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Something stinks in the financial sector · The Financial Exchange Show

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1:51
Speaker 2: gonna kick things off today talk a little bit about well,
1:55
Speaker 2: this this piece from Barons. What's that, Mike, that.
1:58
Speaker 3: Continued shut down in the lack of government data.
2:00
Speaker 2: Yeah, we're not getting any government data right now, and
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Speaker 2: so ultimately what it means is that Wall Street and
2:08
Speaker 2: US we have to try to figure out what's actually
2:11
Speaker 2: going on in the US economy and specifically what's going
2:14
Speaker 2: on with consumer spending, because remember, consumer spending makes up,
2:20
Speaker 2: depending on the day of the week, anywhere from about
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Speaker 2: sixty five to seventy five percent of overall economic activity
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Speaker 2: in the United States, and so it's kind of important
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Speaker 2: to know what's going on there. So, Mike, overall, what
2:33
Speaker 2: are some of the ways that people are trying to
2:35
Speaker 2: figure out what's happening with consumer spending given the fact
2:40
Speaker 2: that we don't get retail sales data today as we
2:43
Speaker 2: were supposed to, Well.
2:44
Speaker 4: We just had the bank's earning bank earnings come in
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Speaker 4: and a lot of people were asking there about credit
2:49
Speaker 4: card spending, debit card spendings, try and get a read there.
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Speaker 4: But you know, honestly, it is not it's not going
2:55
Speaker 4: to be quite the same as the retail sales data
2:58
Speaker 4: that we get. According to fact Set, there was an
2:59
Speaker 4: ESAY meant for total retail sales to come in at
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Speaker 4: a four tenths a percent monthly increase, which is, you know,
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Speaker 4: a pretty good growth rate. At the same time, we're
3:08
Speaker 4: getting a lot of surveys of individuals who continue to
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Speaker 4: point towards higher prices and just a lack of earnings
3:15
Speaker 4: to compel them to continue to spend. But as we
3:19
Speaker 4: have discussed really as the trend for all of this year.
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Speaker 4: Like it or dislike it, that specific consumer that is
3:27
Speaker 4: struggling to keep up with prices, that has seeing the
3:29
Speaker 4: grocery prices stay out of their range is not really
3:32
Speaker 4: what's been driving the growth. The growth has been coming
3:34
Speaker 4: from that upper well spectrum, and they, according to pretty
3:38
Speaker 4: much every private company and survey you can get your
3:43
Speaker 4: hands on, continue to spend like it's going out of style. Yeah,
3:46
Speaker 4: and this gets it the idea that we've talked about
3:48
Speaker 4: this year. We also discussed this back in twenty twenty one,
3:52
Speaker 4: the idea of a K shaped economy. And you're like, well, Chuck,
3:55
Speaker 4: what the heck is a K shaped economy? How can
3:57
Speaker 4: an economy be shaped like any letter, let alone a K?
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Speaker 4: And basically it's saying, look, those people at the high
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Speaker 4: end of the earning and assets spectrum, they are spending
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Speaker 4: like it's going out of style. The reason being number one,
4:09
Speaker 4: it is going out of style, and number two, you
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Speaker 4: have all of this, you know, growth in markets that
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Speaker 4: can fuel additional purchases, and for high income earners, we're
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Speaker 4: not really seeing any signs that inflation is eating into
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Speaker 4: their purchasing power. In any meaningful way. Right now, what
4:27
Speaker 4: evidence do we have of that?
4:28
Speaker 3: Right?
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Speaker 4: We had a bunch of earnings reports from private companies
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Speaker 4: that confirmed that we had Delta reporting, we had Marriott reporting.
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Speaker 4: What else comes to mind for you that really shows
4:35
Speaker 4: that higher end consumer keeping up.
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Speaker 2: Well, I think that those are key data points. The
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Speaker 2: other one that I point to is we just got
4:42
Speaker 2: a report earlier this week. I think it was from
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Speaker 2: Kelly Bluebook, but maybe it was from Edmunds. I can't
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Speaker 2: remember who, but someone in the auto space, and it showed, look,
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Speaker 2: the average price of a new vehicle purchased in September
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Speaker 2: rose to over fifty thousand dollars for the first time,
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Speaker 2: after we've been floating around like forty eight to forty
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Speaker 2: nine thousand for the last, you know, couple of years.
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Speaker 2: We cleared fifty thousand dollars on new vehicles for the
5:07
Speaker 2: first time ever in that month. But at the same time,
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Speaker 2: auto delinquencies are ticking up at a rapid rate to
5:15
Speaker 2: some of the highest levels that we've ever seen as well.
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Speaker 2: So you try to reconcile these two things, and you say, Okay,
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Speaker 2: I've got vehicle prices moving up to the highest level
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Speaker 2: ever well, does someone making twenty five thousand dollars a
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Speaker 2: year qualify for an auto loan for a fifty thousand
5:32
Speaker 2: dollars vehicle? No, they don't separate question. Maybe but maybe
5:36
Speaker 2: if tricolors making the loan, but otherwise, you know, probably not.
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Speaker 2: So it's not someone with low income that's buying that
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Speaker 2: new vehicle, because quite honestly, most new vehicles are purchased
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Speaker 2: by people with high incomes. The used market is where
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Speaker 2: you tend to see folks with lower incomes kind of
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Speaker 2: dominating the purchasing. And so I think that that's another
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Speaker 2: place where you're clearly seeing what's going on there, another
6:00
Speaker 2: place if you want to look at it, take a
6:02
Speaker 2: look at what's going on with restaurants. We've seen all
6:05
Speaker 2: kinds of weakness in fast food this year, whether you're
6:08
Speaker 2: talking McDonald's, Wendy's, you know, across the board there. It's
6:12
Speaker 2: kind of hard to find a bright spot in the
6:16
Speaker 2: fast food space. The place is where we've seen you know,
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Speaker 2: some decent numbers. Hey, it's in you know, places that
6:25
Speaker 2: are typically a little bit higher and there when you
6:27
Speaker 2: look at Darden and what they're seeing from like Capitol Grill,
6:29
Speaker 2: just as an example, things have been pretty okay there.
6:33
Speaker 2: The one place that kind of goes against that the
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Speaker 2: fast casual places have been getting beaten up. But I
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Speaker 2: think that's just because they're pricing has gotten out of whack.
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Speaker 4: Where fast casual being the Chipotles of the world. Yeah,
6:43
Speaker 4: you know, Chipotle's.
6:44
Speaker 2: COV's been struggling, COVA has been struggling Sweet Green basically
6:47
Speaker 2: think about anything that like wealthy millennials have been attracted
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Speaker 2: to over the last few years. There's been some pullback there,
6:54
Speaker 2: but it's hard to untangle exactly what's going on on
6:57
Speaker 2: that front.
6:57
Speaker 4: Interesting mixed signal I got from somebody just the other day.
7:00
Speaker 4: She owns a cooking class in the Boston area and
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Speaker 4: it's a it's a dedicated space where people can sign
7:06
Speaker 4: up for I think they have a few of these
7:08
Speaker 4: a week, and you can sign up for a common.
7:10
Speaker 3: Date night thing or team building thing.
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Speaker 4: She mentioned to me that the bookings right now have
7:17
Speaker 4: fallen to a level that she didn't even see during COVID,
7:22
Speaker 4: which is yeah, I mean like they pretty much have
7:24
Speaker 4: to shut down. I mean she's not including she's not
7:26
Speaker 4: including the you know, probably six to eight week period
7:29
Speaker 4: where they literally couldn't have any classes. But you know,
7:32
Speaker 4: speaking to I would think of that as a slightly
7:36
Speaker 4: higher end type type activity. But she said, you know,
7:40
Speaker 4: the corporate bookings are still there, but the individual bookings
7:42
Speaker 4: for that date night where you go out and and
7:45
Speaker 4: take a cooking class and then need a good meal
7:47
Speaker 4: have fallen to levels that she has never seen and
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Speaker 4: were even worse than during the COVID levels.
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Speaker 2: Yeah, so that's that's not great when you're seeing that
7:55
Speaker 2: type of action in those types of businesses. So I
7:59
Speaker 2: think overall, when we look at you know, households right now,
8:04
Speaker 2: that K shaped economy, I've actually this is not my
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Speaker 2: own uh, not my own work, Mike, but I actually
8:10
Speaker 2: saw something that I'm gonna.
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Speaker 3: Cite as your own work. No, play dress.
8:15
Speaker 2: It's not the plagiarism if you say it came from
8:17
Speaker 2: someone else, You're like, plagiarism is when you're like, hey,
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Speaker 2: this was my original thought. No, this is very much
8:23
Speaker 2: not my own work. But if we are in a
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Speaker 2: K shaped economy that's being dominated by artificial intelligence AI,
8:31
Speaker 2: if you will, is it safe to say that we
8:34
Speaker 2: are in a Cobra Kai economy?
8:39
Speaker 3: Ah? There it is, Chuck, I believe it is.
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Speaker 2: Okay, I believe it is. So as we continue through
8:46
Speaker 2: the Cobra Kai economy, let's talk a little bit about
8:49
Speaker 2: what we saw yesterday from the Fed Beage Book, because
8:51
Speaker 2: this is another instance where hey, in the absence of
8:55
Speaker 2: the standard government data that we get, we start to
8:58
Speaker 2: do things like actually read the Baisee Bok Bok, which
9:00
Speaker 2: normally we just kind of look at the summary and say, okay,
9:02
Speaker 2: you know, what gives what's going on here? But when
9:06
Speaker 2: we dig through this basically what the Beige Book is
9:08
Speaker 2: for those of you who aren't familiar with it, it
9:11
Speaker 2: is the Federal Reserves twelve branches. One of the main
9:14
Speaker 2: functions that they do that they that they conduct. They
9:18
Speaker 2: go out in their communities on a regular basis and
9:20
Speaker 2: they talk to business owners and they say, what are
9:22
Speaker 2: you seeing? Tell me about what you're experiencing right now,
9:26
Speaker 2: and overall the sense that you get here, and I'll
9:31
Speaker 2: quote from CNBC, the Central Banks Periodic Beage Book, published
9:35
Speaker 2: eight times a year, generally at about six week intervals,
9:38
Speaker 2: categorized overall economic growth as having changed little since the
9:41
Speaker 2: last report on September third. Labor markets were largely stable
9:45
Speaker 2: as demand was muted for most of the fed's twelve districts.
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Speaker 2: When it came to prices, though Trump's duties implemented in
9:52
Speaker 2: April and then staggered through ensuing months, showed an impact.
9:55
Speaker 2: Quote prices rose further during the reporting period. Tariff induced
10:00
Speaker 2: put cost increases were reported across many districts, but the
10:03
Speaker 2: extent of those higher costs passing through to final prices varied.
10:07
Speaker 2: So this was a change from before where you still
10:10
Speaker 2: had in September and August a lot of chatter about
10:12
Speaker 2: companies that we're using existing inventory to not have to
10:15
Speaker 2: move prices up. Yet we're now in a lot of
10:18
Speaker 2: cases through that existing inventory and companies that are needing
10:21
Speaker 2: to reorder saying yeah, I've got to raise prices in
10:24
Speaker 2: order to reorder or I've got to eat it. And
10:27
Speaker 2: now my margins are going down and my profits not
10:29
Speaker 2: as good, And might I lay someone off in the
10:32
Speaker 2: event that I want to maintain my margins?
10:34
Speaker 4: Yeah, And where we continue to see this most pressure
10:36
Speaker 4: is on those smaller firms. Walmart still able to drive
10:40
Speaker 4: those supplier prices lower, but your run of the mill
10:46
Speaker 4: local store with less pricing power really is struggling. I
10:50
Speaker 4: think as we get into retail season. What I'll be
10:53
Speaker 4: looking to differentiate on is when we look at those
10:56
Speaker 4: businesses that are reporting earnings, focusing on the ones that
10:59
Speaker 4: tend to serve a lower income consumer. I think of
11:01
Speaker 4: the dollar stores that are out there. I think of
11:02
Speaker 4: fast food restaurants out there. Are they continuing to see
11:05
Speaker 4: that pullback and are we starting to see it eat
11:08
Speaker 4: into profit margins. I've heard of many of these companies,
11:10
Speaker 4: McDonald's especially, having to offer discounts to bring customers in,
11:14
Speaker 4: and so do we start to see that and do
11:17
Speaker 4: the big guys Walmart two again, Walmart serves many different customers,
11:22
Speaker 4: but what they've really succeeded in over the course the
11:24
Speaker 4: last few years has been bringing in a higher income
11:27
Speaker 4: consumer that's worried about prices, and so they've been able
11:30
Speaker 4: to combat this trend. Some of those other guys not
11:33
Speaker 4: so much. And we'll be hearing from all of them
11:35
Speaker 4: over the course of the next month or so.
11:36
Speaker 2: Let's take a quick break here. When we come back,
11:39
Speaker 2: we'll talk about some of the good in the financial sector,
11:42
Speaker 2: big bank earnings this week, which have been quite honestly,
11:45
Speaker 2: nothing short of outstanding, and then we'll talk about some
11:49
Speaker 2: of the bad in the financial sector, which is, Hey, Jeffries,
11:52
Speaker 2: why did you lend so much money to first Brands?
11:56
Speaker 2: We don't know, but we'll try to figure it out.
11:58
Speaker 3: After this.
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13:06
Speaker 2: So we're basically through the bulk of earning season at
13:10
Speaker 2: this point for big banks. Yes, you know, yesterday you
13:14
Speaker 2: had kind of the last ones, Bank of America, Morgan
13:17
Speaker 2: Stanley reporting, just going down the list of you know,
13:20
Speaker 2: other big banks. Bank New York Mellon reported today, but
13:23
Speaker 2: I don't really consider them a big bank. They're they're
13:26
Speaker 2: kind of mid sized at this point. Same with US
13:28
Speaker 2: Bank Court the.
13:29
Speaker 3: Other Chuck reported this morning as well.
13:32
Speaker 4: They did they did Ushwa no relation, but tomorrow you'll
13:36
Speaker 4: have MX which again not exactly a bank, but you know,
13:39
Speaker 4: another financial institution, but yet to your points, JP, Morgan,
13:42
Speaker 4: Bank America, Wells fargest city, they're all done reporting earnings.
13:45
Speaker 2: So here's what the banks told us when I look
13:48
Speaker 2: at them and the aggregate their investment, banking and trading
13:53
Speaker 2: businesses were going gangbusters in Q three, knocking the cover
13:58
Speaker 2: off the ball, just fantastic. Like you look at that
14:01
Speaker 2: and you're like, the only thing that would be better,
14:02
Speaker 2: as if they were better, But they're they're pretty darn good.
14:07
Speaker 2: The home lending business not really much growth there, kind
14:12
Speaker 2: of flat, kind of nondescript, but no real signs of trouble.
14:16
Speaker 4: They're also not really showing giving any real signs of
14:21
Speaker 4: concern about cracks in the foundation. You'd think about, you know,
14:25
Speaker 4: might they be worried about credit card defaults given everything
14:28
Speaker 4: that we've been talking about with the consumer, and the
14:30
Speaker 4: answer has been no. JPM Morgan actually lowered their expected
14:32
Speaker 4: losses on credit card loans, and so these big banks
14:38
Speaker 4: are not the best bell weather for the overall consumer.
14:44
Speaker 4: But they you know, it's not like they just serve
14:46
Speaker 4: the top ten percent of wealthy individuals. They do serve
14:50
Speaker 4: a large swath of the US customer base. And for
14:53
Speaker 4: them to basically be coming out and saying, no, we're
14:55
Speaker 4: not seeing losses on credit cards, we're not seeing we're
14:58
Speaker 4: not seeing growth on home land, but we're not seeing
15:01
Speaker 4: any real fractures there, it speaks to some real confidence
15:06
Speaker 4: in terms of direction right now.
15:08
Speaker 3: Now.
15:08
Speaker 2: What they are saying is more of what we talked
15:11
Speaker 2: about in the first segment. So Bank of America UH
15:15
Speaker 2: splits their spending growth into a few different areas, and
15:18
Speaker 2: what they showed was, Hey, lower income households, their spending
15:22
Speaker 2: grew point six percent year over year. Higher income households,
15:27
Speaker 2: their spending grew two point six percent year over year. Yes,
15:31
Speaker 2: there's something like there's more data that's kind of backing
15:34
Speaker 2: that up here. So I think that when we look at,
15:38
Speaker 2: you know, what we are seeing from the banks, they're
15:42
Speaker 2: telling us, hey, there's nothing that's really a problem for
15:46
Speaker 2: us yet. And quite honestly, that's what we expect from
15:49
Speaker 2: all of the other data that we've been getting. That
15:51
Speaker 2: there hasn't been anything that's shown stresses in credit card
15:56
Speaker 2: delinquencies this year. There hasn't been anything that's shown stresses
15:59
Speaker 2: in mortgage delinquencies. The one place that we have seen
16:02
Speaker 2: it has been in auto loans. But you could make
16:06
Speaker 2: the case, hey, a lot of that might be happening
16:08
Speaker 2: at the dealer level or through non banks yep, And
16:11
Speaker 2: that is starting to show up in other places, and
16:13
Speaker 2: that's something that we're going to continue to monitor.
16:16
Speaker 4: Once that that I just found wild Chuck. So, Charles Schwab,
16:20
Speaker 4: as I mentioned, reported earnings this morning, and just not
16:24
Speaker 4: your traditional bank obviously, you know, most of us don't
16:26
Speaker 4: have a Charles Schwab bank account, but one of the
16:29
Speaker 4: biggest trading platforms out there, they reported one hundred and
16:33
Speaker 4: thirty four point four billion in total net new assets.
16:36
Speaker 4: That's a forty eight percent increase from a year earlier.
16:40
Speaker 2: Did you say forty eight.
16:42
Speaker 4: Forty eight percent increase from a year earlier in total
16:44
Speaker 4: net new assets, it's more than anybody expected. Their trade
16:50
Speaker 4: revenues is growing thirty percent topping estimates there. And this
16:56
Speaker 4: is only coming to mind because I'm reading Andrew Ross
16:59
Speaker 4: Orkins book nineteen twenty and you know that era of
17:02
Speaker 4: speculation and all that the FED was doing to try
17:04
Speaker 4: to combat it at the time. By the way, Little
17:07
Speaker 4: Tea's Andreas Orkin's coming on the show next Tuesday, if
17:09
Speaker 4: you want to tune in. But it is something that
17:14
Speaker 4: the FED is seemingly not focused on, is the level
17:18
Speaker 4: of speculation, the level of the asset level of the
17:21
Speaker 4: stock market. The idea that they are planning to continue
17:25
Speaker 4: to cut into.
17:27
Speaker 3: What is very clearly.
17:31
Speaker 4: A huge growth in the stock market and a huge
17:34
Speaker 4: growth in the wealth effect is just very intriguing and
17:37
Speaker 4: compared to other times in history, to me.
17:40
Speaker 2: It is I think that you can also make a
17:42
Speaker 2: case that this is a pretty unique time in history
17:45
Speaker 2: in terms of look, we've seen things in the economy
17:50
Speaker 2: and markets over the last five years that we haven't
17:54
Speaker 2: ever seen before and this is kind of an extension
17:58
Speaker 2: of that. So you know, we've talked it, and in
18:00
Speaker 2: terms of why the Fed is moving, it's because they're
18:04
Speaker 2: clearly concerned about the labor market.
18:06
Speaker 3: Yep.
18:06
Speaker 2: And I think rightly so given some of the things
18:10
Speaker 2: that we're seeing out there. Now. If you start to
18:13
Speaker 2: see more and more inflation data that is piling up
18:16
Speaker 2: suggesting that inflation is starting to grow, you know, close
18:19
Speaker 2: to a three and a half or four percent rate
18:20
Speaker 2: as opposed to you know, two nine to three one,
18:24
Speaker 2: then you start having questions about, okay, like should the Fed?
18:27
Speaker 2: You know, is inflation the bigger problem? But in the
18:31
Speaker 2: absence of that inflation data, it's hard to make that case.
18:36
Speaker 4: Speaking of the absence of data, you know, we missed.
18:38
Speaker 4: The last jobs report that would have come out was
18:41
Speaker 4: that two fridays ago. Now I can't keep track of
18:43
Speaker 4: the dates, but comes out the first Friday of every month.
18:45
Speaker 4: Right now, we are in that survey period for the
18:48
Speaker 4: October jobs report. If the government remains shut down, I
18:51
Speaker 4: would think for even another week, it seems unlikely to
18:54
Speaker 4: me that we will get.
18:54
Speaker 3: That October jobs data.
18:56
Speaker 4: Don't know, Yeah, because remember like they release it, you know,
18:59
Speaker 4: three weeks after they actually do the collection, and it
19:02
Speaker 4: takes a while to do it. And right now there
19:05
Speaker 4: is no collection happening because the government's shut down, so
19:08
Speaker 4: we may it's entirely possible we will miss the October
19:11
Speaker 4: jobs report entirely.
19:12
Speaker 2: Yeah, we're now in day sixteen on the shutdown. There,
19:16
Speaker 2: so overall banks telling us, yes, there are some problems
19:20
Speaker 2: with the economy, but not of our doing. There's nothing
19:24
Speaker 2: that's showing up there. Let's take a quick break. When
19:26
Speaker 2: we come back, we do have Wall Street Watch, and
19:29
Speaker 2: then we're gonna talk about Jeffries, the investment bank that
19:34
Speaker 2: somehow decided to lend a bunch of money to first Brands.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFFE show. Breaking business news is always first right here
19:48
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:53
Speaker 1: Street Watch a complete look and what's moving market so
19:56
Speaker 1: far today right here on the Financial Exchange Radio.
19:59
Speaker 5: Netw markets aren't positive territory and extending their gains driven
20:04
Speaker 5: by AI in more strong earnings as investors can continue
20:08
Speaker 5: to monitor the ongoing tradespat between the.
20:10
Speaker 2: US and China.
20:11
Speaker 5: Right now, the Dow is up by tenth of one percent,
20:14
Speaker 5: or fifty four points higher. SMP five hundred is up
20:17
Speaker 5: a third of a percent, or twenty three points higher.
20:20
Speaker 5: Nasdaq is up two thirds of one percent, or about
20:23
Speaker 5: one hundred and fifty points. Russell two thousand is retreating
20:26
Speaker 5: about two tenths of one percent. Tenure treasurealed flat at
20:30
Speaker 5: four point zero four percent, and crude oil is flat
20:33
Speaker 5: as well, leedging higher training a fifty eight dollars in
20:36
Speaker 5: thirty five cents a barrel. Shares in Taiwan Semiconductor are
20:40
Speaker 5: mostly flat now after the chip maker reported another record
20:43
Speaker 5: profit in the previous quarter, jumping thirty nine percent, well
20:47
Speaker 5: above street expectations. The company also hiked its revenue outlook
20:51
Speaker 5: for twenty twenty five. Meanwhile, Nesli said it plans to
20:55
Speaker 5: reduce costs by cutting sixteen thousand jobs over two years,
20:59
Speaker 5: sending share and the maker of kit Kats and Espresso
21:01
Speaker 5: capsules up by eight percent. Elsewhere, JB Hunt Transport Services
21:06
Speaker 5: posted solid third quarter results, beating on earnings and revenue.
21:10
Speaker 5: Shares in the trucking and logistics company are surging nearly
21:13
Speaker 5: nineteen percent on those results. Other trucking companies are also
21:18
Speaker 5: seeing gains in reaction to the news. United Airlines miss
21:21
Speaker 5: third quarter revenue estimates but beat earnings expectations that stocked
21:25
Speaker 5: down by over three percent, travelers down by three percent
21:29
Speaker 5: after posting mixed third quarter results. Sales in shoot excuse me,
21:33
Speaker 5: Shares in Salesforce are jumping about seven percent after the
21:37
Speaker 5: CRM vendor said it expects revenue above sixty billion dollars
21:41
Speaker 5: in twenty twenty and twenty thirty. And tomorrow morning, ahead
21:45
Speaker 5: of the opening bill, we'll see more financial earnings, this
21:48
Speaker 5: time from AMEX. I'm Tucker Silva and that is Wallstree
21:51
Speaker 5: watch Mike.
21:52
Speaker 2: So every every now and then on the show, we
21:57
Speaker 2: just get this convergence where the stat that Tucker has
22:00
Speaker 2: put together is just perfectly timed for something that's happening
22:05
Speaker 2: in the market exactly right now. And this is one
22:08
Speaker 2: of them, like the fifth item in the stack. It's
22:11
Speaker 2: how Jeffries found itself at the center of first brands collapse. Tucker, Tucker,
22:15
Speaker 2: when did you put this together? This was like six.
22:17
Speaker 5: Thirty this spe I don't remember.
22:18
Speaker 2: It was early early, yeah, it was. It was still
22:21
Speaker 2: dark out. And as we sit here right now, Jeffrey's
22:25
Speaker 2: financial open the day flat and sits here right now,
22:29
Speaker 2: down about seven and a quarter percent in the first
22:32
Speaker 2: hour or so of trading, And this obviously leads you
22:35
Speaker 2: to say, what's going on? So you start digging through it.
22:38
Speaker 2: And first let's talk about just what's going on in
22:40
Speaker 2: this piece. So First Brands is the autoparts manufacturer that
22:45
Speaker 2: turned out to be the center of a whole bunch
22:48
Speaker 2: of questionable accounting and off balance sheet lending that now
22:54
Speaker 2: totals somewhere in the ballpark of twelve billion dollars when
22:56
Speaker 2: people thought it was about six billion dollars in debt
22:58
Speaker 2: that they had outstanding.
22:59
Speaker 3: Yeah, I fraud may not be either case.
23:02
Speaker 4: Pretty questionable type stuff that was happening, and many investors
23:07
Speaker 4: or lenders to the company left holding the bag. Here
23:12
Speaker 4: before we go for the does this feel as though
23:14
Speaker 4: it's not getting much coverage in the media, Not First
23:18
Speaker 4: Brand specifically, but we've now had two bankruptcies in the
23:21
Speaker 4: auto space and a lot of financials under pressure, and
23:25
Speaker 4: it just seems to me that the only thing that
23:27
Speaker 4: people want to talk about is either China and tariffs
23:31
Speaker 4: or artificial intelligence.
23:32
Speaker 3: Well, and I know that you know, it's pretty niche.
23:35
Speaker 4: When we're talking about private credit, but it is kind
23:39
Speaker 4: of the grease that makes the economy.
23:41
Speaker 2: Work, the grease that makes the economy. It's the grease
23:45
Speaker 2: on the briddle of the economy. Now we're cooking. So
23:49
Speaker 2: I think that when we talk about this, like, let's,
23:51
Speaker 2: you know, take ourselves back to two thousand and seven.
23:55
Speaker 2: Did anyone in April of seven, you know, want to
23:59
Speaker 2: spend any time I'm thinking about subprime mortgages and whether
24:02
Speaker 2: or not they could matter to the US economy. No,
24:05
Speaker 2: because like no one cared, Like, yeah, I mean, Mike,
24:09
Speaker 2: this is like asking It's like asking a golden retriever
24:14
Speaker 2: to worry about why the lights aren't turning off. Like
24:18
Speaker 2: there's like it doesn't matter, it's just whatever. It's not
24:22
Speaker 2: part of their life, it's not part of their their perception.
24:25
Speaker 2: So I think that when we look at this, yeah,
24:28
Speaker 2: like no one cares about first brands because no one
24:30
Speaker 2: cares about first brands unless you like work for them
24:33
Speaker 2: or a related company. It's not impacting you in any way,
24:36
Speaker 2: shape or form right now.
24:37
Speaker 4: And you know, people don't really care that much about
24:40
Speaker 4: the financial sector. I mean the financial sector as a whole.
24:42
Speaker 4: It's down about nine tenths of a percent this year.
24:46
Speaker 4: This this morning, the S and P is up four
24:48
Speaker 4: tenths a percent. It's kind of buried in the data here,
24:51
Speaker 4: and it's not that impactful on the overall moves in
24:54
Speaker 4: the stock market.
24:54
Speaker 2: So but but here's the thing. You've watched mad Men, indeed,
25:01
Speaker 2: you know, and and you know, there's the famous scene
25:04
Speaker 2: where you know, John John hamm is arguing with Peggy
25:08
Speaker 2: I can't remember the actress's name right now, for what
25:10
Speaker 2: the reason, Elizabeth Elizabeth, It's Moss, that's the one.
25:15
Speaker 3: And so it could do a whole segment, it'd be great.
25:20
Speaker 2: So you know, they're going back and forth, and you know,
25:23
Speaker 2: she's like, I need like more, and he's like, I'm
25:25
Speaker 2: giving you more. And she's like, well, you know, you know,
25:27
Speaker 2: I need like some positive feedback in this neck. And
25:29
Speaker 2: he's like, that's what the money's for. Like that's you know,
25:32
Speaker 2: we get that line, that great line of like, that's
25:33
Speaker 2: what the money's for. And ultimately that's what it comes
25:36
Speaker 2: back to with financials is the money that's out there,
25:39
Speaker 2: Like it all flows through there, and it's for the
25:41
Speaker 2: reason that if you don't have it, none of this
25:44
Speaker 2: actually works like that. The only reason it does is
25:47
Speaker 2: because everyone gets paid, and the only reason that everyone
25:50
Speaker 2: gets paid is because the financial plumbing works. And so
25:54
Speaker 2: I look at what we're seeing today in markets, and
25:58
Speaker 2: you know how, for the last like a month or so,
26:00
Speaker 2: I've been saying that something stinks in the auto sector. Yes,
26:05
Speaker 2: something stinks in the financial sector now and markets are picking.
26:08
Speaker 3: Up on it.
26:09
Speaker 2: Yeah, you've got again a no major news or anything.
26:14
Speaker 2: Insurers across the board selling off three percent, insurance brokers
26:17
Speaker 2: selling off four to five percent.
26:19
Speaker 3: That piece isn't obvious to me.
26:20
Speaker 4: We got to talk about why insurers specifically would be
26:23
Speaker 4: selling off so earlier this week.
26:25
Speaker 3: SMP Global or was it over the weekend, doesn't matter.
26:27
Speaker 4: SMP Global, a big rating agency went out there and
26:31
Speaker 4: gave a warning to insurance companies specifically and said that
26:34
Speaker 4: they hold a lot of this debt on their books
26:39
Speaker 4: that is now being called into question. And so they
26:42
Speaker 4: put that warning out there that hey, these insurance companies
26:45
Speaker 4: hold a fair bit of this. This is where they
26:47
Speaker 4: have gone to juice their returns with their balance sheet
26:49
Speaker 4: over the last few years. It's not been by buying
26:52
Speaker 4: CDs and treasuries like you and I do. They've been
26:55
Speaker 4: making or buying up the loans that other firms like
26:57
Speaker 4: Jeffreys and KKR have been issuing to these small companies
27:01
Speaker 4: that are off the books, not traded, and a little
27:05
Speaker 4: bit opaque in terms of how much is out there.
27:09
Speaker 2: And this this is where we unfortunately like do take
27:11
Speaker 2: a detour back to two thousand and seven because we're
27:14
Speaker 2: gonna have to learn once again about what are called
27:17
Speaker 2: collateralized loan obligation clos. It's basically, remember in finance, there
27:22
Speaker 2: are two ways that everyone blows up. Typically it is
27:25
Speaker 2: either like there's two innovations that you have on anything.
27:28
Speaker 2: It's either how do I lend to a new you
27:31
Speaker 2: know category in some way, shape or form, and then
27:34
Speaker 2: how do I securitize what I have lent. Basically, leveraging
27:39
Speaker 2: and securitization is the whole game in finance. Everything else
27:42
Speaker 2: is just you know, playing games. It's it's not real money,
27:45
Speaker 2: it's not where it's made. So with a collateralized loan obligation,
27:49
Speaker 2: it's pretty simple. You have something that is a loan,
27:53
Speaker 2: money that you've lent to someone. It is collateralized backed
27:56
Speaker 2: by something. In a case of auto loans, it can
27:59
Speaker 2: be backed by the VA goal. In the case of
28:01
Speaker 2: mortgage backed securities, which are a type of clo It
28:04
Speaker 2: can be backed by a mortgage, what was it backed
28:06
Speaker 2: by in first Brand's case inventory and like basically like
28:10
Speaker 2: the windshield wipers and correct. In the case of Tricolor,
28:14
Speaker 2: the auto loans were backing the loans that you know
28:17
Speaker 2: they were making, except Tricolor was then pledging them two
28:20
Speaker 2: and three times over. You had vins that were listed
28:22
Speaker 2: in multiple packages, it turned out. So there's all kinds
28:25
Speaker 2: of gnarly stuff that you're finding. And the problem is
28:29
Speaker 2: that in with insurance companies. Remember insurance companies with how
28:36
Speaker 2: they are able to raise rates and how much they
28:39
Speaker 2: have to charge in order to operate markets. It's a
28:42
Speaker 2: very tightly regulated pricing structure in many markets. But they're
28:45
Speaker 2: also competing for market share.
28:47
Speaker 3: Sure.
28:48
Speaker 2: One of the ways that you can try to improve
28:50
Speaker 2: your pricing is through earning more on your general account.
28:54
Speaker 2: Mike and Chuck each pay in one thousand dollars a
28:57
Speaker 2: year on their auto auto insurance premiums, and hey, if
29:03
Speaker 2: you put that in US treasuries, earning you know four percent, great.
29:06
Speaker 2: The general account grows from two thousand dollars to two
29:09
Speaker 2: thousand and eighty dollars and then they can use that
29:12
Speaker 2: to pay claims. This is a small, simplified example, but
29:15
Speaker 2: that's how it works. On the other hand, if two
29:19
Speaker 2: thousand and eighty dollars is what's needed, but the insurance
29:22
Speaker 2: company says, hey, we can go out and so and
29:25
Speaker 2: so is selling a bunch of collateralized loan obligations that
29:28
Speaker 2: aren't yielding four percent. They're yielding ten percent. And so,
29:33
Speaker 2: Mike and Chuck, instead of you needing to pay us
29:35
Speaker 2: one thousand dollars, you can pay us nine to fifty.
29:39
Speaker 2: We get nineteen hundred dollars from me, We put it
29:41
Speaker 2: into this ten percent colo, and we still get to
29:44
Speaker 2: two thousand ninety dollars right now, and we were able
29:47
Speaker 2: to save you some money. Isn't that great? Yes, it
29:49
Speaker 2: is when everything's humming.
29:50
Speaker 3: Yeah.
29:51
Speaker 2: But what I'm seeing in this market today people are
29:55
Speaker 2: getting nervous about what's going on with these lateralized loan
30:01
Speaker 2: obligations related to private credit. This is why when you
30:04
Speaker 2: look at the big banks, Wells Fargo's up almost a
30:07
Speaker 2: quarter percent today. Bank of America is flat today. JP
30:09
Speaker 2: Morgan's down less than half percent. It's not affecting them
30:12
Speaker 2: because they're not the.
30:12
Speaker 3: Ones to do it.
30:14
Speaker 2: They can't anymore, but they still might end up holding
30:17
Speaker 2: some of this if they're warehousing it in a particular
30:19
Speaker 2: deal or something like that. But it's it's not like
30:21
Speaker 2: the thing for them. But when you look at KKR
30:26
Speaker 2: down two and a quarter percent, Apollo Group down two percent, like,
30:31
Speaker 2: those are things that start to get me being like, okay,
30:33
Speaker 2: what's going on? And then you look at the insurers
30:35
Speaker 2: that are down, you know, anywhere from two to four
30:37
Speaker 2: percent today and insurance brokers down four to seven percent,
30:40
Speaker 2: and you're like, okay, they like the market's starting to
30:45
Speaker 2: finally sniff out, like here's where the problem is going
30:48
Speaker 2: to be if it's going to be there.
30:49
Speaker 3: So we've we've got to take a pretty quick break.
30:51
Speaker 3: But I do want to content after we can do whatever.
30:53
Speaker 3: Yeah right here, Yeah, that's true the game keeping.
30:57
Speaker 4: I want to talk a little bit about what this
31:00
Speaker 4: could mean to the rest of the economy. Obviously, you
31:02
Speaker 4: could have some lenders blowing up, but if credit drives up,
31:08
Speaker 4: to me, that is a bigger story than insurance companies
31:11
Speaker 4: having a tough go of it.
31:13
Speaker 2: They're both big problems for different reasons. Let's talk about
31:16
Speaker 2: what the next three to six months might look like
31:18
Speaker 2: in a good situation and bad situation.
31:21
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31:25
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32:04
Speaker 3: All right.
32:04
Speaker 2: So last segment, Mike, we were talking about the problems
32:08
Speaker 2: in this private credit space, and basically, the way I
32:12
Speaker 2: see it, there are at this point two ways that
32:15
Speaker 2: this can play out. It's entirely binary. In my opinion.
32:19
Speaker 2: This is either going to be a problem or it's not.
32:22
Speaker 2: There's no middle there's no middle ground in this. It's
32:25
Speaker 2: like it's it's either hey, it actually is contained, and
32:29
Speaker 2: it's a small number of companies that are the problem,
32:31
Speaker 2: and all the people holding this are gonna figure this
32:34
Speaker 2: out over the next six months, or they're gonna figure out, Hey,
32:38
Speaker 2: it's it's a bigger problem and you're going to have
32:42
Speaker 2: you know, some real issues there. So the question then
32:45
Speaker 2: is what does it mean, you know, if it's a problem,
32:48
Speaker 2: because if it's not, Basically what you'll see is all
32:51
Speaker 2: of the places where they're worries right now, regional banks, insurers,
32:55
Speaker 2: you know, Jeffries, all these places. Okay, like think about
32:59
Speaker 2: the concern after Silicon Valley Bank, just as an example.
33:02
Speaker 3: Got contained and we moved along, we.
33:04
Speaker 2: Saw banks that were you know, kind of on edge
33:06
Speaker 2: and trading nervously for a month or two, and then
33:09
Speaker 2: everyone was like, yep, everything actually checks out. No one
33:12
Speaker 2: actually has a problem. That's that same scale. The couple
33:15
Speaker 2: other problem ones were dealt with over the the subsequent weeks,
33:18
Speaker 2: and we moved into the summer of twenty three and
33:21
Speaker 2: rallied and there was not another thought about bank failures.
33:25
Speaker 2: So the path out of this is either hey, that's
33:28
Speaker 2: where we go over the next two to three months,
33:31
Speaker 2: or it's another cockroach pops up, another one pops up,
33:35
Speaker 2: They start clustering and then all of a sudden it's okay,
33:37
Speaker 2: no one knows what any of this stuff is actually worth.
33:39
Speaker 4: Yeah, and again you know how this relates to big
33:43
Speaker 4: things that we're all talking about, like artificial intelligence. UBS
33:46
Speaker 4: estimates that at a minimum, the private credit sector as
33:50
Speaker 4: a whole is providing fifty billion dollars in quarterly financing
33:54
Speaker 4: for AI related infrastructure. So I'm a little bit less
33:59
Speaker 4: concerned out the auto sector blowing up, and you know
34:03
Speaker 4: auto loans being a real problem. That is a problem,
34:05
Speaker 4: but it's not going to affect the economy as a whole.
34:08
Speaker 4: It's not going to lead into recession. It's probably not
34:10
Speaker 4: going to spark the stock market to sell off dramatically.
34:13
Speaker 4: The private credit lending industry taking a step back and
34:17
Speaker 4: looking at their loans and saying we need to pause
34:19
Speaker 4: new issuance or dramatically lower new issuance is what could
34:23
Speaker 4: lead us into a really bad spot.
34:24
Speaker 2: And here's the comparison is in the run up to
34:28
Speaker 2: two thousand and eight, Again, this is a quarter of
34:30
Speaker 2: the size of the housing market, so it's not the
34:33
Speaker 2: same scale. It can still cause problems, but different scale
34:36
Speaker 2: of problems. In two thousand and eight, it was Okay,
34:39
Speaker 2: we're concerned about these mortgage backed securities. We're going to
34:42
Speaker 2: pull back on lending to the residential market. Which caused
34:45
Speaker 2: home prices to fall further, which caused more problems with
34:47
Speaker 2: mortgage backed securities. Was this whole cycle that you got into.
34:51
Speaker 2: You could see a similar one in these non bank lenders,
34:55
Speaker 2: these private equity, private credit firms that lend money out
34:58
Speaker 2: to those middle market firms and invest companies and investing
35:01
Speaker 2: companies that say, yeah, we're gonna pull back on deploying
35:04
Speaker 2: capital there, and then you've got a problem in kind
35:08
Speaker 2: of those mid sized businesses with trying to get financing
35:11
Speaker 2: for either expansion or just to cover over existing financing
35:15
Speaker 2: that's out there.
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36:21
Speaker 2: Taiwan Semiconductor reported earnings this morning, and they bumped up
36:27
Speaker 2: their projection for twenty twenty five revenue growth for the
36:30
Speaker 2: second time this year. And basically what they're saying is, Yeah,
36:36
Speaker 2: we're the only game in town, and we've got pricing power,
36:38
Speaker 2: and as long as y'all want some semiconductors, y'all gonna
36:42
Speaker 2: have to pay more to get those semiconductors.
36:44
Speaker 4: I didn't know that the Taiwanese spoke with such a
36:46
Speaker 4: Texas like accent.
36:47
Speaker 3: Have you been to their.
36:48
Speaker 2: New facility Arizona?
36:49
Speaker 4: If not, Yeah, in either case, when I think about this, company. Right,
36:55
Speaker 4: we talk about valuations on Nvidia and and you know
36:58
Speaker 4: what if the Chinese become better developing chips and are
37:01
Speaker 4: able to outpace things here in any case, doesn't TSMC
37:06
Speaker 4: feel a little bit more insulated to any of the
37:08
Speaker 4: risks there? I mean, I know the Chinese want to
37:10
Speaker 4: aid from invasion. Yes, aside from the Chinese literally invading Taiwan,
37:15
Speaker 4: there is nobody else out there that is producing these
37:19
Speaker 4: things at this scale.
37:20
Speaker 3: I know China wants to catch up.
37:22
Speaker 4: I know Intel's trying to do it here domestically, and
37:24
Speaker 4: we're investing a lot of money in here, But doesn't
37:26
Speaker 4: that seem like a ten year story rather than a
37:30
Speaker 4: eighteen month threat to.
37:31
Speaker 3: Their business model?
37:33
Speaker 2: Yes?
37:33
Speaker 4: To me, the only threat to their business model is
37:37
Speaker 4: Ai is a bubble and we are producing too many
37:39
Speaker 4: chips and we all have to and all the companies
37:42
Speaker 4: have to cut back. Then there's a real problem. But
37:46
Speaker 4: there is nobody else that is capable of doing what
37:49
Speaker 4: Taiwan Semi is currently able to.
37:51
Speaker 2: No, it's the in theory. What Intel was trying to
37:55
Speaker 2: build itself into with their foundry business was to be
37:58
Speaker 2: able to compete with Taiwan Semi.
38:00
Speaker 3: And they have utterly failed to do it.
38:01
Speaker 2: But it didn't work, and they're like, okay, like this
38:03
Speaker 2: is this is not going to be part of us
38:04
Speaker 2: going forward. We need to, you know, figure out what
38:06
Speaker 2: to do with that business. So uh, in any case,
38:09
Speaker 2: let's take a quick break. We still got a whole
38:11
Speaker 2: lot more to cover. Our two of the financial exchange
38:15
Speaker 2: is coming
38:15
Speaker 3: Up in a bit