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Why is talking about a ‘K-shaped’ economy? · The Financial Exchange Show

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Speaker 2: Good morning, Welcome back to the Financial Exchange. Happy Tuesday.
1:14
Speaker 2: Hope everyone is if you're getting snow, staying safe, not
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Speaker 2: riding the tail of any plows out there, or trying
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Speaker 2: to pass them while they're while they're doing their jobs.
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Speaker 2: Here closer to the Boston area, we are getting precisely
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Speaker 2: zero snow, so quite the disappointment here in need them Massachusetts,
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Speaker 2: where we broadcast our show for disappointment.
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Speaker 3: Is that the word you chose?
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Speaker 4: Yeah? Interesting choice.
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Speaker 2: I will I've said this over and over again, Tucker.
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Speaker 2: I will gladly take a foot of snow over top
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Speaker 2: thirty six degree rain any day of the week.
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Speaker 4: Any day of the week, that's crazy, Yeah, any day
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Speaker 4: of the week.
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Speaker 2: Driveway I snowway, all right, so you.
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Speaker 4: Know, I you walk the walk. I can deal with
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Speaker 4: these things.
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Speaker 2: I have also occasionally been away and not done and
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Speaker 2: have that nice frozen slop on another driveway. But nonetheless,
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Speaker 2: I hope everyone is being safe out there. For those
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Speaker 2: who are getting some snow. We are officially disappointment disappointed
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Speaker 2: here on the Financial Exchange, although Tucker seems to be
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Speaker 2: doing all right with it.
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Speaker 4: A Sam Altman has issued a code you.
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Speaker 5: Don't have a sorry, too much info. Maybe your commute
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Speaker 5: is shorter than some people.
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Speaker 2: Yeah, my commute is considerably shorter than the average America.
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Speaker 5: That would color your view.
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Speaker 2: Of it, would of snow, Yeah, it definitely would. I
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Speaker 2: am very spoiled on that front. The the let's say,
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Speaker 2: founder CEO both of open Ai, the maker of chat gpt,
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Speaker 2: is issued a code red across the board, so we'll
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Speaker 2: be discussing what that might mean for chat GPT, the
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Speaker 2: AI sector.
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Speaker 4: Generally. We have got.
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Speaker 2: Outlets once again calling it crypto winter, and Tucker, I'd
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Speaker 2: love for you to be able to pull some stuf
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Speaker 2: on that, but I feel like it's probably been described
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Speaker 2: as crypto winter at least five times in the last
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Speaker 2: seven years, would be my guest, So new crypto winter
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Speaker 2: might be upon us here according to media. And before
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Speaker 2: all that, though, we're going to start off with a
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Speaker 2: Federal Reserve because in eight days we have a FED
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Speaker 2: meeting with a bunch of seemingly divided and confused Federal
3:21
Speaker 2: Reserve members on where to go next. So that's our
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Speaker 2: top story of the day mark and we will start
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Speaker 2: right there with the Bloomberg piece that the FED has
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Speaker 2: rarely been so divided over its long term plan for
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Speaker 2: interest rates, and I suppose you could describe that as true.
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Speaker 2: But the division is pretty clear. There are a number
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Speaker 2: of either Donald Trump appointees or those who are going
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Speaker 2: for the role of a Donald Trump appointee, who are
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Speaker 2: pretty strongly in favor of dramatically lower long term interest rates,
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Speaker 2: and then you have pretty much everybody else.
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Speaker 4: And I think what it will be interesting is does
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Speaker 4: this division.
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Speaker 2: Remain after there has been a pick for the excuse me,
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Speaker 2: chairman of the Federal Reserve going forward, because right now
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Speaker 2: I think there's a fair bit of posturing about what
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Speaker 2: people are saying publicly versus actually believing.
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Speaker 5: Everything's with respect to monetary policy, it's in complete disarray.
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Speaker 5: I've never seen or read about anything like it in
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Speaker 5: the modern era. And it's in disarray because the president
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Speaker 5: wants to control the Federal Reserve, so he's upset the
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Speaker 5: traditional calculus that goes into the FED trying to strike
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Speaker 5: a balance between inflation and unemployment. If you keep in mind,
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Speaker 5: the Fed's job is to act like the economy's thermostat,
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Speaker 5: to cool it down when it's running too hot and
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Speaker 5: there's too much pressure on prices, i e. Inflation is accelerating.
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Speaker 5: The Fed's job is to cool down the economy under
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Speaker 5: those circumstances or to stimulate the economy, which it does
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Speaker 5: through its main policy to lowering its federal funds rate,
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Speaker 5: it's short term interest rate target when labor market conditions
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Speaker 5: appear to be weakening, which they do, by the way,
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Speaker 5: So there's an argument for low wearing rates, but not
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Speaker 5: as aggressively as the President wants them lowered, and as
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Speaker 5: his appointee to the Federal Open Market Committee, the body
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Speaker 5: that makes the interest rate decision, wants to see them lowered.
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Speaker 5: So it's it's it's a really weird combination of factors. Mike,
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Speaker 5: you've got the labor market is you and Chuck talk
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Speaker 5: about a lot? It is weakening. So there's an argument
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Speaker 5: for cutting rates, But there are people who want to
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Speaker 5: cut rates by frankly absurd amounts that are not called
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Speaker 5: for by any type of clearheaded thinking about the economy.
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Speaker 4: So what do we consider it to be longer run?
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Speaker 2: Because we obviously have the dot plot and the dot
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Speaker 2: plot for those who are unfamiliar at.
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Speaker 4: Is it four meetings a year they do the dot plot.
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Speaker 2: The summary of comers every other meeting, every other meeting,
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Speaker 2: so roughly, yeah, roughly for a year they put together
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Speaker 2: these projections for longer term rates, and so I'm looking
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Speaker 2: at it right now. You can look at it to
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Speaker 2: on the CME group website among other places, and they
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Speaker 2: plot out every Federal Reserve member's viewpoint on rates going
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Speaker 2: from twenty five through twenty twenty eight and then what
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Speaker 2: they describe as longer term. And to be fair there
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Speaker 2: there does seem like a fair bit of division. When
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Speaker 2: you look at this. You have one Federal Reserve member
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Speaker 2: by twenty twenty seven thinking that interest rates should be
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Speaker 2: below two and a half percent. You've got two Federal
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Speaker 2: Reserve members that believe they should be nearly four percent.
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Speaker 2: That's a pretty wide divergence. But I guess my question
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Speaker 2: is are we is this getting to publicized because when
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Speaker 2: I look at this dop plot, yeah, it's you know.
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Speaker 4: Between four and two and a half percent. That's pretty
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Speaker 4: extreme number.
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Speaker 2: But is that truly so outside the norm for the
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Speaker 2: Federal Reserve to have FED members saying that you know,
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Speaker 2: one member thinks that they should be rates should be.
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Speaker 5: It is it is unusual historically spaking?
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Speaker 4: Yeah, yeah, and it's much more narve.
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Speaker 5: But we know that the we know the reason for
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Speaker 5: the president's putting prey. You could say you think this
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Speaker 5: is great. You could say you think it's sure a
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Speaker 5: tragedy for independent monetary policy and for stable inflation. I
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Speaker 5: fall in the ladder, can't. But again, honest people can
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Speaker 5: sort of disagree. There are some people who think politicians
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Speaker 5: should directly control the money supply and therefore interest rates everywhere.
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Speaker 5: That's been tried, though it's led to very high inflation
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Speaker 5: and economic instability, because you can't if you're a politician.
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Speaker 5: You have to succumb to the temptation to stimulate the economy.
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Speaker 4: Which means lower interest rates, which you know.
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Speaker 5: No politician is going to pound the table for higher
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Speaker 5: interest rates.
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Speaker 4: You don't get.
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Speaker 5: What sane politician would call for recession to squelch inflation.
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Speaker 4: Nobody would.
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Speaker 5: They've they've tolerated it historically in the modern era. But
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Speaker 5: even then there's there's been a lot of buying the
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Speaker 5: scheme behind the scenes, brawling and pressure put on the FED.
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Speaker 5: So I understand those who think rates should be relatively high,
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Speaker 5: I mean relative to the average f o MC measure,
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Speaker 5: because inflation remains elevated, and everybody listening knows that prices
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Speaker 5: have not come down. That's not the president's fault, by
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Speaker 5: the way, that's not necessarily the feds fault. Prices have
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Speaker 5: not come down in the modern era. And when I
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Speaker 5: say I keep using the phrase modern era, I just
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Speaker 5: mean mostly since World War Two, with a couple of
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Speaker 5: very brief exceptions that were characterized by dramatic and nauseating
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Speaker 5: economic contractions. Prices don't fall anymore. They used to under
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Speaker 5: the old gold standard because there were other considerations there
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Speaker 5: that that that that dictated the inflation rate. So prices
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Speaker 5: price growth inflation is somewhere in the mid two s
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Speaker 5: to mid threes based on three based on trend may
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Speaker 5: that's fine because that's actually where the last reading was
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Speaker 5: year over the year, And if you're going to call
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Speaker 5: it three, you have to say that's elevated because the
8:39
Speaker 5: Fed's goal is two, which it has not met in
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Speaker 5: like ages for the for nearly a decade. So it's
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Speaker 5: odd that anybody would argue for aggressively lowering interest rates
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Speaker 5: unless you think the economy is about to fall off
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Speaker 5: a cliff.
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Speaker 2: Right, And that is not the opinion that those who
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Speaker 2: are seeking the leadership role are voicing. They are not
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Speaker 2: opining that the economy is about to fall apart. They
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Speaker 2: are merely saying that rates need to be lower in
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Speaker 2: order to continue the economics.
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Speaker 4: And this makes sense, right.
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Speaker 5: I think you don't have to be like a monetary
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Speaker 5: policy officionado to recognize that. If normally when you're calling
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Speaker 5: for much for aggressive monetary stimulus, it's because you're really
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Speaker 5: worried about the economy. There are in the area of
9:21
Speaker 5: floating exchange rates when you don't have to worry about
9:23
Speaker 5: the value of the doll FED doesn't worry about the
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Speaker 5: value of the dollar anymore like it used to pre
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Speaker 5: nineteen early nineteen seventies. The only reason you'd call for
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Speaker 5: dramatically lower exchange rates abruptly is that you think the
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Speaker 5: economy is in big trouble.
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Speaker 2: Moving on from the longer term disagreements, can we focus
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Speaker 2: in on the meeting in eight days, because I thought
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Speaker 2: that this was a little bit silly, but I'm kind
9:44
Speaker 2: of coming around to the argument that they should just
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Speaker 2: delay this meeting. I don't really see the Yeah, just
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Speaker 2: genuinely here, you do not have any economic data on
9:54
Speaker 2: the state of the economies since September.
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Speaker 5: Oh, and so the action you meet, Yeah, delay the action,
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Speaker 5: not the meeting, but just say, look, we're gonna You.
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Speaker 2: Could just say, hey, we're having our meeting and we're
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Speaker 2: not going to do anything until a week later when
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Speaker 2: we determine what the hiring pace was for October and November,
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Speaker 2: until we determine what the inflation rates were for October
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Speaker 2: and November. Not that that should be the end all
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Speaker 2: be all of what's driving you your monetary policy, but
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Speaker 2: it just seems to me that there's really a no
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Speaker 2: win situation for the Fed here as they are trying
10:24
Speaker 2: to assure the general public that they know what they
10:28
Speaker 2: are doing. Any decision you make at this next meeting
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Speaker 2: is going to be made in a blanket of uncertainty,
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Speaker 2: and so why make a decision?
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Speaker 4: There's always that Unusually.
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Speaker 2: Yeah, this all comes from the government shut down. By
10:44
Speaker 2: the way, they did not get any data releases. The
10:46
Speaker 2: data releases that we're getting right now reflect collections from September,
10:50
Speaker 2: which are, in my opinion, irrelevant to what we are
10:53
Speaker 2: seeing right now, and so you will get a whole
10:56
Speaker 2: slog of data in the week after the Federal Reserve meeting,
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Speaker 2: and so I'm just envisioning this scenario where the Fed
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Speaker 2: decides to continue on their current path, which would be
11:06
Speaker 2: for another quarter of a percent cut, and subsequently you
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Speaker 2: get an inflation reading that's three point two percent and
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Speaker 2: hiring rates that are in the two hundred thousand range.
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Speaker 4: It would just seem to me that there's no good.
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Speaker 2: Reason that you have to go forward with this interest
11:21
Speaker 2: rate decision in December. So maybe they won't. Maybe they
11:25
Speaker 2: will just say, hey, we're not doing anything. We're not
11:27
Speaker 2: cutting rates, we're not increasing rates. But I don't know,
11:30
Speaker 2: sticking to this schedule just doesn't make a whole lot
11:32
Speaker 2: of sense to me. Let's take a quick break. When
11:35
Speaker 2: we come back. We were talking about the K shaped
11:37
Speaker 2: economy yesterday. The Associated Press is going to answer for
11:43
Speaker 2: us why everyone and their mother seems to be talking
11:46
Speaker 2: about the K shaped economy. Now that's next on the
11:48
Speaker 2: financial exchange, keep talking, go ahead, No, we are not
11:55
Speaker 2: going to do that next week.
11:56
Speaker 4: We talk about going to do it, now, go ahead,
11:58
Speaker 4: silly computer.
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Speaker 5: We didn't talk about Hassett, who's seemingly going to be
12:04
Speaker 5: the President's.
12:05
Speaker 2: Yeah a point the president was asked about his appointment.
12:08
Speaker 2: Somebody asked him specifically if it was Heavin Hassid. He
12:10
Speaker 2: did not answer, Yeah, probably has.
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Speaker 5: Asset's done a good job carrying water. And I don't
12:14
Speaker 5: mean that negatively. He's done it. He's been a good,
12:16
Speaker 5: dutiful head of the National Economic Council, and he's a
12:20
Speaker 5: respected was a respected acon. He's become more of a
12:22
Speaker 5: hack lately. But there was a time, by coincidence, I
12:26
Speaker 5: found his name in the footnote of a paper over
12:29
Speaker 5: the weekend, written like thirty years ago. So there was
12:31
Speaker 5: a time when he was a respected, nearly prominent economists.
12:37
Speaker 5: So at least my point is, at least he can
12:38
Speaker 5: read a modern paper in economics, unlike the other potential.
12:42
Speaker 2: And again I will just point out that he is
12:44
Speaker 2: a member of an administration now in his job at
12:47
Speaker 2: least in part is to be the voice of the
12:50
Speaker 2: president right now, and when he's appointed to the Federal Reserve,
12:53
Speaker 2: we've seen that change.
12:54
Speaker 4: And he could say the.
12:55
Speaker 5: Same thing become Thomas Beckett.
12:57
Speaker 2: You could say the same thing about Oh gosh, I'm
13:01
Speaker 2: forgetting her name now. Tucker wants to who is the
13:04
Speaker 2: previous Federal Reserve chair Jenny Yellen? Jenny Yellen, right, she
13:07
Speaker 2: joined the Biden administration, and then you started hearing some
13:09
Speaker 2: things that I was like, Wow, I don't think I
13:11
Speaker 2: would have heard that from her mouth as Federal Reserve Chair.
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Speaker 2: Quick break when we come back. K shaped Economies next.
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Speaker 2: So, Mark, I don't know if you have taken as
14:22
Speaker 2: much notice as Tucker and I have, but major news
14:25
Speaker 2: publications like.
14:26
Speaker 4: The Journal, New York Times.
14:29
Speaker 2: Maybe less so in the Financial Times, but CNBC have
14:33
Speaker 2: been taking up the term K shaped economy with increasing frequency.
14:37
Speaker 4: It seems to me it's getting more and more mentions.
14:40
Speaker 2: And the AP attempted here to put together some reasoning
14:44
Speaker 2: for it. They describe what is, in their opinion, unusually
14:50
Speaker 2: muddy convoluted period for the US economy. They blame consumer
14:54
Speaker 2: spending still rising, Americans being less confident, growth appearing solid
15:00
Speaker 2: yet hiring being sluggish, unemployment rates starting to tick up,
15:04
Speaker 2: AI related data center construction staring, while factories laying off workers,
15:09
Speaker 2: home sales being weak, And I guess I ask you,
15:13
Speaker 2: it honestly doesn't seem all that much muddier and more
15:17
Speaker 2: convoluted than other periods. I would say that twenty twenty
15:20
Speaker 2: through twenty twenty two were extremely convoluted and muddy.
15:24
Speaker 4: Yeah, I think that was.
15:24
Speaker 2: A once hopefully once in a lifetime type event, and
15:30
Speaker 2: the solutions to it proposed by the government were you know,
15:34
Speaker 2: largely untested and it really really new, and that was
15:38
Speaker 2: muddy unclear how it would proceed, and you know, we
15:41
Speaker 2: saw a spike in inflation. When I'm looking at twenty
15:44
Speaker 2: twenty three through twenty twenty five, I'm looking at an
15:47
Speaker 2: economy that to me is behaving pretty logically. For one
15:51
Speaker 2: where all, yeah, yeah, you're seeing government deficit spending at
15:55
Speaker 2: six percent annualized. You are seeing, right, like we say
16:00
Speaker 2: it so catchy, right like, it's crazy, an emergency level
16:03
Speaker 2: deficit we've just become.
16:04
Speaker 5: I'm talking about the trade deficit, which is not an emergency.
16:06
Speaker 5: I'm talking about the budget deficits.
16:07
Speaker 2: The budget deficit, yah, the collections of tax revenue versus
16:11
Speaker 2: government spending.
16:13
Speaker 4: We're running at deficit levels of six.
16:16
Speaker 2: And at the same time, you have an economy that
16:19
Speaker 2: is cooling off from the previous record levels of deficit
16:22
Speaker 2: spending spend during that muddy Water's time.
16:25
Speaker 5: I like the K shaped figure of speech. Maybe we
16:30
Speaker 5: should just like tofine that because people are going to
16:32
Speaker 5: continue to hear it. If you think of the capital
16:34
Speaker 5: letter K, it's got one. Uh, what would you call
16:39
Speaker 5: those things that go off the vertical they kind of
16:42
Speaker 5: point diagonally. The horns a has one line going up,
16:48
Speaker 5: one line going down. Okay, well, I'm just but think.
16:51
Speaker 4: Of everyone here was thinking of a cursive K, So
16:54
Speaker 4: I get it.
16:54
Speaker 5: It may be, so why do we call the economy
16:57
Speaker 5: K shape? Well, because, for one coal, let's call it
17:01
Speaker 5: the top one percent. Even though it's a little bit
17:03
Speaker 5: broader than that, wages are going up and other measures
17:07
Speaker 5: of well being are going up. So you would you
17:09
Speaker 5: would if you were gonna describe the economy and you
17:13
Speaker 5: tried to do it with one line, you could, but
17:16
Speaker 5: it would be something with a slightly positive slope. It
17:18
Speaker 5: would not capture the experience of a big part of
17:21
Speaker 5: the population. So if you were kind of modeling this phenomenon,
17:24
Speaker 5: you'd instead model it with two trend lines, if you will,
17:28
Speaker 5: one pointing up like the upper part of the K,
17:30
Speaker 5: and one pointing down like the lower part. Because for
17:33
Speaker 5: the non say top ten percent, death sile of earners,
17:38
Speaker 5: or whatever measure you're using, things aren't getting better. In fact,
17:41
Speaker 5: in real terms and inflation adjusted terms, they're getting worse.
17:44
Speaker 5: So that line points down.
17:45
Speaker 4: So I sort of like the visual that that conveys too.
17:47
Speaker 2: I'm just I keep going back to how how am
17:51
Speaker 2: I to make use of VE because I don't think
17:53
Speaker 2: it's gonna help me predict earnings or spending patterns.
17:56
Speaker 4: I've come to.
17:57
Speaker 2: The only real conclus llusion I've been able to make
18:01
Speaker 2: is that some individual businesses might be able to use
18:04
Speaker 2: it to better understand the spending of their customer base. Right,
18:08
Speaker 2: if you can accurately describe.
18:10
Speaker 5: They're doing this, We're you're seeing businesses pivot to luxury stuff.
18:13
Speaker 2: Right, and others try and you know, companies that don't
18:18
Speaker 2: focus on the luxury spaces for.
18:19
Speaker 5: Pete's sake, they only build mansions, right, because on the
18:22
Speaker 5: margin it makes sense economically.
18:23
Speaker 2: I think the other area that it's probably helpful for
18:27
Speaker 2: is trying to better understand things like sentiment and you know,
18:34
Speaker 2: voter blocks and things like that. Right, if you looked
18:37
Speaker 2: at just that median number like you described, and looked
18:40
Speaker 2: at the economy in twenty twenty three and twenty twenty four,
18:42
Speaker 2: you'd look at it and say, wages are up, inflations down,
18:46
Speaker 2: This economy looks pretty good other than the deficit spending.
18:49
Speaker 2: And yet the sentimentally was case the worst you've seen,
18:53
Speaker 2: and you had a really compelling election that voted the
18:59
Speaker 2: existing administry out of office. And I think that and
19:03
Speaker 2: help in part, helps describe why the K shaped economy
19:07
Speaker 2: is important. And importantly, I don't think you've seen any
19:10
Speaker 2: reversal of the case.
19:11
Speaker 5: That's not really the shape of the I know the
19:13
Speaker 5: expression is too widely used now we're not gonna be
19:15
Speaker 5: able to shake it. But it's not a K shaped economy.
19:18
Speaker 5: It more describes trends for different groups of people.
19:21
Speaker 2: Let's take a quick break. When we come back, market's
19:24
Speaker 2: rebounding a bit from yesterday's action.
19:26
Speaker 4: Will have a full recap for you next with Wall
19:27
Speaker 4: Street Watch.
19:41
Speaker 1: Like us on Facebook and follow us on Twitter at
19:44
Speaker 1: TFE show. Breaking business news is always first right here
19:48
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:54
Speaker 1: Street Watch a complete look at what's moving markets so
19:57
Speaker 1: far today right here on the Financial Exchange Radio Network.
20:00
Speaker 3: After a negative start to the month, markets today are
20:03
Speaker 3: in the green, led by a rally in tech, where
20:06
Speaker 3: traders are also monitoring Bitcoin after its recent tumble, Bitcoin
20:10
Speaker 3: rebounding today and trading right around ninety thousand dollars right now.
20:15
Speaker 3: The Dow is up by over a tenth of a percent,
20:18
Speaker 3: or seventy two points higher. SMP five hundreds up two
20:21
Speaker 3: tenths of one percent or thirteen points. Hired Nasdaq up
20:25
Speaker 3: six tenths of one percent or one hundred and forty points.
20:28
Speaker 3: Rusted two thousand also up by six tenths of one percent.
20:32
Speaker 3: Tenure treasure Field is flat currently a four point one
20:35
Speaker 3: zero percent crewed oiled down about a third of a percent,
20:39
Speaker 3: trating right around fifty nine dollars a barrel. According to
20:43
Speaker 3: several reports, Comcast, Netflix, and Paramount all submitted second offers
20:47
Speaker 3: for Warner Brothers Discovery assets, while Paramount and Comcast made
20:51
Speaker 3: improved offers. Netflix reportedly submitted a primarily cash based offer. However,
20:57
Speaker 3: a Netflix acquisition of HBO Mac could raise concerns among
21:02
Speaker 3: Justice Department officials. Netflix shares are down nearly one percent,
21:06
Speaker 3: while Warner Brothers stock is climbing about one percent. Meanwhile,
21:10
Speaker 3: Apple is shaking up its artificial intelligence leadership, where the
21:13
Speaker 3: iPhone maker landed a Microsoft executive after announcing the retirement
21:18
Speaker 3: of its top AI leader. Apple shares are up modestly. Elsewhere,
21:23
Speaker 3: Developer data platform Mango dB is seeing its stock searched
21:28
Speaker 3: twenty five percent after posting solid third quarter results. The
21:32
Speaker 3: company also hiked its full year guidance as booming AI
21:35
Speaker 3: demand lifted its revenue. Shares Insignette Jewelers falling three percent
21:40
Speaker 3: after the parent company two K and Zale's posted disappointing
21:44
Speaker 3: fourth quarter guidance, and Boeing stock is soaring eight percent
21:48
Speaker 3: after its CFO set at a UBS conference this morning
21:53
Speaker 3: that the company expects deliveries for both its seven thirty
21:56
Speaker 3: seven jets and seven eighty seven jets to be up
22:00
Speaker 3: next year. I'm Tucker Silva and that is Wall Street Watch,
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22:24
Speaker 2: We're gonna talk a bit about the recent bitcoin route
22:27
Speaker 2: and Tucker just mentioned it. It's bouncing back today, but
22:30
Speaker 2: yesterday was off. Big journalists calling it crypto winter again,
22:35
Speaker 2: which I swear that terms come up.
22:37
Speaker 3: I've seen it going back to twenty twenty one.
22:39
Speaker 6: That term.
22:40
Speaker 2: Yeah, so nothing new for crypto investors in this space.
22:44
Speaker 2: But for some context here priced in dollars. Bitcoin hit
22:47
Speaker 2: over one hundred and twenty six thousand dollars per coin
22:50
Speaker 2: back on October sixth as recently as what's that last week?
22:57
Speaker 2: Two weeks ago it was at eighty four thousands. Now
23:00
Speaker 2: it's sitting at ninety thousand. This thing is extraordinarily volatile.
23:03
Speaker 2: It's down seven percent yesterday, up five and a half
23:05
Speaker 2: percent today. But I want to start with some basics, Mark,
23:08
Speaker 2: because we were talking offline about correlations, and specifically correlations
23:14
Speaker 2: between the S and P five hundred and bitcoin, and
23:19
Speaker 2: when you look back a decade ago, it was pretty
23:23
Speaker 2: close to zero. They didn't have much to do with
23:25
Speaker 2: each other. Today the correlation isn't one. It's not you know,
23:29
Speaker 2: you don't see it going up in the exact same way,
23:33
Speaker 2: but they are. The two are much more highly correlated,
23:36
Speaker 2: And I guess I want to start with what does
23:38
Speaker 2: that mean for investors?
23:39
Speaker 4: And how why?
23:40
Speaker 2: And how do asset classes become correlated in the first place?
23:43
Speaker 2: Is they're a financial theory for this?
23:46
Speaker 4: This effect very hard to answer.
23:48
Speaker 5: I think both of those questions is easier to point
23:50
Speaker 5: out that correlations, which just refer to the degree to
23:55
Speaker 5: which two things move together. It's actually a little more
24:00
Speaker 5: involved in that, it's the degree to which they depart
24:02
Speaker 5: from their averages together. So when we say that bitcoin's
24:07
Speaker 5: correlation with the broad market, using as a proxy for
24:10
Speaker 5: broad markets, say the S and P five hundred, when
24:12
Speaker 5: we say that it's gone up, and I use daily
24:16
Speaker 5: returns in my little internal example, you could use monthly
24:19
Speaker 5: or whatever period floats your boat. We mean that when
24:22
Speaker 5: Bitcoin is above its average, the S and P tends
24:27
Speaker 5: to be above its average, or vice versa. That's just
24:29
Speaker 5: an empirical, so to speak. Statement. It's just what.
24:31
Speaker 4: Happened, and we really last two days are good examples
24:34
Speaker 4: of that.
24:34
Speaker 2: Yesterday you had Bitcoin down percent, S and P five hundred,
24:37
Speaker 2: nasdak all down around half percent in early training or average.
24:40
Speaker 2: You've got Bitcoin up five percent. You've got major indites.
24:43
Speaker 5: Up early on in its history, and it wasn't publicly
24:46
Speaker 5: traded early on. Now you've got a lot of vehicles
24:48
Speaker 5: that allow us to jump in and out, and it's
24:51
Speaker 5: it's more liquid than it used to be, but early
24:53
Speaker 5: on it was less tightly related to movements in the
24:57
Speaker 5: broad stock market. It follows from that if you are
25:00
Speaker 5: constructing a portfolio, the holy grail is imperfectly correlated asset
25:07
Speaker 5: classes because it makes for a smoother ride. This is
25:10
Speaker 5: why your financial advisor says, well, you don't just want
25:12
Speaker 5: to own big US companies. You want to own a
25:14
Speaker 5: little international. You want to own some small US companies, you
25:16
Speaker 5: want own some emerging market companies, you want to own
25:18
Speaker 5: some bonds. Is insurance that type of thing. So to
25:22
Speaker 5: the extent that Bitcoin becomes more correlated with major asset classes,
25:26
Speaker 5: specifically riskier asset classes like equities, like stocks, it's less
25:31
Speaker 5: useful as a diversifier. That may not matter to you.
25:33
Speaker 5: You may own it for different reasons, it may not
25:35
Speaker 5: be part of a diversified portfolio, or you just may
25:38
Speaker 5: not care. But for institutional investors it does become a problem.
25:43
Speaker 4: To me, the correlation is somewhat natural here.
25:46
Speaker 2: It has become much more normalized in terms of an
25:49
Speaker 2: asset class that's investable. To your point, you can pretty
25:52
Speaker 2: easily invest in mimics of it or public traded companies
25:57
Speaker 2: that invest heavily in it through public markets vehicles. Yeah,
26:00
Speaker 2: not really possible at all prior to twenty twenty, and
26:03
Speaker 2: became even more mainstream in the Trump administration, So I
26:07
Speaker 2: think the correlation makes some sense. I think leverage plays
26:09
Speaker 2: a role too, would be. My guess is, hey, when
26:12
Speaker 2: you borrow to invest in an asset class like stocks
26:15
Speaker 2: or like cryptocurrency, and if.
26:17
Speaker 4: You're borrowing.
26:19
Speaker 2: To invest in the two of them, when they move
26:22
Speaker 2: in the other direction, then your leverage can buy necessity
26:25
Speaker 2: call you out of positions, and that could be stocks
26:27
Speaker 2: that could be crypto. So I think that's part of
26:30
Speaker 2: it as well. But I'll tell you I am once
26:34
Speaker 2: again getting a lot of questions about it. I was
26:37
Speaker 2: meeting with somebody yesterday and she felt a little bit
26:42
Speaker 2: embarrassed to ask, it seemed like. But she was like,
26:43
Speaker 2: you know, we've got this friend. They just paid thirteen
26:47
Speaker 2: thousand dollars to attend a crypto investing course, which, boy,
26:53
Speaker 2: does that seem like a scam to me? And they're
26:56
Speaker 2: telling me that I had better get used to crypto
26:58
Speaker 2: and learn a lot about it because by this time
27:00
Speaker 2: next year, your entire bank account is going to be crypto.
27:03
Speaker 2: And my jaw kind of fell to the floor, like
27:05
Speaker 2: that seems incredibly unlikely to me, unless you choose to
27:09
Speaker 2: go this is do so it's a problem, but there
27:13
Speaker 2: seems to be just a lot of amous information b
27:16
Speaker 2: lack of understanding and see get rich quick schemes.
27:21
Speaker 4: That's when it comes to crypto.
27:23
Speaker 5: And that's different than past booms which had something I
27:28
Speaker 5: don't know, substantive concrete underlying them. For the with the
27:31
Speaker 5: exception of you, depending on how far back you want
27:33
Speaker 5: to go in history, you might cite like the Tula
27:35
Speaker 5: bubble and say, well, that wasn't exactly concrete.
27:37
Speaker 1: Well it was.
27:38
Speaker 5: They were trading tulips, they were real physical entities. The
27:41
Speaker 5: problem with crypto is that it's been around nearly twenty years.
27:44
Speaker 5: It is yet to find a mainstream use. It's used
27:47
Speaker 5: mainly by people who want to under money or get
27:50
Speaker 5: it to Russia or get it to LKA. These are facts.
27:54
Speaker 4: Well yeah, in terms of like real uses, but it's
27:56
Speaker 4: I see two of them.
27:57
Speaker 2: It's auspicious uses like you just described, or it's for
28:02
Speaker 2: speculation purposes.
28:03
Speaker 5: Yeah, but in terms of medium of exchange, it's used
28:07
Speaker 5: mostly by people who are doing illegal things and it
28:10
Speaker 5: draws in, it draws in schemers. People who have no
28:16
Speaker 5: background in crypto, like the Trump children, and decide to
28:18
Speaker 5: get into it. And make three billion dollars in a year.
28:20
Speaker 5: Forgive me, but it draws in people who want to
28:22
Speaker 5: get rich quick that gear I would not give that
28:26
Speaker 5: to me. Is not an attractive way to invest capital
28:29
Speaker 5: for the long term. But maybe my perspective, maybe you
28:32
Speaker 5: see that and think, oh, if the Trump kids are
28:33
Speaker 5: in on it, it's got to be hot.
28:35
Speaker 1: I should too.
28:37
Speaker 5: I'm not judging that, I'm saying quickly. It's got all
28:39
Speaker 5: the hallmarks of past things that have ended very badly
28:43
Speaker 5: for people who didn't get in very early and for
28:45
Speaker 5: people who are easily duped. Is an unkind word because
28:50
Speaker 5: it implies you don't know what you're talking about. But
28:52
Speaker 5: I could be easily duped when it comes to crypto
28:54
Speaker 5: or AI because I don't fully understand what's going on.
28:57
Speaker 4: Therefore I avoid it.
28:58
Speaker 2: There's also a lot of financialsay of these things that
29:01
Speaker 2: have been going on right there.
29:02
Speaker 4: There's been these single.
29:03
Speaker 2: Stock ETFs that are used to track companies that are
29:06
Speaker 2: involved in crypto, and many of those have tanked this year.
29:10
Speaker 2: And then you've got the differences between you know, if
29:12
Speaker 2: I had to nail down the average American and ask
29:15
Speaker 2: them to explain to me the difference between blockchain, bitcoin,
29:18
Speaker 2: and stable coin. I think I would maybe be able
29:22
Speaker 2: to come up with a reasonable definition of the three,
29:25
Speaker 2: but I think the average American was drug.
29:27
Speaker 5: The fact that we can and I certainly can't, is
29:29
Speaker 5: a testament to the lack of any practical use for it.
29:34
Speaker 4: To this.
29:34
Speaker 5: Well, maybe the average American myself included, can't can't differentiate
29:38
Speaker 5: AC from DC and sure, okay.
29:41
Speaker 2: The best use cases that I've heard for it come
29:44
Speaker 2: from the stable coin piece, right, But that's different, though
29:47
Speaker 2: very different than cryptocurrency. But a stable coin, you know, effectively,
29:51
Speaker 2: as far as I can tell, looks to me a
29:53
Speaker 2: lot like a gift card that you would hold at
29:55
Speaker 2: one vendor or a series of vendors and make it
29:59
Speaker 2: make it allowable to make payments very seamless between somebody,
30:04
Speaker 2: let's call it Amazon. Right, If I am a vendor
30:06
Speaker 2: and a purchaser on Amazon, I may be able to
30:10
Speaker 2: store my dollars in a stable coin sponsored by Amazon
30:13
Speaker 2: and conduct all my transactions via that stable coin, and
30:15
Speaker 2: therefore avoid the fees charged by Visa. But that has
30:21
Speaker 2: nothing to do whatsoever with bitcoin, and I think people fail.
30:24
Speaker 5: To rerect But as long as the dollar remains a
30:28
Speaker 5: trusted medium of exchange. There are other functions that a
30:32
Speaker 5: currency performs. All this focus on that one that.
30:35
Speaker 2: Would be the other means of speculating is Hey, if
30:37
Speaker 2: you think the dollar is doomed, then there are a
30:39
Speaker 2: whole bunch of ASI classes that look maybe more.
30:41
Speaker 5: And there's an argument we talked about correlations earlier. Bitcoin
30:45
Speaker 5: does when you control for other factors that influence both
30:48
Speaker 5: Bitcoin does exhibit a negative core. It moves in the
30:52
Speaker 5: opposite direction on average, and the magnitude is not big,
30:54
Speaker 5: you might not even detect it. But there is some
30:56
Speaker 5: evidence in the data, so to speak, that people are
30:59
Speaker 5: using bitcoin as a dollar at you and that's consistent
31:03
Speaker 5: with what you hear ATS promoters talk about.
31:06
Speaker 4: Let's take a quick break.
31:07
Speaker 2: When we come back, world economy seeming pretty resilient to
31:12
Speaker 2: tariffs and being acknowledged by the OECD. We'll talk about
31:15
Speaker 2: why next on The Financial Exchange miss.
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32:24
Speaker 2: Bloomberg's writing this morning about the world economy being resilient
32:27
Speaker 2: to terriffs, and I'll acknowledge for a moment that compared
32:30
Speaker 2: to my expectations on April second, I do think that
32:33
Speaker 2: the world economy has proven.
32:35
Speaker 4: Quite resilient to terriffs.
32:37
Speaker 2: But a few things have changed since April second that
32:39
Speaker 2: you have to acknowledge when trying to evaluate the effects
32:42
Speaker 2: of all this.
32:42
Speaker 4: One.
32:43
Speaker 2: On April second, the average effective tariff rate that was
32:45
Speaker 2: announced was somewhere around forty percent on goods being important
32:49
Speaker 2: into the United States. We're now sitting between like twelve
32:53
Speaker 2: and fifteen percent. So let's you know, start off with Yeah,
32:57
Speaker 2: that's a big increase in the previous effective tariff rate,
32:59
Speaker 2: but it's a far cry from where we were back
33:02
Speaker 2: in April two. There's some question as to whether or
33:07
Speaker 2: not those tariffs are going to be long term, and
33:11
Speaker 2: so trying to measure the effects of all of these
33:13
Speaker 2: after you know, barely six months of collections of tariffs,
33:18
Speaker 2: I think they're seeing a question.
33:20
Speaker 5: It's impossible to measure the effects of terroriffs, virtually impossible.
33:24
Speaker 5: It's very tricky statistically speaking, because you can't hold all
33:26
Speaker 5: the other stuff. Constant economists are very good at looking
33:29
Speaker 5: at individual markets. Like the Trump steel tariffs of twenty nineteen.
33:33
Speaker 5: They cost eighty jobs for every steel job that they saved.
33:36
Speaker 5: It's very it's straightforward to do that analysis.
33:38
Speaker 4: Because five years later, Yeah, it takes.
33:41
Speaker 5: Time the study was actually published. Yeah, a couple of
33:44
Speaker 5: years to get the data. Yeah, but no, you're right,
33:46
Speaker 5: it takes years.
33:47
Speaker 4: It's the point.
33:48
Speaker 5: So we're very good at isolating effects when the policy
33:53
Speaker 5: is sort of limited and targeted this type of stuff,
33:56
Speaker 5: tariff's on everybody, changing almost day to day, varied amounts.
34:01
Speaker 5: Very hard to estimate that in the long term it
34:03
Speaker 5: will reduce growth. There's absolutely no doubt about that. That's
34:06
Speaker 5: that's pretty well known about tariffs. But don't expect a
34:09
Speaker 5: big recession or something like that right away.
34:11
Speaker 2: Right and the other points too, like that all else
34:13
Speaker 2: held equal thing is really important. What would the effect
34:16
Speaker 2: of teriffs be if we weren't spending deficits of six
34:19
Speaker 2: percent of GDP, if the government weren't pouring money out
34:22
Speaker 2: there still.
34:23
Speaker 5: Well half of that is interest, but yeah.
34:25
Speaker 4: Yeah, agreed.
34:26
Speaker 2: But you know, if we weren't running those types of deficits,
34:28
Speaker 2: what would that look like? If the main portions of
34:34
Speaker 2: the US tech industry were not spending all of their
34:37
Speaker 2: free cash flow or a large portion of their free
34:40
Speaker 2: cash flow on AI development and build out and borrowing
34:43
Speaker 2: a whole bunch of money to do.
34:44
Speaker 4: So, what would It's just very hard to do.
34:46
Speaker 5: Economy look because the model is so immense. Of course,
34:50
Speaker 5: it has to be general, it has to take into
34:52
Speaker 5: account many many economy wide variables. It's easier to keep
34:57
Speaker 5: in mind that when you raise prices on and import.
35:02
Speaker 5: It does a couple of things. It could increase inflation
35:05
Speaker 5: in the short term. Indeed it does, so I'm very
35:08
Speaker 5: comfortable with saying inflation is a little bit higher than
35:10
Speaker 5: without the tariffs. We're at three percent, which is a problem.
35:14
Speaker 5: Maybe we would have been at two seven, so a
35:16
Speaker 5: little bit higher. Some have pointed out that tariffs reduce employment,
35:19
Speaker 5: which reduces demands. So tariffs can actually be disinflationary under
35:24
Speaker 5: certain circumstances. But on average they raise prices, and they
35:27
Speaker 5: also cause capital to flow to industries at which we are,
35:33
Speaker 5: in a relative sense, less productive than than than foreign countries,
35:40
Speaker 5: so over time it reduces They reduce productivity and thus growth.
35:45
Speaker 5: These are the lessons of history, and any economists would
35:49
Speaker 5: have told you that. But again, dire predictions might imminent recession,
35:53
Speaker 5: imminent jump and inflation. I don't have any serious economist
35:55
Speaker 5: that was making predictions like that. Proponents of tariffs say, oh,
35:58
Speaker 5: the economists were wrong. Show me a respected one who
36:01
Speaker 5: was making those types of predictions. You won't find it.
36:04
Speaker 5: That was kind of media hype.
36:06
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36:09
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36:12
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36:20
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37:15
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37:18
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37:21
Speaker 2: Staying on the tariff subject for a moment. Here, Costco
37:24
Speaker 2: has filed suit against the Trump administration in regard to
37:28
Speaker 2: their tariffs. Bit of legal wrangling that I'm not sure
37:31
Speaker 2: I fully understand here, But there's some concern apparently from
37:35
Speaker 2: legal experts that if they don't participate in a lawsuit
37:38
Speaker 2: prior to the Supreme Court ruling on the legality of
37:41
Speaker 2: the tariffs, they may be ineligible for reimbursements. I don't
37:45
Speaker 2: really understand the legal argument of that, but I'll trust
37:48
Speaker 2: Costco's legal counsel over my own expertise. They join companies
37:53
Speaker 2: like Revlon Consumer Products, Bumblebeefoods, Kawasaki Motors in those lawsuits
38:00
Speaker 2: against the Trump administration. What's notable here, it's just the
38:03
Speaker 2: size of Costco, right, the third largest retailer by revenue
38:08
Speaker 2: in the country filing suit is, you know, pretty different
38:11
Speaker 2: than Bumblebee Foods filing suit against the Trump administration. I think,
38:15
Speaker 2: so take that for what you will. Taking a look
38:18
Speaker 2: around at markets, we have a strengthening market as we
38:22
Speaker 2: head towards the eleven o'clock hour. Here, all three major
38:26
Speaker 2: indices in the green, with the Nasdaq leading the way,
38:29
Speaker 2: up a full percentage point SNP up thirty five points,
38:32
Speaker 2: about half a percent. Dow Jones Industrial Average also up
38:35
Speaker 2: about half percent. We've got to take a quick break,
38:38
Speaker 2: but we've got a lot more to cover, including the
38:41
Speaker 2: code red warning from Sam Altman over at open AI.
38:45
Speaker 2: That's next here at the Financial Exchange