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Is stagflation poised to make a comeback? · The Financial Exchange Show

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Speaker 1: a donation today. This is the Financial Exchange with Chuck
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Speaker 1: Zada and Mark Vandetti Chuck.
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Speaker 2: Mark and Tucker with you here on a Thursday, and
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Speaker 2: continuing just to try to figure out what's going on
1:19
Speaker 2: with the economic data that we're getting, seeing how things
1:21
Speaker 2: are evolving as we go a little bit further into
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Speaker 2: the year. And also who's trying to figure that out
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Speaker 2: is the Federal Reserve, who had their meeting minutes from
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Speaker 2: their January meeting released yesterday at two pm. And Mark,
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Speaker 2: anything notable in these meeting minutes that you saw on
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Speaker 2: your end.
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Speaker 3: They're a little vague because they're not actually minutes, as
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Speaker 3: you know, they're summaries. We don't get the minutes, the
1:47
Speaker 3: blow by blow for several years. But the upshot, and
1:52
Speaker 3: this is something anybody who read a headline could have gleaned,
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Speaker 3: is that the Fed understands that they are walking a
1:58
Speaker 3: very fine line. They're always trying to balance the forces
2:01
Speaker 3: of inflation, which are a product of excessive economic growth
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Speaker 3: and unemployment a product of too little demand or too
2:09
Speaker 3: little economic growth. And they recognize that they may be
2:14
Speaker 3: walking that fine line successfully right now, but you're always
2:17
Speaker 3: in danger of getting bumped off that line by some
2:20
Speaker 3: outside shock or by a policy mistake. They can avoid
2:23
Speaker 3: the ladder if they're wise and lucky. Policy shocks from
2:29
Speaker 3: say fiscal policy, a politician saying something, an oil price shock,
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Speaker 3: those are impossible to predict and really tricky to navigate.
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Speaker 3: But I think they think they've struck the right balance, Chuck,
2:40
Speaker 3: for now.
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Speaker 2: Do you get a sense in how they're talking now,
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Speaker 2: whether they are more concerned about a rebound in inflation
2:48
Speaker 2: or an uptick in unemployment or does it seem to
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Speaker 2: be fairly balanced concern at the moment.
2:52
Speaker 3: I think it's the ladder, and it's hard to argue
2:56
Speaker 3: with that conclusion. The forces that tend to push inflate
3:00
Speaker 3: up and those that tend to push inflation down. Maybe
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Speaker 3: I say maybe because data gets revised and we never
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Speaker 3: have a complete picture, but appear to be is maybe
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Speaker 3: a better way to phrase it. In balance, as you
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Speaker 3: put it at this point, as evidence by stable though
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Speaker 3: still elevated by many measures inflation and very respectable I
3:24
Speaker 3: was going to say robust That might be a bit
3:26
Speaker 3: of an exaggeration, but respectable solid economic growth, particularly relative
3:31
Speaker 3: to potential, Chuck.
3:33
Speaker 2: When when we look at what we're seeing from the
3:38
Speaker 2: economic growth perspective, and again it's very early. At the moment,
3:43
Speaker 2: we have almost no Q one data. You know, we've
3:47
Speaker 2: had a few reports here and there for January. But again,
3:51
Speaker 2: you and I always like to look at the Atlanta
3:53
Speaker 2: Feds GDP now now cast, which, if anyone's not familiar
3:57
Speaker 2: with it, the basic premise of it is they take
4:00
Speaker 2: a number of economic data releases and as they come out,
4:03
Speaker 2: they make a projection of where economic growth currently stands
4:06
Speaker 2: for the quarter on an ongoing basis, so you can
4:09
Speaker 2: kind of see how it evolves. And again it's it's
4:12
Speaker 2: really early right now, so it's it's not to say
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Speaker 2: that this is definitive or that it means much, but again,
4:18
Speaker 2: it's nice to kind of track the evolution over the
4:21
Speaker 2: course of the quarter, just because again I find that
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Speaker 2: it's informative to see, you know, just how the data
4:28
Speaker 2: in the aggregate is evolving. And what we see right
4:34
Speaker 2: now is that gp now is currently saying, hey, the
4:37
Speaker 2: US economy is growing at two point three percent. Now,
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Speaker 2: as Mark said, this is an estimate, and really it's
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Speaker 2: kind of like an estimate of an estimate. Even more
4:45
Speaker 2: so so, it's it's not something where you look at
4:48
Speaker 2: this and say, okay, like that's definitively what is going
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Speaker 2: on here. But the evolution of it is that when
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Speaker 2: the first release came out for Q one, it was
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Speaker 2: can get around a three point one percent uh print.
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Speaker 2: That was the first one that I have here. It's
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Speaker 2: subsequently you know, spiked on the ISM manufacturing index, but
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Speaker 2: you know, has come back in It's now sitting in
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Speaker 2: about two point three percent, and you know, we'll see
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Speaker 2: where this actually ends up, just because again it's still
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Speaker 2: is very early in the quarter and we don't have
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Speaker 2: a ton of data, but it is something where hey,
5:27
Speaker 2: if if you look at this in the context of
5:29
Speaker 2: where the US economy has been in you know, previous quarters,
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Speaker 2: it is continuing, you know, somewhat of a deceleration, you know,
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Speaker 2: from where it was in Q three of last year,
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Speaker 2: and potentially you know, coming down closer to the type
5:48
Speaker 2: of growth that is a little bit more sustainable. Giving
5:52
Speaker 2: these demographics and other things that feed into growth. The
5:57
Speaker 2: idea that hey, we can grow the US economy at
5:59
Speaker 2: you know, three four or five percent, it's not really
6:03
Speaker 2: something that I think is possible in the long run.
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Speaker 2: And I think Mark would agree largely because one of
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Speaker 2: the main factors that leads to demographic to GDP growth
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Speaker 2: is favorable demographics and people, you know, more people working,
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Speaker 2: and based on you know, the number of kids that
6:18
Speaker 2: were had eighteen years ago. It's just not something that
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Speaker 2: you can get to on a sustainable basis of you know,
6:25
Speaker 2: three four five percent GDP growth in the US, right, Yes.
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Speaker 3: Yeah, that's a key point two point three percent estimated
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Speaker 3: contemporaneous growth, meaning that is a snapshot a now cast,
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Speaker 3: as you pointed out, not a forecast from the Atlanta FED,
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Speaker 3: is higher than most researchers estimate of potential GDP. And
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Speaker 3: you may scoff at that concept of potential growth. I
6:49
Speaker 3: saw the new Treasury secretary on Fox News the other
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Speaker 3: night dismiss it out of hand. Of course, the journalist
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Speaker 3: interviewing him didn't know enough about it to follow up
6:57
Speaker 3: and push back. But it's not a thing of somebody's imagination.
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Speaker 3: It's a product. It's a function of structural forces, like
7:05
Speaker 3: you said, Chuck, labor force growth, how many people there
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Speaker 3: are contributing to the economy, how much they can do
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Speaker 3: in an hour. That's it. Growth doesn't come from anything else.
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Speaker 3: Productivity can be augmented by AI miracles or Internet miracles
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Speaker 3: from time to time, but that gets captured in the data,
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Speaker 3: so you can't assume a you know, a growth, a
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Speaker 3: positive growth shock, a growth miracle from some outside source
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Speaker 3: is going to save the day. So potential GDP it
7:33
Speaker 3: doesn't make the headlines a lot, but it's a very
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Speaker 3: valuable guidepost for policy makers and for people like us
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Speaker 3: who have to make investment decisions on behalf of individuals.
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Speaker 2: Mark what would it take to you know, create a
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Speaker 2: world or a situation in which the US has potential
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Speaker 2: GDP growth close to three three and a half percent?
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Speaker 2: What what what do you need in order for that
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Speaker 2: to happen.
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Speaker 3: We go back to the components and you're you already
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Speaker 3: listed them of potential GDP, it's how many people are
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Speaker 3: working and how much they can produce in an hour.
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Speaker 3: That those two things dictate in economies a speed limit
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Speaker 3: if you like. Now, it can grow faster at times
8:15
Speaker 3: because of say a fiscal stimulus, or because of some
8:17
Speaker 3: favorable event like a big drop in the price of
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Speaker 3: oil that makes inputs cheaper in boost growth. In the
8:23
Speaker 3: nineteen nineties, famously, economic growth sped up because productivity growth
8:28
Speaker 3: sped up because of the pervasiveness of it. The internet,
8:33
Speaker 3: specifically in the nineteen seventies. And by the way, that
8:37
Speaker 3: nineteen nineties confluence of favorable circumstances allowed us to have
8:41
Speaker 3: very high growth, very low on employment, and very low inflation.
8:45
Speaker 3: It was unusual. The exact opposite happened in the nineteen seventies.
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Speaker 3: Productivity growth slowed down about nineteen seventy three. Nobody quite
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Speaker 3: knows why. Labor force growth was high, but productivity growth slowed.
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Speaker 3: Potential growth slowed. Nobody knew what was happening. The Fed
9:02
Speaker 3: didn't know. They thought they weren't stepping on the gas enough.
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Speaker 3: We got and we're going to talk about this later
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Speaker 3: in this morning's stories. We gout as a result stagflation.
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Speaker 2: So chuck.
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Speaker 3: There's not a lot the government can do in the
9:15
Speaker 3: short term to improve potential growth. They can invest in education,
9:18
Speaker 3: so called human capital, and they can do things for
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Speaker 3: our so called social infrastructure, making it easier to do business.
9:26
Speaker 3: This is what the administration, the Trump administration, talks about
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Speaker 3: when they discuss ways to improve the supply side of
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Speaker 3: the economy. That's an effort to increase potential growth. But
9:38
Speaker 3: if it were really easy to do, everybody would do it.
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Speaker 2: Let's take a quick break there. When we come back,
9:43
Speaker 2: Mark mentioned stagflation, we'll talk a little bit about a
9:46
Speaker 2: piece in Bloomberg Opinion talking about whether or not stagflation
9:49
Speaker 2: is poised for a comeback or is that just a
9:52
Speaker 2: bunch of noise.
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10:21
Speaker 2: All right, Mark, you touched on it a little bit
10:23
Speaker 2: in the last segment. But there's a piece from Tyler
10:27
Speaker 2: Cowan in Bloomberg Opinion. Tyler is pretty smart dude. He
10:31
Speaker 2: is a professor of economics at George Mason University. I've
10:36
Speaker 2: read Tyler's stuff for I don't know, probably ten fifteen years.
10:39
Speaker 2: He tends to take a pretty libertarian view of economics generally,
10:44
Speaker 2: you know, advocating for less regulation, less you know, government
10:48
Speaker 2: intervention in markets. And what he points out here is, hey,
10:53
Speaker 2: we've got some concerns about potentially a stagflationary situation that
10:59
Speaker 2: could develop if the Trump administration has bad implementation of
11:03
Speaker 2: the policies that they are suggesting in some cases. And
11:08
Speaker 2: this this isn't to say that you will definitively see this,
11:12
Speaker 2: but Cowen simply points out, Look, you've got inflation that
11:16
Speaker 2: is still, you know, kind of bottoming at a higher
11:20
Speaker 2: level than you'd like to see. When you look at
11:23
Speaker 2: the inflation data that's out there right now, CPI for
11:26
Speaker 2: the last twelve months is at three percent, Core cpis
11:29
Speaker 2: at three three, pcees at two six, core pcees at
11:33
Speaker 2: two eight, and PPIs at three five. Core PPIs at
11:37
Speaker 2: three six. So you're, again, take your pick, but it's
11:40
Speaker 2: it's it's pretty clear inflation is running somewhere in the
11:43
Speaker 2: ballpark of three percent right now. And Cowen points out, look,
11:48
Speaker 2: there are some things that could lead to greater inflation. Specifically, uh,
11:52
Speaker 2: if there are tariffs that are implemented on a widespread basis,
11:57
Speaker 2: Both the additional costs from you know, higher you knowdditional
12:00
Speaker 2: imports or additional costs related to restoring production are likely
12:05
Speaker 2: to push prices up. But the other piece is on
12:08
Speaker 2: the inflation side of things, is that the Trump administration
12:12
Speaker 2: is pushing for you know, lower interest rates, which all
12:15
Speaker 2: else being equal also tends to push more economic activity
12:19
Speaker 2: out into the economy, and it's unclear that the economy
12:21
Speaker 2: can really handle more economic activity given the again the
12:25
Speaker 2: demographics and the set up here. So you have potentially
12:28
Speaker 2: some inflation coming from that as well. And on the
12:32
Speaker 2: growth side of things, the question that I think is
12:34
Speaker 2: out there is look, as much as you know, I
12:37
Speaker 2: think a lot of us can agree that there is
12:40
Speaker 2: probably significantly too much government spending going on right now,
12:44
Speaker 2: with deficits running six to seven percent of GDP on
12:47
Speaker 2: an annual basis, If you were to simply say, hey,
12:51
Speaker 2: we're going to reduce that deficit this year from six
12:56
Speaker 2: percent to three percent, as Treasury Secretary Scott Beston has
12:59
Speaker 2: guided for, you are stripping out a lot of potential
13:02
Speaker 2: demand in the economy, and in doing so, you risk
13:06
Speaker 2: slowing the economy to the point where growth is pretty stagnant,
13:09
Speaker 2: hence the potential for stagflation. Again, I look at this
13:13
Speaker 2: and I say, yes, this is all possible. But this
13:16
Speaker 2: also is why the implementation, the timing, and the specifics
13:20
Speaker 2: of these policies matter because to me, it's not a
13:22
Speaker 2: foregone conclusion that what the Trump what the Trump administration
13:26
Speaker 2: implements is either going to be good, bad, or neutral
13:30
Speaker 2: just because we're still I mean we're a month out
13:33
Speaker 2: from the inauguration right now, so we're still pretty early on,
13:36
Speaker 2: and I think in a number of areas, most notably
13:38
Speaker 2: tariff policy, it still is unclear what those policies are
13:41
Speaker 2: going to look like once they're finally finalized.
13:45
Speaker 3: Let me make the point he's making, but a little
13:48
Speaker 3: bit more traditionally. Sure, we talked about this in the
13:52
Speaker 3: last segment. The economy, objectively speaking, is strong. Arguably not
13:57
Speaker 3: everybody agrees, but seventy five percent I think of researchers
14:01
Speaker 3: would agree with the statement that the economy is running
14:03
Speaker 3: a little bit hot. Indeed, that's confirmed by elevated underlying inflation.
14:07
Speaker 3: That's your thermometer. It's registering a slight fever. You'd have
14:12
Speaker 3: to make a really stretched case to come to any
14:15
Speaker 3: other conclusion. So we start with this set of facts.
14:18
Speaker 3: Economy is running in the GDP rate, the rate of
14:21
Speaker 3: economic growth after inflation, that is, is above what most
14:25
Speaker 3: researchers think is its potential. When an economy exceeds its
14:27
Speaker 3: speed limit, or it's in the red zone. If you
14:29
Speaker 3: want to think about it in terms of your tachometer,
14:31
Speaker 3: not that anybody reads those anymore. That's what pushes inflation up.
14:35
Speaker 3: Demand growing too fast relative to the economy's productive capacity.
14:39
Speaker 3: That's the situation we appear to be in right now.
14:41
Speaker 3: The mistake that the Trump administration might make is the
14:44
Speaker 3: same mistake the Biden administration made, fueling the fire. The
14:49
Speaker 3: sauce has enough chili pepper. If you like Chuck, I
14:52
Speaker 3: know you're practically a chef, you might This is an
14:54
Speaker 3: unusual analogy for me. I'm going outside my comfort zone.
14:57
Speaker 3: I'm gonna try. It's good to push yourself. So when
14:59
Speaker 3: you're when your wife says, you don't put another sprinkle
15:03
Speaker 3: of that whatever, which I don't know, give me a
15:06
Speaker 3: what's what's what's the seasoning that you could overdo it
15:09
Speaker 3: with some like.
15:10
Speaker 2: I mean, you could overdo it with any seasoning technically, okay,
15:12
Speaker 2: I mean you know, you could even have a little
15:14
Speaker 2: too much paprika in there, and all of a sudden,
15:16
Speaker 2: it's like, oh.
15:16
Speaker 3: You've already lost go on, you've already lost me. So
15:19
Speaker 3: the economy's seasoned, it's spicy enough. I think Chuck is
15:22
Speaker 3: a different way of making Cohen's point and some of
15:26
Speaker 3: this depends on your ideology. You pointed out you made
15:28
Speaker 3: an important point at the beginning. People at George Mason,
15:30
Speaker 3: where he teaches, they tend to be libertarian ish, like
15:35
Speaker 3: I can, I can relate. I respect sure, that's a
15:37
Speaker 3: little bit his views. The models they use are a
15:39
Speaker 3: little outside the mainstream. You can come to the same
15:41
Speaker 3: conclusion with using our potential growth relative to actual growth,
15:47
Speaker 3: or unemployment being too low. Cohen would disagree with that framework,
15:50
Speaker 3: but you can come to the same conclusion using it.
15:53
Speaker 3: I'm going to use the more traditional framework and say
15:55
Speaker 3: that the Trump administration might make the same mistake the
15:58
Speaker 3: Biden administration made, which is over seasoning the sauce, pushing
16:02
Speaker 3: the economy too much, whatever metaphor you want to use
16:06
Speaker 3: for this. The result might not initially be stagflation. I'm
16:10
Speaker 3: not sure I'm comfortable going there. It's certainly persistent elevated
16:15
Speaker 3: underlying inflation such that the Fed has to keep rates high. Look,
16:18
Speaker 3: if that's accompanied by strong growth, is anybody gonna care
16:22
Speaker 3: that at core inflation is somewhere in the load to
16:25
Speaker 3: mid threes.
16:27
Speaker 2: We probably not.
16:28
Speaker 3: I don't think so. I can live with that. If
16:31
Speaker 3: it's accompanied by low growth because tariffs act as a
16:38
Speaker 3: drag on economic activity. It's just it's it's hard for
16:41
Speaker 3: me to get there based on what we know today.
16:44
Speaker 3: Is as you said, we need to see how these
16:46
Speaker 3: policies unfold.
16:48
Speaker 2: Yeah, And and look, we're still at a point right
16:52
Speaker 2: now where on the tariff side, everything is increasingly being
16:55
Speaker 2: pushed out to kind of the start of April. The
16:57
Speaker 2: one thing that we're we may see soon is the
17:01
Speaker 2: situation with Canada and Mexico getting a more full resolution
17:06
Speaker 2: simply because that was a one month reprieve on tariff
17:09
Speaker 2: implementation at the beginning of February. So in a couple
17:12
Speaker 2: of weeks we should start to we should have some
17:16
Speaker 2: news on that front. And I think the the big
17:21
Speaker 2: question is going to be the implementation of these these items.
17:24
Speaker 2: I saw a report last night that the Trump administration
17:27
Speaker 2: is considering a twenty five percent tariff on lumber products.
17:30
Speaker 2: And one of the questions that you get to then,
17:32
Speaker 2: when you're talking about Canada in particular, is okay, if
17:35
Speaker 2: you do impose a twenty five percent tariff on Canada,
17:38
Speaker 2: is the twenty five percent tariff on lumber products in
17:41
Speaker 2: addition to that, and so are you talking about something
17:44
Speaker 2: closer to a fifty percent tariff on on you know,
17:46
Speaker 2: imported the lumber from Canada. These are things that we
17:50
Speaker 2: just don't know yet, and so it's it's just something
17:54
Speaker 2: where the fear that I have in the short term
17:58
Speaker 2: is just from talking to more and more business owners.
18:03
Speaker 2: They're just not sure how to operate right now. And
18:05
Speaker 2: we saw this, by the way, in the National Association
18:07
Speaker 2: of home Builders index yesterday that came out where there
18:10
Speaker 2: was a five point drop in that index, and it
18:14
Speaker 2: was largely related to builders having concerns about, you know,
18:18
Speaker 2: future ability to build and sell houses. And so if
18:23
Speaker 2: you're a builder that's concerned about these things, you might say, Okay,
18:25
Speaker 2: am I going to pull fewer permits? How do I
18:28
Speaker 2: handle my pricing? What do I do on this? And
18:31
Speaker 2: I think the part that you get to in my
18:34
Speaker 2: book is okay, if if you're trying to implement large
18:38
Speaker 2: changes economically, I generally view the best time to do
18:41
Speaker 2: that at a time when the economy is hot and
18:44
Speaker 2: inflation is at least somewhat under control. The longer you
18:48
Speaker 2: go with uncertainty on tariffs, the more the economy potentially slows.
18:51
Speaker 2: And now you're running into, you know, the question of Okay,
18:54
Speaker 2: has the economy slowed so much that you know the
18:56
Speaker 2: tariffs are the thing that pushes the economy over the edge.
18:59
Speaker 2: We're not there yet because we just don't know. But
19:02
Speaker 2: in theory, you want to conduct big changes from a
19:05
Speaker 2: place of strength, not when the economy has already slowed.
19:09
Speaker 2: And I think some of the uncertainty on tariffs and
19:11
Speaker 2: other policy is pushing a little bit of slowing in
19:14
Speaker 2: the economy. Nothing huge that we've seen to this point,
19:17
Speaker 2: but a little bit that's there that makes it a
19:19
Speaker 2: little concerning from my perspective.
19:21
Speaker 3: Oh that's the case for Stackflash.
19:23
Speaker 2: I don't like that. I wasn't going that far. Let's
19:27
Speaker 2: take a quick break here. When we come back, we
19:30
Speaker 2: got Wall Street Watch, and then Walmart reported earnings yesterday.
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19:34
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Speaker 4: Oh, markets are negative territory as Wall Street reacts to
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20:13
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Speaker 4: one hundred and thirty six points, Russe of two thousand
20:25
Speaker 4: pulling back by one percent as well. Ten year Treasure
20:28
Speaker 4: Wheel down by two basis points now at four point
20:31
Speaker 4: five zero percent, and crude oil up about six tenths
20:35
Speaker 4: of a percent, trating a seventy two dollars in sixty
20:38
Speaker 4: eight cents a barrel. Walmart skidding by six percent after
20:42
Speaker 4: the retail giant offered weaker than expect to expected guidance,
20:46
Speaker 4: with the company sees earnings per share ranging between two
20:49
Speaker 4: dollars and fifty and two dollars and sixty cents per
20:51
Speaker 4: share below Street forecast. Walmart also said it wouldn't be
20:56
Speaker 4: immune to impacts from currently postponed tariffs on Mexico and
20:59
Speaker 4: Canada to Other retailers, including Target, Dollar General, and Dollar Tree,
21:04
Speaker 4: are also seeing sympathy losses in reaction to the news.
21:09
Speaker 4: Chuck and Mark will have more on Walmart coming up
21:11
Speaker 4: here in a matter of moments. Meanwhile, after its ten
21:14
Speaker 4: percent plunge yesterday, Pallenteer stock down another ten percent today.
21:19
Speaker 4: The downward move comes after The Washington Post reported that
21:22
Speaker 4: the US is readying to cut its defense budget by
21:26
Speaker 4: eight percent annually over the next five years. Separately, Pallenteer
21:31
Speaker 4: unveiled a new stock trading plan. Elsewhere, Ali Bob shares
21:35
Speaker 4: jumping nearly eleven percent after the Chinese e commerce giant
21:39
Speaker 4: posted better than expected quarterly earnings and revenue. Carvana stock
21:43
Speaker 4: down by fourteen percent after the online used car seller
21:47
Speaker 4: posted stronger than expected earnings. However, revenue per vehicle fell
21:53
Speaker 4: in the previous quarter. Shakeshack b quarterly earnings forecast, sending
21:57
Speaker 4: that stock up by eleven percent. The fast chain saw
22:00
Speaker 4: its revenue climb fourteen point eight percent year over year
22:04
Speaker 4: and also opened nineteen new company operated locations. And Wayfair
22:09
Speaker 4: shares down by two and a half percent after the
22:12
Speaker 4: online furniture retailer beat fourth quarter revenue expectations. I'm Tucker Silvan,
22:18
Speaker 4: that's Wall Street Watch.
22:20
Speaker 2: Marcus Tucker noted we saw Walmart report their earnings before
22:25
Speaker 2: the bell this morning, and basically what we saw here
22:30
Speaker 2: is that they are anticipating a full year profit coming
22:34
Speaker 2: in between two fifty and two sixty a share below estimates,
22:38
Speaker 2: and so Walmart's stock at one point this morning was
22:41
Speaker 2: actually down. I think I saw like eight or nine percent.
22:44
Speaker 2: It's now down about five and a half. And overall,
22:47
Speaker 2: I think if you read through like the actual data here,
22:50
Speaker 2: the quarter was actually pretty good. And some of the
22:53
Speaker 2: reduced guidance is for uh, you know, just things in
22:56
Speaker 2: terms of how the calendar sets up at least this
22:59
Speaker 2: you know, in the upcome quarter and things like that.
23:01
Speaker 2: But overall, this is a company that still is showing
23:07
Speaker 2: you know, pretty good overall growth rate. And you know,
23:11
Speaker 2: I think the bigger thing that I see with Walmart,
23:14
Speaker 2: quite honestly, and it's kind of wild to say this
23:17
Speaker 2: right now, just because it's normally such a boring company,
23:23
Speaker 2: I think, quite honestly, they just got a little bit
23:26
Speaker 2: out over their skis as far as the valuation, which
23:28
Speaker 2: is not something that you normally see from a Walmart.
23:32
Speaker 2: But just to give you a point of context, Walmart
23:35
Speaker 2: right now is trading at thirty five times forward earnings.
23:40
Speaker 2: If you look at its average for the last decade,
23:44
Speaker 2: just as an example, it has averaged a forward pe
23:48
Speaker 2: of twenty five point six and that's even including you
23:52
Speaker 2: know period in the last year where its valuation has
23:54
Speaker 2: gone up significantly and again thirty five times earnings. Microsoft,
23:59
Speaker 2: just is, as an example, is trading thirty one times
24:02
Speaker 2: forward earnings right now. So Walmart on an earnings basis
24:06
Speaker 2: is being valued more steeply than Microsoft is right now.
24:12
Speaker 2: And so I think part of this is just as
24:15
Speaker 2: so often happens. Hey, if the expectations are sky high,
24:19
Speaker 2: you can come in just fine and still get punished
24:21
Speaker 2: for it, just because just fine isn't good enough to
24:24
Speaker 2: deal with those kinds of expectations.
24:26
Speaker 3: Your thoughts, Yeah, it's being priced like a growth stock
24:30
Speaker 3: because of the amazing, the unbelievable, in fact, growth in
24:34
Speaker 3: sales over the past five years, just for perspective, from
24:37
Speaker 3: twenty ten to twenty twenty, sales grew. And I'll just
24:42
Speaker 3: do this on an annual basis. The cumulative numbers a
24:45
Speaker 3: little over thirty percent, but the annual if you want
24:47
Speaker 3: to look at it that way, as to and change
24:49
Speaker 3: percent per year, or about the same pace as the economy,
24:53
Speaker 3: which makes sense given their big diversified lineup in their
24:56
Speaker 3: national cresence makes sense to me anyway. So that's the
24:59
Speaker 3: growth sales two in change per year. That's a ten
25:02
Speaker 3: year average in the past five years. Then that ten
25:06
Speaker 3: year average was again twenty ten.
25:08
Speaker 2: To twenty twenty yep.
25:09
Speaker 3: In the last five years, the growth rate has been
25:12
Speaker 3: nearly double foreign change. Yeah, cumulative growth over the last
25:17
Speaker 3: five has been the same again in sales as the
25:19
Speaker 3: previous ten. The growth has been absolutely spectacular. So the
25:24
Speaker 3: multiple that you quoted, the growth stock like multiple makes
25:28
Speaker 3: sense from that point of view. I think the question
25:30
Speaker 3: is is this sustainable or just an overhang of all
25:32
Speaker 3: the COVID stimulus.
25:34
Speaker 2: Hard to say, right, yeah, yeah, it's it's something where
25:38
Speaker 2: you know, if you look at again, I'm just pulling
25:41
Speaker 2: it up right now, so i don't even know what
25:42
Speaker 2: I'm going to find here. But if we look at
25:47
Speaker 2: USCPI over I'm just again, this is completely on the fly.
25:52
Speaker 2: I have no idea what I'm going to find. So
25:53
Speaker 2: this might be useful, it might be completely useless. Over
25:56
Speaker 2: the last ten years, uscpi's averaged two point nine percent,
25:59
Speaker 2: So kind of matches with what you said, Mark, which
26:02
Speaker 2: is not even like the overall US growth right, Like
26:05
Speaker 2: Walmart sales have basically tracked the inflation rate over the
26:07
Speaker 2: last ten That's better.
26:08
Speaker 3: That's a better example, thank you.
26:10
Speaker 2: In the last five years, USCPI is running four two one.
26:14
Speaker 2: So again you kind of look at and you go, Okay,
26:17
Speaker 2: what I think a reasonable case here is And again
26:21
Speaker 2: this is one data point, but I think you can
26:23
Speaker 2: point to it is, Hey, Walmart is able to pass
26:26
Speaker 2: along its costs to end buyers on a pretty you know,
26:32
Speaker 2: consistent basis. The actual growth in sales and how much
26:37
Speaker 2: stuff they're selling beyond that is I think a more
26:40
Speaker 2: open ended question. Is that fair?
26:43
Speaker 3: Yeah, you're right. I didn't adjust my little percentages there
26:46
Speaker 3: and my drawn out exercise for inflation the period I
26:49
Speaker 3: was looking at. Yeah, it's fair. Let me just let
26:51
Speaker 3: me end right there, rather than throwing more numbers out
26:53
Speaker 3: there without thinking more carefully about it. There, Look, it's
26:56
Speaker 3: it's it's impressive. I'll just leave it that. Given their
27:00
Speaker 3: size to grow at this clip, oh yeah, And so
27:04
Speaker 3: to be growing multiples instead of seeing multiples gradually settle
27:08
Speaker 3: down to something that you tradition, that you'd associate with
27:11
Speaker 3: a staid a consumer staples company. They probably don't think
27:15
Speaker 3: of themselves that way, but that's sometimes how I think
27:19
Speaker 3: about it.
27:19
Speaker 2: It's just so impressive, and you know, looking at the again,
27:25
Speaker 2: I'm just kind of looking at you know, some of
27:26
Speaker 2: the other the other pieces in this earnings report to
27:29
Speaker 2: sort out like what's actually going on here. They guided
27:33
Speaker 2: their margins in particular, they guide it a little bit
27:35
Speaker 2: weaker this year, but they're advertising businesses growing pretty darn quickly.
27:40
Speaker 2: They're advertising at Walmart dot Com is up twenty nine
27:43
Speaker 2: percent year over year, so they're seeing something pretty good
27:47
Speaker 2: on that side traffic. Their comps year over year. Comps
27:50
Speaker 2: came in at four point six percent growth. That's down
27:54
Speaker 2: from five point three percent in the prior quarter, so
27:57
Speaker 2: a little bit of rolling over on that side, but
28:00
Speaker 2: again still a pretty good clip that you're seeing there.
28:03
Speaker 2: As far as same store comps. Gross margin was up
28:06
Speaker 2: as a result of the advertising revenue Web sales, like
28:10
Speaker 2: what percentage are coming through Walmart dot com as opposed
28:13
Speaker 2: to in store. Eighteen point eight of their sales coming
28:17
Speaker 2: from Walmart dot com. That's up from sixteen and a
28:20
Speaker 2: half last year, So they are seeing, you know, some
28:22
Speaker 2: pretty good traction on that side. And let's see the
28:28
Speaker 2: other big thing. Remember, sixty percent of Walmart sales are groceries.
28:33
Speaker 2: People often forget that Walmart is the biggest grocery store
28:36
Speaker 2: in the country, and it's not even particularly close. More
28:39
Speaker 2: than half their revenue comes from groceries, and that's that
28:41
Speaker 2: revenue that goes online very easily. So if if nineteen
28:46
Speaker 2: percent of sales are coming from online and sixty percent
28:48
Speaker 2: is groceries, you're probably pretty close to fifty percent of
28:52
Speaker 2: your non grocery sales being bought online at Walmart dot
28:56
Speaker 2: com for them.
28:56
Speaker 3: Have you heard any chatter about how cuts to snow
29:00
Speaker 3: app supplemental what is it? Nutritional assistance program? Also noticed
29:03
Speaker 3: food stamps? I have I've heard. Can you tell me
29:06
Speaker 3: if this is on point or not, or or or
29:08
Speaker 3: true or not that a fifth or so of their
29:11
Speaker 3: sales is accounted for it? And I don't know if
29:14
Speaker 3: that's fifth.
29:14
Speaker 2: It's because the grocery business.
29:15
Speaker 3: Yeah, okay, So if SNAP is cut, and it almost
29:19
Speaker 3: has to be for Republicans to achieve their deficit objectives,
29:23
Speaker 3: how does that affect This question might be rhetorical, might
29:26
Speaker 3: be premature. How does that affect Walmart sales?
29:29
Speaker 2: If you actually see you know, meaningful cuts to Snap benefits.
29:33
Speaker 2: It's it's going to have a meaningful impact on Walmart
29:35
Speaker 2: revenue and profit. How meaningful, I I don't know. I
29:39
Speaker 2: haven't studied the numbers well enough, but it absolutely would.
29:43
Speaker 2: It's it's it's a huge business for them. Let's see.
29:47
Speaker 2: So that's Walmart and what we're seeing on that side
29:50
Speaker 2: of things. Let's take a quick break here and when
29:54
Speaker 2: we come back, we've got a piece from CNBC that
29:59
Speaker 2: we're going to be covering. The earnings picture for stocks
30:01
Speaker 2: is deteriorating. How worried should investors be? Well, we'll let
30:05
Speaker 2: you know right after this text.
30:07
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30:09
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30:12
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30:14
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30:44
Speaker 2: Mark peace out CNBC today, the earnings picture for stocks
30:47
Speaker 2: is deteriorating. How worried should investors be? What's the case
30:50
Speaker 2: they lay out for the earnings picture deteriorating.
30:53
Speaker 3: Well, there are a bunch of I don't know if
30:57
Speaker 3: they're one off examples. I'm gonna call them one off
30:59
Speaker 3: because I don't see anything systemic out of either. Right,
31:03
Speaker 3: So the big picture is this, In any given year,
31:08
Speaker 3: the return on the S and P five hundred or
31:10
Speaker 3: whatever your favorite benchmark for US equity market performance can
31:13
Speaker 3: be broken down into two components, some oversimplifying a little bit,
31:17
Speaker 3: but one is earnings, how much they went up or down.
31:20
Speaker 3: The other is how much investors were willing to pay
31:23
Speaker 3: for future earnings. That can be expressed as a multiple
31:28
Speaker 3: of earnings. PE ratios are one example of the earnings multiple,
31:33
Speaker 3: and there are lots of them. So the point the
31:36
Speaker 3: article makes is, well, if earnings decline from last year's
31:39
Speaker 3: pretty torrid pace, and I forget the year of the year,
31:42
Speaker 3: but what were you in the mid teens for twenty
31:44
Speaker 3: twenty four as the final tallies being so what.
31:47
Speaker 2: I have so far? And this is again we're still
31:49
Speaker 2: not quite yeah, just because like in Nvidia still has
31:52
Speaker 2: to report next week. But calendar, you're twenty twenty four.
31:56
Speaker 2: We've got ten point two percent earnings growth on five
31:58
Speaker 2: point two percent revenue growth.
32:00
Speaker 3: Oh yeah, I was way off. Okay, so even worse.
32:03
Speaker 3: So stocks were up somewhere in the mid twenties. I
32:06
Speaker 3: forget already. If earnings end up up around call it
32:11
Speaker 3: ten percent, I'm rounding down. I guess the rest was
32:15
Speaker 3: what you'd call multiple expansion. Expansion in the price investors
32:20
Speaker 3: are willing to pay for future earnings is measured again
32:23
Speaker 3: by PE ratios. So suppose earnings declined from ten percent
32:26
Speaker 3: last year to five percent this year, is that necessarily
32:28
Speaker 3: bad news for equity as well? We'd prefer higher earnings,
32:32
Speaker 3: that's for sure, But it doesn't mean that investor enthusiasm
32:35
Speaker 3: for equities will ebb to the point where, I don't
32:39
Speaker 3: know it drags down returns. Their willingness to take risk,
32:43
Speaker 3: as manifested in growing PE multiples, might more than make
32:47
Speaker 3: up for that. There have been plenty of years when
32:48
Speaker 3: earnings were soft, lukewarm, to flat or even negative, but
32:53
Speaker 3: investors willingness to take on risk again, as evidence by
32:57
Speaker 3: higher PE multiples, made up for that.
33:01
Speaker 2: And when we look at that, I think ultimately the
33:04
Speaker 2: question that investors ask is, hey, how long could the
33:06
Speaker 2: downturn and earnings last? How deep could it go? And
33:10
Speaker 2: that's you know, those are the things that you look
33:12
Speaker 2: at as you're trying to sort through that type of situation, folks.
33:16
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33:20
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33:27
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33:30
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33:33
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34:57
Speaker 2: Past in Bloomberg talking about how the first month of
35:02
Speaker 2: the Trump administration has actually produced some interesting results in
35:05
Speaker 2: terms of, hey, what markets are performing better than others.
35:10
Speaker 2: The trend over the last fifteen years or so has
35:13
Speaker 2: really been that, aside from a few small instances, US
35:15
Speaker 2: markets specifically the S and P five hundred have dominated
35:18
Speaker 2: international markets today, we're kind of seeing that reversing in
35:24
Speaker 2: a few areas where you've got European markets that have
35:27
Speaker 2: been strong, Chinese markets have been strong, other emerging markets
35:31
Speaker 2: have been pretty good, and overall, the AQUIXUS index is
35:37
Speaker 2: up about seven percent so far here todate, while the
35:39
Speaker 2: S and P five hundred is up about what we
35:43
Speaker 2: got like three in three and three quarters percent as
35:45
Speaker 2: of today. So it's kind of interesting that, hey, for
35:50
Speaker 2: you know, investors who said, okay, you know, Trump is
35:52
Speaker 2: going to be great for American stocks thus far. And again,
35:56
Speaker 2: look it's it's been a month, so like it always
35:58
Speaker 2: kind of bothers me when we write these pieces. We
36:00
Speaker 2: but when people do about hey, like the first month
36:04
Speaker 2: of this has shown this, it's like, okay, like talk
36:06
Speaker 2: to me in like a couple of years. But at
36:08
Speaker 2: least initially, what we have seen here to date is
36:12
Speaker 2: international markets in a lot of cases outperforming domestic US ones.
36:16
Speaker 3: Probably shouldn't surprise Chuck. You pointed out that they've been
36:19
Speaker 3: in a historic drought. There were decades the seventies the
36:22
Speaker 3: eighties when international stocks did spectacularly relative to US, and
36:27
Speaker 3: subsequent to that, of course, institutional investors, people who invest
36:31
Speaker 3: on behalf of pension funds and college endowments and stuff
36:33
Speaker 3: like that piled into them probably got a little ahead
36:37
Speaker 3: of themselves that. Of course, when something gets expensive, that
36:39
Speaker 3: lower's future returns. The more you pay for something today,
36:42
Speaker 3: the lower the yield over time. It's true of a stock.
36:44
Speaker 3: It's as true of a stock as it is of
36:46
Speaker 3: a bond or anything else. So possibly we're still this
36:51
Speaker 3: is not something I'd hang my hat on, but possibly
36:53
Speaker 3: the exuberance of those two and a half or so
36:56
Speaker 3: decades this went on right through the nineties is still
36:58
Speaker 3: burning off a little bit. I'm not sure sure I
37:00
Speaker 3: believe that, but I'm trying to come up with something.
37:02
Speaker 3: So international stocks have gotten really cheap, as you hinted at,
37:05
Speaker 3: and they were bound to turn around at some point.
37:08
Speaker 3: Do we have enough evidence to say that the turnaround
37:10
Speaker 3: is finally arrived? Of course, But you know when some
37:14
Speaker 3: politicians and I'm not gonna name names, Donald Trump, say
37:18
Speaker 3: they're going to fix this, that and the other on
37:20
Speaker 3: day one, it does start to set expectations for evaluation
37:27
Speaker 3: on a very short timeframe or a very high frequency.
37:32
Speaker 3: It is fair, I guess, to judge a politician by
37:34
Speaker 3: where inflation or growth stand today when they promise to
37:37
Speaker 3: fix it on day one, I could be grasping it.
37:40
Speaker 3: Reasons why people are trying to extrapolate from the past
37:43
Speaker 3: five weeks with respect to stock market or inflation or
37:47
Speaker 3: economic data. But it's possibly because politicians set these crazy
37:51
Speaker 3: expectations for miracle cures on day one.
37:54
Speaker 2: Yeah, I just think it's too early to be able
37:57
Speaker 2: to say whether this is anything conclusive or not. And
38:01
Speaker 2: I still remember Tucker Tucker loves when I bring this up.
38:04
Speaker 2: Last year, we had like the first three days of
38:06
Speaker 2: the year down and everyone was writing, all, this is
38:09
Speaker 2: gonna be a horrible year for stocks, and it turned
38:11
Speaker 2: out great. So I try not to read too much
38:14
Speaker 2: into the short term moves. Here quick break hour two
38:17
Speaker 2: of the Financial Exchange coming up in just a bit.