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Strong earnings ease investors minds after shaky economic data releases · The Financial Exchange Show

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Speaker 2: Welcome to this Monday edition of the Financial Exchange. I
1:14
Speaker 2: hope everyone had a great weekend was able to enjoy
1:17
Speaker 2: the beautiful sunshine that we have. Paul Lane, Mark Vendetti,
1:21
Speaker 2: and Tucker Silva here with you as we kick off
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Speaker 2: the week here. Markets remain relatively mixed, almost flat at
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Speaker 2: the moment. What we have to kick off this week,
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Speaker 2: we'll get the FED Meeting minutes. Those are going to
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Speaker 2: come out at two o'clock this afternoon that will recap
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Speaker 2: what was discussed in the late July meeting for the
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Speaker 2: Federal Reserve. We also have the Federal Reserve out in
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Speaker 2: Jackson Hole, Wyoming for their annual symposium, where we'll be
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Speaker 2: looking to glean anything that we can on commentary from
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Speaker 2: Jerome pal for FED policy changes. And then in terms
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Speaker 2: of earnings, this week, we've got a couple of major
1:55
Speaker 2: retailers that will be kicking off the earn at the
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Speaker 2: end of the earnings and where we've got about ninety
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Speaker 2: plus percent of the S and P five hundred has
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Speaker 2: reported their Q two earnings, but we're gonna get Walmart,
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Speaker 2: Target and Low's are gonna be some of the major
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Speaker 2: retailers that will come out this week.
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Speaker 3: Just to clarify real quick.
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Speaker 4: Meeting minutes are Wednesday.
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Speaker 3: Wednesday.
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Speaker 2: It'll be really so oh I thought I saw that
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Speaker 2: they were kind out to day, so that will be Wednesday.
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Speaker 3: We will be seeing what a.
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Speaker 2: Jerome pal has to say out in Jackson Hole. Other
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Speaker 2: than that, it's relatively quiet in terms of economic reports.
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Speaker 2: The items that I mentioned previously are gonna be of
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Speaker 2: the major focus. The Federal Reserve won't get together for
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Speaker 2: its next meeting until mid September the sixteenth and seventeenth,
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Speaker 2: so we're not gonna see anything there. But we'll kick
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Speaker 2: off this show just discussing sort of what we are
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Speaker 2: looking at on the weekhead. And I want to start
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Speaker 2: with the labor market because that's one of the things
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Speaker 2: that they will be discussing in Jackson Hole symposium. Just
2:56
Speaker 2: where we sit at the moment, we had a job
2:59
Speaker 2: support for or the month of July that was pretty
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Speaker 2: starring in that we saw major reductions in terms of
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Speaker 2: the job's growth across the country. Two hundred eighty five
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Speaker 2: thousand jobs were revised off of May and June's reports,
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Speaker 2: where we saw respectively, in the mid teens of fourteen
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Speaker 2: and fifteen thousand jobs added in those months nineteen thousand
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Speaker 2: and fourteen thousand jobs for the month of May and June,
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Speaker 2: and the focus will be here. Initially, when that job's
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Speaker 2: report came out, there was really overwhelming sentiment that we
3:33
Speaker 2: would see a rate cut for this September meeting. Now,
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Speaker 2: you did have an inflation report that came out recently
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Speaker 2: that was a little bit mixed. I would say that
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Speaker 2: probably not as hot as some people anticipated. But also
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Speaker 2: on the wholesale side of things, we had a producer
3:50
Speaker 2: price inflation report that did skew a little bit higher
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Speaker 2: than expectations. And the labor market that we sit in
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Speaker 2: at the moment, what we're looking at is and I
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Speaker 2: was just discussing this earlier this morning with Jim Palito
4:03
Speaker 2: on his program, where twenty twenty one and twenty twenty
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Speaker 2: two mark were times where we had this great resignation.
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Speaker 2: There was a tremendous amount of people leaving and trying
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Speaker 2: to find higher paying jobs. We had fifty million people
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Speaker 2: quit their jobs in twenty twenty two. That set a
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Speaker 2: record according to the Jolt Support. But now it's much
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Speaker 2: more of a sort of low fire, low higher job
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Speaker 2: market that we find ourselves in where companies aren't laying
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Speaker 2: off a tremendous amount of people. But at the same
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Speaker 2: point in time, everyone seems to be rather complacent and
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Speaker 2: not willing to just jump ship yet in terms of
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Speaker 2: their job mobility.
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Speaker 3: Here.
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Speaker 5: Yeah, I think with respect to the FED and how
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Speaker 5: it views the labor market, you have to keep in
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Speaker 5: mind what the FED does. It controls the money supply,
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Speaker 5: and it tries to target interest rates. I always started
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Speaker 5: at a very high level when we start these conversations,
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Speaker 5: but I think it's useful because most of us don't
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Speaker 5: think about this every day. So the Fed's job is
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Speaker 5: to balance the forces that push inflation up against the
4:58
Speaker 5: forces that push employment down. You can think of the
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Speaker 5: FED as the economy's thermostat. When the economy gets too hot,
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Speaker 5: and that's the FED zone fault. By the way, when
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Speaker 5: the economy gets too hot, it's overstimulate. Usually it's overstimulated demand.
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Speaker 5: It has to push on the brakes or tap the
5:13
Speaker 5: brakes to slow the economy, to slow demand, to slow
5:17
Speaker 5: upward pressure on prices. That's why I say the FED
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Speaker 5: is the economy's thermostat that works most of the time.
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Speaker 5: There are crises when that analogy doesn't work. But most
5:26
Speaker 5: of the time normal business cycles that work. So you
5:29
Speaker 5: just keep that in mind. That's what the FED is doing.
5:31
Speaker 5: It's trying to gauge now, the state of the labor market.
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Speaker 5: And you just ticked off a bunch of recent indicators,
5:37
Speaker 5: some of which point to a little bit of loosening
5:38
Speaker 5: of labor market conditions. But they were quite tight for years.
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Speaker 5: And arguably that quite tight. And what do I mean
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Speaker 5: by tight? Unemployment historically in the fives or the fours
5:48
Speaker 5: was considered.
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Speaker 3: Good, tremendous. Yeah, right.
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Speaker 5: You would not have fretted a lot about unemployment in
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Speaker 5: the fives unless you had some reason to believe that
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Speaker 5: the economy's natural rate, so to speak, was much lower.
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Speaker 5: Questionable proposition, and I'll just leave it there. The economy,
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Speaker 5: the labor market remains quite healthy by most measures. There's
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Speaker 5: some evidence is slowing. You pointed to slowing payroll growth.
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Speaker 5: It slowed twenty twenty three to twenty twenty four, and
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Speaker 5: again it slowed from twenty twenty four to twenty twenty five,
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Speaker 5: but again it was breakneck, So there are reasons to
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Speaker 5: discount that. Overall unemployment, what do we have four point
6:23
Speaker 5: two percent for the unemployment rate, which is probably the
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Speaker 5: most widely followed broad measure of labor market health. That's
6:31
Speaker 5: an impressively low rate. Still, it might be on its
6:33
Speaker 5: way up, in which case my comments will sound foolish.
6:35
Speaker 5: But based on what we know today, the labor market
6:38
Speaker 5: remains steady as you characterize it. It's not exciting like
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Speaker 5: it was earlier on in this expansion, but that was
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Speaker 5: not sustainable, as evidenced by the high rate of inflation.
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Speaker 5: So what is the Fed going to make of all this?
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Speaker 5: Thinking about things through the lens that they do, they
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Speaker 5: view inflation for which they are responsible, and don't forget
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Speaker 5: that they're not responsible for anything but inflation and unemployment.
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Speaker 5: But they probably weighed inflation a little bit more. What
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Speaker 5: is their assessment of things right now? It's probably that
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Speaker 5: the economy is running it about potential GDP growth according
7:13
Speaker 5: to like the Atlanta Fed's GDP now, which you guys
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Speaker 5: talk about a lot, is a little above what like
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Speaker 5: two percent, it's like two and a half I think
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Speaker 5: now something like that. That's above the economy's potential. That's
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Speaker 5: above the speed limit of the economy, if you like.
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Speaker 5: So if that's gonna be careful and they know this.
7:27
Speaker 5: They don't want to push too hard. If they do,
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Speaker 5: they'll they'll spark another round of high inflation. Inflation properly
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Speaker 5: measured by that, I mean, it's it's trend. What's really
7:37
Speaker 5: going on remains elevated. FED knows this. It's why they
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Speaker 5: haven't eased more.
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Speaker 2: Yeah, we're looking at the headline inflation numbers that we saw.
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Speaker 2: Would that report come out a week or two ago,
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Speaker 2: early early August together?
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Speaker 3: Yeah? Yeah, last week? Right? Last week?
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Speaker 2: Yeah, two point seven percent was the headline CPI figure
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Speaker 2: year over year month over month, I believe was it
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Speaker 2: point two.
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Speaker 5: Point three for headline and point two for core?
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Speaker 2: Right, and then core core we have running at three
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Speaker 2: three percent?
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Speaker 5: Tuckersification, does you get paid for the market ultra?
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Speaker 3: Last week? I don't know.
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Speaker 2: It was totally off the grid. He was in Margueritaville.
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Speaker 2: But it's to a point where the long term target
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Speaker 2: is two percent. You know, it's been skewing, like we mentioned,
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Speaker 2: whether you look at headline or or core two seven
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Speaker 2: or or three percent. So now the focus of this
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Speaker 2: meeting will be any sort of commentary that they have
8:32
Speaker 2: on the rate front or how they view where inflation
8:35
Speaker 2: is and mark you always bring up. You know, the
8:37
Speaker 2: long term target is two I get it, that's their
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Speaker 2: stated goal. But is it really that problematic to have
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Speaker 2: two and a half percent or three percent and.
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Speaker 5: People expect too and you surprise them with three And
8:49
Speaker 5: the key operative word there is surprised. That will stimulate
8:52
Speaker 5: demand and inflation. So yeah, it is a problem if
8:55
Speaker 5: you try to if you're a policymaker, you try to
8:57
Speaker 5: surprise the market by printing more money than they expect.
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Speaker 5: I'm oversimplifying a little bit here, but the way monetary
9:04
Speaker 5: policy works is by surprising people. If an increase in
9:08
Speaker 5: the money supply and therefore inflation is expected, it's not
9:11
Speaker 5: an influence demand. People price it in so to speak,
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Speaker 5: it's unanticipated Monetary shocks is a sort of technical way
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Speaker 5: to describe it, but in plain English. When the Fed
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Speaker 5: prints more money than people were expecting, think about it.
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Speaker 5: You see you're a producer, your company, you see your
9:28
Speaker 5: demand go up? Do you increase prices? Is it a relative?
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Speaker 3: Are people? Excuse me?
9:34
Speaker 5: Are people moving or people's preferences changed? Are they buying
9:37
Speaker 5: more of what you sell because they want it more,
9:39
Speaker 5: like it more? Or is that just inflation. You may
9:42
Speaker 5: not know. I'm getting a little bit into economic theory here,
9:45
Speaker 5: but it's just useful to keep in mind that the
9:47
Speaker 5: FED can influence demand in the short term by surprising people.
9:52
Speaker 5: I'm oversimplifying a bit. It's actually that plus the fact
9:56
Speaker 5: that not all prices adjust in the short term, so
9:58
Speaker 5: they flood the economy with not everybody changes their prices away.
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Speaker 5: The flooded money goes at first into demand and then
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Speaker 5: eventually into prices, and the FED has a problem to
10:07
Speaker 5: fix down the road. This is a little bit ourcane
10:11
Speaker 5: and you have to think about it. It's not intuitive,
10:13
Speaker 5: but this is the framework the FED operates in.
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Speaker 3: Well.
10:16
Speaker 2: Also, they're constantly monitoring the supply chained side. But I'm
10:20
Speaker 2: not saying that they could do anything about it, but
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Speaker 2: they have to. And that's what we're looking in the
10:24
Speaker 2: fall here potentially is would we see any impact from
10:27
Speaker 2: tariffs on inflation is and that is why the FED
10:30
Speaker 2: has been in this limbo stage for the last several
10:33
Speaker 2: months where they have been really hesitant to make any
10:36
Speaker 2: rate cuts because they've been waiting for inflationary impact from tariffs.
10:40
Speaker 2: To this point, we haven't seen it. There's arguments to
10:43
Speaker 2: be made that it's delayed and we will see in
10:46
Speaker 2: the fall. There's other arguments that perhaps it's not going
10:48
Speaker 2: to be as strong as once was anticipated, and that's
10:53
Speaker 2: really what we need to monitor you.
10:55
Speaker 5: I don't want to downplay the Fed's handling of so
10:58
Speaker 5: called supply shocks. Tariffs are example. Oil price spikes are
11:01
Speaker 5: an example, like when OPEC embargoes US. There are positive
11:04
Speaker 5: supply shocks to productivity unexpectedly goes up like it did
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Speaker 5: in the late nineties, that helps push inflation down. The
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Speaker 5: Fed's going to make a decision as to whether or
11:12
Speaker 5: not to If it's an adverse supply shock, like an
11:14
Speaker 5: oil price shock, do we accommodate it, which they did
11:17
Speaker 5: in the seventies that resulted in inflation expectations going up,
11:20
Speaker 5: which created more problems in terms of inflation control. Their
11:24
Speaker 5: job is really really hard, which is why politicians need
11:28
Speaker 5: to We're not going to learn this lesson the easy way. Unfortunately,
11:31
Speaker 5: politicians should back off and let them do their job
11:33
Speaker 5: in an objective, almost technocratic way. But that's not the
11:38
Speaker 5: world we live in right now.
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Speaker 2: We're going to take a quick break here on the
11:41
Speaker 2: finished exchange. When we come back, I want to talk
11:43
Speaker 2: about earning season. It's wrapping up here shortly. We want
11:46
Speaker 2: to talk about what we've seen and what we can
11:48
Speaker 2: anticipate over the course of the next week. That's right
11:51
Speaker 2: here on the Financial Exchange.
11:52
Speaker 6: Right after this break, Tara Fever is in high gear.
11:56
Speaker 6: We've got the latest on what might be next and
11:59
Speaker 6: how long it might last. Only here on the Financial
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12:49
Speaker 2: Earning season is coming to a close throughout this week
12:53
Speaker 2: will be sort of the last major earnings reports that
12:55
Speaker 2: we'll see from the S and P five hundred kontenency
12:58
Speaker 2: and overall, it's been a pretty good earning season. We've
13:01
Speaker 2: seen that profit has grown twelve percent in Q two,
13:05
Speaker 2: up from a year earlier, and beating a lot of
13:08
Speaker 2: expectations out there. The one caveat to that is a
13:12
Speaker 2: lot of the earnings growth that we're seeing is consolidated
13:16
Speaker 2: within two industries. It's the technology sector and the communications
13:21
Speaker 2: services sector, which they kind of overlap one another.
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Speaker 3: It's the big the big.
13:25
Speaker 2: Group you know, fang or whoever you want to call them,
13:27
Speaker 2: whatever nickname you want to use, that is really dominated.
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Speaker 2: It's the the Amazons, the facebooks, the Microsofts, the the
13:35
Speaker 2: Googles that are really seeing a tremendous amount of earnings growth.
13:39
Speaker 2: All of their earnings came in quite strong. You know, Facebook,
13:42
Speaker 2: for example, saw a twenty two percent jump in revenue.
13:45
Speaker 2: You had Microsoft come in with some strong numbers as well.
13:50
Speaker 3: And if you look at just the.
13:53
Speaker 2: Earnings growth from the S and P five hundred, two
13:55
Speaker 2: thirds of it is from those companies that I just
13:58
Speaker 2: spoke about. They are the ones that are really powering
14:01
Speaker 2: a lot of the earnings growth that we've seen and
14:03
Speaker 2: also spending a tremendous amount of money in terms of
14:08
Speaker 2: capax in order to prop up some other sectors of
14:12
Speaker 2: business out there. The all surge and data center spending
14:16
Speaker 2: has really helped propel companies in some of the companies
14:19
Speaker 2: in the utility space like gia, Vernova and others out there.
14:23
Speaker 2: The eighty five billion of CAPEX that Microsoft will spend
14:27
Speaker 2: is more than the annual revenue of about ninety two
14:30
Speaker 2: percent of the S and P five hundred companies, So
14:33
Speaker 2: it's it's significant, and it's peers are spending a significant
14:36
Speaker 2: amount too. Microsoft and Facebook are spending thirty percent of
14:39
Speaker 2: their revenue on CAPAX. So I wonder Mark, just you know,
14:43
Speaker 2: we sit at a point in time now where you
14:46
Speaker 2: had discussed off air that there's concerns about bubble popping up.
14:51
Speaker 2: In some of the financial pieces that we read, we
14:54
Speaker 2: are seeing that price to earnings ratios are are very high,
14:59
Speaker 2: and a lot lot of it the earnings growth that
15:01
Speaker 2: we're seeing is consolid in one sector. Just how you
15:04
Speaker 2: view sort of the earning season that we've just gone
15:06
Speaker 2: through here.
15:07
Speaker 5: Well, like you said, through the end of the second quarter,
15:10
Speaker 5: earnings year over year were up. Profits that is up
15:13
Speaker 5: about twelve percent. Stock prices over the same period up
15:16
Speaker 5: a little over fourteen percent, so you sure as heck
15:19
Speaker 5: better have had high earnings growth over that period. Stocks
15:25
Speaker 5: were expecting that and more if you just look at
15:28
Speaker 5: that twelve month period, which is a little bit selective,
15:31
Speaker 5: but to me, it's still telling you only buy a
15:35
Speaker 5: stock because you expect it at some point to pay
15:38
Speaker 5: high dividends, or to expect or you expect the company
15:41
Speaker 5: to buy back stock and return some of your investment
15:46
Speaker 5: to you in the forms of higher capital gains over time,
15:49
Speaker 5: which of course you've got to sell to realize. My
15:51
Speaker 5: point is earnings are the whole game, and stocks right now,
15:56
Speaker 5: as you noted Paul, by virtually any measure, our priced
16:00
Speaker 5: at record highs relative to earnings, and by any measure,
16:04
Speaker 5: I mean no matter how you want to measure earnings,
16:05
Speaker 5: whether you want to look at the last twelve months,
16:07
Speaker 5: whether you want to look at the expected next twelve
16:10
Speaker 5: month earnings performance, whether you want to look at something
16:13
Speaker 5: longer term. There are measures that look at the last
16:15
Speaker 5: ten years worth of earnings, take an average of those,
16:18
Speaker 5: and the reason for that is that business cycle affects
16:21
Speaker 5: the ups and downs of the economy, even when it's expanding,
16:25
Speaker 5: can distort the trend in earnings by any of those measures,
16:27
Speaker 5: trailing twelve month forward PEES, the cyclically adjusted so to speak, PE,
16:32
Speaker 5: which looks at that ten year average earnings relative to
16:36
Speaker 5: prices prices, and they're in the numerator. I just reversed it,
16:39
Speaker 5: but you know what I'm getting at. By any measure,
16:41
Speaker 5: stocks are very richly priced, so you better have aigh
16:45
Speaker 5: earnings growth. The result if you don't could be a
16:49
Speaker 5: reduction in valuations, which is diplomatic a delicate way of saying,
16:56
Speaker 5: a big fall in prices. You hope it's orderly. You
16:59
Speaker 5: hope Suppose earnings don't meet investor expectations. One possibilities that
17:03
Speaker 5: prices just kind of stay where they are and earnings
17:05
Speaker 5: grow modestly over time. That would cause valuations to return
17:10
Speaker 5: to more typical levels, which would require, by say, twelve
17:14
Speaker 5: month forward PE standards, a ten to twenty percent decline
17:18
Speaker 5: in stock prices. You hope that doesn't happen. You hope
17:20
Speaker 5: it's rather earnings growing slowly and stock price is staying static. Unfortunately,
17:24
Speaker 5: adjustments are usually abrupt, like when you would overinflate something.
17:30
Speaker 5: Sometimes you're able to disinflate whatever the object is you
17:33
Speaker 5: overinflated in an orderly manner. Other times that thing just pops,
17:36
Speaker 5: which is where the bubble analogy comes from.
17:39
Speaker 2: I think when you're looking forward here. The other thing
17:42
Speaker 2: that's at play is, as I mentioned, earnings growth has
17:44
Speaker 2: been consolidated in some of these companies that I mentioned before,
17:49
Speaker 2: they've also just had a very strong run in their
17:52
Speaker 2: traditional lines of businesses. At the same time, they're spending
17:54
Speaker 2: billions of dollars in capex to develop out their AI capabilities.
17:59
Speaker 2: One of the things that is mentioned in this Wall
18:01
Speaker 2: Street Journal piece that could be a deterrent for the
18:04
Speaker 2: economy and the markets specific to these big companies is
18:07
Speaker 2: that if there are traditional lines of businesses slow down.
18:10
Speaker 2: So if Microsoft's you know, cloud business or Facebook's you know,
18:14
Speaker 2: advertising revenue that it generates from its social media networks
18:17
Speaker 2: slows down on the backs of them spending at these
18:21
Speaker 2: higher levels, then the market could be set up for a,
18:25
Speaker 2: you know, a setback if that is to be the case.
18:28
Speaker 2: The the other piece is that there's been tremendous tailwind
18:31
Speaker 2: for spending out on data centers and anya, and that
18:35
Speaker 2: doesn't really look like it's slowing. You'd be hard pressed
18:37
Speaker 2: to make that argument in any way, shape or form
18:39
Speaker 2: with the billions of dollars companies are plowing into it.
18:42
Speaker 2: But ultimately you're going to need to see a return
18:45
Speaker 2: on that invested capital. And you know, as much as
18:48
Speaker 2: chat GBT is a a fantastic you know, chatbot to use,
18:54
Speaker 2: and they're continuing to innovate, and there are competitors out
18:56
Speaker 2: there that are that are doing the same, Ultimately it
19:00
Speaker 2: needs to lead to productivity growth and it leads needs
19:03
Speaker 2: to lead to revenue growth. And I think the jury
19:05
Speaker 2: is still very early on those things. And if you
19:08
Speaker 2: have any loss in momentum in that capac expenditure cycle
19:12
Speaker 2: that I'm talking about, that could lead to a slowdown
19:15
Speaker 2: in many sectors of business that have benefited from just
19:18
Speaker 2: a tremendous amount of money being pumped into it so
19:21
Speaker 2: frequently over the course of the last year or two.
19:23
Speaker 3: We're gonna take a quick break here, but when we.
19:25
Speaker 2: Come back, we're gonna have Wall Street Match and much
19:28
Speaker 2: more here on the Financial Exchange.
19:29
Speaker 7: Stick with us, Like us on Facebook and follow us
19:43
Speaker 7: on Twitter at TFE show.
19:45
Speaker 6: Breaking business news is always first right here on the
19:49
Speaker 6: Financial Exchange Radio Network.
19:53
Speaker 1: Time now for.
19:54
Speaker 6: Wall Street Watch a complete look at what's moving market
19:57
Speaker 6: so far today right here on the Financial Exchange Radio Network.
20:03
Speaker 4: Markets are mostly quiet as Wall Street readies for the
20:06
Speaker 4: final significant batch of second quarter earnings due out this week,
20:10
Speaker 4: with retailers including Home Depot, Low's, Target, and Walmart to
20:15
Speaker 4: gauge the status of the consumer. Attention will also shift
20:19
Speaker 4: back to the FED this week, with July meeting minutes
20:22
Speaker 4: due out Wednesday afternoon and FED Chairman Jerome Powell slated
20:26
Speaker 4: to speak from Jackson Hole on Friday. Right now, the
20:30
Speaker 4: Dow is off by only twenty seven points, SMP five
20:33
Speaker 4: hundred is down one point, and the Nasdaq is down
20:37
Speaker 4: by two points. Russell two thousands up by three tenths
20:40
Speaker 4: of one percent, Tenure Treasury reeled at four point three
20:43
Speaker 4: two eight percent, and crude oil down over half a
20:47
Speaker 4: percent lower, trading at sixty two dollars and forty two
20:50
Speaker 4: cents a barrel shares, and Novo nor disc rising nearly
20:54
Speaker 4: five percent after the company's we go. The obesity drug
20:58
Speaker 4: was granted accelerated approval from the FDA for the treatment
21:03
Speaker 4: of a serious liver disease. Meanwhile, Bloomberg reporting that Thomas
21:06
Speaker 4: Bravo is in talks to acquire human resources management software
21:11
Speaker 4: provider day Force. Day Force shares are surging twenty seven
21:16
Speaker 4: percent on that news. Elsewhere, according to The Times in London,
21:21
Speaker 4: Tesla is now offering discounts of up to forty percent
21:25
Speaker 4: on leased vehicles in the country as sales slip. However,
21:29
Speaker 4: Tesla's stock is up nearly one percent at the moment.
21:33
Speaker 4: Terror Wolf shares are jumping seventeen percent following news that
21:37
Speaker 4: alphabets Google will lift its investment in the bitcoin minor
21:41
Speaker 4: in AI company to around three point two billion dollars.
21:46
Speaker 4: Soho House shares are climbing fifteen percent after a group
21:50
Speaker 4: of investors led by MCR Hotels announced that it is
21:53
Speaker 4: planning to take Soho House private in a two point
21:57
Speaker 4: seven billion dollar deal. In cyber security company Palo Alto
22:01
Speaker 4: Networks will post their quarterly results after today's closing bell.
22:07
Speaker 4: I'm Tucker Silvan. That is Wall Street Watch.
22:10
Speaker 2: As I mentioned earlier in the program, Jerome Powell will
22:13
Speaker 2: conduct his annual speech in Jackson Hole, Wyoming. This is
22:18
Speaker 2: an opportunity for him to give further commentary on the
22:22
Speaker 2: Federal Reserve and where they feel economic policy will shift,
22:25
Speaker 2: and also look back and recap some mistakes that he
22:29
Speaker 2: may have made or just adjustments to long term federal
22:33
Speaker 2: reserve policy.
22:33
Speaker 3: In general.
22:34
Speaker 2: This will be his very likely last annual speech that
22:38
Speaker 2: he will give at Jackson Hole as his term is
22:40
Speaker 2: set to expire in May of this year. And what
22:43
Speaker 2: will really be in focus this week in terms of
22:47
Speaker 2: what we will be looking for on the policy front,
22:50
Speaker 2: is any indications that he has on the Fed's view
22:55
Speaker 2: of the labor market, where inflation sits, and where they
22:58
Speaker 2: could possibly take monetary policy. Specifically, will there be rate
23:04
Speaker 2: cuts later in the month of September when they get
23:08
Speaker 2: back together again on September sixteenth. At the moment looking
23:11
Speaker 2: this morning, according to CME futures, there was a pretty
23:15
Speaker 2: high probability there was about an eighty three percent probability
23:20
Speaker 2: that we would see a rate cut for that September
23:24
Speaker 2: seventeenth meeting. So any information that we get that will
23:28
Speaker 2: really be the focus that we'll see here, as well
23:32
Speaker 2: as digesting the FED meeting minutes set to come out
23:35
Speaker 2: on Wednesday afternoon.
23:36
Speaker 5: Yeah, we covered this at the top at the top
23:39
Speaker 5: of the last hour, so I won't rehash my The
23:41
Speaker 5: FED is the economy is their mistat routine, but it
23:44
Speaker 5: is useful to keep that analogy in mind. It tries
23:46
Speaker 5: to cool the economy down when it overheats as a
23:49
Speaker 5: result of the FED having overheated it printing too much
23:51
Speaker 5: money at an earlier stage of the business cycle, and
23:54
Speaker 5: similar lay, the FED has to anticipate slowdowns, which it
23:57
Speaker 5: seems to be in the mode of doing now. Because
24:02
Speaker 5: monetary policy a fancy way of saying printing money to
24:05
Speaker 5: target the federal funds rate their policy tool. Monetary policy
24:08
Speaker 5: works with very long legs, sometimes a couple, sometimes several quarters,
24:12
Speaker 5: so they have to anticipate. On top of that, we
24:15
Speaker 5: don't even know what the economy is doing right now.
24:17
Speaker 5: All these so called data points that we get, they're noisy,
24:21
Speaker 5: and I don't use that term casually. It has very
24:24
Speaker 5: specific meaning. What happens month to month isn't necessarily indicative
24:28
Speaker 5: of the underlying trend. So the inflation number we got
24:31
Speaker 5: last week point three percent for headline inflation, I think
24:34
Speaker 5: it was Godfred, but I looked that up after not
24:36
Speaker 5: knowing it in the last segment. But I didn't point
24:38
Speaker 5: three percent. You annualize that you get three and a
24:40
Speaker 5: half or so percent, Is this a problem?
24:42
Speaker 3: Well, maybe maybe not.
24:43
Speaker 5: It could be noise. There are other measures that suggest, though,
24:46
Speaker 5: that underlying inflation is somewhere in that range. The FED
24:48
Speaker 5: knows this. The Fed's also thinking, though, what's the labor
24:51
Speaker 5: market going to look like in three to six months.
24:54
Speaker 5: If it slows further, that could put a brake on
24:57
Speaker 5: the inflation process, indeed result the economy slowing too much,
25:01
Speaker 5: pushing the economy into so called recession. So the FED
25:05
Speaker 5: is dealing with imperfect information about the present, trying to make,
25:08
Speaker 5: in turn predictions about the future.
25:11
Speaker 3: Their jobs.
25:12
Speaker 5: As I indicated, I'm not defending what they've watched in
25:15
Speaker 5: the past. I'm simply trying to point out their job
25:17
Speaker 5: is incredibly hard, when you think about it from that
25:19
Speaker 5: point of view.
25:20
Speaker 3: Really challenging.
25:21
Speaker 2: Yeah, So inflation in the labor market, those are the
25:23
Speaker 2: two prior priorities of the FED. Where we sit on
25:27
Speaker 2: those fronts right now, Like we've talked about before on
25:29
Speaker 2: the program, we're in a spot where inflation is higher
25:33
Speaker 2: than their intended target. But I would not characterize it
25:36
Speaker 2: as overly concerning at the moment. A labor market that
25:39
Speaker 2: is weakening, but by historical standards, isn't in that bad
25:43
Speaker 2: of a place.
25:44
Speaker 5: Did you see the You probably didn't last week because
25:47
Speaker 5: you weren't here, But the University of Michigan released their
25:51
Speaker 5: consumer survey talked to.
25:53
Speaker 2: You were to hear either I was, whereas everybody.
25:56
Speaker 5: Yeah, damn it, I was barely here last week, So
25:59
Speaker 5: I really don't know what I'm talking about. Inflation expect
26:01
Speaker 5: Let me just cut to the chase and say, inflation
26:02
Speaker 5: expectations are on the rise. They're significantly higher than they
26:06
Speaker 5: were a year ago. They jumped up in April, came
26:09
Speaker 5: down a bit. They've since sort of settled, but in
26:12
Speaker 5: the mid single digits. This is dangerous territory. When people
26:16
Speaker 5: expect high inflation, they demand higher wages if they've got
26:19
Speaker 5: the clout to do so. Firms ask for higher prices
26:22
Speaker 5: if they feel like consumers will continue to buy at
26:25
Speaker 5: the pace they were buying at iev it doesn't alienate customers.
26:30
Speaker 5: So the FED is also I bring this up because
26:31
Speaker 5: I didn't bring it up in the last segment, but
26:33
Speaker 5: it's a critical part of the inflation process. According to
26:35
Speaker 5: the models the FED uses, inflation expectations are high. This
26:40
Speaker 5: is something the FED has to manage. It's not part
26:43
Speaker 5: of their dual mandate, but it directly relates to it,
26:47
Speaker 5: and it's something they can control through their speeches and
26:49
Speaker 5: to an extent through their actions.
26:51
Speaker 2: Kevin Warsh is the potential replacement for FED Chairman Jerome Powell.
26:57
Speaker 2: He's a former FED governor. A recently he was quoted
27:02
Speaker 2: in discussing the idea of shrinking the Fed's balance sheet
27:07
Speaker 2: in order to use that as a fulcrum to lower
27:11
Speaker 2: down short term interest rates. So as Mark has mentioned
27:14
Speaker 2: the FED controls the money supply, he had mentioned that
27:19
Speaker 2: perhaps by tightening that money supply that would allow for
27:25
Speaker 2: further interest rate cuts in and Mark, I'll kick it
27:27
Speaker 2: to you to kind of your two cents on this,
27:30
Speaker 2: but also probably try and keep this as high levels, not.
27:34
Speaker 5: An expert there, asset purchases and quantitatis. It gets harry fast.
27:38
Speaker 3: It gets Harry fast.
27:39
Speaker 2: So maybe much like myself, summarize it for a five
27:42
Speaker 2: year old for listeners out there, because this does get
27:44
Speaker 2: a little tricky monetary policy in general, and his view.
27:48
Speaker 5: Yeah, I mean what Warsh's view in this case doesn't
27:50
Speaker 5: make any sense. He's not an economist. I think it's
27:52
Speaker 5: important to keep that in mind. When he was appointed
27:54
Speaker 5: to the board, he was frankly viewed as a lightweight,
27:56
Speaker 5: and this is why I have misgivings about him. Although
27:59
Speaker 5: I agree that the FED probably a betted asset bubble
28:03
Speaker 5: aided in a bedded asset bubbles in the past, his prescription,
28:08
Speaker 5: at least up until right now when he's angling for
28:11
Speaker 5: the FED share position, his prescription has always been raised
28:13
Speaker 5: interest rates focus entirely on inflation, which I like. I
28:17
Speaker 5: don't think it's necessarily a bad thing to have a
28:19
Speaker 5: FED chair who is overly concerned, who puts more weight
28:23
Speaker 5: on inflation that they than they do on unemployment. That's
28:27
Speaker 5: arguably a good quality to have in a FED chair.
28:29
Speaker 5: The problem is he's done a point eighty since he
28:31
Speaker 5: learned that Trump was considering making him FED share, So
28:34
Speaker 5: I wonder about his character. Frankly, I also think he's
28:36
Speaker 5: an economic bliteweight. He doesn't have a graduate degree. He
28:39
Speaker 5: probably can't read a paper in economics. I don't mean
28:41
Speaker 5: to sound snooty, but you have to have training to
28:43
Speaker 5: do it. It's hard, it takes years. He doesn't know
28:46
Speaker 5: how to do that, so I worry about his he
28:49
Speaker 5: regularly criticizes FED models. I don't think he's ever I
28:52
Speaker 5: don't think he'd know how to solve one. So I
28:55
Speaker 5: think it's a I think nominating. Having someone at the
28:58
Speaker 5: helm of the FED who doesn't fully understand what FED
29:01
Speaker 5: staff is presenting to him is potentially gets us into
29:05
Speaker 5: the same types of problems that we had with Powell
29:08
Speaker 5: early on, where he seemed to lack a firm load
29:12
Speaker 5: star and it led to the high inflation arguably that
29:16
Speaker 5: we got to an extent during to an extent it,
29:18
Speaker 5: let I should say, to the high inflation that we
29:20
Speaker 5: got in the early stages of COVID. In this case,
29:23
Speaker 5: he's way off long term asset purchases. Shrinking that part
29:26
Speaker 5: of the FED so called balance sheet will not shrink
29:29
Speaker 5: the money supply unless he's talking about broader measures of money.
29:33
Speaker 5: But he doesn't say so there. This is where his
29:35
Speaker 5: technical deficiencies come into play. It would not necessarily allow
29:38
Speaker 5: the FED to lower short term interest rates. What he's
29:41
Speaker 5: saying makes very little economic sense, and I think that's
29:43
Speaker 5: the point that Dudley makes in the article that you
29:46
Speaker 5: reference from Bloomberg.
29:47
Speaker 2: Sure, we're going to take a quick break here on
29:49
Speaker 2: the finished sixteenes. But when we come back or when
29:51
Speaker 2: we're talking about the housing market, it's been a very
29:54
Speaker 2: slow housing market and there's some concerns out there that
29:57
Speaker 2: that could slow down the economy. We're going to break
29:59
Speaker 2: that down right after this break here on the Financial Exchange.
30:04
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30:07
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30:11
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30:14
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30:17
Speaker 6: This is your home for the most comprehensive coverage of
30:20
Speaker 6: the economy and the trends on Wall Street.
30:22
Speaker 1: This is the Financial Exchange Radio Network.
30:27
Speaker 2: This coming back from the break here, I want to
30:36
Speaker 2: talk a little bit about the housing market. According to
30:41
Speaker 2: data from redfin home Prices, our home sales have fallen
30:45
Speaker 2: to their lowest level since twenty twelve. That's for the
30:49
Speaker 2: period from April to June, which is typically the hottest
30:52
Speaker 2: stretch in terms of buying and selling. That was according
30:55
Speaker 2: to the New New York Post, but they cited data
30:58
Speaker 2: from redfinn. If you look at the housing market in general,
31:02
Speaker 2: it's really hard to point to anything that would be
31:05
Speaker 2: a positive catalyst for the sector. In general, Housing inventories
31:09
Speaker 2: have risen significantly. They're up to their pre pandemic levels
31:14
Speaker 2: in many states throughout the country. And we're also seeing
31:17
Speaker 2: that fifty six percent of homes through the month of
31:21
Speaker 2: May had sold for less than their asking price. If
31:25
Speaker 2: you look at specific areas the market, again, all of
31:28
Speaker 2: this is regional. There are places in the Florida area
31:32
Speaker 2: that we've seen prices dip pretty significantly, transaction volume, sales
31:36
Speaker 2: volume in Miami has dropped, Naples has seen price decreases.
31:40
Speaker 2: Then you have areas of Texas and other parts of
31:43
Speaker 2: the country where you're seeing some declines in prices and
31:47
Speaker 2: then inventories as well on the new home construction side
31:51
Speaker 2: of things.
31:51
Speaker 3: So you have.
31:53
Speaker 2: Interest rates that have sat really on the thirty year
31:55
Speaker 2: fixed mortgage right in around that seven percent level. There
31:59
Speaker 2: isn't at this moment at least any reason to see
32:02
Speaker 2: that those will come down significantly. You are seeing the
32:06
Speaker 2: price growth that we had seen, which had just been
32:09
Speaker 2: so rapid. I mean, prices have been up forty or
32:11
Speaker 2: fifty percent from back where they were in the beginning
32:15
Speaker 2: of COVID. Those have have moderated quite a bit. And
32:18
Speaker 2: the reason that we talk about this on the program
32:21
Speaker 2: is not only because it's it's an area of interest,
32:24
Speaker 2: but also because there is a tremendous amount of the
32:29
Speaker 2: US economy that is benefited from housing activity. It really
32:34
Speaker 2: accounts for a tremendous amount of acroundic growth. Think of
32:37
Speaker 2: all the industries that when you buy a house are touched,
32:40
Speaker 2: when you're you know, landscaping and you know things within
32:44
Speaker 2: the home. There's a tremendous amount of impact there. And
32:46
Speaker 2: so we sit at a point in time where it
32:49
Speaker 2: just is is unclear mark if you could really have
32:52
Speaker 2: any sort of uptick here. Even though prices are coming down,
32:56
Speaker 2: which is we've all wanted for a long period of time,
33:00
Speaker 2: there are not a tremendous amount of barers.
33:01
Speaker 3: Looking to snap up these listings.
33:04
Speaker 5: No, And you could argue that, well, lower interest rates
33:07
Speaker 5: might help, But if rates go down on the long
33:10
Speaker 5: end it's probably because of concerns about economic growth, then
33:13
Speaker 5: that might not be So there might be other things
33:14
Speaker 5: happening in the economy that put a damper on demand,
33:21
Speaker 5: and that would of course cause prices to go down,
33:24
Speaker 5: but not for reasons that we would celebrate. And all
33:27
Speaker 5: roads to me come back to that. You have to
33:30
Speaker 5: think about the market as composed of two parts, supply
33:33
Speaker 5: and demand. You can't just look at supply. You have
33:35
Speaker 5: to look at what's happening on the demand side. Demand
33:37
Speaker 5: has been feverish, supply has it's always sort of unresponsive
33:45
Speaker 5: in the short term. Maybe it's exceptionally rigid in this
33:48
Speaker 5: cycle because we're bumping up against zoning, local decisions, zoning
33:53
Speaker 5: and other decisions that were made decades ago that are
33:55
Speaker 5: hindering the expansion that could rest respond to the increased demand. Look,
34:01
Speaker 5: what I'm saying here is that the cure, if you
34:05
Speaker 5: think we need one for the frenetic housing market, is
34:09
Speaker 5: probably an economic slowdown or worse. And that's not a
34:13
Speaker 5: cure that anybody, any responsible you know, economist, research or whatever,
34:21
Speaker 5: would would prescribe. I don't I don't really know the
34:23
Speaker 5: answer here, or if.
34:25
Speaker 2: Yeah, one, we need one. It's affordability is an issue.
34:28
Speaker 2: One last stat here, bank rate did in an analysis
34:32
Speaker 2: of the fifty largest metro areas, and they determined that
34:35
Speaker 2: renting is cheaper than buying on average or seeing you know,
34:38
Speaker 2: the mortgage payments are higher in those areas and renting
34:42
Speaker 2: is a better deal. So there's no immediate fix to
34:45
Speaker 2: the affordability issues that we're running into in the housing
34:47
Speaker 2: market here.
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36:09
Speaker 2: Credit card spending is pairing back a little bit a
36:13
Speaker 2: piece here from the Wall Street Journal. Americans pull back
36:15
Speaker 2: from an epic credit card binge. Now, the frustration that
36:19
Speaker 2: I have with the credit card story is that oftentimes
36:23
Speaker 2: a lot of these news publications will cite that balances
36:26
Speaker 2: on Americans credit cards collectively have surged over a trillion
36:30
Speaker 2: dollars if you adjust for inflation. First of all, a
36:33
Speaker 2: trillion sounds like a really big number. I get it,
36:35
Speaker 2: and I know why Wall Street Journal and other news
36:37
Speaker 2: publications use it, because it definitely sticks out of you.
36:41
Speaker 2: But if you adjust for inflation, those balances aren't as
36:45
Speaker 2: daunting as you would think from a historical perspective. Really,
36:49
Speaker 2: what you focus on most here is delinquencies, and those
36:54
Speaker 2: have been ticking up, not to a level that is
36:57
Speaker 2: of great paramount concern, But now you do have Americans
37:02
Speaker 2: at least slowing down the pace that they're spending on
37:05
Speaker 2: their credit cards. And part of that could be certainly
37:07
Speaker 2: because you have average credit card interest rates sitting around
37:11
Speaker 2: twenty two percent, there's a lot more debit card spend
37:14
Speaker 2: that we're seeing rather than credit card spend, it seems
37:16
Speaker 2: like recently here at least.
37:17
Speaker 5: Yeah, you know, when you do adjust it for inflation,
37:19
Speaker 5: And I'm using the CPI here to deflate large bank
37:23
Speaker 5: consumer credit card balances. It's a database available on the
37:26
Speaker 5: Federal Reserve Economic Database website. Anybody can do what I
37:29
Speaker 5: just did here. It's very simple credit card balances. And
37:32
Speaker 5: I'm just talking about absolute terms here and I'm talking
37:35
Speaker 5: real terms, So adjusted for inflation, are no higher. And
37:40
Speaker 5: again this is just a large bank consumer credit card figure,
37:44
Speaker 5: no higher than they were at the peak of the
37:46
Speaker 5: last cycle, when the economy was pretty much firing on
37:49
Speaker 5: all cylinders. I'm looking at Q four to twenty nineteen.
37:51
Speaker 5: It's same as it is today. Q four the latest
37:54
Speaker 5: in this series, Q four tw twenty four. So we've
37:57
Speaker 5: missed a little bit of economic activity. And of course
37:58
Speaker 5: it's a percentage of the economy. In real terms, they'd
38:02
Speaker 5: be smaller, be real economy is bigger. So if we
38:05
Speaker 5: were writing this, we could put a very different spin
38:08
Speaker 5: on that conclusion. I'm not saying it's not a problem.
38:10
Speaker 5: I'm not saying people aren't stretched, and if real wages
38:13
Speaker 5: haven't kept up, that's problematic.
38:15
Speaker 2: That's all the time that we have for the first
38:16
Speaker 2: hour here in the Financial Exchange.
38:18
Speaker 3: But stick with us for the second hour.
38:19
Speaker 2: We've got a lot of earnings to preview and much
38:22
Speaker 2: much more to discuss on the economy that's right after
38:24
Speaker 2: this break here in the Financial Exchange.
38:25
Speaker 3: Stick with us.