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Is the Labor Market Stronger Than the Fed Thinks? · The Financial Exchange Show

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Speaker 1: Zada and Mark FANDETI.
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Speaker 2: Chuck, Mark and Tucker with you as we kick off
1:14
Speaker 2: our show today. And a little bit of economic data
1:19
Speaker 2: out this morning that I'd like to touch on. Just
1:23
Speaker 2: to kick things off. Here, we got weekly jobless claims
1:26
Speaker 2: that came out at eight thirty am Eastern, and here
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Speaker 2: here's what we ended up seeing on these. We've been
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Speaker 2: watching these pretty closely to see if there's anything interesting
1:36
Speaker 2: happening in the labor market. So here's here's what we've seen.
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Speaker 2: Initial claims decreased from a revised level of two hundred
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Speaker 2: and twenty nine thousand down to two hundred and six thousand.
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Speaker 2: So it does appear that, at least on the initial
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Speaker 2: claim side of things, the slight bump that we saw
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Speaker 2: from that low two hundreds into that load to mid
1:58
Speaker 2: two hundreds range probably related more to some of the
2:02
Speaker 2: storms that went through the country in late January than
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Speaker 2: anything else. Like it's it's just kind of what it
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Speaker 2: looks like right now. We've got this little, you know,
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Speaker 2: kind of two week hump there in initial claims, and
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Speaker 2: other than that, we've been basically floating around two hundred
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Speaker 2: thousand weekly claims since late December, so we've got kind
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Speaker 2: of five six weeks surrounding that period that looks that way.
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Speaker 2: The continuing claims data came in at a seasonally adjusted
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Speaker 2: number of one point eight six nine million. That's up
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Speaker 2: about seventeen thousand from last week and about eight thousand
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Speaker 2: higher than this time last year. So here's where we
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Speaker 2: are on the continuing claim side of things. The first
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Speaker 2: three weeks of this year we saw continuing claims running
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Speaker 2: below last year, which would be fantastic. Prior to that,
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Speaker 2: we had generally, for the last two to three years,
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Speaker 2: been seeing continuing claims rising anywhere from four to six
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Speaker 2: percent year over year pretty consistently during the last few years,
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Speaker 2: and so so if you could suddenly get you know,
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Speaker 2: continuing claims decreasing, that's great. The last two weeks we've
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Speaker 2: bumped up to okay, maybe like a half percent to
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Speaker 2: one percent rise in the year over year continuing claims numbers,
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Speaker 2: which is not really problematic. It's still better than it
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Speaker 2: was for the much of the last few years, but
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Speaker 2: it does suggest that, hey, maybe that what we saw
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Speaker 2: the first few weeks of this year, maybe we're not
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Speaker 2: going to be quite that strong. So I think this
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Speaker 2: is still worth watching. But mark my read on this
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Speaker 2: in terms of what it's telling us in as close
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Speaker 2: to real time as we can get about the labor market.
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Speaker 2: This is one of those high frequency data sets that
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Speaker 2: we like to see. There's no major impulse for rising
3:41
Speaker 2: initial unemployment claims at this point, despite you know, all
3:44
Speaker 2: of the hubbub about you know, layoffs, this and layoffs
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Speaker 2: that it's not showing up in initial claims in any way,
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Speaker 2: shape or form. And the continuing claims numbers well, not
3:53
Speaker 2: as good as the first few weeks of this year.
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Speaker 2: Still a market improvement over what we saw the last
3:58
Speaker 2: few years.
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Speaker 3: Yeah, all those few years of labor market weakening, and
4:02
Speaker 3: there may have been a brief period of labor market
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Speaker 3: weakening a normalization late last year. They blied the higher
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Speaker 3: level story, which was imparted by GDP Gross domestic Product
4:14
Speaker 3: economic growth aka economic growth, which was a gangbuster's economy,
4:19
Speaker 3: and it still appears to be one, at least by
4:22
Speaker 3: that measure. The story that took hold of the labor
4:25
Speaker 3: market's weakening, the FED has to stimulate demand by lowering
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Speaker 3: interest rates. Further, I think that story of which serious
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Speaker 3: people should have been and were skeptical to begin with
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Speaker 3: I think that story is falling apart. The economy appears
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Speaker 3: to be doing just fine.
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Speaker 2: So this is where we stand right now. I still
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Speaker 2: think we need to see a few more weeks just
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Speaker 2: to see how things evolve here, but it does appear
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Speaker 2: that we're in kind of the early phase of that
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Speaker 2: labor market weakness maybe starting to turn. And I think
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Speaker 2: if this data continues over the next month or two,
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Speaker 2: I think that we get to a point where we
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Speaker 2: can probably say, you know, absence some kind of external
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Speaker 2: shock or something like that, Yeah, the labor market looks
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Speaker 2: to be finding its footing after some questions in the
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Speaker 2: second half of last year. We'll see where things go,
5:14
Speaker 2: but it's again continued, you know, good news on the
5:18
Speaker 2: labor market front is what we have here. With that
5:22
Speaker 2: in mind, let's talk a little bit about Walmart earnings,
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Speaker 2: because Walmart earnings, I do think tell a very distinct
5:27
Speaker 2: story that we continue to you know, see and hear,
5:30
Speaker 2: which is, look, Walmart is continuing to execute at a
5:34
Speaker 2: really high level, but they're continuing to say, look, lower
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Speaker 2: income households below fifty thousand dollars in household income are struggling,
5:44
Speaker 2: and we're not really getting any kind of sales growth there.
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Speaker 2: We are seeing organic sales growth coming from households that
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Speaker 2: have household income north of one hundred thousand dollars, and
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Speaker 2: ultimately what they're projecting now for their fiscal year profit
5:58
Speaker 2: is going to be any We're from about four to
6:00
Speaker 2: eight percent below what the analysts were expecting. And so
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Speaker 2: I think it's, you know, a company that's executing as
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Speaker 2: well as they can in that you know, kind of
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Speaker 2: big box retail landscape. It's just kind of a tough
6:15
Speaker 2: niche to be in. And I know it's weird to
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Speaker 2: say it's a tough niche for Walmart to be in
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Speaker 2: when they're, you know, such a big retailer, but hey,
6:21
Speaker 2: when you brand yourself as the low cost provider of
6:23
Speaker 2: a lot of these things, Hey, if you're if you're
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Speaker 2: targeting those low income households and they're struggling, organic growth
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Speaker 2: is tough to come by for a big part of
6:32
Speaker 2: your customer base.
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Speaker 3: Yeah, I mean, if you sell virtually everything between their
6:36
Speaker 3: online and in store sales, I think that's almost a
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Speaker 3: fair statement. They could sell virtually anything to anybody. You
6:42
Speaker 3: can't grow faster than GDP forever without taking market share
6:47
Speaker 3: in they're up against the Many articles today are comparing
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Speaker 3: their sales growth to Amazon, which is you can expand
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Speaker 3: on this much better than I can, but probably unfair
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Speaker 3: for various reasons. What their stock has doubled in the
7:01
Speaker 3: past two years, revenues have grown in the mid single digits,
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Speaker 3: up forty percent in the last ten years. What exactly
7:08
Speaker 3: do you want?
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Speaker 2: What do I want?
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Speaker 1: Know?
7:11
Speaker 2: What exactly? You?
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Speaker 3: The American, the the the the investor who is dissatisfied
7:17
Speaker 3: with Walmart's performance. And by the way, there's the stocks
7:19
Speaker 3: up today. So they were down a little bit earlier
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Speaker 3: in pre market, now up. Hard to find much to
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Speaker 3: Maybe there are some particular things they haven't executed well on,
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Speaker 3: but stepping back and comparing their growth to say that
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Speaker 3: of the economy, which is at some point appropriate given
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Speaker 3: their size, what more could an investor want?
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Speaker 2: Yeah, and we've got this companion piece here that you
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Speaker 2: know says Amazon d thrones. Walmart is the world's biggest
7:44
Speaker 2: company by sales. It's true, but it's not all retail sales.
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Speaker 2: If you will get Walmart, remember Walt Walmart is entirely
7:51
Speaker 2: a retailer. Like they don't have a cloud computing business.
7:54
Speaker 2: They don't have a TV business. They have a retail business.
7:58
Speaker 2: Some of it is you know online. A great stat
8:01
Speaker 2: that shows the growth of Walmart online, Walmart's online sales presence.
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Speaker 2: In twenty nineteen, nine percent of Walmart's revenue came from online.
8:11
Speaker 2: Today it's twenty two percent. That's a big shift. I mean,
8:14
Speaker 2: you're talking about going from again, you go back to
8:18
Speaker 2: what Walmart you know made back then twenty twenty, they
8:21
Speaker 2: did about five hundred and fifty nine billion dollars in revenue,
8:23
Speaker 2: So twenty nineteen, given their growth rate, probably somewhere in
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Speaker 2: the five fifty five forty five range. So Walmart back
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Speaker 2: in twenty nineteen did somewhere in the mid fifty billions
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Speaker 2: in e commerce revenue. Today they have seven hundred and
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Speaker 2: thirteen billion dollars in revenue and twenty two percent of
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Speaker 2: that is online, which means that their online sales in
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Speaker 2: the last six years have tripled. That's a huge expansion
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Speaker 2: of a of a very difficult business to operate in
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Speaker 2: and speaks to just how well they're being able to
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Speaker 2: execute while still growing that eco business. Like it's it's
9:02
Speaker 2: tough to you know, be profitable as a retailer when
9:04
Speaker 2: you're making those kinds of investments in a certain type
9:07
Speaker 2: of expansion. So that's pretty big. Amazon full year sales
9:12
Speaker 2: came in its seven hundred and seventeen billion dollars, But
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Speaker 2: remember a decent chunk of that has nothing to do
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Speaker 2: with retail. Without AWS Amazon Web Services, Amazon's twenty twenty
9:23
Speaker 2: five revenue is five hundred and eighty eight billion dollars.
9:26
Speaker 2: So Walmart's still the bigger retailer if you're measuring it
9:29
Speaker 2: that way. But ultimately, yeah, you can say Amazon, you know,
9:34
Speaker 2: sells more stuff. You know, they sell more. Look, they
9:38
Speaker 2: have higher revenue. They're the highest, you know, biggest company
9:41
Speaker 2: by sales in the world, but it's not the biggest
9:46
Speaker 2: retailer necessarily because not all that revenue with Amazon comes
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Speaker 2: from retail h with Walmart. An interesting you know thing
9:55
Speaker 2: that I also just like to point out when you
9:57
Speaker 2: look at the fact that they mentioned, hey, you know,
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Speaker 2: households over one hundred thousand in income are contributing more
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Speaker 2: to our growth. It's important to note that Walmart always
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Speaker 2: likes to reference that one hundred k numbers as kind
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Speaker 2: of a dividing line for income. But I saw this
10:14
Speaker 2: from Michael Santoli this morning, who we occasionally have on
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Speaker 2: the show. Remember that when we talk about, you know,
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Speaker 2: one hundred thousand dollars in income in twenty twenty six,
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Speaker 2: we're talking about the top forty five percent of households.
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Speaker 2: Because like that's that's where that the skew is. One
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Speaker 2: hundred thousand is not top ten percent households anymore, it's
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Speaker 2: top forty five percent. It's a much broader swath of
10:37
Speaker 2: America than you would think if you, you know, were
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Speaker 2: thinking back to you know, one hundred thousand dollars in
10:43
Speaker 2: income back in two thousand and nine or in two
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Speaker 2: thousand or something like that. Forty five percent of American
10:49
Speaker 2: households have income of one hundred thousand dollars or greater today.
10:54
Speaker 2: So it's about a fifty to fifty split that Walmart
10:57
Speaker 2: is referencing there, which is interesting to me. They still
10:59
Speaker 2: use that is the dividing line. They haven't moved it
11:01
Speaker 2: up to you know, one hundred and fifty plus or
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Speaker 2: two hundred and fifty plus. And Mark, I do have
11:06
Speaker 2: to say we were talking yesterday about you know, some
11:08
Speaker 2: cynical things that we were talking about with you know,
11:11
Speaker 2: menus and GLP one sizing and stuff like that. This
11:15
Speaker 2: is another one where I'm a little cynical and that
11:16
Speaker 2: like Walmart's saying, Hey, it's like the high income consumer
11:19
Speaker 2: that's driving this. It could be, but would we consider
11:24
Speaker 2: someone who's in like the fifty sixth percentile for income
11:27
Speaker 2: A high income household doesn't seem right, you know, And
11:34
Speaker 2: it could be that the growth is coming more from
11:36
Speaker 2: that demo than from the ninetieth percentile household. Yees.
11:40
Speaker 3: That's this is why it's important to ask the types
11:42
Speaker 3: of questions that you're answering for people. When someone makes
11:45
Speaker 3: a statement about inequality or something, ask how they're defining
11:49
Speaker 3: the terms that they're using.
11:50
Speaker 2: Right, You have to remember exactly how unequal things are
11:53
Speaker 2: these days when when looking at income distributions. Yes, yes,
11:58
Speaker 2: take a quick break here. When we come back, let's
12:00
Speaker 2: talk a little bit about oil and Iran.
12:04
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13:08
Speaker 2: Market's talk a little bit about oil markets and what
13:11
Speaker 2: we are seeing there. West Texts Intermediate today crossing sixty
13:16
Speaker 2: six dollars per barrel and up almost four dollars a
13:21
Speaker 2: barrel just in the last couple of days. If we
13:23
Speaker 2: take over the last month, it's gone from fifty nine
13:25
Speaker 2: to forty four up to sixty six thirty one, So
13:28
Speaker 2: that's more than a ten percent move in crude oil
13:31
Speaker 2: prices during that time. TRIPAA National Averagur gas prices hasn't
13:35
Speaker 2: moved quite that much. It's up about four to four
13:37
Speaker 2: and a half percent over that time. Just you know,
13:41
Speaker 2: various different reasons why the price of crude may not
13:44
Speaker 2: flow directly into the price at the pump, but it
13:48
Speaker 2: sure seems like the main thing that is in focus
13:51
Speaker 2: here is a potential conflict with Iran. This being suggested
13:56
Speaker 2: due to the build up of US and air forces
14:01
Speaker 2: throughout the region, including another aircraft carrier group that is
14:05
Speaker 2: currently transiting through the Mediterranean Sea and route to the
14:11
Speaker 2: Middle East. So that's a key thing that is driving
14:15
Speaker 2: this year. And ultimately it's you know, a question of hey,
14:21
Speaker 2: if there is any military action in the Middle East,
14:24
Speaker 2: how large is it, how prolonged it, and what is
14:27
Speaker 2: the disruption to oil production or transportation as a result.
14:33
Speaker 2: And the answer is, we don't really know any of
14:36
Speaker 2: that at this point, since nothing has happened yet.
14:39
Speaker 3: You've asked all the key questions and as you say,
14:42
Speaker 3: no one has the answers. And it matters for inflation, obviously,
14:47
Speaker 3: a quick jump followed by a decline in the price
14:51
Speaker 3: of oil. And there are historical analogs to all these
14:55
Speaker 3: different sort of patterns of quick this year we saw them. Yeah,
14:58
Speaker 3: there you go. There was no so evident that jump
15:01
Speaker 3: in headline inflation because food and energy are included in
15:05
Speaker 3: the definition of headline as distinguished from core that the
15:10
Speaker 3: BLS calculates, and other measures that other researchers calculate that
15:13
Speaker 3: try to trim outliers, the big movements up and down
15:17
Speaker 3: to get an inflation's trend. This kind of stuff, the
15:19
Speaker 3: little blips, they can influence core, but they don't necessarily
15:22
Speaker 3: influence headline. Excuse me, but they don't necessarily make their
15:25
Speaker 3: way through to core via inputs that get more expensive
15:30
Speaker 3: when oil gets more expensive, and via expectations too, when
15:33
Speaker 3: people say gas prices GOP, we all freak out, myself included.
15:36
Speaker 3: That pushes up inflation expectations. If that goes on, obviously
15:39
Speaker 3: it can become a problem for the FED, like it
15:42
Speaker 3: was in the seventies. The oil price shocks were arguably,
15:45
Speaker 3: though some researchers disagree, not the Fed's fault, but they
15:49
Speaker 3: did influence the best policy. The FED missed that at
15:52
Speaker 3: the time, and inflation was higher than it would have
15:55
Speaker 3: been perhaps had they read the structure of the economy
15:57
Speaker 3: right and what was happening to the inflation right. So
16:00
Speaker 3: this just makes the Fed's job depending, Chuck. As you
16:03
Speaker 3: point out in your sort of key questions which we
16:05
Speaker 3: don't have answers to, it could make the fed's job
16:08
Speaker 3: more complicated.
16:09
Speaker 2: Yeah, and look, none of us know exactly. None of
16:13
Speaker 2: us have any idea what's going to happen. We all have,
16:16
Speaker 2: you know, different theories as to what may or may
16:18
Speaker 2: not be going on. There are a couple different ways
16:20
Speaker 2: that you can look at this, just because again I
16:23
Speaker 2: think that when we're talking about this in the context
16:25
Speaker 2: of you know, financial markets and trying to inform your
16:28
Speaker 2: decision making on this, the first question is, hey, is
16:31
Speaker 2: there something that is going to happen? And what I
16:34
Speaker 2: will say on this again, I don't know, Like I
16:37
Speaker 2: don't have any idea, you know, with one hundred percent certainty.
16:41
Speaker 2: But what we do have is historical precedent for what's
16:49
Speaker 2: required from a logistical perspective in terms of military build
16:54
Speaker 2: up prior to any kind of significant action. And what
16:58
Speaker 2: I can tell you is that the scale of build
17:01
Speaker 2: up that we are seeing now is absolutely in line
17:06
Speaker 2: with what you would see if you were expecting the
17:11
Speaker 2: US to take military action somewhere in the Middle East
17:14
Speaker 2: in the very near future, likely through combined air strikes
17:21
Speaker 2: and maybe special operation forces and you know limited you
17:26
Speaker 2: know use of of those types of units. That's probably
17:30
Speaker 2: what the bulk of it will be, along with you know,
17:32
Speaker 2: naval air support and things along those lines. That's that's
17:35
Speaker 2: kind of what the build up looks like right now
17:39
Speaker 2: when you talk about you know, not just the ships
17:41
Speaker 2: that have been tasked to the area, but when you
17:43
Speaker 2: talk about, hey, you know, the sheer volume of you know,
17:47
Speaker 2: aerial support units like refueling tankers, a wax command to
17:53
Speaker 2: control you know, aircraft and things like that. There's been
17:57
Speaker 2: a lot of movement and this is at very high cost.
17:59
Speaker 2: Like it's not cheap easy to do this. It takes
18:01
Speaker 2: a lot of time, takes a lot of manpower, you know,
18:04
Speaker 2: choose up morale for crews that you know, have had
18:08
Speaker 2: their deployments extended and things like that, and obviously cost
18:11
Speaker 2: a lot of money to move this stuff, you know,
18:13
Speaker 2: beyond all all of that, So you look at this
18:16
Speaker 2: and you say, generally, when you see this kind of
18:19
Speaker 2: of build up, it suggests some kind of military action
18:23
Speaker 2: is is imminent. The counter to that is, hey, if
18:26
Speaker 2: you're trying to apply maximum pressure to Iran, when negotiating something.
18:31
Speaker 2: Don't you really want the military build up to look real?
18:36
Speaker 2: And the answer is yes, you do. But there's probably
18:39
Speaker 2: a very short window where you can maintain that. Like
18:42
Speaker 2: you you can't keep this level of military readiness in
18:46
Speaker 2: the region in perpetuity for the very reasons I outlined, cost, logistics, morale, Like,
18:53
Speaker 2: there's a whole bunch of reasons why you can't do that,
18:56
Speaker 2: and so it gives you a very limited window in
18:58
Speaker 2: which to negotiate with maximum potential leverage of Hey, like,
19:04
Speaker 2: look what's going on around you, you know, watch out. Yeah,
19:08
Speaker 2: So I think that ultimately we're in that narrow window
19:12
Speaker 2: right now where I think, if you don't see a
19:14
Speaker 2: successful negotiation in the next few weeks, the odds of
19:17
Speaker 2: military action are pretty high, unfortunately, and we'll have to see,
19:22
Speaker 2: you know, exactly what plays out, and that's what traders
19:24
Speaker 2: are pricing in when they look at energy markets as well.
19:29
Speaker 2: Let's take a quick break here. When we return, we've
19:31
Speaker 2: got Wall Street Watch next.
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20:00
Speaker 4: Modestly and negative territory is Wall Street digests fourth quarter
20:04
Speaker 4: earnings from Walmart posted before the opening bell. Investors are
20:08
Speaker 4: also keeping a close eye on energy markets amid escalating
20:12
Speaker 4: tensions between the US and Iran. Right now, the Dow
20:15
Speaker 4: is down about a quarter percent or one hundred and
20:17
Speaker 4: twenty points, SMP five hundred down over tenth of a
20:20
Speaker 4: percent or eight points lowered, Nasdaq dipping only thirteen points.
20:25
Speaker 4: We're also two thousands down by four tenths of one percent.
20:28
Speaker 4: Tenure Treasure reieled flat at the moment at four point
20:31
Speaker 4: zero nine percent, and crewde Oil up almost two percent higher,
20:36
Speaker 4: trading at sixty six dollars and forty one cents a barrel.
20:40
Speaker 4: Walmart reported solid quarterly sales, driven by gains and grocery
20:44
Speaker 4: and online purchases, as the big box retailer continued to
20:48
Speaker 4: attract more shoppers from all income groups. However, Walmart's full
20:52
Speaker 4: your outlook fell short of street expectations. Walmart stock is
20:56
Speaker 4: up by over two percent now after starting the day
21:00
Speaker 4: in negative territory. Meanwhile, Carvarana shares are sinking six percent
21:04
Speaker 4: after the online used car platform disappointed with its quarterly
21:07
Speaker 4: earnings despite record car sales boosting revenue elsewhere by now
21:12
Speaker 4: pay Later from Klarna swung to a quarterly loss despite
21:16
Speaker 4: a jump in revenue as it more than doubled its
21:19
Speaker 4: banking customers. That that stock sinking by twenty three percent.
21:23
Speaker 4: Beer Burger Molsen Cores is seeing its stock drop over
21:26
Speaker 4: four percent after reporting a week forecast. The company CEO
21:30
Speaker 4: said that it plans to invest in and expand lower
21:33
Speaker 4: priced brands. Deer stock rallying ten percent after the equipment
21:37
Speaker 4: makers said demand in the construction in small agriculture markets
21:41
Speaker 4: was recovering, and Wayfair stock is plunging nine percent despite
21:45
Speaker 4: the online furniture retailer posting its first annual sales gain
21:49
Speaker 4: since twenty twenty. I'm Tucker Silva and that is Wall
21:52
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22:11
Speaker 2: Mark. We got a piece here in Bloomberg talking about
22:14
Speaker 2: the FED meeting minutes that came out yesterday. What did
22:17
Speaker 2: we learn from the minutes of the January meeting?
22:20
Speaker 3: Anything interesting, Nothing that should have been surprising, but maybe
22:26
Speaker 3: interesting considering how the overwhelming consensus, at least among the
22:31
Speaker 3: chattering classes financial journalists and stuff like that, is that
22:35
Speaker 3: the FED will continue to reduce interest rates. We learned
22:40
Speaker 3: what we should have known, which is that when GDP growth,
22:46
Speaker 3: that is, gross domestic product is the way we measure
22:48
Speaker 3: economic growth, when it's running way above what most people
22:52
Speaker 3: think is potential or trend or the economy's ability to
22:57
Speaker 3: create stuff, the supply, the productive potentially of the economy,
23:01
Speaker 3: the supply side of the economy. When GDP's growing much
23:03
Speaker 3: faster than that, which by all appearances is and has
23:07
Speaker 3: been for a few quarters, when unemployment is really low
23:11
Speaker 3: and the labor market is showing signs of, say, firming
23:14
Speaker 3: up after maybe a little bit of weakness last year, Chuck,
23:17
Speaker 3: you don't cut interest rates in an environment like that.
23:19
Speaker 3: If inflation is above your target, you should probably be
23:24
Speaker 3: raising them, at least according to conventional economic thinking, which
23:28
Speaker 3: is what the FED models incorporate, or at the very least,
23:33
Speaker 3: if maybe you're worried about the economy because you have
23:35
Speaker 3: some special knowledge about a shock that could hit it,
23:39
Speaker 3: and we could talk more about what those types of
23:41
Speaker 3: things are. At the very least, though, you should be
23:45
Speaker 3: holding rates steady, not even think about cutting them, perhaps
23:48
Speaker 3: think about raising them. If inflation continues to remain above
23:52
Speaker 3: the fed's long term two percent goal.
23:55
Speaker 2: Mark, what's the case for raising interest rates? You know, again,
24:00
Speaker 2: when we look at where inflation sits right now, and
24:03
Speaker 2: we don't have the latest PPI or PCE data yet,
24:08
Speaker 2: but CPI year over year and core CPI are two
24:12
Speaker 2: four and two five, respectively. And we've talked about this,
24:15
Speaker 2: you know, quite a bit where hey, ultimately the FED,
24:19
Speaker 2: at any other central bank is let's talk about the
24:22
Speaker 2: FED actually, just because it really matters in the US,
24:25
Speaker 2: the FED post nineteen, post World War two has not
24:30
Speaker 2: been able to achieve a long run two percent inflation
24:34
Speaker 2: level during any decade. They just haven't been able to.
24:39
Speaker 2: And so we've talked about how, look, you can have
24:41
Speaker 2: perfectly cromulent economies that the nineteen nineties is a key
24:45
Speaker 2: example of this, where inflation for the full decade is
24:48
Speaker 2: above two percent. In the nineties was almost three percent
24:50
Speaker 2: for the full decade. What's the case for the FED
24:54
Speaker 2: raising interest rates given the fact that CPI and core
24:59
Speaker 2: CPI are both two and a half or below. PCE
25:02
Speaker 2: and core PCE are in the high twos, they're two
25:05
Speaker 2: seven seven and two seven nine, respectively, And PPI is
25:08
Speaker 2: the only one that's still showing, you know, any kind
25:10
Speaker 2: of inflationary pressure north of three percent. What's what's the
25:14
Speaker 2: case for a hike being warranted as being discussed by
25:19
Speaker 2: some feed efficients.
25:20
Speaker 3: Yeah, the case is too pronged. One prong is your
25:24
Speaker 3: goal is too trend. Measures of trend inflation put it
25:29
Speaker 3: somewhere in the high twos, maybe low threes. That's that's
25:33
Speaker 3: pillar number one. The other pillar or prong or whatever
25:37
Speaker 3: to the case is the economy is appears to be
25:41
Speaker 3: growing faster than what almost everybody thinks is potential GDP,
25:46
Speaker 3: unless you think potential GDP is sped up by something
25:49
Speaker 3: like AI. But that's speculative, and that may that may,
25:52
Speaker 3: by the way, call for higher not lower interest rates,
25:54
Speaker 3: But I'm gonna go with the opt I'm gonna go
25:56
Speaker 3: with the favorable UH interpretation of that. Unless you think
26:00
Speaker 3: the economies, the economy's ability to supply goods and services
26:04
Speaker 3: is expanding at a higher rate and will continue to
26:09
Speaker 3: Then they may have put their foot too heavily on
26:13
Speaker 3: the gas. That's the second in case. Both of those
26:15
Speaker 3: arguments are sort of traditional arguments subscribed to by the
26:19
Speaker 3: vast majority of economists, though not all agree on how
26:23
Speaker 3: to interpret that interpret exactly what we're seeing.
26:27
Speaker 2: So ultimately, like if we look at I pulled up
26:32
Speaker 2: just the long run data on from the Cleveland Fed,
26:34
Speaker 2: who calculates you know, median CPI, and I guess the
26:39
Speaker 2: question that I'm asking is even in much of the
26:43
Speaker 2: twenty tens, median CPI aside from like the very early
26:47
Speaker 2: part of the decade when we were, you know, coming
26:49
Speaker 2: out of the financial crisis was generally running in the
26:52
Speaker 2: mid twoes, and throughout most of the two thousands, it
26:57
Speaker 2: was generally running in the mid twoes to low threes.
27:00
Speaker 2: Same thing nineteen nineties, median CPI was generally, you know,
27:03
Speaker 2: aside from a brief period around kind of the Asian
27:07
Speaker 2: you know, financial crisis and blow up there, you know,
27:12
Speaker 2: you were basically running somewhere in the mid twoes to
27:14
Speaker 2: low threes. What's what's the case for like those were
27:20
Speaker 2: still perfectly fine economies with inflation in the ballpark of
27:25
Speaker 2: where it was now.
27:26
Speaker 3: The short answer is real interest rates, the right level
27:32
Speaker 3: of real interest rates. The level of real and when
27:34
Speaker 3: I say real, I mean the stated rate minus inflation.
27:38
Speaker 3: That is what determines the level of economic activity. Right now,
27:41
Speaker 3: the Fed Funds rate is three and a half percent,
27:44
Speaker 3: give or take right, I didn't miss a rate cut
27:47
Speaker 3: tot up. Okay, inflation is I'm gonna be generous here,
27:51
Speaker 3: I think and say it's a two and a half.
27:53
Speaker 2: That means the real even two and three quarters? Yeah, twokay, quarters?
27:56
Speaker 3: Fine, So real Fed funds is somewhere between two point
28:00
Speaker 3: five and one. Question is that too high, too low,
28:04
Speaker 3: or just right? I think honest people can disagree on
28:07
Speaker 3: the answer to that question. What I don't think you
28:10
Speaker 3: can disagree on is that the economy seems to be
28:14
Speaker 3: running hot. Indeed, politicians have told us we want to
28:18
Speaker 3: run this economy hot. Sure, we're going to shovel rebates
28:21
Speaker 3: at people. We want monetary policy to get easier. We're
28:26
Speaker 3: gonna do backdoor monetary policy by purchasing mortgage backed bonds
28:32
Speaker 3: government is to do. We're gonna hold off again on
28:35
Speaker 3: requiring people to pay down student loans. I can give
28:37
Speaker 3: you lots of different We can give you lots of
28:39
Speaker 3: different examples. So you've got growth running above trend, You've
28:44
Speaker 3: got unemployment very low by historical standards.
28:48
Speaker 2: I mean I would if if we had to.
28:50
Speaker 3: Come to a compromise, you and I, or me and
28:52
Speaker 3: someone who is more dubbish just by disposition than I.
28:56
Speaker 3: I tend to be hawkish, that's my ideology. That's not
28:59
Speaker 3: really although I think it is empirical because we all
29:02
Speaker 3: know what happened. There's a bias toward inflation in monetary policy.
29:06
Speaker 3: There just is. There are different reasons that researchers have
29:09
Speaker 3: possible design. Yeah, I guess you could say that it's Yeah,
29:13
Speaker 3: it's certainly by human constitution and design. You tend to
29:18
Speaker 3: WinCE when you think about higher unemployment but slightly higher inflation,
29:21
Speaker 3: and myself included, Well, I could live with that if
29:23
Speaker 3: that means more people have jobs. Right, I just asked
29:26
Speaker 3: for slightly higher wages. I'm no worse off in terms of.
29:28
Speaker 2: Even though twenty twenty two suggests that's not the case.
29:31
Speaker 3: Well, when it gets when it seems like it's out
29:32
Speaker 3: of control, and when it hit nearly ten percent of
29:35
Speaker 3: rounding up a little bit.
29:36
Speaker 2: That was more.
29:39
Speaker 3: That was so shocking.
29:40
Speaker 2: Hey, is this is too much?
29:41
Speaker 3: Yeah, it felt like everything was out of control when
29:44
Speaker 3: prices start to spiral, and spirals a little bit dramatic,
29:47
Speaker 3: but there is a rate beyond which a rate of
29:51
Speaker 3: not just change, but change and change. That's what was
29:54
Speaker 3: driving people to despair because you wonder is this going
29:59
Speaker 3: to I was asking the question myself, is the FED
30:01
Speaker 3: doing enough to stop this? Because there are some economic
30:04
Speaker 3: models in which expectations are backward looking and you just
30:08
Speaker 3: get inflation accelerating because people start to bake it in.
30:13
Speaker 3: This is the prevailing I think theory of why inflation
30:18
Speaker 3: was was so vexing in the nineteen seventies, so that
30:22
Speaker 3: that memory has been seared into our our minds. Chuck,
30:25
Speaker 3: and I'm not going to argue that we should impose
30:28
Speaker 3: putitive measures on the economy to get information down to
30:31
Speaker 3: two from two point five. Ideologically, as I say, I'm
30:34
Speaker 3: a little hawkish, I'd argue for a more proactive suppression
30:39
Speaker 3: of inflation. But I could see the other side to
30:41
Speaker 3: what worries me now is that everybody's lining up to
30:44
Speaker 3: run the economy hot, and the president's about to install
30:47
Speaker 3: his puppet at the FED. My guess is that doesn't
30:50
Speaker 3: bode well for inflation.
30:52
Speaker 2: Let's take a quick break when we return, Let's talk
30:57
Speaker 2: a little bit about private equity and prime credit. It's
31:00
Speaker 2: been a little while since we've discussed, and let's do
31:04
Speaker 2: that right after.
31:04
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31:30
Speaker 2: All right, Mark, we had Toucher was kind of have
31:32
Speaker 2: to put a couple pieces in our stack regarding private markets,
31:38
Speaker 2: you know, private equity, private credit, all that fun stuff.
31:42
Speaker 2: What he didn't put in the stack today was this one.
31:47
Speaker 2: Did you see the Blue Owl news overnight? I literally
31:51
Speaker 2: was going back and forth on including it. Damn well,
31:54
Speaker 2: you should have included it because I'm gonna talk about it.
31:57
Speaker 4: Trust my gut, I'll trust my gut.
31:59
Speaker 2: You know what I like? Yeah, you know you know
32:00
Speaker 2: what I like? I do. So here's the headline from Reuters.
32:04
Speaker 2: Blue Owl sells one point four billion from three credit
32:06
Speaker 2: funds permanently halts redemptions at one of the funds. So
32:10
Speaker 2: here's the deal. Look, I don't make the rules. Okay,
32:14
Speaker 2: when you temporarily impose a gate to prevent investors from
32:19
Speaker 2: leaving in a liquid fund, you cannot remove that gate
32:23
Speaker 2: without everyone trying to run for the exit, because any
32:27
Speaker 2: self respecting person who thinks they're smart, whether they are aren't,
32:31
Speaker 2: says hey, you're not letting me leave here. The second
32:35
Speaker 2: you open that door, I'm leaving. That's just how it works.
32:38
Speaker 2: It's not just a finance thing. It's in anywhere thing.
32:41
Speaker 2: If you're somewhere and someone says, hey, you can't go
32:43
Speaker 2: that way, as soon as that door opens, and you're like,
32:46
Speaker 2: I'm going that way, I'm out. And so this is
32:50
Speaker 2: the problem with trying to temporarily gate a fund. It
32:54
Speaker 2: almost always turns into a permanent gait. Like it's again,
32:57
Speaker 2: I don't make the rules. This is just how it goes. Yeah,
33:00
Speaker 2: So you know the clear thing that you can say
33:04
Speaker 2: here is that, Look, the reason why they're permanently gating
33:07
Speaker 2: it is because so many investors tried to leave that
33:11
Speaker 2: they can't meet redemptions without selling a bunch of stuff
33:13
Speaker 2: at way lower prices than they're comfortable selling, which means
33:17
Speaker 2: that the market for this stuff is not really that robust.
33:20
Speaker 2: And of course none of this is actually marked to
33:22
Speaker 2: market on a daily basis, because that's the allure of
33:25
Speaker 2: private credit gets pitched as well. It smooths out the volatility. No,
33:29
Speaker 2: it just hides it. Your home each day would have
33:33
Speaker 2: a different price if you chose to sell it. It's
33:36
Speaker 2: just most of the time you sit in it for
33:37
Speaker 2: ten years and then you sell it and you're like, oh,
33:39
Speaker 2: I made X number of dollars over ten years. It
33:41
Speaker 2: doesn't mean it wasn't a volatile ride along the way.
33:45
Speaker 2: It's just that you didn't try to sell it every day,
33:47
Speaker 2: and there's only one of your homes, so you can't
33:49
Speaker 2: get a market price for it. With private credit. Look,
33:53
Speaker 2: the price does change every day, it's just they don't
33:55
Speaker 2: market to market because they're not trying to sell it
33:58
Speaker 2: on any particular day. But what I got to tell
34:00
Speaker 2: you is that what this is saying about the health
34:04
Speaker 2: of that private credit space is that the values that
34:09
Speaker 2: they would expect to get are not what they want.
34:12
Speaker 2: And the fact that they have to sell some other
34:14
Speaker 2: stuff in order to meet redemptions is not great.
34:20
Speaker 3: Yeah, I think the lesson here if you're an individual investor,
34:22
Speaker 3: and this applies to other types of investments too. It
34:24
Speaker 3: used to apply to money market funds less so before that,
34:27
Speaker 3: more so before they changed the regulations regarding what these
34:33
Speaker 3: funds can own and how often they have to make
34:37
Speaker 3: those funds available to depositors effectively, because that's what you are.
34:40
Speaker 3: In a money market fund. It's not much different from
34:42
Speaker 3: a bank.
34:43
Speaker 2: But all it is it is it's very different from me. Well,
34:46
Speaker 2: I'm sorry.
34:47
Speaker 3: In in a sort of financial sense. In a more
34:52
Speaker 3: abstract sense, yes, it is not. There's nothing.
34:54
Speaker 2: It is completely different that there is a huge amount
34:57
Speaker 2: of risk in a money market fund, actually.
34:59
Speaker 3: Relative in the sense that you're borrowing short lending longer.
35:03
Speaker 3: There's this mismatch where you can have a run. So
35:06
Speaker 3: in an abstract sense, it is a bad I'm not
35:09
Speaker 3: saying it's FDIC. In short, I'm not saying a money
35:11
Speaker 3: market fund is a physical.
35:13
Speaker 2: Don't say it's a bank. Don't say it's a bank.
35:16
Speaker 3: You only said that three times. I'm not picking up
35:19
Speaker 3: say it's not a bank. Okay, but it can there
35:23
Speaker 3: were times, and it's still theoretically possible that they could
35:26
Speaker 3: sort of close their doors to protect remaining shareholders, not
35:30
Speaker 3: unlike an institution whose name I won't mention. Uh So,
35:34
Speaker 3: you just have to know what you're buying when you
35:36
Speaker 3: buy it. And if you need something to be money
35:38
Speaker 3: good and you might need it for an emergency, or
35:41
Speaker 3: you might freak out if you thought you could get
35:43
Speaker 3: it but you can't. Private market investments are definitely not
35:47
Speaker 3: for you.
35:48
Speaker 2: And this is I think one of the problems is
35:51
Speaker 2: oftentimes people don't realize that until they've moved into them,
35:54
Speaker 2: and then they're sitting there saying, hey, I want to
35:56
Speaker 2: get out of this, Sorry you can't. Oh well, I
35:58
Speaker 2: didn't you know. I never thought about it that way.
36:01
Speaker 2: And this is again one of the dangers that you
36:04
Speaker 2: have of private markets relative to public ones is that, hey,
36:08
Speaker 2: you might end up investing in something that doesn't meet
36:11
Speaker 2: your liquidity needs, doesn't meet your risk tolerance, and by
36:14
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36:16
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36:21
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37:59
Speaker 2: Tu Big Reese's fan Massive Massive about though, the grandson
38:06
Speaker 2: of the founder of Reesus says that Hershey has turned
38:09
Speaker 2: the brand of crap and there They've changed the recipe apparently,
38:13
Speaker 2: and he's not happy about it. So I'm gonna have
38:15
Speaker 2: to do a little sampling and taste tests from some
38:17
Speaker 2: different vintages if I can get my hands on him.
38:20
Speaker 2: Quick Break hour two in just a little bit,