker 2: about these car companies that they are screwed if gas
17:27
Speaker 2: prices are headed for higher for longer.
17:30
Speaker 4: Unless they can go ahead, sorry no please, unless they
17:33
Speaker 4: can shrink like like they've done, keep inventories. You know,
17:36
Speaker 4: they're they're creating scarcity. No, not quite the right way
17:39
Speaker 4: to look at it, but they.
17:41
Speaker 3: Lean into the artificial scarcity.
17:42
Speaker 4: I agree they're not as opposed to the old days
17:44
Speaker 4: where they were compelled to discount aggressively, which is not
17:48
Speaker 4: making as many and they're making more per vehicle and
17:50
Speaker 4: EPs growth has been good. Some other metrics are are
17:54
Speaker 4: are lousy, but some of the top line stuff looks.
17:57
Speaker 2: I just don't think that they have the ability to,
18:00
Speaker 2: for instance, quickly pivot and say, hey, we're going to
18:04
Speaker 2: be a top provider of hybrid vehicles or electric vehicles
18:08
Speaker 2: and in any way compete with Tesla or Toyota in
18:11
Speaker 2: those spaces. I'm not saying that that's where the US
18:13
Speaker 2: car market is going, but they've pretty much abandoned those
18:17
Speaker 2: those endeavors and seated ground to Yeah, Tesla to a
18:22
Speaker 2: large part a few other Korean automakers. Do either of
18:26
Speaker 2: these companies make any sedans? I know, Ford doesn't. General
18:29
Speaker 2: Motors probably has one or two. Again, you know, this
18:34
Speaker 2: is probably not an issue, but we're gas prices to average,
18:39
Speaker 2: let's say four dollars and fifty cents a gallon for
18:41
Speaker 2: the next five years. I'd be really interested what sort
18:45
Speaker 2: of position these two automakers, Ford and General Motors specifically
18:48
Speaker 2: find themselves in a few years out. Like I can't
18:52
Speaker 2: imagine it would be great, because we do tend to
18:57
Speaker 2: react pretty quickly to things like high gas prices.
19:00
Speaker 4: Not to mention what happens when the regulatory regime wheel
19:03
Speaker 4: turns again, of course.
19:05
Speaker 3: Which is it's going to happen.
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Speaker 2: Yeah, that is The other disappointing thing about the political
19:12
Speaker 2: state we're in is that every four years we have
19:14
Speaker 2: a complete seesaw in terms of the direction of regulations
19:19
Speaker 2: on all sorts of different things tariff's fuel efficiency, et cetera.
19:23
Speaker 2: Let's say quick break when we return Wall Street Watch
19:26
Speaker 2: coming up next.
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20:01
Speaker 6: Well, markets are in positive territory with a rebounded tech
20:05
Speaker 6: as second quarter earning season picks up steam. Right now,
20:08
Speaker 6: the Dow is up two thirds of one percent, SMP
20:10
Speaker 6: five hundred, up by a similar measure, NASDAC up over
20:13
Speaker 6: one percent higher, RUSSA two thousand is up over three
20:17
Speaker 6: quarters of one percent. Ten you're treasure reeled up two
20:20
Speaker 6: basis points at four point sixty two percent, and oil
20:23
Speaker 6: jumping two percent higher, trading at eighty five dollars a barrel.
20:27
Speaker 6: GM reported better than expected earnings and raise its full
20:31
Speaker 6: year profit outlook, driven by stronger margins on its largest
20:34
Speaker 6: vehicles in lower tariff costs. GM up by three percent. Meanwhile,
20:38
Speaker 6: Novo Nordis said it issuing Eli Lilly, claiming that Lily's
20:42
Speaker 6: advertising for its obesity shot in diabetes injection is misleading consumers.
20:47
Speaker 6: Novo is referring to Lily's nationwide ads that cite outdated
20:51
Speaker 6: clinical trials to compare the highest doses of Lily's medicines
20:55
Speaker 6: to lower doses of Novo's drugs. Both stocks modestly higher.
20:59
Speaker 6: Sticking with farm, where Novardies beats second quarter earnings and
21:02
Speaker 6: revenue expectations, that stock up by five percent. Threem jumping
21:06
Speaker 6: nearly ten percent higher if the manufacturing conglomerate beat earnings
21:10
Speaker 6: and revenue expectations, and shares in Taiwan Semiconductor up four
21:15
Speaker 6: percent fall on a report from Nike that the chip
21:18
Speaker 6: maker will raise prices for its services by up to
21:21
Speaker 6: ten percent next year. I'm Tucker Silva and that is
21:26
Speaker 6: Wall Street Watch.
21:28
Speaker 2: In retaliation for Canadian treatment of US alcohol and other products,
21:35
Speaker 2: the President is using a Great Depression era law from
21:40
Speaker 2: the nineteen thirties to impose tariffs on Canada this morning.
21:44
Speaker 2: The terriffs are being applied under section three thirty eight
21:48
Speaker 2: of the nineteen thirty Tariff Act, which gives the President
21:51
Speaker 2: power to impose duties of as much as fifty percent
21:54
Speaker 2: on countries deemed to discriminate against US commerce. This law
22:00
Speaker 2: vision has never once been used to impose tariffs, according
22:04
Speaker 2: to officials, which makes me wonder just how successful it's
22:07
Speaker 2: going to be in courts in imposing them and what
22:09
Speaker 2: needs to be adhered to. But as I mentioned, never
22:13
Speaker 2: before been used tariffs on Canada, should they go into effect,
22:18
Speaker 2: will be on products including milk, hockey equipments, which I mean, guys,
22:23
Speaker 2: that's all they got, beer, plywood, but would exclude major
22:29
Speaker 2: resource imports such as energy, potash, and critical minerals, which
22:33
Speaker 2: kind of makes your question just how significant this will
22:35
Speaker 2: be on Canadians. We will see where this goes. I
22:40
Speaker 2: don't know, you know how serious this is. There's been
22:46
Speaker 2: threats of tariffs over Canadian wildfire smoke hitting the United States,
22:51
Speaker 2: and quite frankly, the tariff mess seems to be.
22:58
Speaker 3: How do I describe it? Unpredictable and very uncertain.
23:03
Speaker 4: Well, their application certainly has been whether you agree with
23:07
Speaker 4: tariffs or like me, you think that they benefit a
23:09
Speaker 4: very small group at the expense of the rest of us,
23:12
Speaker 4: which is absolutely the case, and there are lots of
23:14
Speaker 4: examples historically.
23:17
Speaker 3: So whether you agree with me or whether you're wrong.
23:20
Speaker 4: Or whether you don't know anything about tariffs or trade, no,
23:23
Speaker 4: it's true, though, I mean, you'd have to be either
23:25
Speaker 4: an advocate for a specific industry, like the sugar producers,
23:29
Speaker 4: for example, sugar farmers. We raised tariffs on this is
23:32
Speaker 4: one example. There are so many raised tariffs on sugar.
23:35
Speaker 4: We put the candy business. We put them out of business.
23:38
Speaker 4: We used to make candy here, among other things, using sugar.
23:43
Speaker 4: We don't anymore because of nineteen eighties and nineteen nineties
23:46
Speaker 4: ARA tariffs. Lots of examples of that. Beyond the academic
23:51
Speaker 4: argument for and against tariffs, the way they've been applied
23:54
Speaker 4: here is not productive. I wish the president, we all
23:57
Speaker 4: wish the president we just settle on a tariff strategy
24:00
Speaker 4: and see it through the reason why economic growth was
24:03
Speaker 4: slower last year by a lot than the previous two years,
24:07
Speaker 4: previous four years for that matter, if you want to
24:10
Speaker 4: judge it on presidential term performance. The reason why job
24:13
Speaker 4: growth disappeared last year relative to the prior two years,
24:17
Speaker 4: the reason why one of the reasons why inflation went
24:20
Speaker 4: up last year relative to the year before, is the
24:23
Speaker 4: way that tariffs were pursued. It's erratic, it comes and
24:28
Speaker 4: fits and starts, it's incoherent overall.
24:31
Speaker 2: Yeah, I think again, Marcott his very clear view on tariffs.
24:36
Speaker 2: I tend to agree with the view on tariff's and
24:39
Speaker 2: their impact on productivity.
24:41
Speaker 5: I'm not really excuse me what I'm saying.
24:42
Speaker 4: It's not really a view. It's more like how they
24:44
Speaker 4: affect the economy. And then you can say, nope, I
24:46
Speaker 4: still like them because I think we should protect this
24:49
Speaker 4: extra Sorry, I just wanted to clarify.
24:51
Speaker 5: Excuse me, But.
24:52
Speaker 2: Even should you follow that logic, the problem here has
24:56
Speaker 2: been that they have not been predictable for busines. That is,
25:01
Speaker 2: in my mind, the biggest problem with all of this
25:04
Speaker 2: is the rules that were used to pass the tariffs
25:07
Speaker 2: were deemed unconstitutional, and therefore the White House has been
25:11
Speaker 2: trying to Jerry rig a whole bunch of different systems
25:14
Speaker 2: to temporarily impose tariffs. We're gonna be talking about a new,
25:18
Speaker 2: fresh set of tariffs on other countries because the new
25:21
Speaker 2: ones that they put into place pretty much globally ten
25:24
Speaker 2: percent on different countries are about to expire. And so again,
25:27
Speaker 2: just putting yourself in the position of a manufacturing business
25:31
Speaker 2: here in the United States, which pretty much with a
25:34
Speaker 2: high degree of certainty, sources materials and goods from all
25:38
Speaker 2: over the world, it's really difficult to be making business
25:42
Speaker 2: decisions right now based on what perceived tariff policy might
25:46
Speaker 2: be six months from now, And that, to me is
25:48
Speaker 2: the biggest downside to all of this is because Congress
25:52
Speaker 2: is not involved in the implementation of tariffs, there's zero
25:55
Speaker 2: certainty about what those tariff rates are going to look like,
25:58
Speaker 2: and therefore, taking out a loan to go expand a
26:01
Speaker 2: construction or manufacturing facility pretty much unless you're being backed
26:06
Speaker 2: by Google or Microsoft to do it for the purpose
26:08
Speaker 2: of building out AI right now, it's really difficult to
26:11
Speaker 2: paint a path for why I would do that in
26:13
Speaker 2: this economy right now, right like it's just hey, there's
26:17
Speaker 2: too many questions about not only what will be the
26:21
Speaker 2: tariff rate on goods that I need to import to
26:23
Speaker 2: make a product, but then what sort of retaliation am
26:27
Speaker 2: I going to face when I try and sell my
26:28
Speaker 2: finished product into another market? And so with all that uncertainty, yeah,
26:34
Speaker 2: thank goodness, we're getting saved by kind of the AI
26:37
Speaker 2: moment that we are having right now. I know there's
26:39
Speaker 2: plenty of downsides to that too, but economically, thank goodness
26:43
Speaker 2: that there are a bunch of very well funded companies
26:46
Speaker 2: that are pouring money indiscriminately into the AI sector.
26:49
Speaker 4: But the uncertainty had real I guess the point I'm
26:51
Speaker 4: trying to make. Even if you are indifferent to the arguments,
26:55
Speaker 4: the theoretical arguments against restrictions on trade, specifically araffs because
27:00
Speaker 4: they favor select industries, usually politically powerful, at the expense
27:04
Speaker 4: of the rest of us. Look at what it did
27:07
Speaker 4: to economic growth and job creation last year. Last year
27:10
Speaker 4: should have been a slam dunk. We were coming off
27:13
Speaker 4: too very strong years relative to potential growth or trend
27:17
Speaker 4: of two point eight and two point nine percent in
27:19
Speaker 4: twenty twenty three and twenty twenty four. It was actually
27:21
Speaker 4: two point nine and two point eight but nearly three
27:24
Speaker 4: GDP growth real year over year. We went from that
27:27
Speaker 4: to two point one. That's the wrong direction. We went
27:31
Speaker 4: from about one hundred and twenty thousand jobs a month
27:34
Speaker 4: to nine thousand jobs a month, and that started happening,
27:38
Speaker 4: the shriveling of payrolls precisely when the tariff ahnsments liberation. Yeah,
27:44
Speaker 4: you could see it in the data. It's crystal clear.
27:47
Speaker 4: So even if you're indifferent to free trade, please from
27:52
Speaker 4: people like me and many many others who make them,
27:55
Speaker 4: look at what it did to economic growth and job creation.
27:58
Speaker 2: I will play devil's advocate for a moment, just for
28:00
Speaker 2: the sake of doing so. I can look at that
28:03
Speaker 2: and blame it on the way in which the tariffs
28:06
Speaker 2: were done, rather than the tariffs.
28:07
Speaker 5: That's what I'm saying, Mike.
28:09
Speaker 4: Look, I'm not I Almoso want to put the issue
28:12
Speaker 4: should we be imposing tariffs on this or that country
28:14
Speaker 4: or this are that good aside? There's a way to
28:17
Speaker 4: do that, a process for that. It's deliberative, and it
28:22
Speaker 4: gives businesses certainty as to what the law will be
28:25
Speaker 4: a year from now. The key point is the one
28:26
Speaker 4: you already made. Nobody knows what the structure of tariffs
28:30
Speaker 4: will be six months or a year from now. And
28:32
Speaker 4: if you had asked us to guess what it would
28:33
Speaker 4: have been today six months ago based on what we
28:35
Speaker 4: knew at the time, we would have guessed incorrectly because
28:38
Speaker 4: they've been all over the place.
28:40
Speaker 2: Let's take a quick break. When we come back. FED
28:43
Speaker 2: meeting coming up next week? What should we expect out
28:46
Speaker 2: of Kevin worsh at his second Federal Reserve interest rate decision?
28:50
Speaker 2: That's next year on the Financial Exchange.
28:52
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29:31
Speaker 2: All right, Mark, we've got a FED meeting next week,
29:34
Speaker 2: July twenty ninth. Probabilities According to Chicago Mercantile Exchange, the
29:38
Speaker 2: CME fedwatch tool is that there is an eighty percent
29:41
Speaker 2: chance that they do not do anything at that next meeting.
29:44
Speaker 3: In terms of rate moves, and things stand right where
29:46
Speaker 3: they are.
29:47
Speaker 2: Current rates for the FED sitting between three and a
29:50
Speaker 2: half and three seven five. When we go look at
29:53
Speaker 2: mortgage rates, they are as always considerably higher thirty year
29:57
Speaker 2: fixed rate average according to Mortgage News Daily now sitting
30:00
Speaker 2: at six point seven percent. And I guess my first
30:02
Speaker 2: question for you, Mark, is our interest rates restrictive at
30:05
Speaker 2: these levels?
30:07
Speaker 5: That's a hard argument.
30:08
Speaker 3: Let's define restrictive.
30:10
Speaker 4: Yeah, So a rate that is a federal funds rate,
30:13
Speaker 4: which is their short term interest rate, their main policy
30:16
Speaker 4: tool that is not restrictive, keeps inflation constant and growth
30:19
Speaker 4: at its potential growth rate. Let's call potential growth two percent.
30:23
Speaker 4: And when we say growth, we mean gross domestic product,
30:25
Speaker 4: that number we get every quarter from the BEEA. So
30:29
Speaker 4: if rates are neither restrictive nor stimulative, you would expect
30:33
Speaker 4: the economy to be growing at about potential and inflation
30:36
Speaker 4: to be neither increasing nor decreasing. Growth, as I mentioned
30:41
Speaker 4: in the last segment, slowed down a lot last year
30:43
Speaker 4: relative to the previous two years. That may have helped
30:46
Speaker 4: put some downward pressure on inflation. If you're looking for
30:48
Speaker 4: a silver lining, inflation is not staying still. It's been
30:52
Speaker 4: going up to what extent is.
30:54
Speaker 3: Yeah, a little drop last month with energy prices.
30:56
Speaker 5: We had down, we had energy deflation.
30:58
Speaker 3: The trend for this year is inflation backup.
31:01
Speaker 5: Yeah.
31:01
Speaker 4: So the Fed's got a problem, and the Fed's always
31:04
Speaker 4: got a problem, but it's unusually acute. And that you've
31:07
Speaker 4: got growth having slowed last year, was sluggish in the
31:11
Speaker 4: first quarter. Looks like it's gonna be below trend again
31:15
Speaker 4: this quarter if you give credence to the Atlanta Fed's
31:18
Speaker 4: real GDP now estimate. Some private sector forecasters have a
31:21
Speaker 4: more optimistic forecast for GDP. But let's just suppose it
31:25
Speaker 4: comes in at trend.
31:27
Speaker 3: That hiring has been good.
31:28
Speaker 4: Like I know, I'm not saying it's the end of
31:30
Speaker 4: the economic world.
31:31
Speaker 5: Trend is two percent growth. That's fine.
31:33
Speaker 4: That's what we had under Obama that everybody lamented and
31:36
Speaker 4: myself included. So you know, it's not you can't pull
31:40
Speaker 4: growth out of a hat. You've got to create conditions
31:42
Speaker 4: conducive to it and then let the economy do its thing,
31:44
Speaker 4: as opposed to waylaying it with new tariffs every other
31:47
Speaker 4: month or something that said, it's not a growth emergency.
31:51
Speaker 4: Is it an inflation emergency? We don't know yet. I
31:54
Speaker 4: mean inflation went from three to four when inflation peaked
31:59
Speaker 4: in with the MACE CPI report. That's a big jump.
32:02
Speaker 4: Inflation expectations went up. The Fed can get inflation back
32:07
Speaker 4: down if it's willing to impose economic pain in the
32:11
Speaker 4: form of higher unemployment and slower growth by raising interest rates.
32:15
Speaker 3: Then the second question, because and you asked.
32:16
Speaker 5: Our rates restrictive right now? Right?
32:18
Speaker 3: Yeah?
32:18
Speaker 4: And I should have I'm sorry I didn't answer that,
32:20
Speaker 4: just very briefly. You know, Fed funds is three point five,
32:24
Speaker 4: inflation is three point five. If you CPI, real Fed
32:27
Speaker 4: funds is zero. Most people think real Fed funds neutral
32:31
Speaker 4: should be one. In fact, the Fed thinks that if
32:33
Speaker 4: you look at their Summary of Economic projections. So it's
32:36
Speaker 4: hard to make the case in the affirmative MIC.
32:38
Speaker 2: So in that case, then this article, you know, Bill
32:41
Speaker 2: Dudley lays out the case that the Fed needs to tighten.
32:44
Speaker 3: Meaning raise interest rates.
32:46
Speaker 2: Do you agree like or can Kevin worsh at this
32:50
Speaker 2: stage still get away with talking tough on inflation, because
32:54
Speaker 2: that's what he did in the last meeting, that's what
32:56
Speaker 2: he's done in the limited you can get he's had
32:58
Speaker 2: so far.
32:58
Speaker 5: Yeah, you know, you make a good point.
33:00
Speaker 4: The researchers have concluded some it's not uncontroversial that more
33:06
Speaker 4: credible central banks central bank being the Federal Reserve or
33:09
Speaker 4: the ECB, or the Bank of Japan or whatever. I'll
33:11
Speaker 4: just say the FED. The more credibility the Fed's got,
33:14
Speaker 4: the longer it can wait because people's expectations will stay anchored.
33:18
Speaker 4: You and I won't think inflation's gonna get out of control.
33:21
Speaker 4: So a key question for I can't answer your question
33:24
Speaker 4: right now. My inclination will be to hike a little
33:26
Speaker 4: bit just to prove that I'm tough on inflation. And
33:30
Speaker 4: I don't know that warsh is going to do that, because,
33:33
Speaker 4: as you reminded me the other day, it's a little
33:36
Speaker 4: too early to sing warshes praises too aggressively as I've
33:41
Speaker 4: been doing. Oh sorry, but you know you were thinking it.
33:46
Speaker 4: It's a little too early to be too excited about Warsh.
33:48
Speaker 5: He does have to prove.
33:49
Speaker 4: As much as I love the way he articulates the
33:53
Speaker 4: goal of monetary policy, he does have to prove it,
33:56
Speaker 4: and the more.
33:57
Speaker 5: Credibility you have.
33:58
Speaker 4: The credibilities is just a short way of saying, people
34:01
Speaker 4: believe you're going to follow through on what you say
34:03
Speaker 4: you're going to do, the easier it is to ultimately
34:06
Speaker 4: get inflation down.
34:08
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35:23
Speaker 3: By the way.
35:23
Speaker 2: Just one more item on interest rates and where we are.
35:27
Speaker 2: I mentioned that we are now at six point seven
35:29
Speaker 2: to one percent according to Mortgage News Daily on the
35:32
Speaker 2: average thirty year fixed rate mortgage. That is up substantially
35:36
Speaker 2: from where we were right before the outbreak of war
35:39
Speaker 2: in Iran, where we were touching about six percent. Housing
35:42
Speaker 2: inventory has had been one of the big topics that
35:45
Speaker 2: we were talking about on the program earlier this year,
35:49
Speaker 2: because it for the last several years has been ticking
35:52
Speaker 2: back up to you know, what are somewhat normal levels
35:55
Speaker 2: to kind of even out the housing market.
35:58
Speaker 3: In June, there were one point one million.
36:01
Speaker 2: Active listings that would be both single and multi family
36:03
Speaker 2: homes available for sale.
36:05
Speaker 3: That is up from June of last year, where is
36:08
Speaker 3: at one point zero eight two million.
36:11
Speaker 2: Basically, no move year over year. I have to imagine
36:14
Speaker 2: that higher interest rates is playing a role in that.
36:17
Speaker 2: And just for some frame of reference, I always site
36:20
Speaker 2: back to twenty nineteen levels of inventory. June of twenty
36:24
Speaker 2: nineteen one point two two million homes for sale in
36:28
Speaker 2: the United States. So we still have not recaptured that
36:32
Speaker 2: total level of inventory that we were sitting on prior
36:35
Speaker 2: to COVID. No big surprise there, but that's that's where
36:38
Speaker 2: we are in terms of the housing market, in terms
36:41
Speaker 2: of data points that I think are pretty important.
36:43
Speaker 5: Yeah, interest rates.
36:43
Speaker 4: You mentioned at the start of the show that S
36:45
Speaker 4: and P, the price level of the S and P
36:48
Speaker 4: five hundred hasn't goneywhere in two months, neither of longer
36:51
Speaker 4: term interest rates. They shot up at the beginning of
36:54
Speaker 4: the conflict of the Middle East, went back down, have
36:57
Speaker 4: since shot back up. They're roughly at their highest levels
37:01
Speaker 4: in the post global financial crisis that two thousand and
37:05
Speaker 4: eight two thousand and nine recession for US, credit crisis
37:08
Speaker 4: for the world, et cetera. They're right where they were
37:12
Speaker 4: before the so called GFC.
37:14
Speaker 2: Yeah, interest rates I mentioned the S and P five
37:17
Speaker 2: hundred in aggregate is about the same place it was
37:20
Speaker 2: in mid May, as is the ten year Treasury. We're
37:22
Speaker 2: sitting at four point six two two. We were sitting
37:24
Speaker 2: at four point six to two back on May eighteenth.
37:27
Speaker 2: We have not We've gone full circle, but we've not
37:30
Speaker 2: actually gone anywhere either in terms of interest rates or stocks.
37:34
Speaker 2: And I don't find that immensely surprising given what has
37:37
Speaker 2: happened out of the Middle East. While that might not
37:39
Speaker 2: be the biggest driver of stocks in the short term,
37:41
Speaker 2: it is a huge driver of inflation expectations, interest rates,
37:45
Speaker 2: and what the Fed is or is not going to
37:48
Speaker 2: be able to do here. Stocks continuing to climb as
37:52
Speaker 2: we head towards eleven o'clock, Nasdaq up more than one percent,
37:57
Speaker 2: SMP and Dow up as well, two thirds and half
38:00
Speaker 2: a percent, respectively. We're gonna take a quick break, but
38:03
Speaker 2: a lot more to cover in the second hour the
38:05
Speaker 2: financial exchange.
38:06
Speaker 3: We'll be right back