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Markets Are Underestimating a Prolonged Oil Disruption · The Financial Exchange Show

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Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
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Speaker 1: and Mark Fandetti.
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Speaker 2: Chuck, Mark and Tucker with you. And as we sit
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Speaker 2: here today and kick off another week, still no change
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Speaker 2: to the status of the Strait of Hormuz, but potentially
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Speaker 2: another round of talks between the United States and Iran
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Speaker 2: kicking off within the next twenty four hours. The time
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Speaker 2: table is a little bit uncertain, it's a little uncertain
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Speaker 2: who exactly is going to be showing up, but ultimately
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Speaker 2: taking a step back. As as we've said since the
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Speaker 2: start of this, it's not worth paying attention to what
1:51
Speaker 2: everyone is saying, because just in the course of a
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Speaker 2: day on Friday, you get, you know, one portion of
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Speaker 2: the Iranian government saying, hey, everything's fine, hormones is open.
2:02
Speaker 2: You get another part saying no, it's closed. Again. It's
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Speaker 2: just not worth paying attention to what people say, and
2:09
Speaker 2: it's more important to pay attention to what people do.
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Speaker 2: This is generally the approach that we take on this
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Speaker 2: show most of the time, because if you pay attention
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Speaker 2: to everything that people say, like man, you're just gonna
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Speaker 2: have really a tough time getting through a day, let alone,
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Speaker 2: you know, a month or two. So ultimately, here's where
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Speaker 2: things stand. Traffic through the straight of horn moves remains
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Speaker 2: largely restricted. Over the weekend, you had a number of
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Speaker 2: different instances including I think, quite honestly, like you can
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Speaker 2: laugh about it a little just because no one ended
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Speaker 2: up getting hurt as a result of this. Did either
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Speaker 2: of you happen to hear the Indian tanker that was
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Speaker 2: trying to go through horror moves that then got fired
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Speaker 2: upon by the IRGC. The captain of.
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Speaker 3: It, No, what's the punchline?
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Speaker 2: No, this is this is not a punchline. This this
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Speaker 2: actually happened. So basically here's what was going on. There
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Speaker 2: were a bunch of tankers that were trying to go through.
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Speaker 2: I think it was on Saturday morning, maybe it was
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Speaker 2: Sunday morning, I can't remember. Honestly, they all bore it
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Speaker 2: together and the IRGC goes and like they've got all
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Speaker 2: these you know, fast attack boats and they send them
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Speaker 2: out and these tankers are trying to go through and
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Speaker 2: basically had to tucktail and turn around because the IERGC
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Speaker 2: was like, no, you guys aren't getting through. And again,
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Speaker 2: it's funny because no one ended up getting hurt on it.
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Speaker 2: I'm sure it's you know, frustrating for the captain and
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Speaker 2: still scary. But the captain of this Indian tanker maybe
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Speaker 2: it was a cargo ship, I can't remember offhand, Tucker,
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Speaker 2: have you heard the audio of this? I did not know.
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Speaker 2: So the guy literally is is hailing the the Iranian
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Speaker 2: you know, ships around him, and it's basically like a
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Speaker 2: call to like tech supporter, customer service that went badly,
4:02
Speaker 2: or like trying to get into a party, is how
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Speaker 2: it comes off. The guy sitting there, he's like, he's
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Speaker 2: like IRGC boats, like, stop firing me, Stop firing at me.
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Speaker 2: I'm second on your list. I'm on the list. I'm
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Speaker 2: supposed to be able to get through, like stop firing
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Speaker 2: at me. And of course, like they didn't, and so
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Speaker 2: he ends up, you know, turning around. But you know,
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Speaker 2: you've just got this case where as it stands right now.
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Speaker 2: Even though there's been some sporadic upticks in traffic here
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Speaker 2: and there, and at one point over the weekend it
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Speaker 2: looked like twenty ships were making a run at it
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Speaker 2: and then they all turned around right after this, there's
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Speaker 2: there's just no meaningful flow of ships, and so as
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Speaker 2: a result, there's no meaningful way that you get the
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Speaker 2: offline production back online right now. So Hormos remains closed.
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Speaker 2: But despite that, the piece that I find interesting in
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Speaker 2: all of this is again, pay attention to what people do,
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Speaker 2: not what people say. And both sides at this point
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Speaker 2: have accused the other of violating the ceasefire. The Iranians
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Speaker 2: have said that the blockade has violated the ceasefire. The
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Speaker 2: US has said that the closure of Hormuz has violated
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Speaker 2: the ceasefire. And normally, when when you've been shooting at
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Speaker 2: someone to begin with and they do something that you
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Speaker 2: say is violating terms that you agreed on, generally it'd say, okay, like,
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Speaker 2: I guess we're gonna start shooting at each other again.
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Speaker 2: And that hasn't happened. And I find that interesting because
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Speaker 2: it suggests to me that again for all of the
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Speaker 2: public posturing in this and that that continues to be
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Speaker 2: the noise. The action is Hormons remains closed. But despite
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Speaker 2: each side saying, oh, like, you violated the ceasefire, no
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Speaker 2: one's going and saying okay, well, we're just gonna start,
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Speaker 2: you know, shooting everything that we can at you again,
5:47
Speaker 2: which is constructive to a certain extent. I'm not saying
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Speaker 2: it's like good, but I am saying it's it's constructive.
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Speaker 2: And so I think the lay of the land here
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Speaker 2: is that there are at least elements on each side
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Speaker 2: that want to be able to move on from this.
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Speaker 2: And you know, I struggle to find the idea for
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Speaker 2: exactly what an agreement looks like because there are you know,
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Speaker 2: clear differences where you know, the US wants you know,
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Speaker 2: get rid of the enriched uranium, you know, ban on
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Speaker 2: you know, further enrichment, so on and so forth. Horm
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Speaker 2: Moonves remain, you know, goes back to you know, pre
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Speaker 2: war characteristics, like you go down like the whole list.
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Speaker 2: The Iranians are sitting there saying, hey, you guys, yes,
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Speaker 2: like our military is not what it used to be.
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Speaker 2: But ultimately we're controlling the straight off Hoore moves right now,
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Speaker 2: and we're not just gonna give that up and get
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Speaker 2: take the deal that you were offering twelve months ago.
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Speaker 2: So the question is what's the deal that ends up
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Speaker 2: being acceptable to both sides, which look, in an environment
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Speaker 2: where there is not a clear decisive victory, where one
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Speaker 2: party walks away and says yep, like I'm able to
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Speaker 2: dictate terms, what do you end up with is a
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Speaker 2: negotiated agreement where not everyone gets everything that they want
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Speaker 2: and you have to kind of live with that. So
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Speaker 2: it seems like we're heading towards something along those lines,
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Speaker 2: but exactly what that looks like I don't really know.
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Speaker 2: And the other pieces I will always, you know, continue
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Speaker 2: to point out here none of these sides trust each other.
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Speaker 2: The Iranians are sitting there going, hey, we were negotiating
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Speaker 2: with you twice before in the last year. Both times
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Speaker 2: we were you started shooting at us. We don't really
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Speaker 2: trust you. The United States is sitting there going, hey,
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Speaker 2: you guys have been, you know, messing around and you've
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Speaker 2: been watching stuff at everyone, and now you're like horror
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Speaker 2: moves is open end closed at the same time, like guys, like,
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Speaker 2: what are we gonna do about this? Let's figure this
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Speaker 2: out and move on. And the Israelis, remember the Israelis
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Speaker 2: are sitting there too, saying, hey, we just playing don't
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Speaker 2: like the Iranians. The arrangiers sitting there, we don't plane
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Speaker 2: like the Israelis. And then you get all these gold states,
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Speaker 2: the uae, Qatar, Kuwait, Iraq, They're all sitting there going, hey,
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Speaker 2: we don't really like this either, you know, we don't
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Speaker 2: really trust the Iranians to be the judge of who
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Speaker 2: should be able to get you know, ships through back
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Speaker 2: and forth and the other thing I'll add on this.
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Speaker 2: If you're the Iranians, this is kind of a one
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Speaker 2: shot deal that you have here, because if there's one
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Speaker 2: thing that all these Gulf states have learned, it's okay,
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Speaker 2: you gotta have backup plans to the straight of horm move.
8:29
Speaker 2: Saudi Arabia basically prove this with their East West pipeline
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Speaker 2: that they have, that they've been able to maintain some
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Speaker 2: export capacity. You better believe that every single country in
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Speaker 2: the Gulf is sitting there saying, Okay, as soon as
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Speaker 2: this is wrapped up for good, we are starting construction
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Speaker 2: on pipelines to somewhere. I don't know where that somewhere
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Speaker 2: is going to be, but we need an alternative that
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Speaker 2: doesn't go through horror moves and so Aron sit They're going, Guys,
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Speaker 2: we probably have one shot to do this because the
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Speaker 2: situation ten years from now, a Horrormuz closure won't meet
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Speaker 2: what it used to because all of these countries have
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Speaker 2: realized they can't be so reliant on it anymore.
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Speaker 3: Yeah, I guess one lesson if you're an economist trying
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Speaker 3: to model these things, or you're a market participant trying
9:11
Speaker 3: to synthesize all of this into something coherent. We're in
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Speaker 3: a world where supply shocks, which is what this oil
9:20
Speaker 3: this sees up represents higher lower supply, higher price. They
9:26
Speaker 3: may become more frequent and at least until alternatives can
9:29
Speaker 3: be found. And there's the geopolitical uncertainty factor as well,
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Speaker 3: which is closely related. I guess one analogy is you
9:39
Speaker 3: got this, you know, this hornets nest, like on the
9:41
Speaker 3: side of your garage, and you just you tell the
9:43
Speaker 3: kids just don't go near it, and we finally, you know,
9:46
Speaker 3: bashed it, and now they're all over the place. I
9:47
Speaker 3: don't know of a better analogy. I'm sorry, but my
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Speaker 3: point is for a while that it changes a lot
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Speaker 3: of patterns. You've disturbed something that was there for a while,
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Speaker 3: you had this sort of understanding with, but you decided
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Speaker 3: to go in full bore, and now you've got to
10:05
Speaker 3: deal with the short term consequences. Will we be better
10:07
Speaker 3: off in five years, possibly, But if you are, again, say,
10:12
Speaker 3: worried about inflation perking up from time to time as
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Speaker 3: a result of supply shocks that's more likely now than
10:19
Speaker 3: it was before, and disturbances to capital markets that are
10:23
Speaker 3: maybe knock on effects of that are are more likely,
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Speaker 3: at least in the short term. I mean, suppose this
10:27
Speaker 3: goes on for a couple of years, We come to
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Speaker 3: an agreement, then they renege, we go in again.
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Speaker 2: You know, this is the problem that you potentially get
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Speaker 2: to is remember in a negotiated agreement, everyone walks away
10:40
Speaker 2: being like I got wronged. No, no, No one feels
10:44
Speaker 2: good after a compromise. I mean, think about, like you
10:46
Speaker 2: compromise with your kids about something. You're like, I can't
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Speaker 2: believe I had to give ground on that. Your kids
10:51
Speaker 2: are like, can't believe Dad's such a heart. Oh, like
10:53
Speaker 2: what's the deal? Like, you know, like no one feels
10:56
Speaker 2: good after a compromise, and especially when you're talking about
10:59
Speaker 2: like billions of dollars at stake and you know, control
11:02
Speaker 2: of you know, your economic destiny, and like, you know,
11:05
Speaker 2: like all the Gulf States are sitting there going, hey,
11:08
Speaker 2: like everything was fine before this, Like we might not
11:10
Speaker 2: have liked these guys, but like, yeah, we could make
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Speaker 2: our money and we could you know, kind of go
11:15
Speaker 2: about our day. And now like they're sitting there saying, okay,
11:19
Speaker 2: so you're gonna like have some like lever of level
11:22
Speaker 2: of control or you're gonna no, like no, none of
11:25
Speaker 2: these states liked Iron to begin with, Like the Qataris
11:28
Speaker 2: put up with them just because they would, you know,
11:30
Speaker 2: be able to facilitate some deals. But you go through
11:33
Speaker 2: the region like no one liked them, Like it was
11:36
Speaker 2: just like nope, like not interested.
11:37
Speaker 3: But we lived with it because you had to.
11:40
Speaker 2: You dealt with it because it was like, Okay, as
11:41
Speaker 2: long as we can keep making money hand over fist,
11:44
Speaker 2: like who cares. Like we all have neighbors that we
11:46
Speaker 2: don't like, you know, as long as it doesn't affect
11:48
Speaker 2: our livelihood. Okay, fine. You know, it's one thing when
11:51
Speaker 2: they're you know, sending a La crossball into your house.
11:53
Speaker 2: It's another when like the neighbor shows up like drunk
11:56
Speaker 2: on your front doorstep, like pounding the door. It's like, okay,
11:58
Speaker 2: like we've gone too far now, So yeah, you might
12:02
Speaker 2: have you know, recurrences here. And the issue that you
12:04
Speaker 2: get to if that happens is think about this from
12:07
Speaker 2: a business perspective, And again, this is what ended up
12:10
Speaker 2: happening in the seventies. The way to avoid a seventy
12:14
Speaker 2: style not inflation, but a seventies style problem with productivity
12:19
Speaker 2: growth is to have this be done and dusted and
12:22
Speaker 2: move on. If companies have to build in additional resilience,
12:26
Speaker 2: that directly impacts productivity because now you can't make as
12:29
Speaker 2: much for the same number of inputs. You have to
12:31
Speaker 2: be storing extra inputs, and you know, building up backups
12:34
Speaker 2: and this and that. You can't be as agile and
12:37
Speaker 2: as lean as you want to. So where this goes
12:42
Speaker 2: short term? I got no idea, but again things seem
12:45
Speaker 2: to be pointing in the right direction despite all of
12:48
Speaker 2: the noise over the weekend. Ignore the noise, focus on
12:52
Speaker 2: the signal longer term, like next five to ten years.
12:55
Speaker 2: Could things flare up again? Maybe I have no idea,
13:00
Speaker 2: but these are not exactly groups that get along well
13:03
Speaker 2: in the best of times. They've been through a decent
13:06
Speaker 2: amount in the last couple of months. They're all going
13:08
Speaker 2: to come out of this, you know, with their their
13:10
Speaker 2: hackles up and like all like, you know, ready for
13:13
Speaker 2: something else. And so it just it's not exactly the
13:19
Speaker 2: most stable long term equilibrium. But you'll just have to
13:23
Speaker 2: see how it goes. Let's take a quick break. When
13:26
Speaker 2: we come back, let's talk a little bit about what
13:29
Speaker 2: we're seeing with stocks after this.
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14:12
Speaker 2: I know I'm only do that, all right, Let's talk
14:15
Speaker 2: a little bit about what's going on with these stock
14:19
Speaker 2: markets as it's referred to. So here's the deal. Stocks
14:23
Speaker 2: are at all time highs, and you got a whole
14:24
Speaker 2: bunch of people handwringing, being like, oh, how can stocks
14:27
Speaker 2: be at all time highs when there's all this uncertainty?
14:30
Speaker 2: And I'm not saying that like you're right or wrong,
14:33
Speaker 2: because the next few weeks we're gonna find out who's
14:36
Speaker 2: right and who's wrong. This is not like a victory lap.
14:38
Speaker 2: But what I am saying is the same thing I've
14:40
Speaker 2: said since last week, which is if you owned stocks
14:46
Speaker 2: last year, last summer, and you were comfortable paying twenty
14:51
Speaker 2: two times forward earnings for stocks, then today when stocks
14:55
Speaker 2: are training in stocks, I'm talking about the S and
14:57
Speaker 2: P five hundred. If the SP five hundred right now
15:01
Speaker 2: is at twenty point nine x forward earnings, which it
15:04
Speaker 2: is according to fact set as of last Friday, then
15:07
Speaker 2: if you were to do the simple math, you would
15:10
Speaker 2: find that stocks are five point two percent cheaper relative
15:13
Speaker 2: to earnings now than they were throughout most of last
15:18
Speaker 2: summer and in two last fall. Now, there's a case
15:22
Speaker 2: to be made that until the situation with Hormuze fully resolves,
15:27
Speaker 2: stocks probably should still be cheaper on a valuation basis,
15:29
Speaker 2: because this is a new question that wasn't present last year,
15:33
Speaker 2: and so that's cool. But ultimately, if you believe that
15:37
Speaker 2: earnings are going to grow the way they're projected to grow,
15:40
Speaker 2: and you believe that stocks should be valued, you know,
15:43
Speaker 2: somewhere in the ballpark of where they were last year,
15:46
Speaker 2: then right now with the S and P five hundred,
15:49
Speaker 2: it's seventy one eighteen. You've got easy upside to the
15:52
Speaker 2: seventy five hundred region based on the fact that earnings
15:55
Speaker 2: estimates have grown over the last six months, while the
15:58
Speaker 2: S and P has basically gone nowhere until the last
16:01
Speaker 2: couple of days. So this is, in my opinion, if
16:06
Speaker 2: you want to believe the path to stocks going higher,
16:10
Speaker 2: it's that earnings projections have continued to grow. Not only that,
16:14
Speaker 2: but earning's actual received earnings have been better than expectations,
16:20
Speaker 2: as they normally are. And so ultimately, if the horrmon
16:25
Speaker 2: situation resolves, there's not really a whole lot of stuff
16:30
Speaker 2: in the way to say, yes, stocks can move higher
16:33
Speaker 2: from here now. If you want to sit there and say, chuck,
16:38
Speaker 2: that's all well and good, But I don't think horm
16:39
Speaker 2: moves is gonna resolve, and even if it does, it's
16:41
Speaker 2: still going to cause problems in the economy. Blah blah blah. Fine,
16:45
Speaker 2: totally get that view too. Again, I'm not here to
16:47
Speaker 2: say either one is going to or not going to happen.
16:51
Speaker 2: But the great thing about markets is, hey, if you've
16:54
Speaker 2: got a view that you want to express, there is
16:56
Speaker 2: a tool to allow you to express that view. You
16:58
Speaker 2: think stocks are going to seventy five hundred, great, you
17:01
Speaker 2: can buy them. You think stocks are going to fifty
17:03
Speaker 2: five hundred, great, you can sell them. There's nothing stopping
17:08
Speaker 2: you from doing that. But I do think this is
17:12
Speaker 2: somewhat of a binary market in that I don't think
17:15
Speaker 2: that there's like a ton out there where you're like, well,
17:18
Speaker 2: maybe stocks fall like five to seven percent from here,
17:21
Speaker 2: and that's you know, kind of where they are, you know,
17:23
Speaker 2: for a while. What what's the path there? I don't
17:28
Speaker 2: quite get that. I understand the path to future upside
17:31
Speaker 2: this year, and I understand the path to like a
17:34
Speaker 2: twenty to thirty percent pullback this year. I don't think
17:38
Speaker 2: there's a viable path where it's like, well, stocks are
17:41
Speaker 2: just gonna have a modest pullback and and just hang
17:43
Speaker 2: out there. I don't get that. But these are kind
17:47
Speaker 2: of the two paths that are out there. I think
17:49
Speaker 2: if you want to look at markets.
17:50
Speaker 3: Yeah, it's not really surprising that stocks are up. They
17:53
Speaker 3: tend to go up because the economy tends to grow.
17:55
Speaker 3: If you drop yourself into any period in history, any day,
17:58
Speaker 3: any hour, and you had to make it bet, you
18:00
Speaker 3: should say stocks are up today, stocks are up this year.
18:02
Speaker 2: And if you go today, if you said to fifty prints,
18:05
Speaker 2: today's basically a fifty.
18:06
Speaker 3: P Yeah, on a daily basis, it is the fifty one, right, yell,
18:12
Speaker 3: not even but close. But you know, you compound that
18:14
Speaker 3: and it's powerful. Yeah, you could if you. As a
18:17
Speaker 3: rule of thumb, stocks are up a little more than
18:19
Speaker 3: half the time on a daily basis, about sixty percent
18:21
Speaker 3: of the time on a monthly basis, and about seventy
18:23
Speaker 3: percent of the time are a little bit more than
18:25
Speaker 3: that on an annual basis. The trend is up because
18:28
Speaker 3: the economy continues to expand. It is not really remarkable
18:30
Speaker 3: that stocks are up. You could have your own opinion
18:32
Speaker 3: about why they should be down. But globally stocks are up.
18:36
Speaker 3: The x US Global index is up about ten and
18:40
Speaker 3: a half percent this year. I'm rounding up just a
18:43
Speaker 3: tiny bit. US stocks are up about four and a
18:46
Speaker 3: half percent, rounding up just a few fractions of a
18:48
Speaker 3: percentage point, so you could say US stocks are sagging
18:52
Speaker 3: relative to the global stock market. I wouldn't put it
18:54
Speaker 3: that way, but one could.
18:56
Speaker 1: So.
18:56
Speaker 3: Again, I don't think it's surprising at all that stocks
18:59
Speaker 3: are up, because the long term ramifications of what's happening
19:03
Speaker 3: in the Gulf are unclear.
19:05
Speaker 2: I do think this is a pretty pivotal couple weeks.
19:07
Speaker 2: Just again, I've since the beginning of this, I've kind
19:10
Speaker 2: of those of you who have been listening the last
19:12
Speaker 2: couple of months. Sinco Demayo has been my line in
19:14
Speaker 2: the sand, where if there's no resolution by then, then
19:17
Speaker 2: you can't really have a Synco Demayo party because things
19:20
Speaker 2: start to get pretty gnarly for the global economy. But
19:23
Speaker 2: we still have a couple of weeks to get there,
19:25
Speaker 2: so let's see how things develop over the next couple
19:27
Speaker 2: of weeks. Here quick break. When we return, it's Wall
19:30
Speaker 2: Street Watch.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
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19:47
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19:52
Speaker 1: Street Watch tracking the stocks, the data, and the headlines
19:55
Speaker 1: driving markets so far today right here on the Financial
19:59
Speaker 1: Exchange Radio.
20:00
Speaker 4: Work The markets are down modestly despite tensions between the
20:04
Speaker 4: US and Iran increasing over the weekend after the US
20:07
Speaker 4: seized an Iranian ship and maintained its blockade of the
20:10
Speaker 4: Straight Upfourmuz, causing uncertainty around the second round of peace talks.
20:16
Speaker 4: Right now, the Dow is down over a tenth of
20:17
Speaker 4: a percent, or seventy four points lower, SMP five hundred,
20:20
Speaker 4: off about a quarter percent. NASDAK down over four tenths
20:24
Speaker 4: of a percent to one hundred and thirteen points of
20:27
Speaker 4: Rusted two thousand is up two tenths.
20:29
Speaker 1: Of a percent.
20:30
Speaker 4: Tenure Treasure reeled up one basis point at four point
20:33
Speaker 4: two six two percent, and Oil jumping over four percent higher,
20:37
Speaker 4: trading at eighty seven dollars a barrel. Shares in American
20:40
Speaker 4: Airlines down over four percent after the company shot down
20:43
Speaker 4: rumors of a possible merger with United Airlines, saying it
20:47
Speaker 4: was not engaged with or interested in any discussions regarding
20:52
Speaker 4: a merger with United. Meanwhile, shares in Marvel Technology rising
20:55
Speaker 4: four percent after the information report of the chip maker
20:59
Speaker 4: is in discussion with Google to build new AI chips.
21:02
Speaker 4: Broadcom shares falling two percent on that report after recently
21:06
Speaker 4: agreed to produce future versions of Google's AI chips. Building
21:10
Speaker 4: products distributor QXO agreed to acquire installation products company top
21:16
Speaker 4: Build for seventeen billion dollars. Top Build stock is surging
21:19
Speaker 4: sixteen percent. Eli Lilly agreed to buy cancer drug maker
21:26
Speaker 4: Kelnonia Kelonia Therapeutics for as much as seven billion dollars.
21:32
Speaker 4: I don't know why that was so hard Eli shares
21:34
Speaker 4: a dipping and tomorrow morning, ahead of the opening bell,
21:37
Speaker 4: we'll see first quarter earnings from ge Aerospace, United Health
21:41
Speaker 4: RTX N three m I'm Tucker Silva, and that is
21:45
Speaker 4: Wall Tree Watch.
21:46
Speaker 2: It's nice to note that on a day when Mike's
21:48
Speaker 2: out here, we can still mispronounced medical names. I'll get
21:53
Speaker 2: there on the show maybe next hour as no, no,
21:56
Speaker 2: keep it the same. That was good, if you asked me,
21:59
Speaker 2: it was fine. Let's talk a little bit about this
22:02
Speaker 2: piece from the Wall Street Journal. It's titled Kevin Worsh
22:05
Speaker 2: pitched a case for FED rate cuts. His future colleagues
22:09
Speaker 2: are skeptical. Mark, can you outline the case that Worsh
22:12
Speaker 2: has pitched before we go?
22:14
Speaker 3: Can I compare it to the late nineties?
22:16
Speaker 4: Well?
22:17
Speaker 3: Trying to so, yeah, so green. Let me let me
22:19
Speaker 3: just start with him. I'm sorry to start with a
22:21
Speaker 3: little history here, But in the late nineties there was
22:24
Speaker 3: a mystery. How can unemployment be so low and inflation
22:28
Speaker 3: below Why is an inflation ticking up? Unemployment seemed to
22:32
Speaker 3: be below the natural if you like rate in sort
22:38
Speaker 3: of general terms, textbook terms, when unemployment is too low,
22:42
Speaker 3: the economy is running too hot. Inflation should be accelerating.
22:45
Speaker 3: That wasn't happening in the late nineties. Green Span speculated
22:48
Speaker 3: a lot of people thought, but he acted on this
22:50
Speaker 3: conviction that it might be due to increasing productivity.
22:54
Speaker 2: Down around four percent unemployment right.
22:56
Speaker 3: Excuse me, yeah, for the first time in a long time,
22:59
Speaker 3: and people's.
22:59
Speaker 2: Times people very war late nineteen sixties.
23:02
Speaker 3: So by conventional thinking at the time, that was indicative
23:07
Speaker 3: of an economy that was running way too hot, almost
23:09
Speaker 3: surely to put upward pressure on inflation. The normal thing
23:12
Speaker 3: for the Fed to do would have been a titan policy.
23:15
Speaker 3: Greenspan said, let's wait and see. This could have something
23:18
Speaker 3: to do with productivity. I'm oversimplifying a little bit, but
23:20
Speaker 3: that's the gist of it. So Greenspin didn't argue that
23:23
Speaker 3: rate should be cut. He simply argued that, you know,
23:26
Speaker 3: unemployment in the floors, which was an historical it was
23:31
Speaker 3: an anomally, at least at that time, relative to the
23:33
Speaker 3: experience of the seventies and eighties. He said, this might
23:35
Speaker 3: be due to more or less the computer revolution and
23:41
Speaker 3: the related Internet revolution, and in retrospect he was right.
23:45
Speaker 3: We didn't know it at the time, but productivity was
23:47
Speaker 3: soaring and that did help to keep the cost of
23:50
Speaker 3: that that did help to keep real wage growth modest
23:53
Speaker 3: and thus inflation down. Warsh is arguing this time that
23:59
Speaker 3: because of the prospective hasn't happened yet, boost to productivity
24:03
Speaker 3: from AI, or at least isn't strongly evident from the data,
24:09
Speaker 3: conclusively evident from the data, that we should be cutting
24:11
Speaker 3: rates when rates already in real terms, after inflation terms
24:16
Speaker 3: quite low, lower than anybody thinks is consistent with the
24:22
Speaker 3: neutral level of interest rates. So Warsh is making a
24:25
Speaker 3: much more aggressive argument than Greenspan made in the late
24:29
Speaker 3: nineteen nineties.
24:30
Speaker 2: When we talk about productivity effectively, remember like when people
24:35
Speaker 2: talk about like how productive they were work, they're not
24:38
Speaker 2: talking about the same way that economists talk about it.
24:40
Speaker 2: Economists are talking about it in terms of, hey, how
24:43
Speaker 2: much output can he produce per units of input? Basically
24:47
Speaker 2: output per hour? Yes? Yeah, Yeah, output per hour yes
24:51
Speaker 2: is how it's typically looked at.
24:52
Speaker 1: Yeah.
24:52
Speaker 2: So, one of the problems that we had in the
24:55
Speaker 2: twenty tens, along with you know a few when it
24:58
Speaker 2: related to the economy, productivity growth went in the toilet.
25:02
Speaker 2: In the twenty tens. We did not have a single
25:06
Speaker 2: year in which productivity growth was north of two percent.
25:10
Speaker 2: It was consistently averaging somewhere like generally between like zero
25:15
Speaker 2: point seventy five and one and a quarter percent is
25:17
Speaker 2: where it's spent most of the time. In the twenty tens,
25:20
Speaker 2: there was just no productivity growth. You can trust this
25:24
Speaker 2: with what we saw in the late nineteen nineties, where
25:26
Speaker 2: productivity growth was consistently running around three percent, generally between
25:31
Speaker 2: like two and a half and three and a half percent.
25:33
Speaker 2: And so the question in the twenty tens that people
25:36
Speaker 2: were asking was like, hey, why is there no productivity growth?
25:41
Speaker 2: I still don't have a great reason for that, but
25:43
Speaker 2: let's put that aside. What is interesting is that in
25:47
Speaker 2: the last three years now, productivity growth has been better
25:51
Speaker 2: than what we've seen in the twenty tens, but not
25:54
Speaker 2: as strong as what we saw in the late nineteen nineties.
25:58
Speaker 2: It's generally running around two two and a quarter percent,
26:01
Speaker 2: which is still good. It's much better than it's been
26:03
Speaker 2: and if you were to look at, you know, kind
26:06
Speaker 2: of what we've generally seen historically, it's a pretty decent number.
26:11
Speaker 2: It's not like outstanding or anything, but it's not terrible.
26:14
Speaker 2: It's not you know, the twenty tens. So I think
26:19
Speaker 2: the case and correct me if I'm wrong. Mark. The
26:21
Speaker 2: case that Worsh is making is that as AI gets
26:25
Speaker 2: deployed into more businesses and we understand how to use
26:28
Speaker 2: it better and it gets more powerful, that productivity growth
26:32
Speaker 2: should grow from the low tomid twos to higher numbers,
26:36
Speaker 2: whether it's three percent, four or set, whatever it might be.
26:38
Speaker 2: Like that, that's very that's a very bad argument. That's
26:41
Speaker 2: that's what he's saying should happen. Why is that a
26:44
Speaker 2: bad argument compared to what Greenspan's argument was? Just can
26:49
Speaker 2: you contrast them?
26:50
Speaker 3: Greenspan said at the time, the puzzle of coincident very
26:55
Speaker 3: low unemployment and very low inflation is attributable to a
26:59
Speaker 3: spike in productivity, which is in turn attributable to the
27:05
Speaker 3: technology revolution. Sure, the fruits of which were realized on
27:10
Speaker 3: a widespread basis in the late nineteen nineties because there
27:14
Speaker 3: was pressure on green Span to raise rates at the
27:15
Speaker 3: time because unemployment was very low.
27:17
Speaker 2: Before we go further, has there been any research done
27:22
Speaker 2: on that to confirm that specifically that was the key
27:27
Speaker 2: driver or like, just as an example, one of the
27:30
Speaker 2: major themes going on then as well was globalization and
27:33
Speaker 2: outsourcing stuff to be able to make it more cheaply.
27:37
Speaker 2: Do we have any research as to what actually caused
27:40
Speaker 2: productivity before?
27:41
Speaker 3: Yeah, lots, it a very fruitful It's something that's that's
27:47
Speaker 3: very widely researched. And the long and short of it is,
27:50
Speaker 3: it's the consensuses. It was productivity, not globalization, because globalization
27:56
Speaker 3: was a very long term phenomenon. Sure, the economy was
27:59
Speaker 3: globalizing the seventies and eighties, and there are there are
28:03
Speaker 3: some other problems with attributing that to imports that I
28:07
Speaker 3: won't get into. But the consensus is it's productivity. But again,
28:12
Speaker 3: what Warsh is saying this time is, let's assume there
28:14
Speaker 3: will be a productivity boom. At the time Greenspan made
28:18
Speaker 3: his argument, it was again to hold rate steady, not
28:20
Speaker 3: to cut them, to hold them steady when there was
28:22
Speaker 3: pressure to raise them because everybody thought unemployment was too
28:25
Speaker 3: low and thus would be inflationary. Warsh is saying there
28:28
Speaker 3: might be a productivity boom at some point, so let's
28:30
Speaker 3: just change policy now based on that prospect. Those are
28:34
Speaker 3: two very different arguments.
28:36
Speaker 2: So to summarize, just to make sure that I'm understanding clearly,
28:42
Speaker 2: Greenspan's comment, do not comment, but thesis was unemployment is
28:47
Speaker 2: low and we're not seeing any type of uptick in inflation,
28:51
Speaker 2: so we can afford to be patient and not raise
28:53
Speaker 2: rates despite the unemployment rate being in an area.
28:56
Speaker 3: Where identified the mechanism. Does it work there? Yeah, don't
28:59
Speaker 3: forget about. There's a short term trade off between inflation
29:02
Speaker 3: and unemployment that the Stone pays close attention to.
29:04
Speaker 1: That.
29:05
Speaker 3: The nature of that trade off, the shape of it,
29:07
Speaker 3: if you will, changed in the nineties. A lot of
29:09
Speaker 3: people realized it, but green Span had the conviction to
29:13
Speaker 3: h to let that influence policy making.
29:15
Speaker 2: Let me ask another question, just just on this. So
29:18
Speaker 2: if we take a look at where the FED funds
29:20
Speaker 2: rate is at this very particular moment in time, Fed's
29:24
Speaker 2: holding it at three and a half to three seven five. Yeah,
29:29
Speaker 2: let's assume. Let's let's assume that Worse is right. I'm
29:34
Speaker 2: not saying that he is or isn't, but let's let's
29:36
Speaker 2: let's just do a thought experiment. Let's assume Worse is right.
29:41
Speaker 2: What's a reasonable case for how low the Fed could
29:46
Speaker 2: take rates?
29:47
Speaker 3: If he is, well, there'll be a neutral They'll be
29:50
Speaker 3: the neutral rate will change if he's right, suppose it's
29:53
Speaker 3: one percent today, the neutral rate being the rate that
29:56
Speaker 3: effectively keeps inflation steady. All else, Sure, if there is
30:02
Speaker 3: this productivity boon due to the widespread adoption of AI,
30:08
Speaker 3: that could actually push the neutral rate up, not down.
30:13
Speaker 3: The New York Fed and others, Richmond Fed, excuse me,
30:16
Speaker 3: publishes a regular update on the neutral rate. It's somewhere
30:19
Speaker 3: in the point seventy five to one point five or so.
30:23
Speaker 2: Rates above today, above inflation.
30:26
Speaker 3: That's the real thank you, that's real real rate today.
30:29
Speaker 3: By the way, it is about point five if inflation
30:31
Speaker 3: is at three. So policy may be loose today. He
30:34
Speaker 3: wants to loosen it further based on the prospect.
30:37
Speaker 2: Sorry, So I guess where I'm going with this is,
30:41
Speaker 2: if one were to assume that wars is right, there's
30:45
Speaker 2: not a path for the Fed to cut rates from
30:47
Speaker 2: like three and a half percent to one and a half.
30:49
Speaker 3: No, because that AI investment requires capital, and that will
30:52
Speaker 3: push up interest rates, more demand for loans. Right, so
30:56
Speaker 3: the neutral rate may go from one to two.
30:59
Speaker 2: So here's where I tend to land on this is look,
31:04
Speaker 2: quite honestly, like let's let's also assume like worst gets confirmed,
31:07
Speaker 2: and YadA YadA. If worst wants to cut interest like
31:11
Speaker 2: all else being equal, if she wants to cut interest
31:14
Speaker 2: rates by a quarter percent or half percent, I don't
31:17
Speaker 2: really care. It doesn't make a difference. What ultimately matters
31:22
Speaker 2: is the magnitude and direction of the change. And if
31:25
Speaker 2: you're just gonna do a rate cut or two, it's
31:27
Speaker 2: probably fine.
31:28
Speaker 3: We'll know in a year or so if he's wrong
31:30
Speaker 3: and they'll have to change course.
31:32
Speaker 2: But but ultimately it's like, you know, everyone gets so like, oh,
31:35
Speaker 2: is the Fed gonna cut by a quarter percent? It
31:38
Speaker 2: doesn't matter if the Fed cuts by a quarter percent.
31:40
Speaker 2: What matters is, Hey, are they gonna have to like
31:42
Speaker 2: move directionally like a quarter percent for six meetings in
31:45
Speaker 2: the row or are they generally in the right ballpark?
31:49
Speaker 2: A quarter percent here and there doesn't matter.
31:51
Speaker 3: In the seventies, they they systematically erred for like several years.
31:57
Speaker 2: Yeah, I don't think I think there.
31:58
Speaker 3: Will source If War, because of political pressure, hold steady
32:03
Speaker 3: on rates or decides to cut them, we'll know if
32:05
Speaker 3: that ends up being the wrong thing to do. We'll
32:07
Speaker 3: know it within a year to two years, and the
32:10
Speaker 3: Fed will have to dramatically change course.
32:13
Speaker 2: Let's take a quick break. When we come back, we'll
32:16
Speaker 2: talk about, Hey, if you're a worker looking for a
32:19
Speaker 2: new job, why are you so stuck right now? We'll
32:22
Speaker 2: discuss that when we return.
32:25
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33:29
Speaker 2: Why are workers stuck? Not enough employers is the headline
33:32
Speaker 2: from a Bloomberg opinion piece, and basically it's saying, Hey,
33:36
Speaker 2: you've got a situation right now where there's very little
33:39
Speaker 2: turnover in the labor market, and you know, you're just seeing,
33:45
Speaker 2: you know, a situation where again low turnover and not
33:49
Speaker 2: much job hopping relative to what it's been in the past.
33:53
Speaker 2: And the case that this piece lays out is, hey,
33:57
Speaker 2: if you don't have another firm to go to, then
34:01
Speaker 2: you can't get a higher offer to either leave or
34:03
Speaker 2: bring to your current company in order to get them
34:06
Speaker 2: to raise your salary. And it's an argument that I'm
34:09
Speaker 2: sympathetic to because I'm a big believer in Look, we
34:11
Speaker 2: could have a whole lot less regulation in the economy
34:16
Speaker 2: if we just had a lot more competition, because competition
34:20
Speaker 2: forces changed better than regulation. In my opinion. It's that
34:23
Speaker 2: need to compete for either business or for workers or
34:26
Speaker 2: for inputs means that companies have to always be evolving
34:31
Speaker 2: and always trying to do better for customers or for
34:35
Speaker 2: their employees, or they risk losing them. If there's only
34:37
Speaker 2: one game in town, you don't have to compete for customers,
34:40
Speaker 2: you don't have to compete for employees, you don't have
34:42
Speaker 2: to compete for resources, and so you get kind of
34:46
Speaker 2: I think fat and happy is the technical term. I'm
34:50
Speaker 2: not sure that I've seen enough data to suggest that
34:53
Speaker 2: this is actually what's going on here, though, but it
34:57
Speaker 2: is a view that I'm sympathetic to.
34:59
Speaker 3: Yeah, this comes from a paper, a very dense paper.
35:04
Speaker 3: I got through like the first couple of pages and said.
35:06
Speaker 2: If you're telling me it's dense, it is.
35:08
Speaker 3: Paper's in economics. You got to have either a math
35:13
Speaker 3: degree undergrad or a graduate degree in economics to understand them.
35:18
Speaker 2: Neither.
35:19
Speaker 3: I'm getting Threll. You're you're pretty smart, though, you can
35:21
Speaker 3: between your instinct and Gemini, you could probably figure it out.
35:25
Speaker 3: But there are some things that even a very smart
35:27
Speaker 3: person would just find totally inaccessible. I got like their
35:30
Speaker 3: dupe ages, and it's so damn specialized that I just
35:33
Speaker 3: sort of gave up and said, Gemini, can you summarize this?
35:36
Speaker 2: Yes, tell me what this means? Yeah, pretty much.
35:38
Speaker 3: I just sort of get I'm like I could spend
35:40
Speaker 3: a half hour trying to derive this the main equation
35:43
Speaker 3: of the model, and a lot of it is theoretical,
35:45
Speaker 3: So beware the idea that mobility or lack thereof due
35:49
Speaker 3: to more concentration might be the culprit behind the very Okay,
35:54
Speaker 3: what's the puzzle? Every paper starts with what are we
35:56
Speaker 3: trying to explain it?
35:57
Speaker 2: It's a hard maybe, what are we trying to explain here?
35:59
Speaker 3: We're trying to explain the fact that real wages doubled
36:01
Speaker 3: from World War Two to nineteen seventy and then since then,
36:05
Speaker 3: in the like the fifty years since then, more or
36:06
Speaker 3: less my whole lifetime, they've only gone up by a
36:09
Speaker 3: quarter of a percentage point. WHOA, what's the reason for this?
36:13
Speaker 3: Is it technology? Is it trade? Is it concentration? Yeah,
36:18
Speaker 3: it's they say it's concentration, which is interesting, chuck. But
36:21
Speaker 3: there's gonna be a lot more, obviously work on this.
36:24
Speaker 2: Well. It also then gets to the question of, like
36:26
Speaker 2: what is an appropriate sample size for the duration that
36:29
Speaker 2: you're measuring, because like what they lay out is true, Like, yeah,
36:32
Speaker 2: real wages have been kind of stagnant for that period,
36:35
Speaker 2: but if you look at the last five or six
36:36
Speaker 2: years and not five or six if you look at
36:39
Speaker 2: the last four now, like basically since inflation peaked in
36:42
Speaker 2: twenty two, real wages have actually moved up pretty constructively
36:46
Speaker 2: over the last four years. And this is one of
36:49
Speaker 2: the most concentrated economies that we've ever had in the
36:51
Speaker 2: United States. So, like, what do we make of that? Like,
36:55
Speaker 2: is is that period enough to you know, either prove
36:59
Speaker 2: or disprove this. I don't, No, I haven't done the research.
37:02
Speaker 2: But like you know, look over a single quarter, it
37:07
Speaker 2: can be noise. But you start looking at something that
37:09
Speaker 2: happens over like four or five six years, and.
37:11
Speaker 3: You're like, Okay.
37:14
Speaker 2: I know that we're fifteen into that, but this new
37:17
Speaker 2: like real wages in the last four years have actually
37:20
Speaker 2: moved up at a decent clip. It's like it's it's
37:24
Speaker 2: it's kind of gone against what we've seen, you know,
37:27
Speaker 2: for that the rest of that time period. So I don't, uh,
37:31
Speaker 2: I don't know what to make of that. Again, I'm
37:33
Speaker 2: sympathetic to the view outlined in this piece just because
37:36
Speaker 2: my general my general preference is, hey, you can regulate
37:41
Speaker 2: the economy a lot less if you allow for more competition,
37:44
Speaker 2: because if a company does bad stuff that people don't like. Okay,
37:48
Speaker 2: they're gonna lose their business and lose their employees. If
37:51
Speaker 2: the only companies in the world are Amazon, Apple, and Google,
37:56
Speaker 2: well they can kind of do whatever they want, because
37:59
Speaker 2: where are you gonna go? Who are you gonna call ghostbusters?
38:04
Speaker 2: No you're not, because they're out of business too. Let's
38:10
Speaker 2: take a quick break, and when we come back, we
38:12
Speaker 2: got more financial exchange and just a bit