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What does the Federal Reserve do? · The Financial Exchange Show

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Speaker 1: a donation today. This is the Financial Exchange with Chuck
1:05
Speaker 1: Zada and Mark Fandetti.
1:10
Speaker 2: Kicking things off. It's Chuck, Mark and Tucker with you,
1:14
Speaker 2: and we're right into the heart of a really busy
1:18
Speaker 2: week of economic data and earnings, and thus far it's
1:22
Speaker 2: been pretty boring for markets, quite honestly, but that's just
1:26
Speaker 2: because of the FED. Is this black hole that just
1:29
Speaker 2: you know, sucks in all the light around it and
1:33
Speaker 2: makes it so that nothing else really moves it on
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Speaker 2: a FED day. But you've got the Dow Jones Industrial
1:38
Speaker 2: average off twelve points, the SP five hundred is up
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Speaker 2: six points, the Nasdaq a little bit of movement. They're
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Speaker 2: about a third of a percent, Green seventy five points up,
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Speaker 2: and so again, pretty quiet in advance of the FED.
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Speaker 2: Not unusual on a FED day. But we did have
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Speaker 2: an awful lot of data this morning, including the first
2:01
Speaker 2: look at second quarter GDP, which came in at a
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Speaker 2: three percent clip. This largely because the import boom that
2:11
Speaker 2: happened in Q one was then preceded by or then
2:15
Speaker 2: followed by an import decline in Q two, and so
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Speaker 2: based on how GDP is calculated, you know, weighed on
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Speaker 2: it in Q one, it boosted Q two. Ultimately you
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Speaker 2: look at it and you say, hey, first half of
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Speaker 2: the year, GDP grew somewhere in the one and a
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Speaker 2: quarter percent range, give or take maybe a quarter percent,
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Speaker 2: So we'll have to see where that evolves to. Big
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Speaker 2: thing is that when you look at what's going on
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Speaker 2: under the hood, when you strip out the trade stuff,
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Speaker 2: that can make it volatile from quarter to quarter. Again,
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Speaker 2: I don't think we suddenly thought that, you know, the
2:47
Speaker 2: economy fell off a cliff in Q one. I don't
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Speaker 2: think we suddenly thought everything's fine in Q two. Underlying
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Speaker 2: private demand probably running somewhere in the one to one
2:55
Speaker 2: and a half percent range right now, and we'll have
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Speaker 2: to see how that evolves as we get to the
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Speaker 2: second half of the year. Tenure Treasury is reversing some
3:05
Speaker 2: of yesterday's gains. It's now up four basis points to
3:07
Speaker 2: four point three six eight percent. Oil is up thirty
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Speaker 2: eight cents barrel to sixty nine fifty nine on West
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Speaker 2: Texts intermediate, and gold is down twenty five eighty an
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Speaker 2: ounced to thirty three fifty five and forty sense mark.
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Speaker 2: Everyone is all excited about the FED meeting this afternoon,
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Speaker 2: which I actually don't think it's going to be that consequential.
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Speaker 2: There's a whole lot of I think hope that we get.
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Speaker 2: You know, a couple descents about FED policy, and gosh,
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Speaker 2: that could make it dramatic, but ultimately a couple descents
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Speaker 2: don't actually lead to a change in policy. So what
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Speaker 2: are we looking for here?
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Speaker 1: Do?
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Speaker 2: Let me ask you the question two questions, What are expectations?
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Speaker 2: And do you believe descents matter when comes to monetary policy?
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Speaker 3: If you don't mind, I'll start with what the FED does,
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Speaker 3: because I think it's important to keep in mind what
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Speaker 3: we expect of them when you start to judge what
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Speaker 3: they're doing or what they ask what they should be doing.
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Speaker 3: The simplest way to think about the FED, which among
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Speaker 3: other things, controls the money supply and uses their control
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Speaker 3: over the money supply, and that's literal how much money
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Speaker 3: is slashing around in the economy. They use banks to
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Speaker 3: do it, but effectively they control the amount of money
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Speaker 3: available to meet the demand for economic activity. You could
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Speaker 3: think of the Fed's function as being a thermostat. When
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Speaker 3: the economy gets too hot. Their job is to cool
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Speaker 3: it down when the economy is not operating at its potential,
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Speaker 3: which is just a different way of saying it's cool.
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Speaker 3: I suppose their job is to stimulate demand, and they
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Speaker 3: do that through their control of the money supply. They
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Speaker 3: print more, lowering their short term target rates so called
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Speaker 3: FED funds rate, and that makes its way over the
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Speaker 3: course of a few to several quarters into the real economy.
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Speaker 3: So that's what the FED does. You could think of
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Speaker 3: it simply as the FED, through interest rates, controls demand.
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Speaker 3: That's what you'd see in a in a textbook in economics. Sure,
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Speaker 3: and that's that's an oversimplification, but not much of one.
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Speaker 3: So to your question about what are people expecting, think
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Speaker 3: about the thermostat analogy. Is the economy running above its potential?
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Speaker 3: Too hot? That is, is it way below its potential
5:29
Speaker 3: too cold? We just got to read on first quarter GDP,
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Speaker 3: which you summarized tough to extrapolate too much from. You
5:36
Speaker 3: wouldn't want to annualize or extrapolate too much from that,
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Speaker 3: I don't think, because it may not be representative. So
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Speaker 3: you have to smooth it out by taking more observations
5:45
Speaker 3: than taking an average. Over the past year, the economy
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Speaker 3: has grown about two percent. I'm gonna say as much
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Speaker 3: as it might be a little bit contrary to the
5:55
Speaker 3: consensus few floating around in the ether out there that
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Speaker 3: the economy's operating at about trend or potential somewhere around
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Speaker 3: two percent might be a little slower than that. I'm
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Speaker 3: not going to argue that point, and honest people can disagree.
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Speaker 2: But your point would be does a little slower merit
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Speaker 2: a change?
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Speaker 3: Does it portend a further slow down? In which case
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Speaker 3: the FED acting is our economic thermostat has to heat
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Speaker 3: the economy up, which would make an argument for lower rates,
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Speaker 3: thus stimulating demand. Alternatively, is the economy light now? The
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Speaker 3: FED is always going to be a little bit forward looking.
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Speaker 3: This is not a perfect. The thermostat analogy is not perfect.
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Speaker 3: A better analogy is these modern programs in which your
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Speaker 3: thermostat is plugged into your utility where it pre cools
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Speaker 3: or preheats ahead of expected demand. The FED is acting
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Speaker 3: smart thermostat. FED is acting more like your smart thermostat
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Speaker 3: by pre cooling or preheating because it knows it's imagine
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Speaker 3: if your furnace was very far or your air conditioner
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Speaker 3: was far away, and it took time to reach your
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Speaker 3: the for the cooler hot air, assuming a forced hot
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Speaker 3: air system, so.
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Speaker 2: You're talking about real central air where there's just it's
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Speaker 2: a huge air conditioning downy and it just spreads it
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Speaker 2: out to the entire country.
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Speaker 3: Can picture the Romans having tried something like that. I
7:07
Speaker 3: guess aqueducts were kind of that way. They probably created
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Speaker 3: a little bit of draft, although not that kind of
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Speaker 3: draft you'd want wafting through your house, considering what flowed
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Speaker 3: through some of those things. But anyway, so they use
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Speaker 3: the if don't get too hung up on monetary policy
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Speaker 3: and the and the arcane specifics of what the FED does.
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Speaker 3: Think of the FED as a thermostat, and much like
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Speaker 3: modern thermostats, they try to preheat or pre cool because
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Speaker 3: you don't know exactly where the economy is at a
7:32
Speaker 3: point in time or where it will be. So to
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Speaker 3: answer your second the second part of your question, Chuck,
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Speaker 3: should the Fed? What should the FED do relative to
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Speaker 3: what's expected? They should do what is expected. You don't
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Speaker 3: want to surprise markets. Absent a very good reason to
7:47
Speaker 3: surprise markets, because markets will infer from your surprise that
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Speaker 3: you know something, or more accurately, fear something that people
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Speaker 3: aren't adequately appreciating. Surprising markets is generally a bad things.
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Speaker 3: Use they hiked today, that would be a shock. People
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Speaker 3: would be passing out, and not from the heat. They
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Speaker 3: would infer from that action that the FED thinks tariff's
8:09
Speaker 3: going to be far or they have real substance of
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Speaker 3: concrete knowledge the tariff's going to be more inflationary than
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Speaker 3: people fear, for example. So you don't want to surprise markets.
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Speaker 3: You want to keep them going slow and steady. And
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Speaker 3: for those of us at home watching this, keep the
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Speaker 3: thermostat analogy in mind as to what the FED does.
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Speaker 3: That'll help you filter out some of the noise and frankly,
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Speaker 3: just some of the bad reporting from the financial press
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Speaker 3: surrounding events like today.
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Speaker 2: So with that in mind, due to sense matter, Oh.
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Speaker 3: I'm sorry that. Yeah, that was like a part B
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Speaker 3: or A of that question.
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Speaker 2: No, maybe it's a second part of the question. Yeah,
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Speaker 2: they do.
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Speaker 3: If you think about what the FED is true. The
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Speaker 3: only reason the FED talks to the public is that
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Speaker 3: they're trying to keep inflation expectations under control full stop.
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Speaker 3: It's the only reason for the press conferences.
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Speaker 2: For j Pal, doesn't Mark doing it.
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Speaker 3: No, you can tell these sort of a reluctant a
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Speaker 3: spokesperson if you will. There in for decades the FED
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Speaker 3: did not talk to the public. But in the seventies
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Speaker 3: we realize inflation expectations matter. They contribute to the persistence
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Speaker 3: of inflation, and the FED realize they can control expectations
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Speaker 3: by projecting certain things to the public and make for
9:19
Speaker 3: self fulfilling prophecies that way. So descents will matter because
9:23
Speaker 3: people will infer that there might be a chance of
9:27
Speaker 3: descents either way matter. I suppose those dissenting blocks, if
9:31
Speaker 3: they have a persuasive argument, could become majority blocks in
9:34
Speaker 3: the next whatever six weeks when the FOMC Federal Open
9:37
Speaker 3: Market Committee, the decision making body meets again. So yeah,
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Speaker 3: I think they do matter. And you can't ignore the politics, right, Chuck,
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Speaker 3: there's a big there's a political backdrop here that cannot
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Speaker 3: be ignored. The President is going to put a flunky
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Speaker 3: at the FED in less than a year, and I
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Speaker 3: don't use that term lightly. I mean he's going to
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Speaker 3: put a toady, a flunky, someone who will do his
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Speaker 3: will or so. He thinks that institution is about to
9:59
Speaker 3: change from and he's to sense may give us a
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Speaker 3: sense for how things are gonna shape up, especially if
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Speaker 3: it's somebody like Waller who seems to be posturing for
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Speaker 3: the job to.
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Speaker 2: Take a quick break here. When we return, we've got
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Speaker 2: a little bit of trivia coming up next.
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12:18
Speaker 2: As we go through second quarter earnings, one of the
12:21
Speaker 2: things that we are starting to get are the indications
12:24
Speaker 2: from companies as to how tariffs are impacting them, and
12:29
Speaker 2: pretty much across the board, we're seeing, you know, some
12:31
Speaker 2: fairly sizable numbers uh from different companies. General Motors when
12:36
Speaker 2: they reported last week they said, look tariffs are effectively
12:39
Speaker 2: eating up twenty nine percent of our profit when it's
12:42
Speaker 2: all said and done. U Stalley Blackendecker said earlier this
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Speaker 2: week they expect an eight hundred million dollars annualized hit
12:50
Speaker 2: related to tariff policy. Canagra brands said they expect an
12:54
Speaker 2: annual increase of about two hundred million dollars in the
12:58
Speaker 2: cost of their goods sold. And so so you're starting
13:01
Speaker 2: to get a sense of where these numbers are. And
13:04
Speaker 2: I got to tell you a combination of things, A,
13:06
Speaker 2: how far this market is run and B you know,
13:08
Speaker 2: the numbers that we're actually seeing from companies. You're generally
13:12
Speaker 2: seeing companies that are reporting earnings struggling, in particular if
13:16
Speaker 2: they're missing expectations. And I think this is the first
13:21
Speaker 2: sign of, you know, kind of where this is starting
13:23
Speaker 2: to actually have an impact in the US economy. We've
13:27
Speaker 2: said all along, look, if you are adding this additional cost,
13:33
Speaker 2: it has to go somewhere in the system. We're starting
13:36
Speaker 2: to see signs of it popping up in the system now.
13:39
Speaker 2: But even at this point it still is kind of
13:41
Speaker 2: a ramp up. The estimates that I've seen now for
13:44
Speaker 2: June based on the trade data that we got yesterday.
13:49
Speaker 2: The average weighted teriff rate on imports in the month
13:52
Speaker 2: of June climbed to just north of ten percent from
13:55
Speaker 2: somewhere in the mid sevens in May. So you're still
14:00
Speaker 2: mping up. And remember when something's imported is not when
14:03
Speaker 2: it is sold. It typically has anywhere from thirty to
14:06
Speaker 2: ninety days between being imported and actually ending up on
14:09
Speaker 2: a store shelf. So the expectation that I think we
14:12
Speaker 2: have right now is that you're going to see further
14:16
Speaker 2: impacts as we get into August and September because the
14:20
Speaker 2: products that were imported in June are typically sold in
14:23
Speaker 2: that time.
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Speaker 3: There, tariffs are supposed to cause pain, that's the whole point.
14:27
Speaker 3: They're supposed to induce consumers to switch to domestically produce
14:30
Speaker 3: stuff and similarly with manufacturers to switch to domestic inputs,
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Speaker 3: unless you have some other objective for tariffs, maybe to
14:37
Speaker 3: raise revenue, which case they're.
14:38
Speaker 2: Still supposed to cause there's no free lunch.
14:41
Speaker 3: Yeah, perfect, So why the administration keeps saying other countries
14:44
Speaker 3: are going to pay these or the tooth fairy is
14:47
Speaker 3: going to pay them, or whatever Their latest explanation of
14:50
Speaker 3: why tariffs will impose no economic pain. Why they will
14:52
Speaker 3: constitute a free lunch to use your expression is kind
14:58
Speaker 3: of bewildering. Just admit, yeah, they're supposed to cause pain
15:01
Speaker 3: so that you start buying stuff that's made here, and
15:03
Speaker 3: just admit that that's going to cost more. It results
15:06
Speaker 3: in other inefficiencies. You don't have to quite go that
15:08
Speaker 3: far if you're a politician, I guess. And that's why
15:10
Speaker 3: ultimately they'll be inflationary. For how much and for how
15:13
Speaker 3: long depends somewhat on the FED, I guess.
15:16
Speaker 2: Yeah, it still is an open question as to exactly
15:19
Speaker 2: what we see from inflation and how long it lasts. Yeah,
15:21
Speaker 2: and not just the FED, but also tariff policy. Does
15:24
Speaker 2: it continue to evolve over time? We've got new rates
15:27
Speaker 2: that may be hitting. We've already had some that have hit,
15:29
Speaker 2: you know, in recent days and weeks with the deals
15:32
Speaker 2: that have been struck. Those rates are ramping up from
15:35
Speaker 2: you know baseline of ten to fifteen in many cases,
15:38
Speaker 2: in some cases higher than that. And so hey, if
15:43
Speaker 2: we continue to raise tariff rates over time, how does
15:46
Speaker 2: that impact companies and the inflation picture as well? So
15:49
Speaker 2: there are still a number of open questions as we
15:53
Speaker 2: go into the second half of the year.
15:54
Speaker 3: I think I'm amazed at how bad the reporting has
15:59
Speaker 3: been on so of this, the reporting of the explanations
16:02
Speaker 3: and the likely effective tariffs. If you're confused about this subject,
16:07
Speaker 3: I am too. I don't want to speak for both
16:09
Speaker 3: of us. I'm definitely confused. And on top of that,
16:12
Speaker 3: there's a lot of stuff we don't know. These deals
16:14
Speaker 3: have not yet been well.
16:17
Speaker 2: And they're not going to be ratified by Congress, so
16:19
Speaker 2: these are not things that are going to be made.
16:22
Speaker 3: The Congress could rest that power back from the President
16:26
Speaker 3: and void all this stuff.
16:27
Speaker 2: Well, there's also the chance, remember, starting tomorrow, you have
16:30
Speaker 2: the appeal of the International Court of Trade ruling that
16:35
Speaker 2: was I think that was late May or early June
16:38
Speaker 2: that said, no, the President does not have the authority
16:41
Speaker 2: to have these tariffs in place based on the emergency
16:45
Speaker 2: powers that are granted that he was citing. And so
16:48
Speaker 2: depending on how those appeals end up playing out, there
16:51
Speaker 2: still is an open question right now, at least as
16:54
Speaker 2: to the statutory authority, and we could be sitting here,
16:58
Speaker 2: you know, six weeks or three months from now, depending
17:01
Speaker 2: on you know, whether this gets all the way to
17:02
Speaker 2: the Supreme Court saying Okay, like do these actually stay
17:07
Speaker 2: in place? We still don't know, right and.
17:10
Speaker 3: You've told stories of people, you know, purchasers or owners
17:13
Speaker 3: of businesses who have put their plans on hold or
17:17
Speaker 3: are dramatically changing their their business model because of this
17:21
Speaker 3: tariff uncertainty. So that's another sense in which policy i'll
17:25
Speaker 3: just call it chaos for lack of a kinder word,
17:28
Speaker 3: has real economic effects.
17:29
Speaker 2: So I think where we stand right now is there's
17:34
Speaker 2: still a great deal of uncertainty because again, these these
17:37
Speaker 2: tariffs could be ruled you know that they're not able
17:40
Speaker 2: to go into effect. We could see higher rates that
17:43
Speaker 2: go into effect and stay in effect. We could see multiple,
17:46
Speaker 2: you know, continued hikes in these tariff rates. We don't
17:49
Speaker 2: know exactly where these are going to go. It still
17:55
Speaker 2: is somewhat of an open question as we get into
17:59
Speaker 2: this second half of the year. But ultimately we are
18:04
Speaker 2: hearing from companies now, yeah, we've got some some money
18:08
Speaker 2: that we're you know, having to allocate towards paying these tariffs.
18:12
Speaker 2: We may in some cases Procter and Gamble yesterday, I
18:15
Speaker 2: think it was indicated that they would start pushing through
18:19
Speaker 2: tariff related price hikes on about a third of their products,
18:22
Speaker 2: they said, So it's going to be something where Q
18:27
Speaker 2: three is where it seems like you're going to start
18:29
Speaker 2: seeing it really showing up, and we'll have to see
18:32
Speaker 2: how the US economy evolves as that becomes, you know,
18:36
Speaker 2: kind of more of a fact of life.
18:40
Speaker 3: Am I right when I say higher prices are the
18:42
Speaker 3: point to get you to?
18:44
Speaker 5: Or?
18:44
Speaker 3: Am I thinking about this too book rigidly? Aren't they?
18:48
Speaker 3: Isn't that the point to get us a substitute away
18:50
Speaker 3: from domestic from.
18:51
Speaker 2: Or if you want to produce domestically, right, which I
18:53
Speaker 2: think is there are two ways that.
18:54
Speaker 5: You can do it.
18:55
Speaker 2: You could impose external costs tariffs on you know, imports,
18:59
Speaker 2: or you could sell domestic production.
19:02
Speaker 3: Yeah, okay, that's fair to give us a cost advantage.
19:04
Speaker 2: That those are the two ways that you can basically
19:07
Speaker 2: go about it if you want to. I'm not saying
19:09
Speaker 2: either is right or wrong. It's just like, those are
19:11
Speaker 2: the mechanisms that you can use here. The thing that
19:14
Speaker 2: you don't want to do is quite honestly, what Josh
19:17
Speaker 2: Holly is proposing, which is, well, we want to give
19:20
Speaker 2: people money in order to help them pay the tear talk. Yeah,
19:23
Speaker 2: let's take a quick break and discuss why stimulus checks
19:26
Speaker 2: to help pay for tariffs doesn't make sense.
19:30
Speaker 1: Right after this, bringing the latest financial news straight to
19:43
Speaker 1: your radio. Every day, It's the Financial Exchange on the
19:46
Speaker 1: Financial Exchange Radio Network. Time now for Wall Street. Watch
19:52
Speaker 1: a complete look at what's moving markets so far today
19:56
Speaker 1: right here on the Financial Exchange Radio Network.
20:00
Speaker 4: Ball Street. With a FED decision on interest rates too
20:02
Speaker 4: out a two o'clock, followed by a press conference from
20:05
Speaker 4: FED Chairman Jerome Paul.
20:06
Speaker 2: At two thirty.
20:07
Speaker 4: All rates are expected to remain steady. There will be
20:10
Speaker 4: more attention at this meeting to see if there are
20:12
Speaker 4: potential dissenters among FED governors in favor of cutting rates.
20:17
Speaker 4: Investors also digesting a second quarter GDP reading which showed
20:21
Speaker 4: the economy grew three percent in the previous quarter, above
20:24
Speaker 4: forecasts of two point three percent. Right now, Dow is
20:28
Speaker 4: down by one tenth of a percent, or sixty two
20:31
Speaker 4: points lower. SMP five hundred is edging only two points higher,
20:35
Speaker 4: Nasdaq is up about two tenths of one percent to
20:38
Speaker 4: forty four points. Russell two thousand is up nearly six
20:40
Speaker 4: tenths of one percent. Ten year treads to reeled up
20:43
Speaker 4: four basis points at four point three seven two percent,
20:46
Speaker 4: and crude oil up about half a percent, rating in
20:49
Speaker 4: sixty nine dollars in fifty nine cents a barrel. Palo
20:53
Speaker 4: Alto Networks has agreed to acquire identity security provider cyber Arc,
20:58
Speaker 4: and deal valued at about twenty five billion dollars. Palo
21:01
Speaker 4: Alto stock down five percent, while cyber Arc shares are
21:04
Speaker 4: up slightly. Meanwhile, shares and Starbucks are down by about
21:07
Speaker 4: a half a percent after CEO Brian Nichols said the
21:10
Speaker 4: coffee chains turnaround plan was ahead of schedule. The company
21:14
Speaker 4: also said it would move away from operating stores that
21:17
Speaker 4: only accept mobile orders for pickup elsewhere. After its double
21:22
Speaker 4: digit slide yesterday, do it a cut in its full
21:25
Speaker 4: year guidance. Novo Nordisk shares are down another six percent today,
21:29
Speaker 4: and after today's closing bell, we'll see more mag seven
21:33
Speaker 4: earnings from Microsoft to Meta qualcarm Qualcom, arm Holdings, Ford
21:39
Speaker 4: and Robinhood will also report their results as well. I'm
21:43
Speaker 4: Tucker Slova and that is Wall Street Watch. And in
21:45
Speaker 4: the previous segment, we asked the trivia question what year
21:48
Speaker 4: did Arnold Schwarzenegger become Governor of California. That would be
21:52
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22:06
Speaker 5: Mark.
22:07
Speaker 2: During the last segment I mentioned at the end, when
22:11
Speaker 2: we were trying to I said, look, you know, we're
22:13
Speaker 2: still sorting out exactly where the tariff cost is going
22:15
Speaker 2: to be absorbed this and that we're seeing, you know,
22:17
Speaker 2: some signs of it in a few different places. And
22:20
Speaker 2: then I mentioned that on Monday of this week, Josh Holly,
22:24
Speaker 2: who is a Senator from Missouri, put out a proposal
22:29
Speaker 2: for tariff rebate checks going out to people. I'll quote
22:33
Speaker 2: from his website just because I want to, you know, again,
22:37
Speaker 2: use his words. Today, US Senator Josh Holly introduced the
22:40
Speaker 2: American Worker Rebate Act, legislation that would send rebate checks
22:43
Speaker 2: to working Americans following the historic revenue accrued through President
22:47
Speaker 2: Trump's tariff policy. The American Worker Rebate Act would provide
22:50
Speaker 2: a tariff rebate check this year to American workers and
22:53
Speaker 2: families with similar parameters to the direct payments passed by
22:56
Speaker 2: Congress in twenty twenty ensure the amount of the rebate
22:59
Speaker 2: is a six hundred per adult and dependent child, and
23:02
Speaker 2: allow for a larger credit per person if tariff revenue
23:05
Speaker 2: exceeds current projections for twenty twenty five. So talk to
23:10
Speaker 2: me about why this is a bad idea.
23:14
Speaker 3: Well, rebates generally are reserve for economic emergencies, sharp fall
23:19
Speaker 3: offs in total demand in the economy and spending, and
23:23
Speaker 3: you want to give those a boost. Problem with reb
23:27
Speaker 3: There's been a lot of literature on rebates because we've
23:30
Speaker 3: been using them once or twice a decade since the
23:33
Speaker 3: nineteen seventies.
23:34
Speaker 2: We went pretty heavy in the last few years.
23:36
Speaker 3: Yeah, we did. Yeah, we went nuts.
23:38
Speaker 5: Right.
23:39
Speaker 3: The problem with rebates, And if you're a Milton Friedman fan,
23:42
Speaker 3: if you're listening to this show, you might tilt to
23:44
Speaker 3: the conservative end of the economic spectrum, like I do.
23:47
Speaker 3: I'm just sort of making an assumption based on who
23:49
Speaker 3: listens to talk radio. You know the name Milton Friedman.
23:52
Speaker 3: He and other people separately came up with this idea
23:56
Speaker 3: called the permanent income hypothesis. Sounds fancy, but it's really simple.
24:00
Speaker 3: You don't spend wind falls, you spend based on your
24:03
Speaker 3: expected average future consumption over the course of your life.
24:07
Speaker 3: So you take a windfall and if you expect to
24:10
Speaker 3: live another thirty years, you're going to only spend a
24:11
Speaker 3: thirtieth of that. Is what permanent income hypothesis says, is
24:15
Speaker 3: that born out by the data. Not really Sometimes people
24:17
Speaker 3: spend more. It depends on your income, it depends on
24:20
Speaker 3: other things, but it's a really useful starting point. People
24:24
Speaker 3: don't spend wind falls blindly. Is the theory that Friedman posited. Again,
24:30
Speaker 3: the evidence is kind of mixed, but it's a it's
24:32
Speaker 3: a good rule with them to start with. So that
24:35
Speaker 3: as you like to say, there's that you have to
24:38
Speaker 3: overcome the permanent income hypothesis. If you're going to say
24:40
Speaker 3: this is going to stimulate spending, then there's the idea
24:42
Speaker 3: that we're running a two plus million dollar deficit. Anyway,
24:46
Speaker 3: you send me a check today, you're effectively financing that check.
24:49
Speaker 3: Doesn't matter where you're going from, right, It don't matter
24:51
Speaker 3: if it came from tariffs, if it came from fees
24:55
Speaker 3: on something else, entry fees for fungible money doesn't Yeah,
25:00
Speaker 3: you don't. You don't count where it came from. So
25:02
Speaker 3: the logical thing for me to do. There's another economic
25:05
Speaker 3: theory behind this. I won't bore you with it with
25:07
Speaker 3: what it's called, but is for me to save it
25:08
Speaker 3: what is it called and use that with the idea
25:10
Speaker 3: of Riccardian equivalence.
25:12
Speaker 2: You shouldn't have said that, I know well, I asked fault.
25:15
Speaker 3: I tempted you that.
25:17
Speaker 1: I know.
25:17
Speaker 2: I'm sorry.
25:20
Speaker 3: It's a great proposition, though. He basically said, debt is
25:23
Speaker 3: just future taxes. So give me a tax cut today,
25:26
Speaker 3: fund it with a bond. If there's only one person
25:29
Speaker 3: in the economy, they're buying the bond with their tax
25:31
Speaker 3: cut and then paying the government back in thirty years
25:33
Speaker 3: when the bond mature is within forest. That's one way
25:35
Speaker 3: to think about so called Ricardian equivalent.
25:37
Speaker 2: It's kind of like the idea of future you having
25:39
Speaker 2: a conversation with present you. If I work out in
25:42
Speaker 2: the morning, present me is going to be really unhappy,
25:44
Speaker 2: but future Me's gonna love.
25:45
Speaker 3: Me, and they'll be really jacked if I if I.
25:47
Speaker 2: Have two twinkies in the morning, present me is thrilled,
25:50
Speaker 2: Future me not so much. I ran up a little
25:53
Speaker 2: bit of a debt on my body.
25:54
Speaker 3: In the future you is dead probably ties well, two
25:58
Speaker 3: tweakies today, I don't know, two a day for an
26:01
Speaker 3: entire life.
26:01
Speaker 2: Actually, you might never die. It might not be preserve.
26:05
Speaker 2: You might just become plastic. Yeah, be fine.
26:09
Speaker 3: So there are a couple good theoretical reasons to say,
26:13
Speaker 3: beyond the usual, this is just a gimmick. What the
26:16
Speaker 3: heck are we talking about here? There are good theoretical
26:18
Speaker 3: reasons that you have to overcome, which is why it
26:20
Speaker 3: helps to step back, see what research is said about
26:23
Speaker 3: these things, what theory says about these things, and you've
26:26
Speaker 3: got to overcome all. The answer may still be doing,
26:29
Speaker 3: but there's a lot of evidence while working against you.
26:33
Speaker 2: What about let me talk about one other piece that
26:36
Speaker 2: you know is the first place that I go. We
26:39
Speaker 2: have a situation right now that I think we can
26:41
Speaker 2: say because of you know, the tariffs and how they're
26:44
Speaker 2: impacting overall you know, purchasing purchasing decisions by both companies
26:51
Speaker 2: and individuals. Is it safe to say that supply chains
26:55
Speaker 2: are a little disrupted now, not to the extent they
26:57
Speaker 2: were back in twenty one, and you know twenty twenty,
27:00
Speaker 2: but you've got businesses trying to reorient to new suppliers.
27:04
Speaker 2: You've got different things that the companies are doing. Am
27:08
Speaker 2: I wrong in thinking that supply is somewhat constrained now?
27:11
Speaker 2: And if you give a bunch of money out in
27:15
Speaker 2: a situation like that and people decide to spend it,
27:20
Speaker 2: does it potentially trigger some additional inflation because you're raising
27:25
Speaker 2: demand while not making any improvements on the supply side.
27:28
Speaker 3: Yes, it could, It could pod size. You don't want
27:31
Speaker 3: to overstimulate and sending money to people and saying please
27:35
Speaker 3: spend it does constitute stimulative fiscal policy. Probably not something
27:41
Speaker 3: you want to do if you think underlying inflation is elevated,
27:44
Speaker 3: which it almost certainly is not dramatically so, but sure, Chuck,
27:47
Speaker 3: So this.
27:48
Speaker 2: Is kind of where we are. And again, just as
27:50
Speaker 2: we discuss this idea here, let's take a quick break.
27:55
Speaker 2: When we return, Joseph Hewn from Edmunds joins us to
27:58
Speaker 2: talk about the trends we are seeing in auto loans.
28:01
Speaker 2: Right after this.
28:03
Speaker 1: Here the Financial Exchange every day from eleven to noon,
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28:44
Speaker 2: Alrighty, as promised, we are joined now by Joseph, youun
28:47
Speaker 2: from Edmunds here to talk about what they are seeing
28:52
Speaker 2: in car Loans these days. Joseph, thank you so much
28:55
Speaker 2: for joining us.
28:57
Speaker 5: Yes, of course, nice to be here again.
28:59
Speaker 2: Let's talk a little bit about people that are trading
29:02
Speaker 2: in vehicles. What percentage of vehicles that are traded in
29:07
Speaker 2: are underwater relative to the car loan outstanding on them.
29:12
Speaker 5: We're looking at about twenty six point six percent of
29:16
Speaker 5: trade ins carrying negative equity at time of transaction, which
29:20
Speaker 5: is pretty high. It's the highest sense first quarter.
29:25
Speaker 6: Of twenty twenty one.
29:27
Speaker 2: Why does someone do that, well.
29:33
Speaker 5: Typically because something happened, right, something happened for you to
29:38
Speaker 5: in your life where you have to feel or where
29:41
Speaker 5: you feel compelled that you have to buy another car.
29:44
Speaker 5: Whether that reason is a good one or a bad one.
29:47
Speaker 6: I don't know, but something happened, and so they're like oh, man,
29:52
Speaker 6: I have to go get another car, and but you know,
29:55
Speaker 6: the current car that they have isn't paid off.
29:57
Speaker 5: And then they go to the dealer and be like, well,
29:58
Speaker 5: let's see what the numbers will at the numbers on game.
30:03
Speaker 2: When we look at this, are we typically talking people
30:06
Speaker 2: that are, you know, a thousand bucks or so underwater?
30:09
Speaker 2: Is it ten thousand? What's kind of the range the
30:12
Speaker 2: distribution that we see there?
30:15
Speaker 6: I would the average amount ode on a typical underwater
30:19
Speaker 6: situation is about sixty seven hundred dollars.
30:22
Speaker 5: The exact number is six thousand, seven hundred and fifty
30:24
Speaker 5: four dollars, So it's not an insignificant amount of money.
30:30
Speaker 5: And I think around a third of underwater trade ins
30:34
Speaker 5: have between five and ten thousand dollars of negative acority,
30:37
Speaker 5: So it's it's pretty significant.
30:40
Speaker 2: Is this something that ends up kind of spiraling for
30:43
Speaker 2: people in that, Hey, if you have one trade that's underwater,
30:47
Speaker 2: is it something that continues just because with cars being
30:50
Speaker 2: depreciating assets, you kind of get into the cycle and
30:53
Speaker 2: you keep having to you know, take out bigger and
30:55
Speaker 2: bigger loans or pay more and more in order to
30:58
Speaker 2: you know, basically move to your next vehicle or is
31:00
Speaker 2: this more of a one time thing or do you
31:02
Speaker 2: not have data on it.
31:05
Speaker 5: We don't have data on it exactly, but you know,
31:08
Speaker 5: we obviously hope that it's a one time thing. But
31:12
Speaker 5: in this case, I mean, these days, with the APR
31:16
Speaker 5: rates as high as they are, it's very very easy
31:20
Speaker 5: for somebody to spiral once they get into a negative
31:23
Speaker 5: equity track because let's say you know, you owed seventy
31:27
Speaker 5: five hundred dollars or something like that on this current
31:31
Speaker 5: trading that you're trying to make a deal.
31:33
Speaker 6: On, so you carry that into your next loan, and
31:35
Speaker 6: then because of whatever reason, you're not getting the prime
31:39
Speaker 6: APR rate, which is already high. Right it's I think
31:42
Speaker 6: most APR rates for new car purchases these aases around
31:45
Speaker 6: covering around seven percent, And so when you finance that
31:48
Speaker 6: much extra on top of an already expensive vehicle, typically
31:52
Speaker 6: your only option to kind of have a managing monthly
31:55
Speaker 6: payment is to take on a longer loan seven years,
31:58
Speaker 6: eight years or even longer. And that's a long time
32:02
Speaker 6: to really commit to something, and it's very likely within
32:05
Speaker 6: that time the car that you're trying to get a
32:08
Speaker 6: deal on right now may break down, or something else
32:11
Speaker 6: in your life is going to happen where you have
32:13
Speaker 6: to get another car, and then you find yourself in
32:15
Speaker 6: another situation a couple of years down the road that
32:18
Speaker 6: oh no, now I have to carry this negative recority
32:21
Speaker 6: into the next loan.
32:22
Speaker 2: When you look at the let me dig into that
32:27
Speaker 2: a little bit more. How long is kind of the
32:30
Speaker 2: average vehicle owned for before being traded in? What what
32:35
Speaker 2: do you see there as far as you know kind
32:37
Speaker 2: of average length before trading.
32:41
Speaker 5: Yeah, so the average age of the trade in these
32:44
Speaker 5: days is around four years. It's three point eight years,
32:47
Speaker 5: so you know, I want to give people the benefit
32:49
Speaker 5: of doubt, round that number up. But the problem is
32:53
Speaker 5: the average length of an auto loan has been hovering
32:56
Speaker 5: around six right, So you know we're seeing a little
33:00
Speaker 5: bit of a kind of a gap there where.
33:06
Speaker 6: Yes, a lot of the depreciation has or the biggest
33:09
Speaker 6: part of the depprechiation has.
33:10
Speaker 5: Already happened when you're four years into a loan. But
33:12
Speaker 5: at the same time, how each car depreciates is very different.
33:18
Speaker 6: Right, So they're going to go into the dealership and
33:20
Speaker 6: be like, oh man, I was so close to paying
33:22
Speaker 6: this off or I felt like I've done a great
33:25
Speaker 6: job paying this off, but at the same time, I
33:27
Speaker 6: haven't and I'll you know, X thousand dollars of equity
33:34
Speaker 6: on this car.
33:35
Speaker 2: You mentioned that the average length of a car loan
33:37
Speaker 2: these days is around six years. I know that's been
33:40
Speaker 2: moving up pretty steadily. I know, you know, when I
33:42
Speaker 2: was younger, it was, you know, kind of three to
33:44
Speaker 2: four years was the norm. How it does seem like
33:47
Speaker 2: five to seven. Is are we getting to the point,
33:49
Speaker 2: as car prices continues to rise, where we're going to
33:52
Speaker 2: be seeing like eight to ten year car loans out there.
33:57
Speaker 5: I think that's a very likely possibility right now.
34:01
Speaker 6: A ten year or a nine year car loan are
34:04
Speaker 6: like extreme ends. We're seeing it in the data, but
34:07
Speaker 6: it's like an a significant portion, but they are there.
34:12
Speaker 6: But what we are what we are seeing is that
34:15
Speaker 6: I believe we're seeing a huge increase in loans that
34:20
Speaker 6: are going to be eighty four months or longer. And
34:24
Speaker 6: I think that's a big signal to us that, you know,
34:27
Speaker 6: people go into a dealer looking or with some number
34:32
Speaker 6: in mind, but because of the way that car prices
34:35
Speaker 6: have gone up, and because the interest rates are so high,
34:39
Speaker 6: that number is so far away, and really the only
34:44
Speaker 6: way for them to kind of meet in the middle
34:46
Speaker 6: is to be like, oh man, maybe six years isn't
34:49
Speaker 6: long enough for me.
34:50
Speaker 5: Maybe I need a seven year loan. Maybe I need
34:52
Speaker 5: a seven and a half year loan.
34:53
Speaker 2: Yep, yep. Joseph, appreciate you joining us today. Thank you
34:56
Speaker 2: so much for all the information on this.
34:59
Speaker 5: Yes, of course, it's always a pleasure being on That.
35:01
Speaker 2: Is Joseph Ewan from Edmunds discussing underwater car loans with
35:06
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Speaker 2: Right, I got something for stack rule out here mark Today.
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Speaker 2: credit card rewards program will be used to fund a
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36:58
Speaker 2: going to take that dollar and put it into Coinbase anyways,
37:01
Speaker 2: what's the big deal?
37:02
Speaker 3: It's found money.
37:03
Speaker 2: Sure, Beginning this fall the ability to use Chase credit
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Speaker 2: cards on Coinbase for the first time, customers will have
37:13
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37:15
Speaker 2: credit cards. You're gonna let people buy crypto on credit cards.
37:19
Speaker 3: Yeah, here we go. Next crisis brewing. Oh my goodness,
37:24
Speaker 3: in so many ways, this crisis is brewing.
37:27
Speaker 2: So here's the thing here, here's what I'm trying to
37:29
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37:35
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37:38
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37:40
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37:44
Speaker 2: so much, you get what's called a margin call where
37:46
Speaker 2: they're like, hey, you got to liquidate that and pay us,
37:49
Speaker 2: you know, put a little money into prove that you
37:51
Speaker 2: actually have it. Okay, Is is JP Morgan going to
37:58
Speaker 2: you know, monitor the coin base to count such that, hey,
38:01
Speaker 2: your credit limits being reduced If crypto has a big
38:04
Speaker 2: downward volatility period and you're not making your monthly payments.
38:10
Speaker 3: Well, you owe what you owe, right you do? Is
38:13
Speaker 3: it securitized by I guess this is the problem.
38:15
Speaker 2: My point is it's not. We're done for the day.
38:18
Speaker 2: Back at it tomorrow. Will tell you all about what
38:20
Speaker 2: the Fed did. Then