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What a break with Europe means for the American economy · The Financial Exchange Show

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Speaker 2: Good morning, Welcome back to the Financial Exchange. Happy Tuesday
1:13
Speaker 2: out there, if everyone had a nice long weekend for
1:16
Speaker 2: those who got off the Martin Luther King Day holiday.
1:21
Speaker 2: We kick things off this week with a increasing tensions
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Speaker 2: really the across the pond with the European Union regarding Greenland.
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Speaker 2: But there's more in stock too that was actually scheduled
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Speaker 2: for this week. We will get an inflation print from
1:36
Speaker 2: the Personal Consumption Expenditures Index. We will have some earnings
1:41
Speaker 2: this week, not from any of the giant tech companies,
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Speaker 2: but Netflix.
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Speaker 3: Will be reporting.
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Speaker 2: We also will hear from Proctor, Gamble, Johnson and Johnson,
1:47
Speaker 2: and Davos kicks off as well, which always gets some
1:51
Speaker 2: coverage in financial circles. It's Mike, Paul and Tucker with
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Speaker 2: you on a Tuesday, but definitively the top story of
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Speaker 2: the day driving markets this morning happens to be increased
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Speaker 2: tensions with Greenland. And so I'll quote the President on
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Speaker 2: a couple of items from over the weekend as we
2:08
Speaker 2: kick the show off here. You know, when speaking about
2:12
Speaker 2: strategic control, quote, the world is not secure unless we
2:15
Speaker 2: have complete and total control of Greenland.
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Speaker 3: Went on to.
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Speaker 2: Say on Saturday, I may quote, I may put a
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Speaker 2: tariff on countries if they don't get along go along
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Speaker 2: with Greenland, because we need Greenland for national security. So
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Speaker 2: what we have happening this morning is once again a
2:35
Speaker 2: bunch of focus on tariffs, the president's ability to impose them,
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Speaker 2: markets reacting to them, and that's where we're going to
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Speaker 2: kick things off here, Paul, is a revisit to April
2:46
Speaker 2: of twenty twenty five in a lot of ways, quite frankly,
2:49
Speaker 2: which in some ways we should be pretty well versed
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Speaker 2: on this at this stage and understand the implications of
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Speaker 2: where these tariffs could go, where a trade war with
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Speaker 2: Europe could go, But I think we all might need
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Speaker 2: a bit of a refresher lesson. In early trading, if
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Speaker 2: you're just tuning in to what's going on in markets,
3:07
Speaker 2: the S and P is off about one hundred points,
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Speaker 2: close to one and a half percent, the nasdak off
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Speaker 2: one point seven percent, the US dollar is moving lower
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Speaker 2: against the against the euro, against the Japanese yen, and
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Speaker 2: you've got yields moving up.
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Speaker 3: So not exactly an unknown.
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Speaker 2: Playbook here, because like I said, this is falling in
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Speaker 2: line to you know, a microcosm of what we saw
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Speaker 2: last April, but with some key differences as well. So, Paul,
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Speaker 2: any thoughts in what we're seeing from markets so far
3:37
Speaker 2: this morning in reaction to the announcements from the weekend.
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Speaker 4: Yeah, certainly reminiscent Mike April of last year, no question
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Speaker 4: about that. I do feel as if that some of
3:47
Speaker 4: the volatility that we're seeing, I mean, there is a
3:49
Speaker 4: sell off to be clear this morning, but perhaps markets
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Speaker 4: have gotten a little bit more immune to this type
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Speaker 4: of back and forth between the United States and some
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Speaker 4: of the economic geopolitical tensions that have stoked up over
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Speaker 4: the last year and a half or so. In terms
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Speaker 4: of unpacking this whole situation with Greenland from an economic standpoint,
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Speaker 4: I mean, I did have flashbacks back to April and
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Speaker 4: last year when I'm reading up on all the different
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Speaker 4: lovers that the European Union could pull in terms of
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Speaker 4: retaliatory tariffs, and that just felt a very similar vintage
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Speaker 4: to last year, where there's talks about, hey, could they
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Speaker 4: go after you know, Harley Davidson's Bourbon's farm goods in
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Speaker 4: terms of things that they would tax back for us.
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Speaker 4: But ultimately this is something that I have learned to
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Speaker 4: be a little bit more cautious on getting too deep
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Speaker 4: into the weeds on the economic tariff retaliatory side of
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Speaker 4: things before we really see action in place. And that's
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Speaker 4: something that I personally felt victim to last year, is
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Speaker 4: making all of these suppositions as to what is going
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Speaker 4: to occur. But better to take things as they come,
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Speaker 4: is what I'm at least trying to do here.
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Speaker 2: I tend to agree with you, and you know, furthermore,
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Speaker 2: I don't think either of us are the foremost experts
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Speaker 2: on the strategic national importance of Greenland to our defense
5:07
Speaker 2: scenarios or to the future of mineral rights and things
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Speaker 2: along those lines. But we can certainly talk through what
5:14
Speaker 2: the trade relationship between the United States and Europe looks like.
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Speaker 2: And you know, the most recent data I could pull
5:19
Speaker 2: was from twenty twenty four, where across the European Union,
5:23
Speaker 2: the United States traded goods and services with the EU
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Speaker 2: to the tune of between one point five and one
5:29
Speaker 2: point seven trillion dollars. So that includes both goods and services,
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Speaker 2: tougher to tariff of service obviously than it is a good,
5:35
Speaker 2: but nonetheless that's the degree of trade between that block
5:39
Speaker 2: and the United States, And to give some context to that. Obviously,
5:44
Speaker 2: the last decade has been when it comes to trade,
5:47
Speaker 2: much more defined by our relationship with China, and we've
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Speaker 2: seen the strategic importance of things like rare earth materials
5:54
Speaker 2: and magnets coming out of China, and just the massive
5:57
Speaker 2: manufacturing capability that they have there. But to put this
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Speaker 2: in context, one and a half to one point seven
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Speaker 2: trillion dollars in trade between the US and EU. Total
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Speaker 2: trade between US and China most recently around six hundred
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Speaker 2: and sixty billion dollars, so we're talking two to three
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Speaker 2: x in terms of total trade between these two blocks
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Speaker 2: that is conducted. Obviously, anything that disrupts that in the
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Speaker 2: way of tariffs or other retaliatory measures. We've seen the
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Speaker 2: European Union, for instance, threatened getting creative with how they retaliate,
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Speaker 2: whether it's against big American tech companies as we've seen
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Speaker 2: for the last decade. Suffice to say, guessing at what's
6:35
Speaker 2: going to happen next on all this I don't think
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Speaker 2: would be.
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Speaker 3: A useful extra exercise.
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Speaker 2: However, understanding the context of how big the trade is
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Speaker 2: and how significant the value of both investment between these
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Speaker 2: two blocks and trade between them could get in the
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Speaker 2: way of things is important. I want to get back
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Speaker 2: to April of twenty twenty five, though, Paul, because there
6:56
Speaker 2: were some important lessons there and is really specifically Liberation
7:00
Speaker 2: Day April second, when things started going pretty wild. And
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Speaker 2: if you'll recall, you know, when we got like a
7:07
Speaker 2: week out from that whole event, it turns out it
7:11
Speaker 2: wasn't really the twenty percent equity market dip that you
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Speaker 2: saw what you did see. You know, you saw twenty
7:16
Speaker 2: percent drop inequities in April of twenty twenty five. It
7:20
Speaker 2: turned out that really wasn't the biggest thing that reshaped
7:23
Speaker 2: opinions within the White House of what should be done here,
7:26
Speaker 2: but rather the movements in the bond markets. We were
7:28
Speaker 2: talking about the wild yield changes that we saw single
7:32
Speaker 2: day moves on the ten year treasury of you know,
7:36
Speaker 2: fourteen nearly twenty basis points at certain points in time.
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Speaker 2: So April second, it looks like the change in the
7:43
Speaker 2: ten year treasure went down by sixteen BIPs the next
7:45
Speaker 2: by April seventh, that had bounced back fourteen basis points
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Speaker 2: as investors, you know, flocked to safety and drove those
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Speaker 2: yields downward and frankly nearly probably broke if you hedgephones
7:57
Speaker 2: and hedge funds and pretty critical parts of the overall market.
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Speaker 2: And you know from commentary Ruth in the White House,
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Speaker 2: it was seemingly those actions that really caused the White
8:08
Speaker 2: House to divert and change plans when it came to
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Speaker 2: their proposed tariffs. This is admittedly different, right, This is,
8:15
Speaker 2: you know, a set of tariffs that are not really
8:18
Speaker 2: specifically designed to protect American industry or you know, reshaped
8:23
Speaker 2: domestic policy, but rather you know, international policy. So I
8:27
Speaker 2: won't claim to say that it works out in the
8:28
Speaker 2: same way, but we are seeing echoes of the same thing.
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Speaker 2: The thirty year treasury yield this morning jumped by nine
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Speaker 2: basis points as people poured into other assets. You have
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Speaker 2: the US ten year yield jumping up five basis points
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Speaker 2: as we speak right now, counteracting some of what the
8:45
Speaker 2: President has done to lower interest rates for things like mortgages.
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Speaker 2: And I don't know if that will be prolonged. It's
8:52
Speaker 2: really hard to say where this thing goes. But you know,
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Speaker 2: obviously the more it escalates, the more there is concern
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Speaker 2: about how much foreigners are willing to pour into US
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Speaker 2: treasury markets and what that could do to yields, and
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Speaker 2: so interesting what's happening in equities, That's what will be
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Speaker 2: reported on. I'm personally a little bit more interested to
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Speaker 2: hear what happens in bond markets over the coming weeks
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Speaker 2: as we learn more about this intense disagreement between some
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Speaker 2: of the United States and some of our closest allies
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Speaker 2: like France.
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Speaker 4: That was the first thing that I looked at this morning, Mike,
9:23
Speaker 4: was immediately to the bond markets, because I feel as
9:25
Speaker 4: if they really showed their muscle and their importance, like
9:29
Speaker 4: you had mentioned back in April, and just interesting to note,
9:33
Speaker 4: as you know, President Trump is now set to have
9:35
Speaker 4: some more commentary on the housing market front. The US
9:38
Speaker 4: Tenure Treasury for listeners out there is the critical benchmark
9:41
Speaker 4: that all mortgages for the most part, are really priced
9:44
Speaker 4: off of, and you are alluding to it just a
9:46
Speaker 4: moment ago. It's up to four point two eight percent.
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Speaker 4: But it's so interesting with financial markets how some geopolitical
9:54
Speaker 4: issues can counteract some of the focus on trying to
9:57
Speaker 4: bring down interest rates on that US Tenure Treasure because
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Speaker 4: it is very different than what we talk about with
10:03
Speaker 4: the Federal Reserve on the shorter end of the curve,
10:05
Speaker 4: when they're controlling interest rate policy, it's something that can
10:08
Speaker 4: be a lot more targeted and there's a lot more
10:10
Speaker 4: control that can be asserted there. When you're talking about
10:13
Speaker 4: the US tenure Treasury, things like what we're talking about
10:15
Speaker 4: this morning can sort of shape the way that the
10:18
Speaker 4: interest rate changes, and it's hard to harder to control it.
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Speaker 4: So interesting kind of ripple effects there.
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Speaker 2: Again, reaction from equities and bonds relatively muted. You know,
10:27
Speaker 2: a five basis point move on bonds is not an
10:30
Speaker 2: immense shift, but interesting to me here, this is pretty
10:34
Speaker 2: clearly a sell America trade today, right. I mean we're
10:37
Speaker 2: only forty five minutes into trading, but when you've got
10:40
Speaker 2: bond yields moving up and you've got stocks moving lower,
10:43
Speaker 2: that means one thing, money is flowing out of US
10:46
Speaker 2: based assets, whether those are bonds or stocks.
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Speaker 3: Not to say that that.
10:49
Speaker 2: Will continue, but pretty clearly the reaction this morning, at
10:53
Speaker 2: least is a bit of a sell America trade. Let's
10:56
Speaker 2: take a quick break when we come back. I'm sure
10:59
Speaker 2: the discussion over Greenland and tariffs will be permeating throughout
11:03
Speaker 2: the show as we go on here, but we're going
11:05
Speaker 2: to shift over and talk more a bit about terraffs. Generally,
11:08
Speaker 2: we very likely could have a Supreme Court ruling any
11:12
Speaker 2: day now when it comes to teriffs.
11:14
Speaker 3: But now that we're over a year away from.
11:17
Speaker 2: Some of those initial proposed terriffs from twenty twenty five,
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Speaker 2: what are we seeing in terms of impacts, who is
11:22
Speaker 2: paying for them? What are we seeing in terms of employment?
11:24
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12:27
Speaker 3: Well.
12:28
Speaker 2: As tariff talk continues to heat up, I think it's
12:30
Speaker 2: worth revisiting some of the some of the studies that frankly,
12:34
Speaker 2: we just kind of put to the backburner over the
12:36
Speaker 2: course of the last what would you say, Paul, like
12:39
Speaker 2: nine months since this has been a real.
12:41
Speaker 3: Focus of the show.
12:43
Speaker 2: Definitely, definitely it has been a minute here, But the
12:46
Speaker 2: Budget Lab at Yale has been doing the real pre
12:49
Speaker 2: eminent research on tariff rates, the average effective rate, you know,
12:53
Speaker 2: really tracking down, hey, when a new tariff has announced,
12:56
Speaker 2: how long before it gets implemented and then what are
12:58
Speaker 2: the exceptions that have been been put into play? And
13:02
Speaker 2: one of the other areas that they've studied is, hey,
13:04
Speaker 2: not only what is the average effective tariff rate, but
13:08
Speaker 2: how much of that seemingly is getting passed through two
13:11
Speaker 2: US consumers in the form of higher prices.
13:13
Speaker 3: And this morning a German was a German think tank,
13:18
Speaker 3: I think it was.
13:21
Speaker 2: Released that they they're finding show. The Keel Institute for
13:24
Speaker 2: the World Economy suggests that the impact of tariffs likely
13:27
Speaker 2: to show up over time in the form of higher
13:30
Speaker 2: US consumer prices, but in either case, they view the
13:34
Speaker 2: pass through rate to Americans to be about ninety six
13:37
Speaker 2: percent of the headline tariffs, and their finding would not
13:41
Speaker 2: be immensely surprising. I don't think largely stating that, Hey,
13:46
Speaker 2: while the tariff rates don't show up immediately, because companies
13:50
Speaker 2: try to absorb some of it, they lean on suppliers.
13:53
Speaker 2: They will try to just wait it out and see
13:56
Speaker 2: if the tariffs get canceled or changed in some way,
13:59
Speaker 2: shape or form, so eventually they can't quite do that
14:01
Speaker 2: and end up passing it through. Interestingly, the Budget lab
14:04
Speaker 2: at Yale, which the last study that I saw in
14:07
Speaker 2: this was from June of last year, so quite a
14:09
Speaker 2: bit outdated, but at that point in time, their pass
14:13
Speaker 2: through estimates was closer to sixty one to eighty percent.
14:17
Speaker 2: And so again I guess where I'm comfortable saying is
14:21
Speaker 2: that somewhere between sixty and one hundred percent of the
14:24
Speaker 2: tariffs will eventually be passed through to consumers.
14:27
Speaker 3: I doubt it'll actually be one hundred.
14:29
Speaker 2: But the longer a tariff stays in place, the more
14:32
Speaker 2: likely it is if that product can't be relocated, that
14:37
Speaker 2: production can't be relocated into the United States, that the
14:40
Speaker 2: tariff will eventually pass through to that consumer in the
14:44
Speaker 2: form of higher prices, and more and more studies are
14:46
Speaker 2: pointing to that. Again, we saw a delay and how
14:50
Speaker 2: long it took, But the longer those tariffs stayed in place,
14:54
Speaker 2: the more got driven home to consumers, which is probably
14:57
Speaker 2: part of why we're having a difficult time getting overall
15:01
Speaker 2: inflation down to the FEDS target of two percent. It
15:04
Speaker 2: is difficult to ultimately achieve that goal when you have these.
15:08
Speaker 3: Things in place.
15:09
Speaker 2: The other piece of this that I'll point out, though,
15:11
Speaker 2: like many will, you correctly say, hey, you know all
15:15
Speaker 2: well and good mic, but we had big tariffs in
15:17
Speaker 2: twenty twenty five. It didn't crash anything. It did not
15:20
Speaker 2: lead to, you know, in prices going up five percent
15:23
Speaker 2: in the aggregate, it did not lead to massive unemployment.
15:27
Speaker 2: And all of that's true. And my summary of why
15:33
Speaker 2: would be that we settled in on tariff rates that
15:35
Speaker 2: are substantially lower than what we were talking about in
15:39
Speaker 2: April of twenty twenty five, right when people were predicting
15:42
Speaker 2: doom and gloom. We were talking about average effective tariff
15:46
Speaker 2: rates in the thirties.
15:47
Speaker 4: Right, and I believe we sit close to thirteen percent
15:50
Speaker 4: or so today. At the last piece of information that
15:53
Speaker 4: I saw on the effective terror rate in the United States,
15:56
Speaker 4: I don't think that you would hit the number here
15:58
Speaker 4: from the Keel Institute for a World the world economy
16:01
Speaker 4: was ninety six percent of the US tariff costs were
16:04
Speaker 4: being absorbed by consumers. But I do think it is
16:06
Speaker 4: important as we revisit these topics to sort of discuss
16:11
Speaker 4: that what you had mentioned before, Mike, this is on
16:15
Speaker 4: a backdrop of a US economy that just reported four
16:17
Speaker 4: point three percent GDP growth in Q three. That number
16:21
Speaker 4: is going to be finalized, I believe later this week.
16:23
Speaker 4: But however you want to cut it, it really was
16:26
Speaker 4: a very strong number in terms of economic growth. Inflation
16:30
Speaker 4: sits at two point six percent, so not the two
16:33
Speaker 4: percent target that we talked about, but far less than
16:37
Speaker 4: I would have estimated, certainly when we were talking back
16:39
Speaker 4: in April and May, and that's partially because the tariffs
16:42
Speaker 4: weren't as high as initially anticipated. Here, I question that
16:48
Speaker 4: any of these estimates here on the ninety six percent
16:50
Speaker 4: or sixty percent. I just don't know how much data
16:53
Speaker 4: you could really wrap your arms around in terms of
16:55
Speaker 4: looking at those prices, because I do think there was
16:57
Speaker 4: some give and take between supplier for and supply and
17:00
Speaker 4: you and companies sort of footing the bill. But there
17:03
Speaker 4: they are ultimately right. We all know that eventually consumers
17:07
Speaker 4: will pay the brunt of those tariff costs, but on
17:10
Speaker 4: the inflatory.
17:11
Speaker 2: Frankly, there's so many different ways to measure this too, Paul, Right, Like,
17:15
Speaker 2: you know you have to factor in that, Okay, if
17:18
Speaker 2: I am buying a T shirt that's manufactured in Vietnam
17:22
Speaker 2: and faces a twenty percent tariff, I may now instead
17:26
Speaker 2: choose to pick a T shirt manufactured in Cambodia, which
17:31
Speaker 2: faces a different tariff rate, and so all of this
17:35
Speaker 2: fast that you have to factor in. Okay, Well what
17:37
Speaker 2: if I substitute where I purchase things from, or or
17:40
Speaker 2: any of these different factors. So actually measuring what the
17:43
Speaker 2: pass through is quite difficult, but suffice to say it's
17:47
Speaker 2: probably most of the tariff gets passed through, and you
17:51
Speaker 2: know what portion of that is honestly, just not the
17:54
Speaker 2: most meaningful thing.
17:55
Speaker 3: I think if.
17:56
Speaker 2: You're worried about markets, you know, react to this latest
18:01
Speaker 2: round of tariffs, the reason would be because we're talking
18:05
Speaker 2: about much bigger tariffs on our single biggest block of
18:10
Speaker 2: trading partners, which would be the European Union. I mentioned
18:12
Speaker 2: this during the first segment, but it dwarfs our trading
18:15
Speaker 2: relationship with China. It's about three times close to three
18:19
Speaker 2: times the total trade relationship with China. And again for
18:24
Speaker 2: that reason, however, I don't want to sound as though
18:28
Speaker 2: I'm ringing alarm bells. I think for that reason, it's
18:31
Speaker 2: very unlikely to me that we get into a trade
18:33
Speaker 2: war with the European Union.
18:35
Speaker 4: Right also, and also the other thing that is worth
18:39
Speaker 4: noting on the concern side, though, is you do have
18:43
Speaker 4: a different situation here where this is a strategic move
18:46
Speaker 4: geopolitically by the United States and the ones of yesteryear
18:50
Speaker 4: of twenty twenty five. We're more focused on reshaping the
18:53
Speaker 4: way the US economy sort of its trajectory, and you
18:56
Speaker 4: could just see perhaps a little bit more resolve from
18:59
Speaker 4: some of the EU nations this time around. When you're
19:02
Speaker 4: talking about a territory of Greenland, then you would have
19:05
Speaker 4: previously when it came to economic decisions.
19:08
Speaker 2: Yeah, I would agree, because you know, frankly, when it
19:11
Speaker 2: comes to trade, there's a much more compelling argument for hey,
19:15
Speaker 2: you know, you play. European countries have high barriers to trade,
19:18
Speaker 2: and so this is about opening those up. That's not
19:21
Speaker 2: what this argument's about, right, So fairpoint on that front,
19:25
Speaker 2: and time will tell in terms of how all of
19:28
Speaker 2: this develops. We've got to take a quick break when
19:31
Speaker 2: we come back. Full market update here during the selloff
19:34
Speaker 2: with Wall Street watch, Like us.
19:41
Speaker 1: On Facebook and follow us on Twitter at TFE show.
19:45
Speaker 1: Breaking business news is always first right here on the
19:48
Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch
19:54
Speaker 1: a complete look at what's moving market so far today
19:57
Speaker 1: right here on the Financial Exchange Radio Network.
20:01
Speaker 5: Market's selling off and reaction to the escalating dramas running
20:05
Speaker 5: President Trump's pursuit of Greenland and more threats of tariffs
20:09
Speaker 5: resulting in increased trade tensions between the US and European Union.
20:14
Speaker 5: Right now, the Dow is down one percent or four
20:17
Speaker 5: hundred and eighty seven points lower. SMP five hundred also
20:20
Speaker 5: down one percent or seventy two points. NASDAC down one
20:24
Speaker 5: in a third percent, or three hundred and nine points lower.
20:27
Speaker 5: Russell two thousand is off one point two percent. Ten
20:31
Speaker 5: Your Treasure wheeled up four basis points at four point
20:34
Speaker 5: two seventy five percent, and crude oil jumping two percent
20:38
Speaker 5: higher today training in sixty dollars and sixty five cents
20:42
Speaker 5: a barrel. Big tech stocks, including in Vidia and Alphabet,
20:45
Speaker 5: seeing losses on the day as investors pulled back on
20:48
Speaker 5: tech as a result of global trade tensions, and Vidia
20:51
Speaker 5: down nearly three percent, while Alphabet shares are down about
20:54
Speaker 5: one and a half percent. Meanwhile, three M reported mixed
20:58
Speaker 5: fourth quarter results this morning, beating earnings forecast but fell
21:01
Speaker 5: short of revenue expectations. A maker of posted notes and
21:05
Speaker 5: Scotch tape also reported a decline in quarterly net income,
21:09
Speaker 5: weighed down by litigation costs. Three M stock is falling
21:13
Speaker 5: five percent. Elsewhere, Fifth third Ban Corp. Stock is up
21:16
Speaker 5: nearly one percent after it beat earnings estimates. However, the
21:20
Speaker 5: regional bank's net interest income fell short of expectations. Dr
21:25
Speaker 5: Horton shares down almost one percent after the home builder
21:28
Speaker 5: reported stronger than expected quarterly earnings and revenue. Warner Brothers
21:32
Speaker 5: Discovery approved the new all cash bid from Netflix. Warner
21:36
Speaker 5: stock edging glower, while Netflix shares are up modestly. Modestly.
21:40
Speaker 5: Speaking of Netflix, they'll report earnings after today's closing bell.
21:44
Speaker 5: In addition to United Airlines. Tomorrow morning, we'll see earnings
21:48
Speaker 5: from Johnson and Johnson and Charles Schwab. I'm Tucker Silvan.
21:52
Speaker 5: That is Wall Street Watch. And remember you can subscribe
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22:11
Speaker 2: So the last few months, Paul, we've been pretty focused
22:15
Speaker 2: on this debate over affordability. It's clearly been at the
22:18
Speaker 2: front of the president's mind. While he tried to dismiss
22:21
Speaker 2: it early on, he's now focused pretty dramatically towards affordability
22:26
Speaker 2: and that has been running the game, but mainly on housing,
22:29
Speaker 2: but also with some new stuff in the electricity markets.
22:33
Speaker 2: There was something really interesting in the mid Atlantic region
22:36
Speaker 2: we covered on Friday, and Tucker, I'm going to blank
22:39
Speaker 2: on the name of the electricity provider, but a large
22:43
Speaker 2: provider that covers from Virginia through the mid Atlantic out
22:47
Speaker 2: to the Midwest, basically came up with a new auction
22:50
Speaker 2: scheme to allow giant tech companies to bid on electricity
22:54
Speaker 2: electricity for the next fifteen years, thereby really locking in
22:58
Speaker 2: prices and profits for the use utility companies that would
23:01
Speaker 2: need to build out the capacity for that electricity.
23:04
Speaker 3: So unique way to try and solve the market.
23:07
Speaker 2: But I think one, this is a problem today, and
23:10
Speaker 2: I pulled some stuff up so we can actually measure
23:12
Speaker 2: how significant the price problem is when it comes to electricity,
23:15
Speaker 2: because to me, it's just not good enough to say, oh,
23:17
Speaker 2: prices are up this much since twenty twenty, we need
23:20
Speaker 2: some benchmark.
23:22
Speaker 3: And two, because of how.
23:25
Speaker 2: We regulate electricity in this country and most countries around
23:29
Speaker 2: the world, not going to be an easy problem to solve.
23:33
Speaker 2: So first things first. The article from the Wallstreet Journal
23:35
Speaker 2: points out that electricity costs are up about thirty eight
23:38
Speaker 2: percent on average since twenty twenty. I decided to pull
23:42
Speaker 2: the most recent CPI data we have, which was December
23:45
Speaker 2: of twenty twenty five, and compare it to right before
23:48
Speaker 2: COVID December twenty nineteen. So in the aggregate since that
23:52
Speaker 2: point in time, all prices in total, as according to
23:56
Speaker 2: how the Bureau of Labor Statistics measures this, they're up
23:58
Speaker 2: about twenty six percent in the aggregate. Electricity prices specifically
24:04
Speaker 2: up forty and a half percent since that December twenty
24:07
Speaker 2: nineteen time period. So what you were experiencing on your
24:10
Speaker 2: electricity bill is not a fluke. It is a huge
24:13
Speaker 2: increase over the last five years, and far more than
24:16
Speaker 2: what we've even experienced in terms of aggregate inflation. It
24:20
Speaker 2: dwarfs even what we've seen in terms of shelter costs.
24:23
Speaker 2: So the way that CPI measures this in terms of
24:26
Speaker 2: shelter cost which would be a combination of rent plus
24:29
Speaker 2: owner's equivalent rent, think of, you know, how much you
24:32
Speaker 2: would have to how much you would get paid if
24:34
Speaker 2: you decided to rent out your own home, is what
24:36
Speaker 2: they think of there. Shelter costs are up about thirty percent,
24:39
Speaker 2: electricity costs up forty Overall prices up twenty six percent.
24:43
Speaker 2: So clearly this is hitting the you know, hitting the
24:48
Speaker 2: nerves of Americans for good reason. My point about how
24:53
Speaker 2: we fix it.
24:56
Speaker 3: Is just incredibly difficult.
24:57
Speaker 2: It takes a long time for generation projects to get
25:02
Speaker 2: off the ground and get going here.
25:05
Speaker 4: Yeah, PGM, which is the provider for Pennsylvania, Jersey, and Maryland,
25:11
Speaker 4: but it spans more than just those three states. It's
25:14
Speaker 4: a massive part of the country in terms of electricity
25:18
Speaker 4: provide what they're providing, they're expecting to see demand grow
25:21
Speaker 4: about five percent on a year on average for the
25:24
Speaker 4: next decade or so. And there's a bunch of different
25:27
Speaker 4: factors Mike that go into this. I mean, AI data
25:30
Speaker 4: centers definitely are part of.
25:32
Speaker 1: The story here.
25:32
Speaker 4: We've covered that on the show before in terms of
25:35
Speaker 4: who foots the bill when you're looking at the big
25:38
Speaker 4: hyperscalers of Amazon and Google and Microsoft. There's certain parts
25:42
Speaker 4: of the country that have been really dramatically impacted by
25:45
Speaker 4: the data center build out in northern Virginia as a
25:47
Speaker 4: power alley, you've got out in Oregon some areas there too,
25:51
Speaker 4: but also there's just some issues with the grid. More
25:54
Speaker 4: generally speaking, for a significant period of time, there was
25:57
Speaker 4: nowhere near a significant amount of power demand growth. If
26:01
Speaker 4: you study back over a twenty or twenty five year period.
26:04
Speaker 4: The demand that we're seeing recently, a lot of it
26:06
Speaker 4: does point to AI. The recent demand that we've seen
26:09
Speaker 4: far pales in comparison to the growth that we had
26:12
Speaker 4: seen for the last twenty twenty five years. And that's
26:13
Speaker 4: why there hadn't been much discussion about the grid or
26:17
Speaker 4: electricity in general. But now we do sit at sort
26:19
Speaker 4: of this tipping point where these price increases are becoming
26:22
Speaker 4: so tenuous that there's going to be I feel a
26:25
Speaker 4: lot of political action here, and you wonder how that
26:28
Speaker 4: impacts the data center build out. Do they start to
26:31
Speaker 4: shift from this burden to these hyperscalis how do you
26:34
Speaker 4: go about doing that? And then you have all the
26:37
Speaker 4: whole deal of how do you upgrade the grid seamlessly?
26:40
Speaker 4: Because it's a very fragmented market, the electricity market. It's
26:43
Speaker 4: not some you know, nationally regular thing. Each area has
26:46
Speaker 4: their own sort of jurisdiction, so it's a lot to
26:49
Speaker 4: unpack and what is a very complicated sort of mechanism
26:52
Speaker 4: that powers the whole country.
26:54
Speaker 2: Yeah, this is a interesting You know, if you listen
26:57
Speaker 2: to the show enough, you hear me constantly talking about
26:59
Speaker 2: how free markets will solve the problem. And and here
27:05
Speaker 2: free markets would hypothetically solve this problem, but in the
27:09
Speaker 2: most disastrous way you can imagine, right, I mean, the
27:12
Speaker 2: reason that electricity prices are going up is because Google,
27:15
Speaker 2: Facebook and other giant tech companies want and need electricity
27:19
Speaker 2: in order to run their AI models. And so if
27:23
Speaker 2: you completely deregulate and allow markets to handle this, then
27:27
Speaker 2: we'll all be paying a lot more for electricity, and
27:30
Speaker 2: some people won't be able to afford to and you
27:32
Speaker 2: have terrible things like people rational electricity or you know,
27:37
Speaker 2: freezing and having real problems there. So this is one
27:41
Speaker 2: of those instances where the free markets, the results of
27:44
Speaker 2: the free markets would be so disastrous that we're not
27:46
Speaker 2: willing to go that route.
27:48
Speaker 3: And I agree, you know, for good reason. I do
27:53
Speaker 3: just wonder.
27:53
Speaker 2: You know, obviously we're talking about nuclear, we're talking about
27:56
Speaker 2: all sorts of other things, but you will there be
27:58
Speaker 2: a conversation about about rationing. About one thing comes to mind, Paul,
28:04
Speaker 2: And I don't think I've discussed it with you as much,
28:06
Speaker 2: but Tucker's heard me talk about it. How I have
28:08
Speaker 2: one of those you know, Nest smart thermostats right sure,
28:12
Speaker 2: and it will prompt me to say, hey, do you
28:15
Speaker 2: want to participate in this program sponsored by your utility
28:19
Speaker 2: company where we will automatically adjust the temperature in your
28:22
Speaker 2: home during peak demand and will pay you, you know,
28:27
Speaker 2: will pay you basically to give you that option where
28:31
Speaker 2: we control the temperature and you can override it. But
28:33
Speaker 2: you know, when when we're at peak demand, we're going
28:36
Speaker 2: to turn down the temperature in your home in order
28:38
Speaker 2: to save things. And really it has to do with
28:40
Speaker 2: you know, cooling costs during the summer because I heat
28:43
Speaker 2: on oil. But ultimately, what they were offering was like
28:47
Speaker 2: twenty bucks a year, and so I said, no, you're not.
28:50
Speaker 2: You're not creepily controlled thermostats from your headquarters for twenty.
28:55
Speaker 3: Bucks a year. But there's a price at which I
28:58
Speaker 3: would say yes, sure.
29:00
Speaker 2: Sure, And so you know there there is more in
29:03
Speaker 2: terms of creative, creative problem solving here that hypothetically could
29:07
Speaker 2: be done using free markets like that.
29:10
Speaker 3: That is a pretty free market.
29:11
Speaker 2: Hey, we're going to pay you, Mike, to sweat it
29:14
Speaker 2: out in your home in August in order to you know,
29:17
Speaker 2: relieve some of that demand from the grid. And if
29:22
Speaker 2: they paid me enough, I'm sure there are plenty of
29:24
Speaker 2: people who would say, Okay, I'll sweat it out for
29:26
Speaker 2: a few hours this July humid day. Again, it's going
29:32
Speaker 2: to require a lot of creative problem solving. And this
29:35
Speaker 2: is not going away right.
29:36
Speaker 3: This is a very clear market problem.
29:41
Speaker 2: Demand for electricity is far out stripping supply that can
29:45
Speaker 2: come online.
29:46
Speaker 3: There is only one.
29:48
Speaker 2: Logical result, which is prices go up. The only question
29:51
Speaker 2: is who is going to ultimately pay for those prices?
29:53
Speaker 1: Right?
29:54
Speaker 3: Do we subsidize? Do we own?
29:57
Speaker 2: You know, do we hold rates for home homes and
30:00
Speaker 2: then jack op rates for commercial properties? If we do
30:03
Speaker 2: it for commercial properties, does that mean that everybody from
30:06
Speaker 2: the AI company to the pizza shop ends up paying
30:10
Speaker 2: much higher electricity prices? And then how does that all
30:13
Speaker 2: get passed.
30:13
Speaker 3: Through to the consumer.
30:14
Speaker 2: Is all an excellent question, and I'm sure we will
30:17
Speaker 2: see very thoughtful, well thought out policies on this and
30:21
Speaker 2: incredibly stupid policies that end up hurting consumers more than
30:25
Speaker 2: helping them. But it is not an issue that I
30:28
Speaker 2: think is likely to go away anytime in the next decade.
30:31
Speaker 2: Let's take a quick break when we come back big
30:35
Speaker 2: CEO's latest excuse.
30:37
Speaker 3: For poor sales. We'll be talking about that next on
30:39
Speaker 3: the Financial Exchange.
30:41
Speaker 1: Breaking business news as it happens only here on the
30:45
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30:51
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30:53
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31:07
Speaker 2: In the latest for inventive terms when your company is struggling.
31:11
Speaker 2: We have a new word that is permeating through earnings
31:15
Speaker 2: calls over the course of the last year. Choiceful is
31:19
Speaker 2: a way of describing people that don't want to buy
31:22
Speaker 2: the pardon my language, crap that you have to sell.
31:27
Speaker 2: The term choiceful was mentioned seventy times across forty three
31:30
Speaker 2: earnings calls in twenty twenty five, according to a fact
31:33
Speaker 2: Set analysis of S and P fifteen hundred earnings calls.
31:37
Speaker 2: That's up from thirty six mentions in twenty twenty four
31:40
Speaker 2: to twenty seven mentions in twenty twenty three. Specifically, last May,
31:45
Speaker 2: Rick Gomez, the chief commercial officer of Targets, said that
31:48
Speaker 2: consumers have been choiceful in their buying selections all right, sorry,
31:51
Speaker 2: in their buying decisions.
31:53
Speaker 3: Macy's CEO mentioned the same thing.
31:55
Speaker 2: You're there with me, Paul, just a complete garbage excuse.
31:59
Speaker 3: For why people don't want to buy your stuff.
32:01
Speaker 4: Specifically, Yeah, the longer you do this gig, the more
32:03
Speaker 4: you kind of get into the ebbs and flows of
32:05
Speaker 4: the rhythms of executives at big time companies finding unique
32:09
Speaker 4: ways to try and pin the blame elsewhere. You know,
32:12
Speaker 4: concerns about tariffs that were one that people leveraged onto.
32:17
Speaker 4: There's a parallel to this in the fast food space,
32:19
Speaker 4: which is the value customers are looking for value deals AAKA.
32:26
Speaker 4: You know McDonald's adopting some more of these five dollars
32:29
Speaker 4: offerings and defending that, hey, we're selling less because in
32:33
Speaker 4: the bottom line and the candid way they should just
32:35
Speaker 4: say it is that consumers aren't buying as much of
32:38
Speaker 4: our product and they are not spending as much. And
32:42
Speaker 4: this is just it has its features everywhere, and I'm
32:45
Speaker 4: trying to think of some others to rack my brain.
32:46
Speaker 4: But there's always a flavor of the month that these
32:49
Speaker 4: CEOs will come in and mention on their earnings calls
32:53
Speaker 4: to try and defend any weakness and their behavior. It's
32:57
Speaker 4: oftentimes macroeconomic concerns that they really try to put an
33:01
Speaker 4: arms length distance from that they can't really control when
33:04
Speaker 4: they're not selling as much.
33:06
Speaker 2: Here's what I know, according to the government's own data,
33:10
Speaker 2: the US Bureau of Economic Analysis, consumers spending via the
33:14
Speaker 2: Personal Consumption Expenditures Index is up five and a quarter
33:18
Speaker 2: percent year over year.
33:20
Speaker 3: So what I am hearing is that people don't want.
33:22
Speaker 2: To buy your stuff, right, and therefore they're being choiceful,
33:26
Speaker 2: which that's fine. I mean, choiceful is just a word
33:29
Speaker 2: for they don't want my stuff, and they are. But
33:32
Speaker 2: what you can't say about the consumer is that they
33:34
Speaker 2: aren't spending. And I guess be saying choiceful, you know,
33:38
Speaker 2: to me, it insinuates that people are strapped for cash
33:41
Speaker 2: and are being really selective. Doesn't really appear so right.
33:44
Speaker 2: They're spending a lot of money year over year, they're
33:46
Speaker 2: just choosing not to spend it with you, and so
33:49
Speaker 2: let keep an eye out for that term. It doesn't
33:51
Speaker 2: seem terribly positive when describing companies right now.
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35:06
Speaker 2: Wall Street Journal asks if a seventeen hundred dollars espresso
35:09
Speaker 2: machine will help Walmart challenge Amazon. So, I know that's
35:13
Speaker 2: a silly headline, and it is like.
35:15
Speaker 4: You're in you're thinking about it. I know you are.
35:18
Speaker 3: You want that press to begin with, You're getting in
35:23
Speaker 3: for the office. Yeah, thanks every time.
35:25
Speaker 2: I see a more expensive espresso maker, I usually just
35:28
Speaker 2: get a rest on it, just throw the other one.
35:31
Speaker 3: In the trash. But okay, here's the point about Walmart.
35:33
Speaker 2: Over the course of the last five years, they have
35:35
Speaker 2: done an excellent job of bringing in a higher income consumer,
35:39
Speaker 2: mainly because that higher income consumer was also feeling budget
35:43
Speaker 2: pinched and came in for cheaper groceries. And so, in
35:46
Speaker 2: my mind, yeah, if you're Walmart, you might as well
35:48
Speaker 2: swing for the fences on this.
35:50
Speaker 3: Again.
35:50
Speaker 2: You don't need to stock your store with three thousand,
35:53
Speaker 2: seventeen hundred dollars espresso machines. That's I don't think the
35:56
Speaker 2: strategy for Walmart. But I think the point would be that, hey,
36:00
Speaker 2: very suddenly you've started attracting a different demographic. And if
36:05
Speaker 2: that allows you to sell a really expensive, you know,
36:09
Speaker 2: coffee maker that probably has a thirty percent markup on it,
36:13
Speaker 2: why wouldn't you.
36:15
Speaker 4: Yeah, And they've also built up their e commerce side
36:18
Speaker 4: of the business. They've seen pretty significant growth and investment there.
36:21
Speaker 4: So they have continued to try and fight as hard
36:24
Speaker 4: as they can against Amazon, who has just done a
36:27
Speaker 4: fantastic job of taking more online wallet share than they
36:32
Speaker 4: had previously, which was already a really significant market. This
36:35
Speaker 4: is news to me. Mike just quoted in this piece
36:37
Speaker 4: that their Amazon's share of the US furniture and home
36:40
Speaker 4: furnishings market hit twenty percent market share, more than double
36:44
Speaker 4: its nine percent share in twenty nineteen. So just incredible
36:49
Speaker 4: the dominance that Amazon has established over so many different
36:53
Speaker 4: areas of the spend market. But from Walmart's perspective, so
36:57
Speaker 4: you've built out the e commerce side, I think that
36:59
Speaker 4: allows you to have a little bit more diversified options
37:03
Speaker 4: on some of these trend your items you could post
37:05
Speaker 4: on your e commerce site. And then also you just
37:09
Speaker 4: need to recognize that you have a bifurcated market right now.
37:12
Speaker 4: We've talked about this all on the show. The higher
37:14
Speaker 4: end consumer, the higher income consumer, is spending more than
37:19
Speaker 4: some of its lower income peers. So branching out to
37:22
Speaker 4: make sure you're servicing those people is probably a smart
37:25
Speaker 4: move on Walmart's part.
37:26
Speaker 2: Yeah, I'm just you know, I think Walmart's pretty much
37:29
Speaker 2: proven that they don't really have an Amazon problem, right
37:31
Speaker 2: like a lot a bunch of other retailers do, like
37:33
Speaker 2: Macy's and Sears all had big Amazon problems.
37:36
Speaker 3: And barely exist anymore.
37:38
Speaker 2: Walmart has found their way to grow and you know,
37:41
Speaker 2: attract consumers into their stores. And so I think what
37:45
Speaker 2: Walmart's really doing is taking a piece out of the
37:48
Speaker 2: playbook from TJX or Costco. They're trying to find products
37:52
Speaker 2: to put in their stores that you can't really find
37:55
Speaker 2: anywhere else, and people will actually come to your store
37:57
Speaker 2: to find them. And attracting that higher end consumer I
38:00
Speaker 2: think is a big overall piece of this. But you know,
38:03
Speaker 2: as far as Walmart and Amazon go, again huge behemoth threat.
38:07
Speaker 2: But I don't know that Walmart has an Amazon problem.
38:09
Speaker 2: Quick Break a lot more to cover in the second
38:11
Speaker 2: hour of the Financial Exchange.
38:12
Speaker 3: We'll be right back