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Why the Bond Market Is Driving Everything Right Now · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Mike Armstrong and Mark Vandetti.
• 1:11
  Speaker 2: Good morning, happy Monday. Welcome back to The Financial Exchange.
• 1:14
  Speaker 2: You know, here in our studio, if you've ever watched
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  Speaker 2: us on YouTube, you might be aware of this, but
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  Speaker 2: we frequently look to the left because there's a big
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  Speaker 2: television screen there and it was facing the other direction.
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  Speaker 2: So I went over and I pivoted our way thinking, hey,
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  Speaker 2: you know, It's been a couple hours since I've checked
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  Speaker 2: on markets. Maybe they staged a full recovery in the
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  Speaker 2: last couple of hours.
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  Speaker 3: They have not.
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  Speaker 2: Equity markets are off by a good half to three
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  Speaker 2: quarters of a percent. Bond yields are up. Oil prices
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  Speaker 2: are up. And we're here to talk to you all
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  Speaker 2: about it after a.
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  Speaker 3: The flood of.
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  Speaker 2: flooding of New England over the course of the last
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  Speaker 2: couple of days here. Hopefully everyone made it out without
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  Speaker 2: any roof leaks or flooding in their backyards or pets
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  Speaker 2: that dragged mud and nasty stuff all over their house
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  Speaker 2: like mine did. And Mike, Mark and Tucker here as
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  Speaker 2: we kick the week off. We've got a jobs week.
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  Speaker 2: We've got an inflation week. So busy week in terms
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  Speaker 2: of economic data coming up. Obviously, some disappointing news for
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  Speaker 2: anyone hoping for cheaper oil prices out of the Middle
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  Speaker 2: East as President Trump rejected the Iranian ridiculous proposal to
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  Speaker 2: reopen the Strait of Hormuz that was never going to
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  Speaker 2: go anywhere. And yeah, we've got equity markets selling off
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  Speaker 2: a little bit and we'll talk about why, especially in
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  Speaker 2: the context of bond yields and what's driving things there.
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  Speaker 3: So Anything that's catching your eye in terms of markets, Mark,
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  Speaker 3: this morning that you think we should start with?
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  Speaker 4: I was just thinking, in light of the way you
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  Speaker 4: described the sell-off, at how mild stocks' reaction has been
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  Speaker 4: to the spike in bond yields, considering the narrative that's
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  Speaker 4: driving that spike.
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  Speaker 3: I agree.
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  Speaker 2: Let's talk about bond yields again for a moment here,
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  Speaker 2: which we spend a lot of time doing, especially recently,
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  Speaker 2: and I'd argue that that's what markets care about right now.
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  Speaker 2: AI is competing for some of that oxygen. But all
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  Speaker 2: eyes have really turned to Treasury, Fed, and interest rates.
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  Speaker 2: And for good reason. They're doing some interesting things. There
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  Speaker 2: was some doubt about seriousness on inflation. And I will
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  Speaker 2: just point out and argue that the U.S. 10-year Treasury
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  Speaker 2: is arguably the single most important price point in the.
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  Speaker 3: Entire global economy.
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  Speaker 4: That's fair.
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  Speaker 2: Obviously, the price of gasoline is far more front and center.
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  Speaker 2: People care a lot about housing prices and other prices.
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  Speaker 2: But in terms of setting how the economy works, the U.S.
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  Speaker 2: 10-year Treasury yield, almost everything else out there is kind
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  Speaker 2: of based off of it or the drivers of it.
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  Speaker 2: And the spike that Mark is talking about is definitely
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  Speaker 2: not insignificant. We have gone just over the course, I'm
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  Speaker 2: trying to think of the most relevant time frame to
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  Speaker 2: talk about here.
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  Speaker 3: End of February. End of February.
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  Speaker 2: Yeah, certainly from the end of February. I think that's, sure,
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  Speaker 2: that's an interesting time period to talk about. February, we
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  Speaker 2: were sitting at under 4.2%. We are, actually, we were sitting,
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  Speaker 2: if you want to take it really low, we got under.
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  Speaker 4: 4%, very briefly before the outbreak of war.
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  Speaker 3: We are now sitting at nearly 5.25%.
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  Speaker 2: That includes two big swings, one back at the beginning
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  Speaker 2: of September, where we moved from 4.75% up to 5%.
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  Speaker 2: And now again, over just the course of the last
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  Speaker 2: week and a half, from five to five and a quarter.
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  Speaker 4: So you never really know why. I'm going to talk
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  Speaker 4: about real or after inflation rates here, because that's what
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  Speaker 4: matters for decision makers.
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  Speaker 3: Okay, so inflation running, what, three and a half percent?
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  Speaker 4: Yeah, I wasn't even going to put a figure on it.
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  Speaker 4: I was just going to, I thought I'd state that
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  Speaker 4: up front so as to not cause any confusion, which
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  Speaker 4: I already have.
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  Speaker 1: Sorry.
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  Speaker 4: So real rates have been going up. The roughly one
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  Speaker 4: percentage point rise in the 10-year treasury yield, and that
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  Speaker 4: translates into higher mortgage rates and stuff like that, obviously,
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  Speaker 4: which I assume we'll talk about. Roughly half of that
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  Speaker 4: is due to after-inflation interest rates, real rates rising. Sometimes
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  Speaker 4: real rates can rise for a good reason. People expect
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  Speaker 4: economic activity to pick up. Firms will borrow more. People
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  Speaker 4: will borrow more. That increases the supply of bonds, loans.
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  Speaker 4: Bonds are just loans.
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  Speaker 1: Uh.
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  Speaker 4: so that is a good reason for interest rates that
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  Speaker 4: is that is a reason interest rates rise with good
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  Speaker 4: implications sure uh... we don't know whether and this is
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  Speaker 4: the point i was trying to get at earlier i
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  Speaker 4: did do it very well we don't know whether the
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  Speaker 4: rising rates the real part of the rising rates is
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  Speaker 4: for the good reasons a i build out uh.
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  Speaker 3: uh.
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  Speaker 4: kai soft companies that run a i programs stuff computers
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  Speaker 4: peripherals all the stuff that goes in the so-called data
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  Speaker 4: centers That would be a good reason, I guess, because
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  Speaker 4: it's boosting growth and it reflects people's positive expectations about
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  Speaker 4: that technology.
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  Speaker 2: We're not putting a judgment here on how we like
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  Speaker 2: or dislike data centers and technology.
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  Speaker 3: No, no, no, no.
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  Speaker 4: I'm just making a statement of fact. I don't want
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  Speaker 4: one in my damn backyard. I don't want one anywhere
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  Speaker 4: near it. But that said, it's happening. Not in my backyard,
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  Speaker 4: but elsewhere. However, this rise in rates started the day
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  Speaker 4: after the war started. If you look at the time
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  Speaker 4: series of real, you were looking at the nominal 10-year,
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  Speaker 4: the stated rate, the one you see in the newspaper.
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  Speaker 4: But you can look at estimated real rates, too, and
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  Speaker 4: they display the same pattern. So that leads me to
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  Speaker 4: question the sort of Pollyannish story, the optimistic take on
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  Speaker 4: the recent rise in rates, which you hear from time
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  Speaker 4: to time. Rates are going up because growth's going up.
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  Speaker 3: Really?
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  Speaker 4: So it's just a coincidence that real rates started to
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  Speaker 4: spike to the day after the war? It's not the
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  Speaker 4: uncertainty engendered by the fluid situation in the Middle East
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  Speaker 4: and the now even more precarious fiscal situation? situation that
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  Speaker 4: we're facing here in the U S that would just
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  Speaker 4: be quite, no one else is to my knowledge has
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  Speaker 4: made this observation. This is just sort of, this is,
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  Speaker 4: you know, we're talking here live on rehearsed. Uh, so
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  Speaker 4: maybe this is flaky, but.
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  Speaker 3: Tucker and I rehearsed before this. That's, uh, you didn't
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  Speaker 3: get the note on the rehearsal.
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  Speaker 4: Is that what was going on? Yeah.
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  Speaker 3: That's too bad for you.
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  Speaker 4: Oh, okay. Well, sir, food next time. Um, so Mike, I,
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  Speaker 4: you know, you never really know why rates are going
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  Speaker 4: up even after the fact. It's debatable. We're still debating
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  Speaker 4: the causes of the Great Depression, for Pete's sake. There's
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  Speaker 4: like a lively little cottage industry. So we'll never know
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  Speaker 4: for sure, but I do find that timing suggestive.
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  Speaker 2: Yeah, it certainly is suggestive about people's interpretations of the
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  Speaker 2: risks on inflation and supply chain disruptions and all sorts.
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  Speaker 4: Of global risks in the economy. Yeah, big question, too.
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  Speaker 2: I will also, I'll raise my hand and say that
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  Speaker 2: I do believe the build out of AI data centers
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  Speaker 2: is more concrete today than it was in February?
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  Speaker 3: Literally. Yeah.
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  Speaker 2: Doesn't it feel a little bit more solidified today than
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  Speaker 2: it was in February? And so those growth plans, those
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  Speaker 2: spending plans have come more into clear focus than it
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  Speaker 2: was back in February. So as you point out, it
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  Speaker 2: is always a multitude of factors. And rising interest rates
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  Speaker 2: does not necessarily mean dictate something broken or wrong.
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  Speaker 4: No, it doesn't portend an upcoming economic disaster. Sometimes it's
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  Speaker 4: good news.
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  Speaker 2: We're going to cover a piece later about, you know, hey,
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  Speaker 2: what happens when rates spike? And the answer in the
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  Speaker 2: stock market is nothing clear.
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  Speaker 4: Well, suppose rates are spiking because of increased, again, growth expectations.
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  Speaker 4: Stocks could be going, this happened. I'm going to do
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  Speaker 4: a chart in our internal meeting tomorrow morning, not for
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  Speaker 4: radio listeners' consumption. But I'm looking at rate spikes and
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  Speaker 4: when they occurred and what was happening around them in
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  Speaker 4: terms of economic growth, inflation. There are just as many
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  Speaker 4: instances to cut to the chase of rates rising. I'll
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  Speaker 4: say again, for good reasons. It's like, I don't know,
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  Speaker 4: you're putting on weight because you're bulking up. You're like
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  Speaker 4: working out. That would be a good explanation for gaining.
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  Speaker 4: This happens, right? I only put it on for bad reasons,
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  Speaker 4: but I'm told.
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  Speaker 3: Some people i've heard from somebody went to a gym
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  Speaker 3: once that.
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  Speaker 4: There was this guy who was a good shape i
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  Speaker 4: was not having a cigarette with his health not and
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  Speaker 4: that is a bad is that what is the context
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  Speaker 4: is really important uh... but again there are timing factors
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  Speaker 4: here that suggest the rise in in the real part
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  Speaker 4: of the the the the the the real increase in
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  Speaker 4: interest rates over the past several months might be ominous.
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  Speaker 3: We've got to take a quick break.
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  Speaker 2: When we come back, whenever rates start moving, the boogeyman
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  Speaker 2: eventually comes out in some way, shape, or form. And
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  Speaker 2: Bloomberg has it this morning with a piece about yield
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  Speaker 2: curve inversion. We're going to talk about the yield curve
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  Speaker 2: inversion and why people like to write about it next
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  Speaker 2: on the Financial Exchange.
• 10:13
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• 10:57
  Speaker 2: Bloomberg this morning writes, an inversion of the U.S. yield
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  Speaker 2: curve becomes new risk as Fed hikes. I suppose there's
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  Speaker 2: somebody that wants to talk about yield curves inverting any
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  Speaker 2: time that the Fed begins hiking. This seems ridiculous right
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  Speaker 2: now to be writing about, but let me talk about it.
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  Speaker 3: The yield on the U.S.
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  Speaker 2: Two-year treasury is currently sitting at 4.922%, according to CNBC,
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  Speaker 2: whereas the 10-year sitting at 5.234 as of this morning. Historically,
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  Speaker 2: when you are looking back at recessions, one thing that
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  Speaker 2: has been pointed out by researchers is that.
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  Speaker 2: Every time there has been a recession in the United States,
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  Speaker 2: we've seen an inversion of these yields, meaning you can
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  Speaker 2: loan out money for a period of time for two
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  Speaker 2: years and get a higher interest rate from the government
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  Speaker 2: than you can get from 10 years. Any qualified researcher
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  Speaker 2: will also tell you that it's happened several times without
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  Speaker 2: a recession occurring after the fact, but every single recession
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  Speaker 2: that has happened, this yield curve inversion has occurred twice.
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  Speaker 2: Sometime before then, I think the average is like 18
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  Speaker 2: to 24 months. I don't even know because I don't
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  Speaker 2: really look at it as important. What I can say
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  Speaker 2: with certainty is it's definitely not important before it's even happened.
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  Speaker 2: And so guessing as to whether or not it will happen,
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  Speaker 2: I think is pretty useless. Also, worrying about yield curve
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  Speaker 2: inversion is worrying about the symptom, not the problem.
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  Speaker 1: Right?
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  Speaker 3: The yield curve inversion is not some.
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  Speaker 4: So your question... Sorry, go ahead.
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  Speaker 2: No, my point is worrying about yield curve inversion is
• 12:36
  Speaker 2: like worrying about getting a fever rather than catching some
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  Speaker 2: really ugly disease that makes you very sick.
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  Speaker 3: You don't worry about the yield curve inversion.
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  Speaker 2: You worry about what it means for the economy, which
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  Speaker 2: would be people very concerned about short-term growth prospects and
• 12:54
  Speaker 2: concerned that the Fed is going to rapidly need to
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  Speaker 2: cut rates... Not the mere fact that the yield.
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  Speaker 3: Curve is inverted. That doesn't affect anyone in reality anywhere.
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  Speaker 4: If it's inverted, this relationship worked really well for a while.
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  Speaker 4: A researcher named Harvey Campbell down at Duke pioneered using
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  Speaker 4: a term in his forecasting models, and a lot of
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  Speaker 4: researchers still do. I'll put one in. I mean, I
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  Speaker 4: just do it sort of as a hobby, but I'll
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  Speaker 4: put one like a lot of people, like any normal person.
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  Speaker 4: I'll put one in mine because it does have predictive
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  Speaker 4: power for an obvious reason. When short-term rates are higher
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  Speaker 4: than longer-term rates, which is anomalous. It's weird. You don't
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  Speaker 4: expect that.
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  Speaker 3: Think about that for a moment, right? It means you
• 13:34
  Speaker 3: can go and get a CD from.
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  Speaker 2: The bank that pays a higher interest rate for two
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  Speaker 2: years than one that pays and you're locked in for
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  Speaker 2: 10 years.
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  Speaker 4: So why would somebody do that, not do that? And
• 13:46
  Speaker 4: there are various reasons why longer-term rates are not just
• 13:49
  Speaker 4: a sequence of shorter-term rates. You don't just buy a
• 13:51
  Speaker 4: one-year CD. and roll it and buy it one year
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  Speaker 4: when it matures and reinvest that and do that for
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  Speaker 4: 10 years. It's not the equivalent of a 10-year bond,
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  Speaker 4: as it turns out, even though you might think.
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  Speaker 3: It would be.
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  Speaker 4: So there are reasons that shorter-term rates should, in a
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  Speaker 4: normal environment, be lower than longer-term rates. You should require compensation,
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  Speaker 4: so to speak, for putting your money out there for
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  Speaker 4: a longer period of time. There's risk there. You don't
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  Speaker 4: know what inflation is going to be. There's credit risk, too,
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  Speaker 4: except for with the U.S. government in theory. when the
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  Speaker 4: so-called curve inverts, just picture something that was pointing up,
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  Speaker 4: meaning short rates are, if you look at your left
• 14:29
  Speaker 4: hand in front of you, on the left-hand side of
• 14:31
  Speaker 4: your left hand, you've got short-term rates, the tip of
• 14:34
  Speaker 4: your middle finger, if that's your longest finger, unnaturally long,
• 14:38
  Speaker 4: maybe like mine, but anyway, that would be where the 10-year,
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  Speaker 4: where the 30-year is normally, that slopes up. Inverted just
• 14:44
  Speaker 4: means you turn your palm if you're doing what I'm doing,
• 14:47
  Speaker 4: and now I don't know why I'm doing it, because
• 14:48
  Speaker 4: it's very awkward, but Point your palm down.
• 14:50
  Speaker 2: Mark currently looks like he's trying to make shadow puppets.
• 14:54
  Speaker 2: We have too many lights.
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  Speaker 4: Monarch butterfly, everybody. Thank you. Okay, so why would the
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  Speaker 4: curve be inverted? Because the Fed's trying to slow the
• 15:03
  Speaker 4: economy to kill inflation. So they jack up short-term rates.
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  Speaker 4: The curve inverts. It starts pointing down. So why do
• 15:10
  Speaker 4: long-term rates come down? Well, people might be worried about
• 15:14
  Speaker 4: the Fed causing a recession, and typically people flee to quality,
• 15:17
  Speaker 4: like government bonds, longer term specifically. They're very interest rate sensitive.
• 15:21
  Speaker 4: So you go there. That will push longer term rates down. Also,
• 15:24
  Speaker 4: people might think the Fed's going to get it under control,
• 15:27
  Speaker 4: as some people do now. The Fed's going to get
• 15:28
  Speaker 4: inflation under, which I actually believe, for what it's worth.
• 15:31
  Speaker 4: They're going to get inflation under control. I'm not going
• 15:33
  Speaker 4: to need as much inflation compensation in the longer. You're
• 15:36
  Speaker 4: checking your watch. Am I going to?
• 15:37
  Speaker 3: No, my watch is vibrating because it was telling me
• 15:39
  Speaker 3: that somebody was calling me. Sorry. Hospital, whatever. Stupid watches
• 15:44
  Speaker 3: these days. They don't tell time. They tell me who's
• 15:47
  Speaker 3: calling me. That's not useful.
• 15:49
  Speaker 4: Go ahead. So it makes perfect sense, Mike, that if
• 15:53
  Speaker 4: the Fed is trying to stamp out inflation, the yield
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  Speaker 4: curve would invert, all else equal.
• 15:59
  Speaker 2: It just seems to me that it's the opposite concern
• 16:01
  Speaker 2: that people have right now. When I think about the
• 16:05
  Speaker 2: concerns that folks have, certainly it's that maybe this AI
• 16:08
  Speaker 2: situation is leading to a bubble that's going to pop
• 16:10
  Speaker 2: But the concerns that people have are we can't get
• 16:13
  Speaker 2: enough diesel.
• 16:13
  Speaker 3: It's going to lead to higher inflation.
• 16:15
  Speaker 2: And growth from the AI sector is so massive that
• 16:18
  Speaker 2: it is crowding out other types of investment. And it's
• 16:23
  Speaker 2: just this massive growth period. I don't hear a lot
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  Speaker 2: of people saying, I am so worried about the Fed successfully.
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  Speaker 3: Stamping out inflation that they're going to cause a recession.
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  Speaker 4: And it's not just pivoting like a seesaw here. It's
• 16:35
  Speaker 4: going up and changing slope at the same. So all
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  Speaker 4: rates are going up. It's just that the short end
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  Speaker 4: is going up faster than the long end. That's not
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  Speaker 4: the usual sort of benign textbook explanation. Excuse me. That
• 16:51
  Speaker 4: doesn't lend itself to the usual comfortable textbook explanation of
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  Speaker 4: why the curve. This is this is more a little
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  Speaker 4: bit more alarming. All rates are going up. So risk
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  Speaker 4: premia are going up, I think. based on what we
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  Speaker 4: talked about in the last segment, but shorter rates are
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  Speaker 4: rising faster than longer-term rates. There's more going on here,
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  Speaker 4: is what I'm saying.
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  Speaker 3: Yeah.
• 17:11
  Speaker 2: A piece from the Wall Street Journal, stocks are defying
• 17:14
  Speaker 2: surging bond yields. I don't think that there is really
• 17:17
  Speaker 2: anything to this story. The Wall Street Journal goes and
• 17:21
  Speaker 2: looks at several different time periods of S & P performance,
• 17:25
  Speaker 2: such as right now.
• 17:27
  Speaker 3: Recently, the 90s, 2000s.
• 17:31
  Speaker 2: I think my overall conclusion, Mark, unless you have a
• 17:34
  Speaker 2: different point on it or a more useful context for bonds,
• 17:37
  Speaker 2: is that in the short to intermediate term, bond yields
• 17:42
  Speaker 2: moving up does not tell you anything concrete about what
• 17:45
  Speaker 2: stocks are.
• 17:45
  Speaker 3: Going to do next.
• 17:46
  Speaker 4: If that's all the information I have, if that was
• 17:49
  Speaker 4: a question on a quiz, hey, bond yields are going up.
• 17:51
  Speaker 4: What are stocks going to do? You serious? Like, what
• 17:54
  Speaker 4: else is going on in the account? Oh, there's a
• 17:55
  Speaker 4: massive AI build-out because everybody's exuberant about AI. Oh, well,
• 18:00
  Speaker 4: I assume stocks are going up. You need context, Mike.
• 18:03
  Speaker 4: Interest rates could be going up for what I'll call
• 18:04
  Speaker 4: good reasons or bad reasons or neutral reasons. Only with
• 18:08
  Speaker 4: context can you make that judgment.
• 18:10
  Speaker 2: Can you help me explain to people why hypothetically... higher
• 18:14
  Speaker 2: interest rates make stocks or other risk assets look less attractive.
• 18:18
  Speaker 2: Because I think that's useful context, but again, it does
• 18:21
  Speaker 2: not tell you anything in the short term.
• 18:22
  Speaker 4: Yeah, that's just mechanics. All else equal, the higher the
• 18:27
  Speaker 4: interest rate, think of it this way. What I get today,
• 18:30
  Speaker 4: I'm going to call that present value, times some interest
• 18:33
  Speaker 4: rate equals future value. You can almost picture that in
• 18:36
  Speaker 4: your head. Present value times just an R, put an
• 18:40
  Speaker 4: R next to it, a little dot or a cross,
• 18:42
  Speaker 4: if that's your multiplication thing, and is equal to future value.
• 18:45
  Speaker 4: You can move... This is a little bit algebra, but
• 18:49
  Speaker 4: everybody can follow this if I can. Move that r
• 18:52
  Speaker 4: over to the right-hand side. Divide both sides by r.
• 18:55
  Speaker 4: What happens when r goes up to present value? Doing
• 18:58
  Speaker 4: a little manipulation I just explained. The thing on the
• 19:00
  Speaker 4: right-hand side, if you'll allow me to ask you to
• 19:03
  Speaker 4: imagine a little equation here, it's got to go down.
• 19:05
  Speaker 4: The denominator just got bigger. That's the simple one-period explanation
• 19:09
  Speaker 4: for why all else equal, a rising discount rate, interest rate,
• 19:14
  Speaker 4: reduces the present value. What's missing from that, of course,
• 19:17
  Speaker 4: is it assumes no growth. If you think AI is
• 19:20
  Speaker 4: going to cause everything to go like gangbusters, then things
• 19:22
  Speaker 4: are going to grow.
• 19:23
  Speaker 3: We've got to take a quick break.
• 19:24
  Speaker 2: When we come back, full market update for you with
• 19:27
  Speaker 2: Wall Street Watches next.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:46
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
• 19:52
  Speaker 1: Tracking the stocks, the data, and the headlines driving markets
• 19:56
  Speaker 1: so far today, right here on the Financial Exchange Radio Network.
• 20:00
  Speaker 5: Markets are in negative territory to kick off a new
• 20:02
  Speaker 5: week with oil prices and treasury yields on the rise
• 20:05
  Speaker 5: again after President Trump rejected Arendt's truce proposal. Right now,
• 20:10
  Speaker 5: the Dow is down over four-tenths of a percent or
• 20:14
  Speaker 5: 225 points lower. S & P 500 down over half
• 20:17
  Speaker 5: a percent or 42 points off. NASDAQ selling off three-quarters
• 20:21
  Speaker 5: of a percent or 209 points lower. Rust 2000 is
• 20:24
  Speaker 5: down about half a percent. 10-year Treasury yield is up
• 20:27
  Speaker 5: five basis points at 5.234%. Crude oil up nearly 2% higher,
• 20:31
  Speaker 5: trading at $ 94. 00. while Brent is up by 2% as well,
• 20:39
  Speaker 5: trading at $ 106 a barrel. NVIDIA's stock is up nearly
• 20:43
  Speaker 5: 3% after the AI and chip giants board approved a
• 20:47
  Speaker 5: $ 150 billion share buyback. This marks the largest ever U.S.
• 20:52
  Speaker 5: stock buyback, surpassing the $ 110 billion buyback from Apple back
• 20:57
  Speaker 5: in 2024. Separately, NVIDIA unveiled a new software platform that
• 21:02
  Speaker 5: can prevent AI agents from going rogue. Meanwhile, after its
• 21:06
  Speaker 5: Near a 13% rally last week, driven by optimism around
• 21:09
  Speaker 5: its AI agent, Muse. Meta shares are retreating 4% today.
• 21:14
  Speaker 5: Speaking of Meta, the Facebook parent hired MongoDB CEO CJ
• 21:19
  Speaker 5: Desai as its chief enterprise platform officer. MongoDB stock is
• 21:24
  Speaker 5: tanking nearly 20% on that news. I'm Tucker Silva, and
• 21:30
  Speaker 5: that is Wall Street Watch.
• 21:33
  Speaker 2: Mark, you pointed something out during the break that I
• 21:35
  Speaker 2: wanted to bring up, because last week we were talking
• 21:38
  Speaker 2: about the reasons rates might be rising.
• 21:41
  Speaker 3: And there's all sorts of those different theories.
• 21:43
  Speaker 2: But one of the concerns that people always have whenever
• 21:45
  Speaker 2: rates go up is, oh, it's the deficit, it's the debt.
• 21:48
  Speaker 2: And people are worried about the stability of the U.S.
• 21:51
  Speaker 2: government and their ability to pay money back. And if
• 21:55
  Speaker 2: that is the concern, one of the ways to detect it.
• 21:58
  Speaker 3: Would be the dollar, the U.S. dollar falling below.
• 22:01
  Speaker 2: Alongside bond yields moving up and perhaps gold getting a
• 22:05
  Speaker 2: bid because it would insinuate, hey, I am trying to
• 22:09
  Speaker 2: dump dollar-denominated assets.
• 22:11
  Speaker 4: Not necessarily. Real rates were going up throughout the early 1980s.
• 22:16
  Speaker 4: Dollar was strengthening. Dollar strengthened to legendary heights, and it
• 22:21
  Speaker 4: necessitated international coordination to bring it down.
• 22:24
  Speaker 2: But that's my point, is was there any real doubt
• 22:26
  Speaker 2: about the state of the U.S. government's willingness to, you know,
• 22:31
  Speaker 2: Was that really a concern back then?
• 22:33
  Speaker 4: Yeah, there were concerns. I mean, arguably those concerns contributed
• 22:37
  Speaker 4: to the 87 crash, too, because the Fed was taking
• 22:40
  Speaker 4: action as somewhat of a consequence of wars. Sorry, I
• 22:45
  Speaker 4: didn't finish that sentence, but I'm just going to jump ahead.
• 22:47
  Speaker 4: It seems quaint now to be worried about a $ 2
• 22:51
  Speaker 4: trillion national debt. It's $ 40 trillion now.
• 22:55
  Speaker 2: You really had a tough time not putting an expletive
• 22:59
  Speaker 2: in the middle.
• 22:59
  Speaker 4: Of that sentence. Yeah, you could see the shape my
• 23:02
  Speaker 4: lips were making there. And you're like, oh, too bad
• 23:03
  Speaker 4: I got to fire him today. He was having a
• 23:05
  Speaker 4: good show. It was going well. So, Mike, we've been
• 23:10
  Speaker 4: saying for my entire life.
• 23:13
  Speaker 3: It'll matter. It'll matter.
• 23:15
  Speaker 4: Maybe it finally does just because you keep warning people.
• 23:18
  Speaker 4: you know, the overweight person, you're going to have a
• 23:20
  Speaker 4: heart attack. You keep smoking and eating like that. And
• 23:23
  Speaker 4: they don't until they're 55. It doesn't mean you weren't right.
• 23:26
  Speaker 4: You're just sort of early. This could be the reckoning
• 23:30
  Speaker 4: that people have been warning everybody about for like 40 years.
• 23:35
  Speaker 4: It's mainly because... Go ahead. I'll stop.
• 23:37
  Speaker 3: It could be.
• 23:37
  Speaker 2: But today, what we have happening, bonds selling off, dollar
• 23:42
  Speaker 2: holding steady, and gold selling off.
• 23:43
  Speaker 4: But I'm just saying those things aren't necessarily contradictory.
• 23:45
  Speaker 3: Not necessarily, but.
• 23:47
  Speaker 2: I would have a much easier time painting a picture
• 23:49
  Speaker 2: of people are selling U.S. denominated assets and going to
• 23:53
  Speaker 2: hard assets if we were seeing different movements in those prices.
• 23:56
  Speaker 3: I have a tough time coming up with a compelling argument.
• 23:58
  Speaker 4: We don't know what they're doing with the dollars they're
• 24:00
  Speaker 4: buying or if it's just very short-term momentum-based speculation.
• 24:04
  Speaker 3: Sure.
• 24:04
  Speaker 4: FX trading dwarfs the foreign exchange trading, dwarfs everything else.
• 24:09
  Speaker 4: It's dominated by speculators. They serve a useful role, obviously.
• 24:13
  Speaker 4: I shouldn't say obviously, but different topic. I wouldn't read
• 24:18
  Speaker 4: that as either a– and I'm not saying you are,
• 24:21
  Speaker 4: but I wouldn't read it as a contradictory or a
• 24:25
  Speaker 4: potentially reassuring signal either because I can think of times
• 24:28
  Speaker 4: when real rates were skyrocketing and the dollar moved right
• 24:32
  Speaker 4: along with them. These rates of return, it could be
• 24:36
  Speaker 4: because it's drawing in some capital into things related to treasuries.
• 24:43
  Speaker 4: I don't know. I mean, you could tell I'm fumbling.
• 24:45
  Speaker 4: I don't really know.
• 24:46
  Speaker 2: I'm going to try and give this next topic exactly
• 24:49
  Speaker 2: as much time as I believe it deserves.
• 24:50
  Speaker 4: Lightning round, lightning round.
• 24:51
  Speaker 3: The U.S.
• 24:52
  Speaker 2: And China, President Trump and President Xi met last week.
• 24:57
  Speaker 2: They agreed on cutting tariffs on some $ 60 billion worth
• 25:01
  Speaker 2: of non-sensitive goods, meaning toys from China, medical devices and
• 25:06
  Speaker 2: agricultural goods from the United States.
• 25:09
  Speaker 3: Nothing blew up. And that was pretty much the excitement. Oh,
• 25:14
  Speaker 3: we got a couple of pandas. So there we go.
• 25:19
  Speaker 3: Anything else that anybody else found?
• 25:20
  Speaker 4: More Chinese imports.
• 25:23
  Speaker 2: Anybody else find anything interesting from the meeting? That was
• 25:26
  Speaker 2: what I would consider to be the highlights. We saw
• 25:29
  Speaker 2: some unimportant moves on tariffs, which I suppose, you know,
• 25:33
  Speaker 2: better than it blowing up in our faces, which I
• 25:35
  Speaker 2: don't think was going to happen if they were meeting
• 25:37
  Speaker 2: in person.
• 25:38
  Speaker 3: And the U.S. got a couple of pandas. So I
• 25:41
  Speaker 3: think that was really the highlight of the meeting. I'm
• 25:43
  Speaker 3: willing to move on from here. One thing I do
• 25:45
  Speaker 3: find interesting, the U.S. has....
• 25:49
  Speaker 2: Properly identified that we have a pretty big risk of
• 25:51
  Speaker 2: importing every rare earth material that we use for pretty
• 25:56
  Speaker 2: much all of the defense from China. And since realizing
• 26:01
  Speaker 2: that back in April of last year, when China basically
• 26:03
  Speaker 2: told us you can't have any, they have started to
• 26:06
  Speaker 2: really put some investment into finding out ways to diversify that.
• 26:10
  Speaker 3: I don't think the U.S.
• 26:11
  Speaker 2: Government has been terribly successful on this, and we probably
• 26:14
  Speaker 2: won't know how successful they have been Until decades later
• 26:19
  Speaker 2: when some of the stuff comes out.
• 26:21
  Speaker 3: But the highlight, go ahead, Mark. You want to get
• 26:23
  Speaker 3: something out of here.
• 26:24
  Speaker 4: Do we have the Wall Street Journal article on this? No,
• 26:26
  Speaker 4: it's not critical. The Wall Street Journal had an article that.
• 26:30
  Speaker 3: Yeah, the U.S. is attacking China's control of critical minerals.
• 26:33
  Speaker 4: Okay, I forget when I read that. Was it yesterday
• 26:35
  Speaker 4: or today?
• 26:36
  Speaker 3: It was in the stack today.
• 26:37
  Speaker 2: And, you know, really what they found is that, yes,
• 26:42
  Speaker 2: the U.S.
• 26:43
  Speaker 3: Has... Where was the exact number? The U.S.
• 26:47
  Speaker 2: Government investments in rare earths Rare earths have grown $ 7. 6
• 26:52
  Speaker 2: billion in the last 18 months. And next year, U.S.
• 26:56
  Speaker 2: defense contractors will be required to eliminate some rare earth
• 27:01
  Speaker 2: materials that are sourced from China from their supply chain.
• 27:05
  Speaker 2: But we don't know which rare earth materials because it's classified.
• 27:09
  Speaker 2: So I think the biggest thing I can say is.
• 27:13
  Speaker 2: Somebody in the government realized how big a problem this
• 27:15
  Speaker 2: was and seems to be investing a lot of money
• 27:17
  Speaker 2: and making it not as big of a problem. And
• 27:19
  Speaker 2: it'll take the better part of a decade to be successful.
• 27:22
  Speaker 4: China did us a favor. We started a trade war.
• 27:24
  Speaker 4: They retaliated. And we realized, oh, crap, we are vulnerable.
• 27:28
  Speaker 4: We better do something about that. Very sensible response.
• 27:33
  Speaker 3: I think so.
• 27:33
  Speaker 4: And one of the probably few examples of government intervention
• 27:37
  Speaker 4: that even a libertarian-ish type person like me can appreciate
• 27:41
  Speaker 4: and make an argument for. Like it or not, these
• 27:44
  Speaker 4: things are vital. They go in virtually everything, every advanced,
• 27:48
  Speaker 4: I'll just say, piece of equipment. You could say missiles.
• 27:51
  Speaker 4: You could say satellites. You could say jet engines, whatever.
• 27:54
  Speaker 4: Everything our military- Semiconductors.
• 27:56
  Speaker 2: Yeah, this one seems very easy for me to get behind.
• 28:01
  Speaker 2: In the days where we're talking about why rent control
• 28:05
  Speaker 2: and price control at grocery stores is a stupid idea,
• 28:08
  Speaker 2: this is one of those where I can sit back
• 28:10
  Speaker 2: and say this seems very reasonable regardless of how the
• 28:14
  Speaker 2: investment turns out.
• 28:14
  Speaker 4: Well, there are considerations that trump the normal economic arguments.
• 28:18
  Speaker 4: Normally you'd say, get it from the cheapest proven supplier.
• 28:22
  Speaker 4: It doesn't really matter where. In this case, they're a
• 28:27
  Speaker 4: I'll just say rival.
• 28:29
  Speaker 3: Strategic rival, that's fine.
• 28:31
  Speaker 4: Enemy's probably more accurate, given where the future, given where
• 28:35
  Speaker 4: history appears to be going. But it would be foolhardy
• 28:39
  Speaker 4: to continue the reliance on them, especially since they taught us,
• 28:43
  Speaker 4: which they probably regret now, if you think about it.
• 28:46
  Speaker 3: Sure.
• 28:47
  Speaker 4: It was their only card to play, arguably. But yeah,
• 28:52
  Speaker 4: they probably regret catalyzing our attempt at becoming independent there.
• 28:57
  Speaker 3: Let's take a quick break. When we come back, drones, mortgages.
• 29:04
  Speaker 2: Now, let's talk a little bit about the rest of
• 29:08
  Speaker 2: this week, key data that we're going to be seeing.
• 29:10
  Speaker 2: That's next here on the Armstrong Advisory Group. I'm Ron Burgundy,
• 29:15
  Speaker 2: and we're going to take a quick break. Financial exchange next.
• 29:19
  Speaker 1: We'll be right back. The Financial Exchange streams every day
• 29:34
  Speaker 1: live on YouTube. Subscribe to our page and follow the
• 29:37
  Speaker 1: markets all morning long, only here on the Financial Exchange
• 29:40
  Speaker 1: Radio Network.
• 29:55
  Speaker 2: We're going to get in a moment to the big
• 29:56
  Speaker 2: data points of the week, but I think we have
• 30:00
  Speaker 2: to get to, before we do that, just an update
• 30:02
  Speaker 2: on bonds, because the moves that we're seeing in the U.S.
• 30:06
  Speaker 2: government bond market are relatively unheard of right now, is
• 30:13
  Speaker 2: what I'm willing to say. So the yield on the
• 30:14
  Speaker 2: 10-year is now up over 5.25%. It's moving nearly eight
• 30:18
  Speaker 2: basis points today, which is a Very sizable move. For
• 30:23
  Speaker 2: an example, you may recall back in April of last
• 30:27
  Speaker 2: year on Liberation Day, April 2nd of last year, what
• 30:31
  Speaker 2: ultimately drove the president and his advisors to turn away
• 30:36
  Speaker 2: from the policy that they were pursuing, which was massive
• 30:41
  Speaker 2: increases in tariffs across the board on pretty much every
• 30:45
  Speaker 2: major trading partner that would have basically tripled the effective
• 30:48
  Speaker 2: tariff rate overnight. The thing that caused them to pull
• 30:52
  Speaker 2: that back and then begin negotiating with countries one by
• 30:55
  Speaker 2: one was a massive spike in bond yields. What we
• 30:59
  Speaker 2: saw was over the course of about a week, a
• 31:01
  Speaker 2: 30 basis point move in yields that effectively had a
• 31:06
  Speaker 2: bunch of the private sector calling the White House and saying,
• 31:10
  Speaker 2: you need to change this quickly or we're going to
• 31:12
  Speaker 2: blow up. It sounded like from the insinuation there are
• 31:15
  Speaker 2: a bunch of hedge fund managers and banks and elsewhere
• 31:18
  Speaker 2: that were on the verge of a really dangerous moment
• 31:22
  Speaker 2: had the president not moved away from that policy. This
• 31:27
  Speaker 2: is not the exact same thing, but I just want
• 31:30
  Speaker 2: to point out where we are right now.
• 31:33
  Speaker 3: On the 1st of September, the yield on the 10-year.
• 31:37
  Speaker 2: Treasury was sitting at, we closed, no, we opened at 4.75.
• 31:44
  Speaker 2: It's now been close to a month and we're at 5.25.
• 31:50
  Speaker 2: I know that that, you know, the range of magnitude,
• 31:52
  Speaker 2: it's bigger move, right? It's 50 basis point move, but
• 31:55
  Speaker 2: it's over the course of a month. I got to
• 31:59
  Speaker 2: say with moves like this, you have to question, are
• 32:00
  Speaker 2: we going to see some of the similar stuff that
• 32:02
  Speaker 2: we saw back in April? The difference now being, I
• 32:06
  Speaker 2: don't know what immediate policy the president could shift to, uh,
• 32:12
  Speaker 2: assuage these concerns, right?
• 32:14
  Speaker 3: Like to, to fix this. I don't know what you do.
• 32:16
  Speaker 3: Do you implement a diesel export ban?
• 32:18
  Speaker 2: Do you, uh, do you immediately try and settle the
• 32:22
  Speaker 2: war with Iran?
• 32:23
  Speaker 3: Like, I just don't know what you could do to
• 32:25
  Speaker 3: fix this problem.
• 32:28
  Speaker 4: This gets back to the difficulty in identifying the reason
• 32:34
  Speaker 4: for rates rising. If it were a discrete event, a
• 32:37
  Speaker 4: policy was announced, uh, Think of the Liz Truss budget
• 32:40
  Speaker 4: in the U.K. U.K. bond market blew up because she
• 32:44
  Speaker 4: announced a bunch of unfunded tax cuts. Unfunded meaning there's
• 32:47
  Speaker 4: no prospect the government is ever going to pay off
• 32:49
  Speaker 4: the debt. The U.S. has been doing that for a while.
• 32:52
  Speaker 4: COVID stimulus was unfunded. We crammed it down the throat
• 32:56
  Speaker 4: of bondholders through inflation for a few years. And tax
• 33:00
  Speaker 4: cuts last year were unfunded. The rationale was, don't worry,
• 33:05
  Speaker 4: they're going to pay for themselves.
• 33:06
  Speaker 1: Yeah.
• 33:08
  Speaker 4: Like we hear every few years from a fiscally reckless administration.
• 33:13
  Speaker 4: So there's always those culprits floating around, just this sort
• 33:17
  Speaker 4: of unfunded spending blowouts, whether it's Democrats spending money or
• 33:23
  Speaker 4: Republicans cutting checks to everybody. Coming home to roost.
• 33:27
  Speaker 2: I think you can certainly say the correlation recently has
• 33:29
  Speaker 2: been with energy prices of one sort or another, whether
• 33:31
  Speaker 2: it's diesel prices.
• 33:32
  Speaker 3: Or oil prices.
• 33:32
  Speaker 4: Well, we pointed that out at the earlier, yeah, yeah, yeah.
• 33:35
  Speaker 3: So that could be something to go after, but I
• 33:37
  Speaker 3: don't know how you fix it.
• 33:38
  Speaker 4: Rates started climbing. The rate of increase has accelerated.
• 33:41
  Speaker 1: Yeah.
• 33:41
  Speaker 4: But rates started climbing on February 28th.
• 33:43
  Speaker 3: Yep.
• 33:45
  Speaker 4: I mean, you don't need to do any sophisticated time
• 33:49
  Speaker 4: series analysis if you're a researcher looking for a break
• 33:51
  Speaker 4: in the trend. I mean, anybody can look at it
• 33:55
  Speaker 4: and say, oh, the war caused interest rates to rise.
• 33:59
  Speaker 5: Leaving your IRA to your children may sound like the
• 34:01
  Speaker 5: obvious choice, but how they receive that money could have
• 34:04
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• 34:15
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• 34:20
  Speaker 5: while they're still working and earning income, potentially creating a
• 34:23
  Speaker 5: larger tax bill. That's one reason why your IRA beneficiary
• 34:27
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• 34:31
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• 34:35
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• 34:51
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• 34:57
  Speaker 1: The proceeding was paid for and the views expressed are
• 34:59
  Speaker 1: solely those of Cushing and Dolan. Cushing and Dolan and
• 35:01
  Speaker 1: or Armstrong Advisory may contact you offering legal or investment services.
• 35:04
  Speaker 1: Cushing and Armstrong do not endorse each other and are
• 35:06
  Speaker 1: not affiliated.
• 35:07
  Speaker 2: We've got a fairly busy week this week for economic data,
• 35:12
  Speaker 2: Fed speeches. There's going to be a number of Fed
• 35:15
  Speaker 2: presidents speaking tomorrow, including Michael Barr, Austin Goolsbee, John Williams,
• 35:22
  Speaker 2: all speaking tomorrow afternoon. But in terms of actual data
• 35:27
  Speaker 2: on Wednesday afternoon or sorry, Wednesday morning, rather, We're going
• 35:31
  Speaker 2: to be getting information on inflation and consumer spending through
• 35:35
  Speaker 2: the PCE index. Right now, expectations, by the way, are
• 35:40
  Speaker 2: for a 3.6% year-over-year reading and 0.3% month-over-month, most of
• 35:45
  Speaker 2: that coming, the month-over-month data coming from the spike in
• 35:48
  Speaker 2: energy rates. The Thursday reports include a ISM manufacturing and
• 35:54
  Speaker 2: a weekly jobless claims number, construction spending as well, which...
• 35:59
  Speaker 2: other than data centers won't look so good. Uh, and
• 36:02
  Speaker 2: then finally Friday, we'll be getting an employment report last month.
• 36:05
  Speaker 2: That jobs report showed 162,000 jobs created as well as
• 36:10
  Speaker 2: revisions to the previous months and, uh, expectations right now
• 36:13
  Speaker 2: for this month, uh, which is going to be, yeah,
• 36:17
  Speaker 2: it comes out Friday for the month of September expectations
• 36:21
  Speaker 2: running right now, 83,000 for that report and a 4.1%
• 36:23
  Speaker 2: unemployment report. Uh, Rather, unemployment rate, which all leads to
• 36:32
  Speaker 2: the question, okay, what does the Fed do then three
• 36:35
  Speaker 2: days before Halloween on October 28th when it comes to
• 36:39
  Speaker 2: their policy decision? At the moment, you've got investors at
• 36:44
  Speaker 2: least betting on another hike right before the midterms.
• 36:48
  Speaker 4: That would be unusual. That would be... That would be
• 36:52
  Speaker 4: an act of tremendous political courage on the part of
• 36:57
  Speaker 4: the Fed if they dared raise rates. So depending on,
• 37:00
  Speaker 4: I guess, the statement that accompanies it. It's a risky
• 37:02
  Speaker 4: thing to do. The Fed would rather, they would say
• 37:04
  Speaker 4: they're insulated. They would say they're disinterested when it comes
• 37:09
  Speaker 4: to those considerations. But they are accountable at the end
• 37:12
  Speaker 4: of the day to politicians.
• 37:13
  Speaker 2: Interestingly, somebody looked at the data on this, and they
• 37:17
  Speaker 2: found that there was not much of a statistical difference
• 37:19
  Speaker 2: in the Fed's likelihood to hike or cut rates within
• 37:24
  Speaker 2: the three months before.
• 37:25
  Speaker 3: The midterms, so historically they haven't done so, which is good.
• 37:28
  Speaker 4: That would confirm the notion that they act independent of
• 37:32
  Speaker 4: political considerations.
• 37:34
  Speaker 2: But in any case, yeah, the Fed currently markets anyway,
• 37:38
  Speaker 2: pricing in another rate hike, not as substantially as they
• 37:42
  Speaker 2: were prior to the last meeting, but a 68.1% chance,
• 37:45
  Speaker 2: according to CME Futures.
• 37:46
  Speaker 4: What do you think? Do you think they'll do it?
• 37:48
  Speaker 3: Fed hikes.
• 37:48
  Speaker 4: Suppose we think they should. I, of course, do. But
• 37:51
  Speaker 4: we can put that aside. Do you think they will?
• 37:53
  Speaker 2: I think that if you just got a unanimous vote
• 37:56
  Speaker 2: for a rate hike at the last meeting, I wouldn't
• 37:57
  Speaker 2: be shocked if they do it again at this meeting
• 37:59
  Speaker 2: in spite of the fact that there's an election upcoming.
• 38:02
  Speaker 3: Markets sell off is worsening here.
• 38:04
  Speaker 2: The Nasdaq now off 1.3 percent and the S &
• 38:08
  Speaker 2: P 500 off a full percentage point as oil and
• 38:11
  Speaker 2: bond yields spike.
• 38:12
  Speaker 3: We'll be back right after this.