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AI Spending Boom Puts Market Earnings to the Test · The Financial Exchange Show

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Speaker 1: a donation today. This is the Financial Exchange with Chuck
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Speaker 1: Zada and Mike Armstrong.
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Speaker 2: Chuck, Mike and Tucker with you here and on the
1:14
Speaker 2: back of the signing of the Memorandum of Understanding between
1:17
Speaker 2: the United States and Iran and Kevin Warsh's first meeting
1:22
Speaker 2: in his FED chair yesterday left us with some downward
1:25
Speaker 2: volatility today. The good news we got the upward kind.
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Speaker 2: The bad news is we still have volatility. You like
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Speaker 2: to see markets calming down. Instead, they're still kind of
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Speaker 2: jumping around as they have for the last couple of
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Speaker 2: weeks right now. To be honest, you take a look
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Speaker 2: at where the S and P five hundred has been
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Speaker 2: over the last couple of weeks, and it's been okay,
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Speaker 2: like four percent dip down, three percent move up, two
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Speaker 2: percent moved down. It's like it's it's not really a
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Speaker 2: stable equilibrium that you have. It's kind of chopping around
1:54
Speaker 2: trying to figure out what the new world looks like
1:57
Speaker 2: in terms of, hey, what's the Middle East going to
1:59
Speaker 2: look like? What's the FED gonna look like? Kind of
2:02
Speaker 2: hard to find, you know, two more meaningful potential drivers
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Speaker 2: of the global economy than those two topics, And so
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Speaker 2: that's why it's not surprising that you got a little
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Speaker 2: bit of volatility in the system. As I noted today,
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Speaker 2: it's a good kind to the upside. Seventy five points
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Speaker 2: up on the S and P five hundred two thirty
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Speaker 2: five on the down three point fifty nine on the NASDAK.
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Speaker 2: It's onnyway from about a half to one point three
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Speaker 2: percent move up in your major indices. Ten year Treasury
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Speaker 2: after selling off yesterday, coming back down a little bit
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Speaker 2: down point three sorry, three point seven basis points to
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Speaker 2: four point four to two six dollar index still strengthening
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Speaker 2: right now, up another point four to nine percent to
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Speaker 2: one hundred point three five five. That is dragging gold
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Speaker 2: to the tune of one hundred and fourteen dollars down
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Speaker 2: at forty two sixty seven right now, and crude oil
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Speaker 2: continuing its slide as well, down two sixty nine a
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Speaker 2: barrel to seventy four to ten on West Texas Intermediate
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Speaker 2: triple A national average four gas prices. Have I got
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Speaker 2: news for you. We are now seeing the play national
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Speaker 2: average at three ninety nine and nine tens back below
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Speaker 2: four dollars a gallon here first time in a couple
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Speaker 2: months that we've seen that be the case. Based on
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Speaker 2: where we are seeing oil priced right now, probably got
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Speaker 2: some room to get down into that three sixty range,
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Speaker 2: So another thirty five forty cents to go once this
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Speaker 2: kicks in over the next couple of weeks here. Obviously,
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Speaker 2: this can all change depending on where crude goes in
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Speaker 2: the near future. I don't think there's too much more
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Speaker 2: room for it to run down in the short term,
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Speaker 2: but we'll see if things move, And obviously if things
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Speaker 2: flare up in the Middle East at some point, that
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Speaker 2: could raise some questions about the stability of the deal
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Speaker 2: that's been signed. But first twenty four hours things look
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Speaker 2: pretty good. We've got ships flowing through horror moves, lower
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Speaker 2: quantities than we'd like to see, but higher than they've been.
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Speaker 2: So you've got to start somewhere and countries indicating that
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Speaker 2: they're starting to ramp production back up or planning to
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Speaker 2: in the near future. Piece in the Wall Street Journal
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Speaker 2: turbocharged earnings are pushing stocks higher. But there's a catch, Michael.
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Speaker 2: What's the catch?
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Speaker 3: The catch is that accounting makes how this money is
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Speaker 3: being spent and realized on company balance sheets and.
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Speaker 2: P and ls a little bit tricky. Oh, you mean
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Speaker 2: that they're going to start talking about the depreciation thing
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Speaker 2: that we've been talking about for the last nine months.
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Speaker 2: That's the one I love when you can listen to
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Speaker 2: our show nine months in advance of what the Wall
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Speaker 2: Street Journal publishes.
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Speaker 3: So let's just let's make this really simple with an example.
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Speaker 3: You are, I'm a super building captain. No, no, let's just
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Speaker 3: talk about a data center. Let's talk about a data center.
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Speaker 2: I am Chuck Ai.
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Speaker 3: Yeah, you're Chuck Ai, and you decide to buy five
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Speaker 3: million dollars worth of chips from Nvideo and you.
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Speaker 2: Somehow get them, got them. What happened in center?
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Speaker 3: What happens in that case, you would think, right, five
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Speaker 3: million dollar expense on Chuck's side, five million dollars of
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Speaker 3: revenue to in Nvidia, So one offsets the other in
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Speaker 3: terms of the gross market and measuring of companies P
5:09
Speaker 3: and ls.
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Speaker 2: That's not what happens.
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Speaker 3: What happens is that in Nvidia does get to book
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Speaker 3: the revenue immediately, assuming that they delivered it immediately. If
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Speaker 3: they deliver it, they get to book the revenue. On
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Speaker 3: Chuck Ai side of things. I'm going to oversimplify this
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Speaker 3: and probably explain it poorly. It's not a P and
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Speaker 3: L item. They are making a purchase of an asset,
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Speaker 3: and they get to depreciate that asset over a period
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Speaker 3: of time and then book some of the expenses over
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Speaker 3: time as an accounting item.
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Speaker 2: Generally it's over its useful life, which let's estimate it
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Speaker 2: five years. So I get a million dollars of depreciation
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Speaker 2: a year that I book.
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Speaker 3: So even though Chuck did depart with five million dollars
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Speaker 3: right up front according to his company's P and L,
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Speaker 3: it's not realize that way.
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Speaker 2: And so what you have flow statement shows it because
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Speaker 2: it goes out there, but it shows up differently on
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Speaker 2: the income statement.
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Speaker 3: And so what you have across the market right now
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Speaker 3: is a bunch of companies paying for things like chips
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Speaker 3: and other things that go into artificial intelligence. They're paying
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Speaker 3: for it upfront, oftentimes with loans, sometimes with equity, all
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Speaker 3: different ways of doing so. The companies that are selling
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Speaker 3: the stuff are booking revenue immediately. The companies that are
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Speaker 3: buying the stuff are not booking expenses immediately.
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Speaker 2: It makes everybody look very pretty, and we've talked about
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Speaker 2: this where look, if you're building the sheer volume of
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Speaker 2: data centers that are being built right now, there's a
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Speaker 2: lot of depreciation that is in the pipeline. So again
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Speaker 2: just looking at some of the numbers that we have
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Speaker 2: in terms of you know, the updated amounts of buildout
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Speaker 2: that are happening. Here we're talking, you know, somewhere in
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Speaker 2: the ballpark of this year probably high seven hundred low
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Speaker 2: eight hundred billion dollar range, and in the next several years,
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Speaker 2: like a trillion dollars in CAPEX between Microsoft, Amazon, Google,
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Speaker 2: Meta an Oracle. Right, So here's the deal. The estimated
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Speaker 2: useful life of a data center. First of all, it's
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Speaker 2: not as simple as that, like each component has like
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Speaker 2: different useful lifes, but if you look at what these
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Speaker 2: companies are generally using, it's anywhere between like six and
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Speaker 2: eight years. So what that means is, if you have
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Speaker 2: eight hundred billion dollars in CAPEX happening this year, this
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Speaker 2: year that build out, you're now going to have one
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Speaker 2: hundred billion dollars in depreciation for the next eight years
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Speaker 2: that you've got to cycle through. Then you've got next
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Speaker 2: year's trillion dollars. Now you get another one hundred and
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Speaker 2: twenty five billion a year on top of that, So
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Speaker 2: it keeps adding up and where you get to very quickly,
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Speaker 2: and this is the place that we've talked about, Hey,
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Speaker 2: this is all well and good until your depreciation starts
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Speaker 2: making your earnings look bad because your earnings aren't growing
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Speaker 2: as quickly, and so you need to grow. Remember, every
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Speaker 2: unit of revenue that you bring in has costs associated
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Speaker 2: with it as well, the op the opperas marketing like this,
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Speaker 2: there's plenty of stuff that's out there, and so the
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Speaker 2: place that you get to pretty quickly is that you
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Speaker 2: need revenue to ramp up by not just like you know,
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Speaker 2: great anthropics doing you know, forty billion dollar annual run rate, No,
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Speaker 2: you need the whole industry to start doing like two
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Speaker 2: to three trillion dollars annually in AI related revenue. Otherwise
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Speaker 2: the math just doesn't make sense as you continue to
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Speaker 2: go out there, and this is the problem that you're
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Speaker 2: gonna run into, which is, look, these companies and trying
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Speaker 2: to be profitable, they're shifting to usage based pricing, which
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Speaker 2: means that you have to pay through the nose in
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Speaker 2: order to actually use the stuff, which means then companies
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Speaker 2: start saying, hey, maybe we shouldn't rank our employees based
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Speaker 2: on how much AI they're using as a positive, but
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Speaker 2: instead we got to figure out how to ration it
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Speaker 2: based on who's getting the most bang for their buck
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Speaker 2: out of that use, and so then does the revenue
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Speaker 2: grow as quickly as it was growing before. It's a
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Speaker 2: red chicken and egg catch twenty two type problems.
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Speaker 3: Yeah, and by the way, this is not hypothetical. The
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Speaker 3: usage piece is happening now, right, the piece that hadn't
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Speaker 3: happened until recently, Like the accounting stuff.
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Speaker 2: We brought that up a year ago. That's been We
9:18
Speaker 2: said that it was going to become a problem in
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Speaker 2: future years.
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Speaker 3: Yes, what's happening now that wasn't happening previously is that
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Speaker 3: companies are actually beginning to care about the costs associated
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Speaker 3: with using AI. Not saying they didn't care about other
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Speaker 3: costs related to AI before, but the idea of Uber
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Speaker 3: or Salesforce or any of these companies that are utilizing
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Speaker 3: artificial intelligence to develop products increase their employee efficiency, actually
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Speaker 3: caring about the input cost for going into it is
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Speaker 3: a new phenomenon. They did not care until recently because
9:52
Speaker 3: the costs weren't that big until recently. And all of
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Speaker 3: a sudden, you have the stories like Uber coming out
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Speaker 3: and saying, oh yeah, blew through our entire annual AI
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Speaker 3: budget of the course of four months should tell you
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Speaker 3: something about where this could go.
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Speaker 2: So the place to watch is over the next couple
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Speaker 2: of years and what company what these big hyperscalers do
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Speaker 2: as those depreciation costs start to come home to roost,
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Speaker 2: Because it's one of two things. Find the revenue to
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Speaker 2: make it make sense, or start cutting that capex. Those
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Speaker 2: are your two options. You can't just keep building a
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Speaker 2: trillion dollars in data centers every year forever. That's not
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Speaker 2: really an option if you don't have the revenue coming in.
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Speaker 2: So one of two things needs to happen. The revenue's
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Speaker 2: got to jump by a ton, or you got to
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Speaker 2: start cutting that capex. You hope for the former and
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Speaker 2: you deal with the latter if that's what it ends
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Speaker 2: up being. But this is the state of play, and
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Speaker 2: this is the next By the end of twenty seven,
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Speaker 2: we're gonna have the outcome on this because they're gonna
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Speaker 2: have to make the capex decisions for twenty eight and
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Speaker 2: twenty nine. Then, so there's an eight teen month period
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Speaker 2: where we're gonna have to see how this works out,
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Speaker 2: and then we're gonna know. I hate when we have
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Speaker 2: these ticking cocks. It's like we just finished the Horror
11:08
Speaker 2: Moves Clock and now we've got this one. Yeah, you know,
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Speaker 2: I feel like I'm on like an episode of twenty four.
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Speaker 3: Well, you know what, as I've said, I think I
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Speaker 3: said this earlier this week. This market feels to me
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Speaker 3: as though it is the most execution dependent market that
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Speaker 3: we have ever seen, at least since I've been investing.
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Speaker 2: I'm trying to think about that, like there's no way
11:30
Speaker 2: to measure, no, no book, there really is. There's no
11:32
Speaker 2: way to measure. But what we're gonna do. We're gonna
11:35
Speaker 2: take a break and when we come back, we're gonna
11:38
Speaker 2: do some trivia because we've got that. But then I'm
11:42
Speaker 2: gonna spend the break thinking and ruminating and meditating on
11:47
Speaker 2: what you just said. You don't have much time to meditate,
11:50
Speaker 2: you That usually takes a little bit more time. Oh
11:51
Speaker 2: not for me. I'm a professional. Don't worry about it.
11:54
Speaker 2: Let's take a second meditation, and when we return, we'll
11:59
Speaker 2: talk about execution dependent markets.
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Speaker 2: All right, so, uh, I was doing some thinking during
13:32
Speaker 2: the break. Mike had called this the the most execution
13:37
Speaker 2: dependent market that we've we've seen, and how would you
13:40
Speaker 2: define that? I guess, you know, I was.
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Speaker 3: I guess my point would be that companies are spending
13:51
Speaker 3: a previously uh rare amount of their profits on capital expenditures,
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Speaker 3: and so therefore you need to realize the profit. And
14:03
Speaker 3: I was trying to find a way of measuring that,
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Speaker 3: and I couldn't do it in the five minute break,
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Speaker 3: But I'm thinking, like, there's got to be a way
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Speaker 3: to measure SMP five hundred cap X as a percentage
14:13
Speaker 3: of sales, or SMP five hundred or general capital expenditures
14:17
Speaker 3: is a percentage of GDP and to look at it
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Speaker 3: that way, And that's my sense, but I don't have
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Speaker 3: any firm charts or data to be able to back
14:26
Speaker 3: up that. Right now is an elevated level of CAPAX
14:28
Speaker 3: compared to some other historical.
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Speaker 2: Norm Let's think about our CAPEX intensive businesses. Airlines, sure,
14:36
Speaker 2: do they typically command any kind of premium? No car
14:39
Speaker 2: companies do they typically command any kind of premium? Only
14:43
Speaker 2: one of them. Computer hardware manufacturers do they typically command
14:47
Speaker 2: any kind of premium? Generally no clothing companies. Do they
14:51
Speaker 2: tend to command any kind of premium rarely, Guys. If
14:56
Speaker 2: you've got to spend a lot of capital to build stuff,
15:00
Speaker 2: your businesses have generally been hated for the last twenty
15:04
Speaker 2: to thirty years because profit growth has been in the
15:08
Speaker 2: companies where hey, you don't have to like spend Does
15:12
Speaker 2: anyone like mining companies right now? I'm not saying that
15:15
Speaker 2: they're not useful, like you need you know, copper, and
15:18
Speaker 2: you need nickel, But does anyone wake up in the
15:20
Speaker 2: morning aside from like the people who really love pain
15:23
Speaker 2: and say, yes, let me dig into the miners today. No,
15:27
Speaker 2: Like everyone's like, no, people love investors have loved the
15:32
Speaker 2: capex light businesses, which by the way, have been the
15:35
Speaker 2: growth engine in you know, recent history, you know, talking
15:39
Speaker 2: about again they get lumped into tech. They're not really
15:43
Speaker 2: tech companies. They're just capex Light companies. Netflix get like,
15:48
Speaker 2: you know, people love that Microsoft, Apple, Like, these are
15:52
Speaker 2: not companies that spend a bunch of money on capex
15:55
Speaker 2: even Apple. Does Apple build any of their own stuff
15:59
Speaker 2: a tiny little fraction of it they build the rest
16:02
Speaker 2: of it. Nope, we found a contractor somewhere else who's
16:06
Speaker 2: gonna build it? Like, go try to find an Apple factory.
16:10
Speaker 2: You can't. They don't really exist aside from like a
16:13
Speaker 2: few niche products that they do make themselves. But the iPhones,
16:17
Speaker 2: they're made by Fox con over in India or over
16:20
Speaker 2: in China or over in Vietnam. Same with iPad, like
16:24
Speaker 2: it's what they do. Like they don't do the Kapex
16:27
Speaker 2: build out. They're like, no, someone else do that for us.
16:29
Speaker 2: Even even the hardware companies that are successful don't do
16:32
Speaker 2: it themselves. They're like, no, someone else do this please.
16:35
Speaker 2: So you look at it, and the big question is, hey,
16:41
Speaker 2: the two of the companies like that, we're talking two
16:44
Speaker 2: of the types of companies that we're talking about. One
16:46
Speaker 2: is computer hardware manufacturers. Well that's exactly what's been like
16:50
Speaker 2: the big driver of this between Nvidia and Broadcommon, Micron
16:54
Speaker 2: and AMD and and you know the whole list of them.
16:57
Speaker 2: Do we really think this is gonna be the one
16:59
Speaker 2: time time when computer hardware companies don't have to sink
17:05
Speaker 2: all of their profits back into like just building more
17:08
Speaker 2: stuff when that cycle, like in the cycle then rolls
17:11
Speaker 2: over as they expand capacity right into the end of
17:14
Speaker 2: the cycle. No, it's it's not like you're not gonna
17:19
Speaker 2: just have a permanent upward slope on the line. Like,
17:22
Speaker 2: it's not how any of this works. Likewise, the companies
17:25
Speaker 2: that people used to you know, not used to still love,
17:28
Speaker 2: you know, in kind of the software space, the Microsoft's
17:30
Speaker 2: of the world. But they're pouring all this capex into
17:33
Speaker 2: Can I actually make any money off it? Now? People?
17:36
Speaker 2: The reason why investors loved Microsoft was because you had
17:39
Speaker 2: to pay x dollars a month for access to Microsoft
17:42
Speaker 2: word now and there's not really much that Microsoft had
17:45
Speaker 2: to do in order to maintain that. The margins were fat. Well, now,
17:50
Speaker 2: if you've got like new Clippy running around trying to
17:52
Speaker 2: help you out with you know, your spreadsheets in this
17:55
Speaker 2: and that new Clippy is a little bit expensive to operate,
18:00
Speaker 2: and can you actually make the money off that or
18:02
Speaker 2: do you have to you know, figure out how to
18:04
Speaker 2: make it work. So I don't know, I look at
18:08
Speaker 2: this and when it comes to you know, hey, this
18:13
Speaker 2: is like the most you know, execution specific time for
18:17
Speaker 2: at least like the market cap that we're talking about. Yes,
18:21
Speaker 2: there's always been companies that have to spend a bunch
18:23
Speaker 2: of money and execute their way through it. They haven't
18:25
Speaker 2: really been in the driver's seat for the last twenty years.
18:28
Speaker 2: Buy in large. True, you know, it hasn't been like
18:30
Speaker 2: mining companies and energy companies and airlines and car companies
18:34
Speaker 2: driving the ship at the S and P. Hasn't always
18:37
Speaker 2: been tech. Again, the tech phenomenon is more recent. I
18:39
Speaker 2: know it feels like forever, but yeah, it's it's more
18:45
Speaker 2: dangerous because typically when you start spending a lot on capex,
18:48
Speaker 2: the market says, no, we don't like that. And right
18:52
Speaker 2: now the market's saying no, I do like that. The
18:54
Speaker 2: more you spend on capex, the more I'm going to
18:55
Speaker 2: reward you. At some point, that mechanism usually breaks. I
19:00
Speaker 2: don't know if we're a month from that, a year
19:02
Speaker 2: from that, or ten years from that. And that's the ballgame, Like,
19:05
Speaker 2: that's the whole thing. Let's take a quick break. As
19:08
Speaker 2: we had towards the bottom of the hour. Stocks remain
19:10
Speaker 2: broadly positive, all major industries up anywhere from a third
19:14
Speaker 2: to about one and a quarter percent. Quick break here.
19:18
Speaker 2: When we come back, we've got the Trivia Answer and
19:22
Speaker 2: Wall Street Watch.
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Speaker 1: and the headlines driving markets so far today. Right here
19:56
Speaker 1: on the Financial Exchange.
19:57
Speaker 4: Radio markets are trading higher after President Trump signed the
20:00
Speaker 4: interim peace deal between the US and Iran, sending oil
20:03
Speaker 4: prices lower. Traders also reacting to the first FED meeting
20:07
Speaker 4: under new chairman Kevin worsh Right now, the Dow is
20:11
Speaker 4: up about three tenths of a percent, SMP five hundred
20:14
Speaker 4: up nine tenths of a percent, Nasdaq up one point
20:17
Speaker 4: one percent or three hundred and nine points higher, RUSS
20:20
Speaker 4: two thousands up nearly one and a half percent, Tenure
20:23
Speaker 4: Treasure reeled down two basis points at four point four
20:25
Speaker 4: to three percent, and Oil down nearly four percent, trading
20:29
Speaker 4: right around seventy.
20:30
Speaker 2: Three dollars a barrel.
20:32
Speaker 4: Apple CEO Tim Cook told The Wall Street Journal the
20:35
Speaker 4: tech giant plans to raise prices on its products to
20:37
Speaker 4: offset the surging costs of memory and storage chips. However,
20:41
Speaker 4: Cook declined to offer details on the timing or scale
20:44
Speaker 4: of the planned price increases, nor which products would be affected.
20:48
Speaker 2: Apple stock is up modestly.
20:50
Speaker 4: Speaking of Apple, intel shares are jumping nine percent after
20:54
Speaker 4: President Trump said the chip maker agreed to deal with
20:57
Speaker 4: Apple to design and build chips in the US. According
21:01
Speaker 4: to Bloomberg, Amazon is in talks to sell its custom
21:04
Speaker 4: made AI chips for use in other companies data centers,
21:08
Speaker 4: a key expansion of its efforts to cut into in
21:11
Speaker 4: video's dominance. Amazon up over two percent and SpaceX shares
21:16
Speaker 4: now following another eight percent. After tapping the brakes on
21:19
Speaker 4: its recent IPO rally, Whord shed five percent yesterday. I'm
21:25
Speaker 4: Tucker Silva and that is Wall Street Watch. And in
21:28
Speaker 4: the previous segment, we asked you the trivia question, what
21:31
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21:35
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21:49
Speaker 3: Uh only a week left here before an event that
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Speaker 1: The proceeding was paid for by Armstrong Advisory, a registered
23:00
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23:13
Speaker 2: Basically, the New York Times retail investors help help send
23:17
Speaker 2: SpaceX soaring. Does that mean that they helped send it
23:21
Speaker 2: following the last two days? I mean, like, yes, it does.
23:24
Speaker 2: I just I can't stand when we have to like
23:26
Speaker 2: write the narrative of what a stock is after less
23:29
Speaker 2: than a full week of trading. Because here's the deal
23:33
Speaker 2: stock iPod last week, the first trades that we had
23:35
Speaker 2: were around one hundred and fifty bucks a share. It
23:37
Speaker 2: went up to two twenty five, so that's a fifty
23:39
Speaker 2: percent rise even if you bought it at that one
23:41
Speaker 2: p fifty. It subsequently now has fallen from two twenty
23:45
Speaker 2: five down to one seventy six, which is a twenty
23:47
Speaker 2: two percent drop from its peak on Tuesday, just like
23:52
Speaker 2: exactly what we warned people. Again, like I don't know,
23:56
Speaker 2: I freaking love to say I told you so because
23:59
Speaker 2: I hold you so. Like IPOs are highly volatile instruments,
24:03
Speaker 2: and they might do great over long periods of time,
24:05
Speaker 2: they might do terrible. But one thing that you know
24:08
Speaker 2: is coming is volatility. And this is now a twenty
24:10
Speaker 2: two percent drawn down in a span of two days.
24:13
Speaker 2: So if The New York Times is gonna say, hey,
24:16
Speaker 2: retail investors help send SpaceX share soaring, well, then are
24:19
Speaker 2: those same retail investors helping it to suck the last
24:22
Speaker 2: two days. I don't think any of this means anything.
24:25
Speaker 2: The stock is gonna do how it does over whatever,
24:28
Speaker 2: you know, extended period of time without this first day
24:31
Speaker 2: or two being a judgment on how the company is.
24:35
Speaker 2: I don't think it's great just because it had a
24:38
Speaker 2: good first three days. I don't think it sucks just
24:41
Speaker 2: because it had a bad last too. It's just a
24:44
Speaker 2: new IPO doing new IPO things.
24:47
Speaker 3: A few things that I just want to one main
24:49
Speaker 3: thing that I want to bring up. We always covered how,
24:52
Speaker 3: you know, newly public companies oftentimes are quite volatile. In
24:58
Speaker 3: the you know, last five years, all sorts of new
25:02
Speaker 3: financial products have made their way into markets that some
25:06
Speaker 3: for better, some for worse.
25:07
Speaker 2: It really depends on how you use them.
25:09
Speaker 3: But for anyone out there that doesn't typically read those
25:12
Speaker 3: prospectuses that they get from investments that they make, if
25:16
Speaker 3: you're considering any of these two times long single stock
25:22
Speaker 3: ETFs or any of those really complicated new financial products
25:27
Speaker 3: that have made their way out there that are all
25:28
Speaker 3: over the place. I would really really encourage you to
25:35
Speaker 3: spend some time actually understanding what it is you're investing
25:38
Speaker 3: in it in It is complicated enough to go and
25:41
Speaker 3: own an individual stock. When you talk about owning an
25:44
Speaker 3: ETF that mirrors the stock with leverage or attempts to
25:48
Speaker 3: you are getting into a whole different ballgame that you
25:50
Speaker 3: may not fully understand. I barely fully understand it. And
25:53
Speaker 3: so just a word of caution out there, because these
25:56
Speaker 3: things did not exist a decade ago.
25:58
Speaker 2: No, let's see what else do I want to get
26:03
Speaker 2: to hear? Oh, let's cover a little bit of housing.
26:07
Speaker 2: If we could just briefly why so many Americans can't
26:11
Speaker 2: afford housing anymore. There's a whole piece in USA today
26:14
Speaker 2: on this and it goes through this report titled the
26:19
Speaker 2: State of the Nation's Housing that was produced by Harvard's
26:22
Speaker 2: Center for Harvard University's Joint Center for Housing Studies. Bunch
26:27
Speaker 2: of nerds, but really good nerds. And here's the deal
26:32
Speaker 2: is that basically they say, pretty much what we have
26:38
Speaker 2: talked about, we are not building enough homes, and so
26:42
Speaker 2: you end up with housing prices being out of reach
26:47
Speaker 2: because incomes are too low to support homes at these
26:50
Speaker 2: prices for the level of demand that is out there.
26:54
Speaker 3: Yeah, this is all fair, reasonable and true, but I'm
26:57
Speaker 3: going to disagree with the title of the article and
27:00
Speaker 3: the premise of it for a moment here. So many
27:03
Speaker 3: Americans can't afford housing anymore. The rate of home ownership
27:06
Speaker 3: in the United States is sitting at sixty five point
27:09
Speaker 3: three percent according to Saint Louis.
27:10
Speaker 2: FED, which is fine.
27:11
Speaker 3: We have been above that, right like in Q two
27:14
Speaker 3: of twenty twenty that bumped up to sixty eight percent.
27:18
Speaker 3: In pretty much the entire period surrounding the late nineties
27:21
Speaker 3: through the early twenty tens, we were above that, but
27:26
Speaker 3: we are currently above anywhere we were.
27:29
Speaker 2: Prior to nineteen ninety seven.
27:31
Speaker 3: So, like again, it is challenging to afford a new
27:35
Speaker 3: home today for people, and I would consider today's market
27:38
Speaker 3: more favorable to renters on a national basis than I
27:41
Speaker 3: would to be to buyers of real estate. That has
27:45
Speaker 3: to do with what we've built over the last few years.
27:48
Speaker 3: But I'm not sure I'm willing to buy into the
27:50
Speaker 3: idea that in the aggregate home ownership is more difficult
27:55
Speaker 3: than it was in American history because the rate of
27:58
Speaker 3: home ownership today is above where it was for most
28:00
Speaker 3: of us history.
28:02
Speaker 2: Yes, but I'll make the point don't mistake a stock
28:04
Speaker 2: with a flow in that when we look at the
28:08
Speaker 2: vast majority of those people who own those homes, yeah
28:10
Speaker 2: they bought them. They haven't been able to buy in
28:12
Speaker 2: the last three years later. You know, first time home
28:14
Speaker 2: buyers are like twenty to thirty percent of you know,
28:17
Speaker 2: home purchasers. Now, given the total pool of housing that's
28:22
Speaker 2: out there, it's probably like two to four percent of
28:25
Speaker 2: that ownership is people who were able to buy recently, so.
28:28
Speaker 3: One hundred percent. I agree that housing is unaffordable for
28:31
Speaker 3: new pipe. I could not buy my home today in
28:33
Speaker 3: the neighborhood much id a chance. I fully recognize it
28:37
Speaker 3: is very unaffordable. And like I said, you know, interestingly,
28:42
Speaker 3: in the same places where you know home price or
28:44
Speaker 3: home sales are increasing, pricing is falling. You've also seen
28:47
Speaker 3: a ton of building go to places like Austin, Texas, Nashville, Tennessee,
28:53
Speaker 3: these very popular places.
28:55
Speaker 2: To move to over the last few years.
28:56
Speaker 3: You are getting offers of free rent, You're getting all
28:59
Speaker 3: sorts of differ deals because they built a lot of
29:03
Speaker 3: housing in there. It's just not single family residences by
29:06
Speaker 3: and large, but in large swaths of the country it
29:09
Speaker 3: is becoming a real upper hand for renters in some places.
29:13
Speaker 2: Take a quick break. When we come back, we're joined
29:15
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Speaker 1: Banks is the Financial Exchange Radio Network. Ladies and gentlemen
34:02
Speaker 1: the weekend.
34:11
Speaker 2: As promised, We're now joined by mister Paul Monica of
34:18
Speaker 2: Barons here to talk a little bit about some stuff. Paul,
34:24
Speaker 2: how you doing today. I'm a little disappointed we're not
34:26
Speaker 2: getting you live from the Knicks parade.
34:30
Speaker 8: Yes, I know. I'm working from home today. It's probably
34:35
Speaker 8: gonna be a little bit too crazy for me and
34:39
Speaker 8: in the city today, but I do have it on
34:42
Speaker 8: in the background watching it on TV.
34:45
Speaker 2: Was that you I saw with the guy who had
34:48
Speaker 2: the cone land on his head, the traffic cone?
34:51
Speaker 8: That was not me? No, I was, you know, pretty
34:56
Speaker 8: tame in my celebration.
34:58
Speaker 2: That's that's fair might be my favorite video of the
35:00
Speaker 2: I've seen in sports celebrations this year, which is wild
35:03
Speaker 2: given all the World Cup stuff going on also, but
35:06
Speaker 2: it is true.
35:06
Speaker 8: That's also making the city even more crowded. I know
35:09
Speaker 8: you guys are experiencing that too.
35:11
Speaker 2: Yes we have. We've actually had a petition up here
35:14
Speaker 2: in New England to rename the region West Scotland and
35:18
Speaker 2: so well we'll see if that ends up taking hold.
35:22
Speaker 2: Nice In any case, SpaceX, their IPO is coming gone.
35:27
Speaker 2: We've got two more big ones on deck, Open AI
35:30
Speaker 2: and Anthropic. But obviously people are like itching to be
35:35
Speaker 2: able to own the companies before they go public. What
35:38
Speaker 2: types of choices are available on public markets for people
35:41
Speaker 2: right now?
35:43
Speaker 8: Yeah, it's a great question, similar to what happened with SpaceX.
35:47
Speaker 8: There are some ETFs that already have private share exposure
35:54
Speaker 8: to these two AI giants, obviously Open Ai, known for
35:58
Speaker 8: chat Gptropic for Claude. Two ETFs in particular that are compelling.
36:03
Speaker 8: Is it actually they actually own both of those companies.
36:07
Speaker 8: There's the I Shares AI Innovation and tech Active ETF.
36:11
Speaker 8: I know that's a mouthful. The ticker is BAI and
36:14
Speaker 8: then there's the t row Price Technology ETF. The ticker
36:19
Speaker 8: on that one is TTEQ. They have small stakes in
36:24
Speaker 8: both companies. They make up about one percent of the
36:28
Speaker 8: fund's assets for each of them, so you know, not
36:31
Speaker 8: a substantial amount of money in those companies, but it
36:35
Speaker 8: does give you some exposure. And those funds have done
36:38
Speaker 8: extremely well this year because they are riding the AI wave,
36:43
Speaker 8: you know, more with than just those companies, both of
36:46
Speaker 8: those funds have big positions in chip companies that are
36:50
Speaker 8: surging this year.
36:51
Speaker 1: So think of.
36:52
Speaker 8: Taiwan Semi and a M D Intel sk Heinex. So
36:57
Speaker 8: both of those funds are surging, probably more or because
37:00
Speaker 8: of their AI chip investments, but it doesn't hurt that
37:04
Speaker 8: they also have stakes in Open AI and Anthropic.
37:07
Speaker 2: So given the relatively small stakes that are in you know,
37:11
Speaker 2: each of the funds that you mentioned, it's you got
37:15
Speaker 2: to buy a lot of them in order to get
37:16
Speaker 2: the amount of these companies that you want, and then
37:19
Speaker 2: you're stuck with everything else that the fund has, which
37:22
Speaker 2: may or may not be a good thing.
37:24
Speaker 8: Yeah, I think that's a great a great point because
37:27
Speaker 8: if you look at some of the other funds. You know,
37:29
Speaker 8: there are some arc funds, Kathy Woods company that owns
37:34
Speaker 8: open ai. There are three tfs that have exposure, but
37:38
Speaker 8: those companies, those funds haven't done as well because some
37:42
Speaker 8: of the other investments have been hurt. You know, there's
37:45
Speaker 8: a you know, a blockchain fintech ETF that owns open ai,
37:51
Speaker 8: but that's been dragged down by coinbase and robin Hood,
37:55
Speaker 8: you know, because of you know, some of the volatility
37:58
Speaker 8: in crypto current. There's some other funds that have done
38:01
Speaker 8: better though. Alger another big investment firm, has anthropic in
38:07
Speaker 8: a couple of ETFs, and those AI related and tech
38:12
Speaker 8: related funds are doing much better. They're up about twenty
38:14
Speaker 8: to twenty five percent this year.
38:16
Speaker 2: And what are we looking at in terms of timeline
38:19
Speaker 2: for both of these IPOs. I know there's still a
38:21
Speaker 2: little ways off, but expectations are sometime this summer, is
38:24
Speaker 2: that right?
38:26
Speaker 8: I mean summer to fall seems reasonable. If you look
38:30
Speaker 8: at the SpaceX timeline, I mean SpaceX you know filed
38:35
Speaker 8: you know, it's confidential IPO a few months before we
38:39
Speaker 8: got to see the actual real quote unquote paperwork that
38:43
Speaker 8: details the financials. Because that's the case that we're in
38:46
Speaker 8: right now with both Anthropic and Open AI. They've filed confidentially,
38:51
Speaker 8: so the IPOs are coming, but investors have to wait
38:54
Speaker 8: a little bit to see what the fundamentals really look like.
38:58
Speaker 8: How much revenue did they generate last year and maybe
39:01
Speaker 8: the first quarter of this year. One of the loss
39:04
Speaker 8: is like because both of those companies are expected, you know,
39:08
Speaker 8: to be still losing money for a bit, so, you know,
39:12
Speaker 8: I think these are two companies that investors are very
39:16
Speaker 8: excited about. And SpaceX successful launch, if you will, for
39:21
Speaker 8: its IPO, you know, probably is a good sign for
39:24
Speaker 8: those two companies as well.
39:26
Speaker 2: All Right, Paul, I appreciate you joining us today. I
39:28
Speaker 2: hope you have a great rest of the week. I
39:30
Speaker 2: hope you enjoy the parade and we'll catch up with
39:33
Speaker 2: you soon.
39:34
Speaker 8: Yep, thanks a lot. I hope you guys have a
39:36
Speaker 8: good long weekend as well.
39:37
Speaker 2: That is Paul Monica from Barons who just joined us.
39:43
Speaker 2: What do you got for me? Mike?
39:45
Speaker 3: There's this piece today from Bloomberg about gen Z traders
39:48
Speaker 3: who are going for broken pursuit of.
39:50
Speaker 2: A new American dream.
39:51
Speaker 3: And the piece follows along of some other stuff that
39:54
Speaker 3: we've highlighted and the increasing gambling like nature of markets
40:00
Speaker 3: these days, and what I perceived to be a confusion
40:03
Speaker 3: between investing and gambling, which is all well and good
40:05
Speaker 3: and interesting. But there's one point that I just want
40:07
Speaker 3: to make with this article. Ish, I'm gonna call him Lucky,
40:11
Speaker 3: was sixteen years old and his last name.
40:14
Speaker 2: Is pronounced or spelled lukh.
40:17
Speaker 3: Wise, I'm gonna go Lucky there, sure sixteen years old
40:19
Speaker 3: and working a part time job at a gas station
40:21
Speaker 3: when he opened his first brokerage account under his mom's name.
40:25
Speaker 3: Don't let your sixteen year old do This is just
40:29
Speaker 3: the main point that I wanted to make here. And
40:32
Speaker 3: here's what people I think might fail to understand. Let's
40:35
Speaker 3: say you do that and the kid funds it with
40:37
Speaker 3: their own money. You might think that the worst that
40:40
Speaker 3: can happen is they lose all of their money. That's
40:43
Speaker 3: not the worst that can happen. No, you can go negative.
40:46
Speaker 3: You can get sued by the brokerage account for trading improperly.
40:51
Speaker 3: You are not allowed to legally open a brokerage account
40:53
Speaker 3: in your own name personally until you are eighteen years old.
40:56
Speaker 3: All of these custodians have teen accounts and new things
41:00
Speaker 3: to you know, try and teach young people how to invest,
41:03
Speaker 3: but you're required to actually oversee it as an adult.
41:06
Speaker 3: Don't let your kid do this, please, Like, you can
41:09
Speaker 3: really actually hurt yourself, your credit score, your own financial
41:12
Speaker 3: wellbeing if you allow for a miner to act on
41:15
Speaker 3: your behalf in financial markets.
41:17
Speaker 2: So really, really, really really really don't do that, Mike.
41:22
Speaker 2: Are you familiar with New Bird AI? Sure?
41:27
Speaker 3: Am, Yeah, the the the former footwear company turned AI builder.
41:31
Speaker 2: Yes, so last month All Birds the company that made
41:36
Speaker 2: shoes which admittedly, like I had a couple pairs of
41:39
Speaker 2: these shows, you know back in the day. I still
41:40
Speaker 2: have their stuff about shaning around, and they made shoes
41:45
Speaker 2: that were, you know, kind of trendy. They were really comfortable,
41:47
Speaker 2: they were made out of wool. It was it was fun,
41:49
Speaker 2: it was nice, it was great. But unfortunately they couldn't
41:52
Speaker 2: really make any money on their shoes, which was problematic.
41:55
Speaker 2: So they decided in April, hey, we're gonna change our
42:00
Speaker 2: business model. We're gonna stop selling shoes and instead we're
42:03
Speaker 2: gonna start buying servers and renting out the space and
42:05
Speaker 2: change our name to New Bird AI. Well, they just
42:09
Speaker 2: changed their name again, for the second time in two months.
42:11
Speaker 2: Now they're calling themselves smart Bird, which is better than
42:14
Speaker 2: dumb bird, but it's still dumb. We're gonna take a
42:19
Speaker 2: break for the rest of the day and think of
42:21
Speaker 2: some new names for the show, and you'll see what
42:24
Speaker 2: we're called next time on the Financial Exchange