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Stocks have a big, expensive problem · The Financial Exchange Show

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Speaker 1: donation Today. Face is the Financial Exchange with Mike Armstrong
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Speaker 1: and Mark Vandetti.
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Speaker 2: Good morning, Happy Monday, Welcome back to the Financial Exchange.
1:15
Speaker 2: Our top story of the day is definitely going to
1:17
Speaker 2: be markets, as they early trading were poised for a
1:21
Speaker 2: comeback after yes Friday sell off, but so far are
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Speaker 2: selling off further in early trading. It's Mike Armstrong, Mark
1:28
Speaker 2: Fandetti and Tucker Silva with you on a Monday morning,
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Speaker 2: and I think it's probably best for us to start
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Speaker 2: with Friday of last week for anyone that tuned out
1:35
Speaker 2: as I did driving through the woods of Quebec and
1:40
Speaker 2: you know, let's focus sorry where Quebec, not Quebec Quebec.
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Speaker 3: I believe Trump said, you can't say that anymore.
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Speaker 4: Right.
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Speaker 2: In any case, Friday markets took a dive, SMP off
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Speaker 2: around one point seven percent and down NASDAK off more
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Speaker 2: than two percent.
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Speaker 4: And in early market trading we.
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Speaker 2: We did have indices up a good half a percent
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Speaker 2: before markets opened, but as I mentioned, selling off now
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Speaker 2: with the NASZAC off more than one percent. So let's
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Speaker 2: start with last week because there weren't any massive data
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Speaker 2: points that came out last week that I think turned
2:14
Speaker 2: turned sentiment by any stretch. You had an announcement from
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Speaker 2: an analyst of Microsoft about the AI trade. You had
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Speaker 2: some numbers from Walmart that sent that stock down, But overall,
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Speaker 2: what was the sentiment pushing your opinion mark last week.
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Speaker 4: Prior to the Friday.
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Speaker 2: Sell off, Anything big that was catching your eye in
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Speaker 2: the news, because I don't think there was much there.
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Speaker 3: Yeah, there are a number of possible culprits.
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Speaker 2: Yeah, and it's always tough to tie market performance to
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Speaker 2: any one thing, and we shouldn't tie it to one thing.
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Speaker 2: But a few things caught my eye as I was
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Speaker 2: reading the headlines. One was another release of sentiment surveys
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Speaker 2: throughout the week that spoke to some negativity. Home Builder
2:52
Speaker 2: sentiment was bad, Consumer sentiment around inflation has remained pretty bad.
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Speaker 2: There wasn't a whole lot of positive news coming out
3:00
Speaker 2: of how are you feeling about things surveys that we
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Speaker 2: got over the course of last week. The Microsoft news
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Speaker 2: that I mentioned will cover a little bit later in
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Speaker 2: the show, but it indicated that Microsoft may be pulling
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Speaker 2: back on artificial intelligence spending, and leading up to Wednesday's
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Speaker 2: report this week of Nvidia earnings, that sense those two
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Speaker 2: stocks tumbling a little bit. Walmart also as they typically
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Speaker 2: do at the beginning of every year, predicted some poorer earnings.
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Speaker 2: But I think more than anything else, Friday sell off
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Speaker 2: just freaked people out because of its irregularity over the
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Speaker 2: last year.
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Speaker 3: Yeah, we're spoilers. If you look back at a century's
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Speaker 3: worth of data, which is something you can get easily
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Speaker 3: on Yahoo, and calculate the frequency of sell offs of
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Speaker 3: one point seven percent or.
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Speaker 4: Less, as people casually do on their Saturday.
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Speaker 3: Most people would spend their their weekend night's doing. Yes,
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Speaker 3: you would see that it happens once in every twenty
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Speaker 3: days or once a month over the past again, one
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Speaker 3: hundred years to take a long term.
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Speaker 2: So a sell off like we got Friday is north
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Speaker 2: as common as once a month.
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Speaker 3: Yeah, some years a lot more, as you would expect
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Speaker 3: high volatility years which we may be entering into. We
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Speaker 3: don't really know yet. We could talk about volatility leading
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Speaker 3: to more volatility for different reasons. We don't know that's
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Speaker 3: going to play out. But I think the important lesson
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Speaker 3: is that while stocks do tend to go up, something
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Speaker 3: we talked about internally this morning, a very interesting property,
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Speaker 3: if you like, of stock markets, because they're tied to
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Speaker 3: economic growth day to day. It could be characterized as
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Speaker 3: a casino It's almost a coin flip, but over long
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Speaker 3: periods of time it becomes less casino like, or at
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Speaker 3: least in our experience so far, we've been lucky as
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Speaker 3: US investors. Our market's never been wiped out like say
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Speaker 3: Germany or Japan. But if the structure of the economy
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Speaker 3: remains unchanged, you could probably expect the economy to continue
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Speaker 3: to grow and stocks to continue to participate in that.
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Speaker 3: There will be occasional uncomfortable pullbacks. You all know that, yep.
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Speaker 2: So, like we said, I don't think there was any
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Speaker 2: one story that I could necessarily tie to to say, yeah,
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Speaker 2: Friday really was caused by X, Y or Z. There
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Speaker 2: were a few potential culprits. There is also an options
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Speaker 2: expiration day, which tends to add volatility. But I guess
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Speaker 2: what today's not And you do have markets recovering a
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Speaker 2: bit now, but a sell off occurring again today.
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Speaker 4: And it leads into.
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Speaker 2: Our next story here, which is the big and expensive
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Speaker 2: problem that approaches US stocks today as we head into
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Speaker 2: twenty twenty five, which is not fortunately not a new
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Speaker 2: problem for US stocks. They have been quite expensive for
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Speaker 2: most of the last two years, but we're now entering.
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Speaker 3: Most of the last thirty five years.
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Speaker 2: Actually, well, I guess depends on you're not I guess
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Speaker 2: it depends on how you're defining expensive. But I guess
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Speaker 2: especially expensive over the course of the last two and.
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Speaker 4: Territory.
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Speaker 2: And so let's let's get into what we mean when
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Speaker 2: we say stocks are expensive. Because the Wall Street Journal
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Speaker 2: defines it one way. I would define it in another,
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Speaker 2: but I think this is an interesting way of categorizing it.
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Speaker 2: So the US stock market today accounts for about two
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Speaker 2: thirds of global stock market value. So let's just start
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Speaker 2: with that. The US market accounts for two thirds of
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Speaker 2: global mark seven trillion, right I believe, So, yeah.
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Speaker 3: We're in that, which is twice our GDP.
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Speaker 2: Twice our GDP. America represents only one quarter of the
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Speaker 2: world's economy in terms of GDP and only four percent
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Speaker 2: of the world's population. And so therefore, you know, by
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Speaker 2: some obvious measures here, the US stock market plays an
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Speaker 2: outsized role in influence in global markets. But I don't
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Speaker 2: think that's really the best way of defining whether or
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Speaker 2: not it's expensive. That doesn't tell me that much because
6:44
Speaker 2: it could be that many companies overseas are privately held
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Speaker 2: or not public. You know a number of different things
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Speaker 2: playing into that. How do you define a market as
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Speaker 2: being cheap or expensive? What's in your view the best
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Speaker 2: way to define practical costeaking?
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Speaker 3: Are you more or less likely to make above average
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Speaker 3: returns over your holding period if you buy today. I
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Speaker 3: think that's what most investors care about, Just like with
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Speaker 3: the bond. The higher the price you or real estate,
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Speaker 3: the higher the price you pay for something, the lower
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Speaker 3: your yield. Just keep that general principle in mind, so
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Speaker 3: you can use dividend yields as a proxy for whether
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Speaker 3: or not stocks are cheap. Dividen yields are pretty paltry
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Speaker 3: right now, like they were in the late nineties and
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Speaker 3: another periods. You can use more sophisticated but not necessarily
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Speaker 3: better correlated with future return measures like taking the last
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Speaker 3: ten years worth of earnings, adjusting them earnings say on
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Speaker 3: the S and P, adjusted for inflation, and then average
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Speaker 3: it out to smooth out ups and downs in the
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Speaker 3: business cycle. This is the so called cyclically adjusted price
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Speaker 3: to earnings ratio because of the process that I just
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Speaker 3: explained to get to it. Robert Schiller Nobel Prize winning
7:52
Speaker 3: economist Financial economist came up with this, but others have
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Speaker 3: their own versions. If there's one relationship in finance that's
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Speaker 3: pretty reliable, it's that the higher that smoothed is cyclically
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Speaker 3: adjusted if you like pe. The higher it is today,
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Speaker 3: the lower returns have investors realized have been realized by
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Speaker 3: investors over the following ten years. Said differently, the higher
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Speaker 3: the price you pay, the lower you can expect your
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Speaker 3: returns to be. That relationship is pretty airtight historically.
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Speaker 4: But not in the short term.
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Speaker 3: Oh short term, it's anybody's guess.
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Speaker 2: Because it's almost because you could say this at the
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Speaker 2: beginning of twenty twenty three what we're saying right now
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Speaker 2: to describe stocks twenty twenty four, dividend yields, or any
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Speaker 2: other way of described.
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Speaker 4: Years for quite some time.
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Speaker 3: That's why I was careful to say ten years out
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Speaker 3: one one year relationship. The correlation is practically non existent.
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Speaker 3: It just looks random. Five years a picture starts to form.
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Speaker 3: It it looks like high prices today relative to earnings
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Speaker 3: equate to lower future returns over ten and longer year.
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Speaker 3: The relationship is pretty clear, but as you point out,
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Speaker 3: it's a bad timing.
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Speaker 2: Tool. So for some context here, you mentioned a number
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Speaker 2: of different statistics for the vast majority of the two
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Speaker 2: thousand decade, From about two thousand and three after the
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Speaker 2: dot com bubble burst through twenty twenty, the dividend yield
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Speaker 2: on the S and P five hundred ranged from two
9:20
Speaker 2: to four percent, four percent during the big sell off
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Speaker 2: to the Great Recession, but generally in that most of
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Speaker 2: the time two to two and a half to three
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Speaker 2: percent range today, where I think below one and a
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Speaker 2: half percent dividend deald in the S and P five
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Speaker 2: hundred and have been for some.
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Speaker 3: Time, but that doesn't share her purchases have replaced to
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Speaker 3: an extent dividends. This trend started in the nineties and
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Speaker 3: it's accelerated.
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Speaker 2: Give me some historical context for where we are in
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Speaker 2: terms of those cyclically adjusted priced earnings ratios, like where
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Speaker 2: does this market compare us to.
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Speaker 3: Top top percentile, top five percent of instances? So again, nosebleed, yep.
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Speaker 3: The actual value is what thirty six thirty seven. That
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Speaker 3: doesn't have to mean anything to you, just know that
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Speaker 3: in nineteen ninety nine is a point of reference. That
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Speaker 3: same value was forty four in the early nineteen eighties.
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Speaker 3: For what it is worth, that value was six or seven.
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Speaker 3: The long term historical average up to the nineties was
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Speaker 3: twelve or thirteen. What's the right number, There is none.
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Speaker 3: It's not stable. That mean shifts over time. I will
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Speaker 3: say though, that it's probably regime dependent, meaning what the
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Speaker 3: laws are, our relationship with our trading partners, stuff like
10:38
Speaker 3: that matters. And we're entering a new regime.
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Speaker 4: Most certainly are. Let's take a quick break.
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Speaker 2: When we come back, want to talk about what all
10:46
Speaker 2: of this different, changing policy, changing regime might mean for
10:50
Speaker 2: the economy. And therefore the Federal Reserve is they're kind
10:52
Speaker 2: of stuck in neutral right now. And we will have
10:54
Speaker 2: a meeting coming up next month for J. Powell and
10:57
Speaker 2: the Fed.
10:57
Speaker 4: That's next. Here on the Financial Exchange, get up.
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11:59
Speaker 4: Mark.
11:59
Speaker 2: I have good news and bad news for you. Which
12:01
Speaker 2: would you look at first. The bad news is we
12:04
Speaker 2: don't have a FED meeting until March nineteenth. The good
12:07
Speaker 2: news is that eleven Federal Reserve Board members will be
12:11
Speaker 2: speaking this week on their opinions on the economy at
12:14
Speaker 2: different speaking events, plus of time for us to digest
12:19
Speaker 2: all of the FED talk that will be occurring at
12:21
Speaker 2: that next meeting on March nineteenth. It's widely expected that
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Speaker 2: the Federal Reserve will leave rates untouched ninety five point
12:28
Speaker 2: five percent probability now that that will remain the same
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Speaker 2: for those next upcoming rate decisions. We will get a
12:37
Speaker 2: PCE Price Index report this Friday, but you kind of
12:41
Speaker 2: already know what's going to be completely with that sentiment, dude,
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Speaker 2: I don't find when you look at the forecast value
12:48
Speaker 2: of CPI in an attempt to forecast same month PCE
12:52
Speaker 2: that it does any better than just using previous months.
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Speaker 3: Okay, I'm getting too technical. The point is it doesn't
12:57
Speaker 3: add a lot to your forecast. Other researchers have noted
12:59
Speaker 3: this too. It's not my specialty. Obviously, I work for
13:03
Speaker 3: you in finance, but you know it's a side project.
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Speaker 3: There are months where they differ significantly. I'm not saying
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Speaker 3: that that's in the cards for this month. But when
13:13
Speaker 3: inflation volatility picks up, the dispersion between these two measures
13:17
Speaker 3: picks up. So I don't think you can just blow
13:20
Speaker 3: these off. Oh this is just.
13:22
Speaker 4: A repeat of what we already said.
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Speaker 3: No, No, that's not gonna tell us anything. I disagree as
13:27
Speaker 3: a as a data matter on that.
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Speaker 4: A little bit. Okay, So that'll be out on Friday,
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Speaker 4: and we may see some volatility.
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Speaker 3: Trying to get everybody to tune in.
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Speaker 2: Yeah, Circin suspense, certainly the FED will be tuning into
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Speaker 2: what is going on with prices as you have seen
13:40
Speaker 2: an uptick in the January CPI data, and it has
13:43
Speaker 2: raised a few questions. Hey, is this just a cyclicality
13:46
Speaker 2: seasonality type issue or are there real price increases a current?
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Speaker 3: Can we talk about why you shouldn't blow it off
13:53
Speaker 3: for just a second. The seasonality explanation does not ring
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Speaker 3: true to me, because does it's precisely what seasonality is for.
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Speaker 3: They continuously adjust their seasonal adjustment method to account for
14:05
Speaker 3: changes in the composition of various sub indices and all
14:09
Speaker 3: the complicated guts underneath these reports. So I don't fully
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Speaker 3: buy that. I've heard others say that with a lot
14:14
Speaker 3: more experience in this area than I have, say that
14:16
Speaker 3: as well, But put that aside for a moment. The
14:18
Speaker 3: economy's running hot. The growth rate in the economy for
14:22
Speaker 3: the last several quarters has been higher than what most
14:24
Speaker 3: researchers think is the economy's productive potential, which is a
14:27
Speaker 3: function of labor force growth and productivity growth. There are
14:30
Speaker 3: cyclical factors that can push it above or below for
14:32
Speaker 3: a time, but that speed limit is an important thing
14:35
Speaker 3: to keep in mind. So we're running hot by that measure,
14:36
Speaker 3: We're running hot by the unemployment measure, unemployment in historical terms,
14:40
Speaker 3: as you know, is very very low, and measures of
14:43
Speaker 3: the job market strain continue to suggest a tight maybe
14:47
Speaker 3: not exceptionally tight like we had in twenty twenty two
14:50
Speaker 3: to twenty twenty three, but a very tight labor market.
14:52
Speaker 3: And there are others that we could get into. The
14:54
Speaker 3: point is elevated inflation shouldn't surprise when looked at through
14:58
Speaker 3: traditional economic n This is the classic FED dilemma. Do
15:02
Speaker 3: we pull the punch bowl away a little bit more
15:04
Speaker 3: because the economy's overheating, or do we let it run
15:08
Speaker 3: hot and see if it resolves on its own.
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Speaker 2: And I would have to say that over the course
15:15
Speaker 2: of the last few years, few of those times have
15:17
Speaker 2: actually let me see, there's been more uncertainty about inflation
15:20
Speaker 2: and where the direction is going to be. I think
15:22
Speaker 2: the Fed was very uncertain amongst themselves at least in
15:26
Speaker 2: twenty twenty one and twenty twenty two in terms of
15:28
Speaker 2: what the price action was going to be on inflation
15:30
Speaker 2: and how they've voiced all of that. There seems to
15:33
Speaker 2: be a fair bit of uncertainty right now by the
15:35
Speaker 2: Federal Reserve as well as as evidenced by the meeting minutes.
15:40
Speaker 2: Where they called for or they mentioned in that meeting
15:44
Speaker 2: a dozen different references to the uncertain climate for political decisions.
15:48
Speaker 2: And I think that's where I land on this and
15:50
Speaker 2: why the Federal Reserve is going to do nothing at
15:53
Speaker 2: several of the next meetings because they are very unclear,
15:57
Speaker 2: as am I about what this administration's.
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Speaker 3: P or wait that either, Mike, I think you just
16:02
Speaker 3: look at the economic dashboard and those measures that I mentioned.
16:06
Speaker 3: There are others too that point to a slightly overheating economy,
16:09
Speaker 3: which traditionally has been associated with upward pressure on prices,
16:13
Speaker 3: and kind of they may I'm sorry, I'll finish my
16:15
Speaker 3: own sentence there and kind of leave it at that.
16:17
Speaker 3: They may cite policy uncertainty is an excuse, but it's
16:21
Speaker 3: hard to model that maybe impossible. Yeah, And I think
16:24
Speaker 3: it risks in meshing them, in entangling them in political
16:29
Speaker 3: conversations that they really ought not to be having right now.
16:33
Speaker 3: Given the White House's predatory instinct with respect to any
16:37
Speaker 3: federal entity that it disagrees with, fed's got to be
16:40
Speaker 3: concerned about maintaining its independence for the next four years.
16:43
Speaker 3: Lay Low, guys, I.
16:44
Speaker 2: Think the question to me would be, so, let's take
16:48
Speaker 2: the case of the Canada Mexico terrists, for instance, they
16:50
Speaker 2: went into place and then they were suspended a day later.
16:54
Speaker 2: If the FED is faced with a situation where inflation
16:56
Speaker 2: remains elevated, let's say this Friday report comes out and
16:59
Speaker 2: mirrors this one where inflation is clearly elevated, and we
17:02
Speaker 2: get a few more.
17:03
Speaker 4: Months of that.
17:04
Speaker 2: The question to me is when do you start actually
17:06
Speaker 2: talking about increases in interest rates? Because that is something
17:10
Speaker 2: that seemed completely off the table for this year going
17:12
Speaker 2: into this calendar year, and I wonder how they would
17:15
Speaker 2: react to, for instance, Okay, there's a new set of
17:18
Speaker 2: tariffs on pretty much all imports in the United States.
17:21
Speaker 2: Do we react right away or do we wait to
17:23
Speaker 2: see that show up in the inflation data. Because we're
17:27
Speaker 2: pretty critical of the FED early on in twenty twenty
17:29
Speaker 2: one and twenty twenty two saying, look, you know what's
17:32
Speaker 2: going to happen here. Prices are going to go up.
17:34
Speaker 2: Everyone's sitting on cash, and there's been massive supply chain
17:37
Speaker 2: disruptions get going on these interest rate increases.
17:41
Speaker 3: I don't actually recall anybody saying that. I think everybody
17:43
Speaker 3: waited to see. There were some who predicted a spike
17:46
Speaker 3: given because of supply constraints, but I don't remember anybody
17:50
Speaker 3: saying the Fed should act preemptively. That would be very unusual, Mike.
17:54
Speaker 4: We were here pretty critical in early twenty twenty ten.
17:57
Speaker 2: One started Yeah, I guess it did start printing a
17:59
Speaker 2: little bit, and they delayed decisions, for instance, saying oh,
18:02
Speaker 2: uncertainty about this Ukraine war and things along those lines,
18:06
Speaker 2: to say we're not going to justify moving interest rates,
18:08
Speaker 2: and I wonder how that would play out this time too,
18:10
Speaker 2: to say, oh, well, these brand new tariffs that are
18:12
Speaker 2: in place, but will they still be here thirty forty
18:15
Speaker 2: five days from now. I don't know that we should
18:17
Speaker 2: act quite yet. That's where the uncertainty comes into me.
18:20
Speaker 2: Is not so much what is the impact of tariffs.
18:22
Speaker 2: I think everyone at the Federal Reserve knows what the
18:24
Speaker 2: effect of tariffs would be. It's will they actually remain
18:27
Speaker 2: in place or will they be more of a bargaining tool.
18:30
Speaker 2: And that's why I don't think the Federal Reserve really
18:33
Speaker 2: moves much at all until you see several months of
18:37
Speaker 2: data to back up what the effects they think will.
18:39
Speaker 3: Be with any supply shock, which is a catch all
18:41
Speaker 3: term for anything that pushes up inflation in the short term,
18:45
Speaker 3: oil price shock, productivity, change in position of tariffs. The
18:49
Speaker 3: Fed has to decide is this likely to be prolonged?
18:53
Speaker 3: Like in the early two thousands oil prices rose relative
18:56
Speaker 3: to everything else over here to several years that was
18:57
Speaker 3: a prolonged shock. Has to decide is this going to
19:01
Speaker 3: be prolonged or is it going to be brief? And
19:04
Speaker 3: will it affect expectations? Therefore, do we have to react
19:07
Speaker 3: there constantly asking themselves that question.
19:09
Speaker 2: Markets still attempting to stage some form of recovery, and
19:12
Speaker 2: you're seeing a bit of it on one of the
19:14
Speaker 2: three major indices, but by and large markets down to
19:17
Speaker 2: start the week here on Monday morning, we'll have a
19:20
Speaker 2: full recap for you next with Wall Street Watch.
19:39
Speaker 1: Like us on Facebook and follow us on Twitter at
19:42
Speaker 1: TFE show. Breaking business news is always first right here
19:46
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:51
Speaker 1: Street Watch a complete look at what's moving markets so
19:54
Speaker 1: far today right here on the Financial Exchange Radio Network.
19:59
Speaker 5: Well after last week's late sell off, Marcus today our
20:03
Speaker 5: mixed territory as investors ready for Nvidia earnings on Wednesday,
20:08
Speaker 5: and another inflation reading later this week on Friday. At
20:12
Speaker 5: the moment, Dow is up now by thirty five points,
20:16
Speaker 5: SMP five hundred is off about a third of a percent,
20:19
Speaker 5: or twenty one points, and the Nasdaq down nearly one
20:23
Speaker 5: percent or one hundred and eighty five points. Russell two
20:26
Speaker 5: thousand is down by two thirds of a percent. Ten
20:29
Speaker 5: year treasure yield is down by one basis point at
20:32
Speaker 5: four point four to one percent, and crude oil up
20:36
Speaker 5: about a third of a percent, rating at seventy dollars
20:39
Speaker 5: and sixty three cents a barrel. Some breaking news from
20:43
Speaker 5: Apple this morning, after the tech giint announced a five
20:45
Speaker 5: hundred billion dollar investment in the US, including plans for
20:49
Speaker 5: a new factory for AI servers in Texas slated to
20:53
Speaker 5: open in twenty twenty six. Apple also said it plans
20:56
Speaker 5: to hire about twenty thousand new employees across the country.
21:00
Speaker 5: Apple stock is up by about three quarters of a percent.
21:03
Speaker 5: Sticking with tech, where Chinese e commerce giant Ali Baba
21:07
Speaker 5: said it plans to invest more than fifty two billion
21:09
Speaker 5: dollars in AI and cloud infrastructure over the next three years.
21:13
Speaker 5: That stock retreating by nine percent after its recent rally. Meanwhile,
21:17
Speaker 5: Starbucks said it would lay off more than eleven hundred
21:20
Speaker 5: corporate employees while not filling several hundred open positions. Cafe
21:25
Speaker 5: workers would not be impacted by the cup the cuts
21:30
Speaker 5: that stock up by one percent. Domino's Pizza posted fourth
21:33
Speaker 5: quarter earning zen revenue that missed the mark this morning.
21:36
Speaker 5: The pizza chain also disappointed on same stores sales, climbing
21:39
Speaker 5: zero point four percent below forecast of a one point
21:43
Speaker 5: one percent climb. Domino's down by four percent. Elsewhere, Shares
21:48
Speaker 5: in Warren Buffett's Berkshire Hathway up four percent after the
21:51
Speaker 5: firm said it's operating profit jumps seventy one percent to
21:55
Speaker 5: fourteen and a half billion dollars during the fourth quarter.
21:59
Speaker 5: Nike up by five percent after Jeffries upgraded the sports
22:02
Speaker 5: retailer to buy from hold, with the firm said Nike
22:05
Speaker 5: is turning back on its innovation engine after pulling back
22:10
Speaker 5: nineteen percent over three days. Stretch Pallantier shares down another
22:14
Speaker 5: eleven percent today and tomorrow morning ahead of the opening bell.
22:18
Speaker 5: We'll see more earnings from the retail sector as Home
22:21
Speaker 5: Depot will post their fourth quarter results. I'm Tucker Silvan,
22:25
Speaker 5: that's Wall Street Watch.
22:27
Speaker 2: Warren Buffett drafted his letter to shareholders this Saturday, and
22:31
Speaker 2: people fore and wide study this and head out to
22:35
Speaker 2: Nebraska frequently for you know, chance occasions, with chance occasion
22:40
Speaker 2: meetings with Warren Buffett and the Oracle of Omaha. And
22:46
Speaker 2: I think there's an important thing to keep in mind
22:48
Speaker 2: whenever we talk about any argument that he's the most
22:53
Speaker 2: legendary investor in US history. No, I mean the guy
22:58
Speaker 2: got his first job as an security as analyst in
23:00
Speaker 2: nineteen fifty four. Guy's been doing this for a long
23:03
Speaker 2: long time and pretty successfully. A few things to remember,
23:09
Speaker 2: I'm not Warren Buffett, Mark's not Warren Buffett, You are
23:12
Speaker 2: not Warren Buffett, and you're definitely not Berkshire Hathaway. And
23:17
Speaker 2: I think people get that confused a little bit. Is Yeah,
23:20
Speaker 2: this is one of the best performing companies that has
23:22
Speaker 2: ever existed, one of the most successful investors that has
23:25
Speaker 2: ever existed. But you cannot invest like Warren Duffitt Buffett does,
23:33
Speaker 2: and you definitely can't invest like Berkshire Hathaway does because
23:36
Speaker 2: they have an endless time horizon.
23:38
Speaker 3: Yeah, his objectives are different, very different, and he may
23:41
Speaker 3: not like the stock market right now, because his return targets,
23:45
Speaker 3: as a consequence, are are different. He's managing to a
23:48
Speaker 3: different standard. Most of us should just stay invested.
23:50
Speaker 2: Yeah, and so I think that's important context to have
23:53
Speaker 2: whenever Warren Buffett talks about markets, but it's been His
23:59
Speaker 2: Saturday letter was pretty absent any stark warnings about the
24:03
Speaker 2: market which he has issued in the past, you know,
24:05
Speaker 2: talking about how he just doesn't find deals attractive for
24:08
Speaker 2: his cash, and we've covered that before.
24:10
Speaker 4: Not a lot of that.
24:11
Speaker 3: Did you see any mention of the market capitalization, the
24:14
Speaker 3: GDP statistic that I mentioned earlier, the Buffett ratio in
24:18
Speaker 3: his shareholder letter, No, I scanned it, didn't see it,
24:22
Speaker 3: which is astonishing because it's never been higher, suggesting extreme
24:25
Speaker 3: valuations like we talked about in the last segment.
24:28
Speaker 2: Tony Fair, I think that Warren Buffett has been a
24:31
Speaker 2: lot less talkative about how markets are priced over the
24:33
Speaker 2: course of the last five to ten years. He is
24:37
Speaker 2: ninety four years old, so we should have guessed that
24:39
Speaker 2: he no longer has Charlie Munger at his side, who
24:42
Speaker 2: passed away I believe last year. I do kind of
24:44
Speaker 2: miss the snippets from Charlie Munger, who used to just
24:46
Speaker 2: throw out stuff that had nothing to do with markets.
24:48
Speaker 2: Remember he built a designed a dorm room, a college
24:52
Speaker 2: dorm room at one point. Just an interesting, interesting duo.
24:56
Speaker 2: But he has issued many, many warnings about the euphoria
25:00
Speaker 2: in stocks throughout his career. But I'll tell you most
25:04
Speaker 2: of those were in the nineties, early two thousands, post
25:08
Speaker 2: Great Financial Crisis. I think anyone expecting Warren Buffett to
25:12
Speaker 2: come out and say look out or go buy this
25:16
Speaker 2: is misguided in terms of what he typically talks about.
25:18
Speaker 3: I'm not part of the Buffett cult. There are dozens
25:21
Speaker 3: of asset managers, mainly running institutional money. You've never heard
25:25
Speaker 3: of them, who have a far better track record. They
25:27
Speaker 3: don't manage as much.
25:28
Speaker 4: Maybe they've got his poster above my bed.
25:30
Speaker 3: They haven't been as good personally.
25:32
Speaker 4: I know you're not, but you know, just so we're
25:33
Speaker 4: on the second.
25:34
Speaker 3: It's never been part of that. I've just never fully
25:36
Speaker 3: understood the infatuation with him, other than that he's a
25:39
Speaker 3: great American story, appears to live a modest life, so
25:43
Speaker 3: he's admirable in many ways. I've just the track record
25:46
Speaker 3: is average over the past twenty years. Especially it was
25:50
Speaker 3: good early on but it was much easier in the fifties, sixties,
25:53
Speaker 3: and seventies to be an active manager. Information was scarcer. Yep,
25:58
Speaker 3: since Mike his record is pretty mediocre, and there are
26:01
Speaker 3: probably hundreds, to be honest, of active managers who buy
26:04
Speaker 3: stocks infractions different than are held by a market cap index,
26:08
Speaker 3: who have a better track record. I don't fully get.
26:10
Speaker 3: I respect him and like him, I guess I don't
26:12
Speaker 3: know him, but I don't quite get the infatuation, to
26:15
Speaker 3: be honest.
26:15
Speaker 4: Yeah, I think.
26:17
Speaker 2: Look to me, a lot of the infatuation comes from
26:20
Speaker 2: the fact that he's ninety four years old and still
26:22
Speaker 2: very active in running his own business. I find that
26:25
Speaker 2: fascinating that I find it mainly fascinating that someone can
26:28
Speaker 2: stay interested and active in this career for such a
26:32
Speaker 2: long period of time.
26:32
Speaker 4: As I mentioned his first job as a.
26:34
Speaker 2: Secure well, his first job was working in investment sales
26:38
Speaker 2: for his father in nineteen fifty one before actually becoming
26:41
Speaker 2: a securities analyst in fifty four. And there's nobody out
26:44
Speaker 2: there alive who has seen as many market cycles as
26:47
Speaker 2: this man has and has studied actually studied them during
26:49
Speaker 2: that period of time and invested in them during that
26:51
Speaker 2: period of time. So that's where my interest is largely from.
26:55
Speaker 2: And let's be honest, he did build one of the
26:58
Speaker 2: most successful investment firms that's out there. You're right, his
27:02
Speaker 2: track record of the last twenty years not anything to
27:04
Speaker 2: write home about, and perhaps he does have a different
27:08
Speaker 2: view on markets than is necessary.
27:10
Speaker 3: In Berkshire, What is their ass what are their assets
27:14
Speaker 3: under management? I'm sorry, Paul and I were talking about
27:16
Speaker 3: this last week.
27:17
Speaker 2: I don't know how to how to properly measure Berkshire's size, Right,
27:21
Speaker 2: is it assets under management when they own a bunch
27:23
Speaker 2: of privately held companies. I mean it's a one trillion
27:26
Speaker 2: dollar market capitalization company.
27:29
Speaker 3: Okay, so there are lots of investment firms out there
27:30
Speaker 3: with multi trillion dollar there are, but with multijenion dollar AUMs.
27:34
Speaker 4: I don't think that's the problem.
27:36
Speaker 3: Never heard of the most of it.
27:37
Speaker 4: I don't think that's the proper way to look at Berkshire.
27:39
Speaker 2: Though, comparing Berkshire's assets under management to like a black
27:45
Speaker 2: Rock or a Fidelity is a little bit different because
27:47
Speaker 2: Berkshire doesn't have a stock trading plant.
27:49
Speaker 3: I'm not just trying to be sensational for radio. This
27:51
Speaker 3: is you know, like criticizing FDR or something warm buff
27:55
Speaker 3: He's great. I'm just I'm just asked Jesus Saturn, what's
27:58
Speaker 3: the day he at his own angle? Yeah, like forgive me,
28:03
Speaker 3: but what's the big deal at this point? There are
28:05
Speaker 3: a lot of very successful asset managers, asset management firms
28:08
Speaker 3: that have diversified. They're a lot bigger, made a lot
28:10
Speaker 3: more for their probably made a lot more. Don't know
28:13
Speaker 3: this for a fact, But I don't think BTRD to
28:15
Speaker 3: find out for their shareholders. I just don't fully get
28:17
Speaker 3: the infatuation. I know, I'm repeating myself.
28:19
Speaker 2: Yeah, I think there's just something to the longevity of
28:23
Speaker 2: his advice and the and the staying power of the infatuation.
28:27
Speaker 4: That's That's really all it is. Let's take a quick break.
28:30
Speaker 2: When we come back, bit of Apple News responding to
28:33
Speaker 2: pressure from the Trump administration regarding terrorist we'll cover that
28:36
Speaker 2: next here on the Financial Exchange text us.
28:39
Speaker 1: At six one seven three, six two one three eighty
28:42
Speaker 1: five with your comments and questions about today's show, and
28:44
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28:46
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29:17
Speaker 2: Apple says they plan to add twenty thousand US jobs
29:21
Speaker 2: here over the net course of the next few years,
29:24
Speaker 2: Mark blow and spoke to avoid tariffs or real plans
29:30
Speaker 2: and commitment.
29:30
Speaker 3: From and Smoke to ingratiate themselves with the new regime.
29:33
Speaker 3: Full stop Mike. They were asked, did you plan these
29:35
Speaker 3: before or after the election? No comment?
29:37
Speaker 4: Yeah, and I would do it too, don't get me wrong. Yeah,
29:39
Speaker 4: sure it's the right move.
29:41
Speaker 2: But if you're looking at a threat of terariffs, there
29:44
Speaker 2: are a few companies I think that are probably actually
29:47
Speaker 2: there are a few companies that are more susceptible to them,
29:49
Speaker 2: depending on where they go.
29:50
Speaker 3: Let me can I expand on that, because that sounds
29:52
Speaker 3: like I'm just reacting and being snide. Nobody makes these
29:58
Speaker 3: decisions overnight. The CEO Apple met with met with the
30:01
Speaker 3: White House one day, and the very next day they
30:03
Speaker 3: make these And oh so you don't make a five
30:05
Speaker 3: hundred billion dollar commitment decision in one day.
30:10
Speaker 4: Sure.
30:11
Speaker 3: Now, they may have talked about it leading up to
30:13
Speaker 3: the meeting at the White House. I don't know, but
30:15
Speaker 3: I don't even think you make this decision over a
30:17
Speaker 3: couple or a few weeks. In all likelihood, these were
30:20
Speaker 3: things they had planned for at some point in the
30:22
Speaker 3: next four years. They just kind of bundled them all together.
30:26
Speaker 2: And to be fair, I think this is precisely what
30:28
Speaker 2: the Trump administration is looking for out of major US companies.
30:32
Speaker 3: Yeah.
30:32
Speaker 2: Now I think they might be Yeah, we're saying it
30:34
Speaker 2: in different ways, but you know, yeah, yeah, this likely
30:38
Speaker 2: in my view, comes with some form of quid pro quo. Right,
30:41
Speaker 2: you get this commitment here and yeah, we will carve
30:44
Speaker 2: out your products from Chinese import terraffs, and therefore you'll
30:50
Speaker 2: be able to continue to do business as you see
30:52
Speaker 2: fit in terms of manufacturing products over there, so long
30:55
Speaker 2: as you commit to some high tech, high paid jobs
30:59
Speaker 2: here in the United States.
31:00
Speaker 3: What else were they going to do with their cash.
31:02
Speaker 3: I mean, it's going out in AI, it's going in
31:04
Speaker 3: chips and AI.
31:05
Speaker 4: We knew that, yep.
31:07
Speaker 3: So I'm not sure how much of this is actually new. Again,
31:09
Speaker 3: they were asked is this new, and they had no comment,
31:12
Speaker 3: which suggests a lot of it was either in process
31:16
Speaker 3: or about to be Look, shareholders need to judge this
31:19
Speaker 3: by the returns they expected. So should you cheer this
31:21
Speaker 3: as a shareholder? I don't know. Should you cheer this
31:23
Speaker 3: as an American? Maybe? I guess all these little one
31:28
Speaker 3: offs that the White House is doing. I hate to
31:30
Speaker 3: keep harping on the dancing on the edge of the
31:33
Speaker 3: political on this, but it's one off after one off,
31:35
Speaker 3: and it's hard to aggregate in total. Like, just wake
31:39
Speaker 3: me in a year. Tell me what GDP did, Tell
31:41
Speaker 3: me what the deficit did, Tell me where unemployment is,
31:43
Speaker 3: tell me where inflation is, and did we build the
31:45
Speaker 3: darn wall. I want to know the answers to those
31:48
Speaker 3: things at that point, and then we can assign grades
31:50
Speaker 3: to the economic stewardship.
31:52
Speaker 2: I agree, And a lot of this stuff is just distraction,
31:54
Speaker 2: right when we talk about we're going to cover later
31:56
Speaker 2: the cuts that Doze has made and to me kind
31:59
Speaker 2: of thing, kind of irrelevant, right, Tell me where employment is,
32:02
Speaker 2: tell me where GDP is, Tell me where inflation def
32:04
Speaker 2: is in this case a year from now. And that's
32:06
Speaker 2: what I'm most interested in. The twenty thousand job win
32:09
Speaker 2: from Apple, Okay, you know, yeah, let's see how that
32:11
Speaker 2: gets offset by other things for Apple, though, could be
32:15
Speaker 2: a very big win if they were otherwise facing three.
32:19
Speaker 3: Million Americans and that maybe five. I think it's closer
32:22
Speaker 3: to three. Sorry, this off the top. I had changed
32:24
Speaker 3: jobs every month, so just for context like this is
32:29
Speaker 3: this won't even be arounding error.
32:32
Speaker 2: In terms of the commitment, they'd committed five hundred billion
32:35
Speaker 2: dollars in investment in twenty thousand new jobs over the
32:38
Speaker 2: next four years. That would be Bapple's biggest US commitment
32:42
Speaker 2: to date. They said that they hired twenty thousand research
32:45
Speaker 2: and development workers anyway over the last five years, and
32:49
Speaker 2: in twenty twenty one it said they would invest four
32:51
Speaker 2: hundred and thirty billion dollars locally over the next half decades.
32:55
Speaker 2: So some of this stuff, like you said, already baked
32:57
Speaker 2: into their plans anyway, but none of theles less a
33:01
Speaker 2: big talking point and probably a big selling point for
33:05
Speaker 2: shareholders in terms of, hey, how can we continue to
33:07
Speaker 2: manufacture our product in the most efficient, low cost place
33:11
Speaker 2: to do so, which remains China.
33:13
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34:18
Speaker 2: At the same time that consumers are expressing pessimism about
34:21
Speaker 2: the state of inflation and their general outlook, according to
34:25
Speaker 2: the Michigan Sentiments Survey, the long run economic outlook is
34:28
Speaker 2: now at its lowest level and over a year in
34:30
Speaker 2: Americans now expect prices to rise an additional four point
34:34
Speaker 2: three percent in the coming year. At the same time,
34:37
Speaker 2: according to a survey of one hundred and thirty four
34:40
Speaker 2: chief executives of Fortune five hundred companies that's going to
34:43
Speaker 2: be released this coming week, sentimentm on CEOs pretty darn good.
34:49
Speaker 2: An interesting divergence. I don't think completely unexplainable. But when
34:53
Speaker 2: you take a look at how CEOs are talking about
34:55
Speaker 2: to the course of the next few years compared to
34:57
Speaker 2: the average American according to you Can Consumer sentiment, pretty
35:01
Speaker 2: big divergence in terms of expectations.
35:03
Speaker 3: They tend to vote Republican. So part of this is
35:05
Speaker 3: the partisan split that we've seen elsewhere, and they've basically
35:08
Speaker 3: just been told, hey, guys, next four years is going
35:11
Speaker 3: to be a free for all. Go for it.
35:12
Speaker 2: Yeah, we're not going to regulate you, and we're going
35:14
Speaker 2: to at least lock in your current tax rates.
35:17
Speaker 4: Maybe lowell, there's a good chance that if.
35:19
Speaker 3: You commit a crime, we're not going to prosecute you.
35:21
Speaker 3: Go see Eric Adams if you need testimonial. So like,
35:24
Speaker 3: times are looking pretty good. If I'm not suggesting these
35:27
Speaker 3: people are all going to do something criminal. There's the
35:29
Speaker 3: government's getting off their backs, and that's a very one
35:32
Speaker 3: sided way to put it.
35:33
Speaker 2: We've talked about regulations in certain areas in terms of
35:35
Speaker 2: the pendulum swinging too far in one direction or another.
35:39
Speaker 2: Banking is one of them gets talked about all the time,
35:42
Speaker 2: is the post Grade financial crisis. Many, especially the CEOs
35:46
Speaker 2: of large banks, have said, look, these regulations don't prevent
35:50
Speaker 2: the next financial crisis, are too onerous, and we're just
35:52
Speaker 2: moving the risk from one place to another, which was
35:55
Speaker 2: the intent of it all. And we want to see
35:57
Speaker 2: that cut back. And I think you're seeing some of that.
36:00
Speaker 4: Fact.
36:00
Speaker 2: The specifics that they cited in this article were from
36:04
Speaker 2: the likes of Wells Fargo, Bank of America, and then
36:06
Speaker 2: also Hilton. What I found interesting about what those three
36:10
Speaker 2: have in common. None of them should be heavily affected
36:12
Speaker 2: by tariffs in any meaningful way. I don't you know,
36:15
Speaker 2: I generally don't think that implementation of tariffs would result
36:19
Speaker 2: in downside for Hilton's hotel brands, or Wells Fargo or
36:24
Speaker 2: Bank of America's businesses. To a again, if you have
36:27
Speaker 2: tariffs going into place that drag the entire economy into recession. Yeah,
36:31
Speaker 2: you've got a problem, but we're not talking about ford
36:34
Speaker 2: that would face substantially higher costs on their vehicles.
36:37
Speaker 3: My reaction to this is similar to the points that
36:39
Speaker 3: were made in the last segment. Wake me in two
36:41
Speaker 3: years and tell me what economic growth did, how many
36:43
Speaker 3: people got jobs, where inflation is, and maybe a few
36:46
Speaker 3: other metrics. These one offs about business people being excited,
36:51
Speaker 3: this person getting an exception for this or that. It's
36:54
Speaker 3: hard to say whether it will in the decades when
36:58
Speaker 3: the economy has grown fastest, so his government, and that's
37:01
Speaker 3: tended to happen. I don't know why under Democrat administrations,
37:04
Speaker 3: when presumably regulations were growing. There's just not much of
37:06
Speaker 3: a relationship there. So it may mean good things for
37:09
Speaker 3: individual businesses bottom lines, but that doesn't necessarily translate into
37:13
Speaker 3: higher economic growth and certainly not higher incomes for the
37:16
Speaker 3: average American. It might, we'll see, but that's not been
37:19
Speaker 3: the case historically.
37:21
Speaker 2: So I don't like to really rely too much on
37:23
Speaker 2: sentiment surveys. How are you feeling about things?
37:26
Speaker 4: Anyway?
37:27
Speaker 2: If you had to weigh one versus the other in
37:29
Speaker 2: terms of just you know, take a step back and
37:32
Speaker 2: just say, hey, if I'm looking for a better read
37:35
Speaker 2: on the future state of the economy, am I going
37:38
Speaker 2: to rely more on executives or consumers?
37:41
Speaker 3: Consumers because GDP is seventy percent spending.
37:46
Speaker 4: Yep, yeah, so I am interested.
37:49
Speaker 2: In terms of the CEO response here, I can see
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Speaker 2: why they are optimistic. But to your point, our economy
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Speaker 2: today is not based on how many manufacturing jobs there
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Speaker 2: are going to be, how many regulations Bank of America faces.
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Speaker 2: It's going to be based on whether or not the
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Speaker 2: average person spends money. Let's take a quick break. Market's
38:07
Speaker 2: continuing their downturn. We'll have a full recap and more
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Speaker 2: next on the Financial Exchange