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Vibes are becoming a go-to economic indicator · The Financial Exchange Show

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Speaker 2: Good morning, Welcome back to the Financial Exchange. It's Mike,
1:15
Speaker 2: Mark and Tucker with you on a Thursday where we
1:18
Speaker 2: had some GDP revisions, increasing chatter about the Federal Reserve,
1:22
Speaker 2: as well as weekly jobless claims. If you're tuning in
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Speaker 2: on sirius for one of the first times, we're a
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Speaker 2: show here that offers insights for investors and business owners
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Speaker 2: as they determined personal and professional decisions given everything else
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Speaker 2: going on in the world today. And we had a
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Speaker 2: few texts into the show. You two can text the
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Speaker 2: show at six one seven three six two thirteen eighty
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Speaker 2: five during our earlier segment talking a bit about interest rates,
1:46
Speaker 2: and five away texted in, Uh, think about interest rates.
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Speaker 2: They're tied to home sales, our national debt, which is
1:54
Speaker 2: huge business finance as well. Yes, we make more on
1:58
Speaker 2: treasury bills. And you know, if I buy a treasury
2:01
Speaker 2: today compared to twenty twenty two, I'm making a fair
2:03
Speaker 2: bit more as an investor. But what does it do
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Speaker 2: for the common person? So I think what he is
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Speaker 2: asking five a weight and forgive me for putting words
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Speaker 2: in your mouth, is there's a lot of compelling reasons
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Speaker 2: why you might want lower interest rates brought on by
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Speaker 2: the Federal Reserve. Right, if you're trying to buy a home,
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Speaker 2: if you are investing in stocks, if you are trying
2:27
Speaker 2: to finance a new business investment, lower interest rates can
2:30
Speaker 2: sure benefit you. And I think people miss the days
2:33
Speaker 2: of the twenty tens when they were considerably lower. I
2:36
Speaker 2: want to walk through the dangers of that of the
2:39
Speaker 2: Federal Reserve lowering interest rates at this point in time,
2:44
Speaker 2: or the President, for instance, dictating that interest rates get lowered.
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Speaker 2: Let's first talk about, you know, I want to take
2:50
Speaker 2: this piece by piece. The primary method that the Federal
2:53
Speaker 2: Reserve has two lower interest rates does not affect mortgage
2:57
Speaker 2: rates in any way, or long term rates on the
3:01
Speaker 2: US government debt. They can do that separately, and we'll
3:03
Speaker 2: get to that. But let's talk about what the Federal
3:05
Speaker 2: Reserve generally does. Wheneverbody talks about the FED up.
3:07
Speaker 3: Yeah, So, the FED control is the supply of money.
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Speaker 3: By buying or by injecting reserves into banks. It can
3:18
Speaker 3: lower the rate called the Federal funds rate, at which
3:21
Speaker 3: banks lend to one another to meet their capital requirements.
3:25
Speaker 3: That's the Fed's primary policy tool. It has been since
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Speaker 3: the early nineteen eighties. The Fed funds rates. So when
3:30
Speaker 3: we say the FED decided to lower rates or not
3:33
Speaker 3: lower rates, we're talking about the federal funds rate. That
3:37
Speaker 3: rate can't affect longer term interest rates though through its
3:40
Speaker 3: impact on expected future short term rates, which is a
3:44
Speaker 3: which aren't part of function of expected inflation. So the
3:47
Speaker 3: Fed does not directly target longer term rates, but its
3:50
Speaker 3: policies can certainly affect them. Sometimes the effect is surprising,
3:54
Speaker 3: like when the FED decided to ease policy last the
3:57
Speaker 3: last quarter of last year, when it cut its federal
4:00
Speaker 3: funds rate target from five and a quarter to four
4:02
Speaker 3: and a quarter. The result was rising, not falling, shorter term,
4:05
Speaker 3: longer term excuse me, interest rates.
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Speaker 2: So I want to explain that again. Last fall, the
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Speaker 2: Fed cut rates, and mortgages became more expensive.
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Speaker 3: Yeah, and longer term treasury rates went up too. Of course,
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Speaker 3: mortgages are tied longer term mortgages are tied to those
4:19
Speaker 3: probably increased growth and inflation expectation. So every interest rate
4:22
Speaker 3: that's quoted has a real or after inflation and aenomenal
4:26
Speaker 3: which is what you see in the newspaper or wherever
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Speaker 3: component and the nominal is just the real plus expected inflation.
4:32
Speaker 3: You have to keep that relationship. It's called the Fisher identity.
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Speaker 3: I'll credit the economist came up with it a long
4:36
Speaker 3: time ago. You have to keep the Fisher identity or
4:38
Speaker 3: relationship in mind when you look at any interest rate.
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Speaker 3: So when rates go up or down, it could be
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Speaker 3: because the real component is rising or falling, or the
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Speaker 3: expected inflation component of the quoted interest rate is rising
4:51
Speaker 3: or falling. And it makes sense that when the FED
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Speaker 3: cuts rates, if inflation expectations go up, or if economic
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Speaker 3: growth expectations rise, growth creates demand for loanable funds, which
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Speaker 3: all else equal, pushes up interest rates. Longer term interest rates,
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Speaker 3: it makes sense that they could rise as they did.
5:07
Speaker 3: So when the administration harangues the Fed over interest rates,
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Speaker 3: they need to be very careful of what they wish for.
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Speaker 3: They might actually get higher longer term interest rates if
5:17
Speaker 3: the FED cuts, especially cuts when economic growth appears to
5:21
Speaker 3: be at about trend. Anything faster could cause inflation to accelerate.
5:26
Speaker 2: So I think the main compelling point that I would
5:27
Speaker 2: make about the FED is they.
5:31
Speaker 4: Generally do not control longer term rates.
5:33
Speaker 5: They've tried that historically, but they've done so and very
5:35
Speaker 5: recently too.
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Speaker 2: We'll talk about it, okay, but they generally don't control
5:39
Speaker 2: those longer term rates. Those are market driven. And if,
5:42
Speaker 2: for instance, you have a FED that decides that because
5:46
Speaker 2: of pressure from some outside force i e. The President,
5:49
Speaker 2: that they want to lower short term rates, the investment
5:52
Speaker 2: community as a whole might look at that very negatively
5:55
Speaker 2: and say, we are not going to buy your long
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Speaker 2: term bonds. If you are talking about, you know, trying
6:01
Speaker 2: to influence artificially lower interest rates, and so you can
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Speaker 2: actually have the opposite effect where investors, because these are
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Speaker 2: market driven interest rates. The FED does not control mortgage rates.
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Speaker 2: They do not control the rates on fifteen year government bonds.
6:15
Speaker 2: You could have foreign buyers saying, now forget this, we're
6:17
Speaker 2: not we're selling these things because we don't believe that
6:19
Speaker 2: the FED has credibility anymore in terms of their actual
6:22
Speaker 2: mandate of controlling inflation.
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Speaker 3: Right, and if inflation goes up by the way, or
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Speaker 3: accelerates from its present level, which it may very well
6:29
Speaker 3: because it's been subdued the past few months, maybe just
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Speaker 3: for statistical correction reasons, you'll be worse off, not better off.
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Speaker 3: So it may seem like the Fed is being punitive
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Speaker 3: by keeping rates too high, but think of the consequences.
6:43
Speaker 3: And we lived with this only very recently, so it
6:45
Speaker 3: should be fresh in our minds. Think of the consequences
6:48
Speaker 3: of high inflation. How disturbing, how unsettling, how disruptive that was.
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Speaker 2: Now during COVID, the FED did a bunch of extraordinary
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Speaker 2: things that they some of which they had never done before.
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Speaker 2: But one of the things they did for quite a
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Speaker 2: bit of time was buying longer term government debt mortgage
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Speaker 2: backed securities. They were buying as well as treasuries, I believe,
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Speaker 2: for a pre prolonged period of time. Still are they
7:13
Speaker 2: still are doing so at a less significant rate, but
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Speaker 2: they are still doing so.
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Speaker 4: And what is the goal of that policy, because that's
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Speaker 4: a little bit different.
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Speaker 3: To keep there's a technical rationale which you don't really
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Speaker 3: need to know. The long and the short of it is,
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Speaker 3: this is not surprising. By buying those you keep longer
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Speaker 3: term interest rates lower than say, if markets were dictating
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Speaker 3: what long term interest rates would be.
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Speaker 4: And how do they do that by printing money?
7:37
Speaker 1: Right?
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Speaker 3: They literally they do it the same way. They instead
7:39
Speaker 3: of using those instead of using money that they can
7:42
Speaker 3: create to inject reserves into banks. They tell the New
7:47
Speaker 3: York Fed, which is the branch of the FED that
7:51
Speaker 3: executes that implements their policy, to instead buy US treasuries directly,
7:56
Speaker 3: so again, treasures being longer term a debt.
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Speaker 2: By the way, here's the point that I'm trying to make.
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Speaker 2: The Fed can influence interest rates pretty dramatically. The downside
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Speaker 2: to them doing so. Let's say the downs that the
8:11
Speaker 2: Fed very intentionally wanted to lower interest rates across the board,
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Speaker 2: they could do so. Doing so would very likely, very possibly,
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Speaker 2: I guess, increase inflation because you are basically printing money
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Speaker 2: to do so. Am I oversimplifying things?
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Speaker 3: Well, it didn't result in increased inflation in the twenty tens,
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Speaker 3: but there were probably other reasons for that, one being
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Speaker 3: inflation expectation stayed low, and the Fed said, we're going
8:37
Speaker 3: to stop doing this eventually. If you pull it, go ahead, Mike.
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Speaker 4: I guess.
8:41
Speaker 2: Let me put it more simply, I don't know what
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Speaker 2: the inflationary impact would be. Their method for controlling longer
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Speaker 2: term rates, if they chose to do so, would require
8:50
Speaker 2: them to print a bunch of money to lower interest
8:53
Speaker 2: rates on the longest, but.
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Speaker 3: There may My point is, depending on how expectations behave,
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Speaker 3: there could be an inflationary impact if the reason why
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Speaker 3: it didn't translate into higher inflation in the twenty tens
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Speaker 3: is that there were changes going on in terms of
9:07
Speaker 3: money demand. Also a technical point that I don't think
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Speaker 3: we need to get into. I'll just leave it at expectation.
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Speaker 3: This is the Bernanke exp explanation. It's not the only one.
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Speaker 3: Expectations were pretty well anchored. If people think the Fed
9:18
Speaker 3: regimes changed, maybe because someone who's sensitive to what politicians
9:22
Speaker 3: want will be made Fed cheer. If Trump gets his way,
9:25
Speaker 3: it could break everything. I'm not saying it's going to
9:27
Speaker 3: be the end of the world, but we're in for
9:29
Speaker 3: higher and more volatile inflation that cannot be good for
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Speaker 3: equity prices or the prices of any asset.
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Speaker 4: So to five a weight.
9:36
Speaker 2: I don't know that we really answered the question directly,
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Speaker 2: but that's how we are thinking about this of why
9:43
Speaker 2: don't we want to lower interest rates? I would love
9:45
Speaker 2: lower interest rates, but if you lower them unjustifiably, then
9:50
Speaker 2: you have a severe risk of high inflation, which is
9:55
Speaker 2: way worse in my mind than high interesting.
9:56
Speaker 3: You know there are good reasons to lower interest rates
9:58
Speaker 3: right now, but one of them is not just to
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Speaker 3: respond to political pressure. What if inflation turns around. What
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Speaker 3: if the subdued inflation of the past few months month
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Speaker 3: over month has been very low. What if that is
10:10
Speaker 3: indeed due to seasonal corrections which were over overcompensating. They
10:14
Speaker 3: will correct seasonal factors being applied. What if it bounces back.
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Speaker 3: I don't think the White House will be calling for
10:20
Speaker 3: higher interest rates because inflation now looks higher. So you
10:23
Speaker 3: do have to keep the trend in inflation in mind,
10:27
Speaker 3: and that's that remains elevated.
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Speaker 2: Let's take a quick break when we come back, a
10:31
Speaker 2: little bit of trivia here on the Financial Exchange, and
10:33
Speaker 2: then we're talking about consumer sentiment and the vibes of
10:37
Speaker 2: the economy that's next year on the Financial Exchange.
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12:18
Speaker 2: Mark, I want to talk a little bit about vibes
12:20
Speaker 2: and by vibes of what I actually mean is sentiment.
12:24
Speaker 2: We get all these different sentiments surveys that get done
12:27
Speaker 2: on the state of the economy, and frankly, our position,
12:32
Speaker 2: if I'm to summarize the financial exchanges position on the
12:36
Speaker 2: sentiment surveys over the last few years, it's been because
12:40
Speaker 2: of the recent history, with a fair bit of skepticism
12:42
Speaker 2: about what they might mean.
12:44
Speaker 1: Uh.
12:44
Speaker 2: There's a piece in Bloomberg today with basically like an
12:48
Speaker 2: expose on the new head of the University of Michigan
12:53
Speaker 2: Consumer Sentiment Survey, which is an interesting piece her background
12:56
Speaker 2: and her view of things.
12:57
Speaker 4: But I think the compelling the argument that she.
12:59
Speaker 2: Made is a lot of people are discounting the data
13:03
Speaker 2: on Wall Street these days because it didn't indicate much
13:06
Speaker 2: during COVID, and I think her perspective is that could
13:09
Speaker 2: be a big mistake. I still don't know what to
13:13
Speaker 2: do with this information, I guess would be my point.
13:16
Speaker 2: Do we trust it, do we still put it into models?
13:19
Speaker 2: And will it indicate what it did for frankly decades
13:23
Speaker 2: before COVID.
13:24
Speaker 3: I mean, the cold analytical answer is you put it
13:27
Speaker 3: in When we say a model is just an abstract
13:30
Speaker 3: way of describing the way something works. We all use models.
13:33
Speaker 3: When you're gonna change your tire, you get a model
13:35
Speaker 3: in your head. I'm gonna lift the car. I'm gonna we're.
13:38
Speaker 6: Gonna dial the phone and call Triple.
13:41
Speaker 5: I'm gonna sit in my air conditioned car, or.
13:43
Speaker 3: Wait for some model that one out poor bastard to
13:45
Speaker 3: come and jack my car up while I watch him
13:48
Speaker 3: sipping my diet coke.
13:49
Speaker 5: Yeah, that's my model. No, but sorry.
13:53
Speaker 3: The only way to answer this, and like this article's
13:55
Speaker 3: four pages long for Pete's sake, the only way to
13:57
Speaker 3: answer it is does it improve the fit of your model?
14:00
Speaker 3: You could test that very easily. This software is now
14:03
Speaker 3: available to run on your laptop. It has been for
14:05
Speaker 3: over twenty years. Like any economists with a little bit
14:08
Speaker 3: of training, you don't need a PhD. Can test the
14:10
Speaker 3: hypothesis if you will, if you want to get fancy
14:13
Speaker 3: that something helps you forecast the future direction of economic growth.
14:17
Speaker 3: That's that's the way I approach it. Anyways, as a generalist,
14:21
Speaker 3: like you can, you can wax romantically about consumer surveys
14:25
Speaker 3: and they tap into the soul of man and like blooney,
14:29
Speaker 3: do they give me a higher R squared on my
14:30
Speaker 3: model or meaning do they fit, do they fit the
14:32
Speaker 3: data better or don't they?
14:34
Speaker 5: Do they help me predict recessions? Or do they make
14:37
Speaker 5: my predictions noisier?
14:38
Speaker 4: The problem is the answer in twy twy two was
14:41
Speaker 4: resoundingly they make your models worse. Right, well, I don't.
14:44
Speaker 5: It depends on the model. This is another thing.
14:46
Speaker 3: Two different researchers have different than what they call specification.
14:49
Speaker 3: That's like what you put into your model. They're like
14:51
Speaker 3: ingredients if you want to think about it that way,
14:53
Speaker 3: and you can give very different results depending on the
14:55
Speaker 3: timeframe the specification. So some people may have a strong
14:59
Speaker 3: preference for sentiment because they use it in such a
15:01
Speaker 3: way that they think it's improved the fit. Again a
15:05
Speaker 3: little bit technical, but I think that conveys also what
15:08
Speaker 3: a researcher tries to do. Does it improve the fit
15:10
Speaker 3: of your model or not? You don't need to go
15:12
Speaker 3: on and on. I have great respect for the work
15:14
Speaker 3: that they do by the way they run circles around me.
15:16
Speaker 3: But if it doesn't improve the fit of my model, thanks,
15:19
Speaker 3: I don't need one.
15:20
Speaker 4: Right the evidence it does.
15:23
Speaker 2: The evidence on sentiment, by the way that that Bloomber
15:26
Speaker 2: points out here is that sentiment According to Michigan Survey,
15:30
Speaker 2: plunged this spring twenty nine percent in the first four
15:33
Speaker 2: months of twenty twenty five. This survey has been done
15:36
Speaker 2: for seventy nine years. Drops that of that magnitude have
15:41
Speaker 2: in almost every case predicted recession.
15:43
Speaker 4: And again I think a lot.
15:46
Speaker 5: Of and we did have negative growth in the first
15:47
Speaker 5: court we dideh the.
15:48
Speaker 2: Way, so you know, it predicted I guess negative growth.
15:51
Speaker 2: We haven't seen a recession yet. The point that she
15:55
Speaker 2: or the article the author makes, and then you know,
15:58
Speaker 2: the person who runs the survey makes is you know,
16:01
Speaker 2: it seems to them that a lot of people are
16:03
Speaker 2: ignoring this. She also points out that, hey, look, consumer
16:06
Speaker 2: is important. The consumer spending drives nearly seventy percent of
16:09
Speaker 2: the economy today. There's one structural thing that's different about
16:13
Speaker 2: the economy today compared to decades past that I think
16:17
Speaker 2: is important for us to acknowledge, which is the income
16:21
Speaker 2: and wealth gap. We've highlighted this a few times, but
16:25
Speaker 2: today was it half of overall spending is happening by
16:29
Speaker 2: the top ten percent of income earners.
16:31
Speaker 4: I believe was the stat that we pulled out.
16:33
Speaker 2: That is significantly different from the nineteen seventies. This survey
16:37
Speaker 2: does not just go survey the people that are in
16:38
Speaker 2: the top ten percent income spectrum. It probably touches them too,
16:42
Speaker 2: But you might be getting very different results from this,
16:46
Speaker 2: in part due to where the spending is coming from
16:48
Speaker 2: compared to previous decades.
16:50
Speaker 3: It could be that spending becomes less pro technical cyclical,
16:55
Speaker 3: to use a technical term, meaning does it move strongly
16:57
Speaker 3: in tandem with the business cycle, whether it's the business cycle,
17:01
Speaker 3: is one is at the expansion stage or the contraction
17:04
Speaker 3: phase stage. I mean, I don't know, Mike. Like with
17:07
Speaker 3: all the data points we've been talking about, all the series,
17:10
Speaker 3: the time series, or very whatever you want to call them,
17:12
Speaker 3: economic measures more generally we've been talking about this morning,
17:16
Speaker 3: we won't know if they matter until well after the fact,
17:19
Speaker 3: which is why you got to sympathize with the FED.
17:20
Speaker 3: They have to react in real time using models that
17:24
Speaker 3: may not be right, a picture of the economy that
17:27
Speaker 3: may not be right, and on top of that you've
17:29
Speaker 3: got imperfect information. What you do have is stale and noisy,
17:34
Speaker 3: as evidenced by the fact that GDP was revised down
17:37
Speaker 3: by one hundred and fifty percent from point two to
17:40
Speaker 3: point five. I got that right, right, it's one hundred
17:43
Speaker 3: and fifty percent. If you want to put you wouldn't
17:45
Speaker 3: put in percentage terms because that's preposterous, it's hysterical. But
17:48
Speaker 3: it does make the point that, geez, the errors sometimes
17:51
Speaker 3: are bigger than the estimate.
17:53
Speaker 4: Yeah.
17:55
Speaker 2: I think the overall lesson I have is when it
17:57
Speaker 2: comes to economics, there are no rules.
17:59
Speaker 4: There are no laws.
18:01
Speaker 3: Well, there are a few I wouldn't for example, inflation
18:04
Speaker 3: on implant. Now you can Greg manqu who teaches over
18:07
Speaker 3: it Harvard, Not that they would let me in over there.
18:09
Speaker 5: But he's in his textbook.
18:11
Speaker 4: He leads with like, like anywhere on campus.
18:13
Speaker 5: No, they won't even let him.
18:14
Speaker 3: No kidding, aren't you the guy that tried like ten
18:19
Speaker 3: times to get it?
18:20
Speaker 5: Yeah, that's me. I said I'd pay anyway.
18:24
Speaker 3: Here he cites ten rules in his his sort of
18:28
Speaker 3: classic textbook that's used for for undergrads, like there's a
18:32
Speaker 3: short term trade off between inflation and unemployment. Most ninety
18:35
Speaker 3: five percent of economists maybe more, would agree with that
18:38
Speaker 3: free trade makes those that engage in trade better off.
18:41
Speaker 3: Ninety five percent agreement money is neutral in the long
18:44
Speaker 3: run ninety five percent agreement, and there are others. They're
18:47
Speaker 3: not laws in the sense that it doesn't freeze water
18:51
Speaker 3: agrees that beautiful, thank you. They're not laws in that sense,
18:56
Speaker 3: but they're sort of rules of thumb that you can
18:58
Speaker 3: count on happening most of the time. But if we
19:00
Speaker 3: don't get the magnitude right, yeah, so it's I wouldn't
19:03
Speaker 3: like discard No, I wouldn't discard it either. But I
19:07
Speaker 3: think for many when they see something like the Psalm rule,
19:10
Speaker 3: which had been this rule that everyone knew was going
19:12
Speaker 3: to break at some point, break like it did last year,
19:16
Speaker 3: it's confused. That's the medium like though, and they don't
19:19
Speaker 3: know a lot about economics, even those that cover the FED.
19:22
Speaker 3: And I'm not picking on anybody in particular, they just
19:25
Speaker 3: their journalism majors.
19:26
Speaker 4: Let's take a quick break.
19:28
Speaker 2: When we come back, we've got Wall Street Watch and
19:29
Speaker 2: that will have the trivia winner next.
19:40
Speaker 1: Bringing the latest financial news straight to your radio. Every day,
19:45
Speaker 1: it's the Financial Exchange on the Financial Exchange Radio Network.
19:50
Speaker 1: Time now for Wall Street Watch, a complete look at
19:54
Speaker 1: what's moving markets so far today right here on the
19:57
Speaker 1: Financial Exchange Radio Network.
19:59
Speaker 6: Markets are extending their gains today as investors digest a
20:02
Speaker 6: new batch of economic data points, including jobless claims, revised
20:06
Speaker 6: first quarter GDP, and durable goods. Wall Street's also reacting
20:10
Speaker 6: to a report from The Wall Street Journal that President
20:13
Speaker 6: Trump was considering naming his pick to succeed FED chairman
20:16
Speaker 6: Jerome Powell. Early. Right now, the Dow is up by
20:20
Speaker 6: six tenths of one percent, or two hundred and sixty
20:23
Speaker 6: five points. SMP five hundred is up over one or
20:26
Speaker 6: excuse me, up over half a percent higher. NASDAK also
20:29
Speaker 6: up over half a percent. RUSS of two thousand is
20:31
Speaker 6: up nearly one percent higher now, a ten year treasure
20:35
Speaker 6: reeled down by one basis point of four point two
20:37
Speaker 6: seven percent, and crude oil up two percent higher, trading
20:41
Speaker 6: in sixty six dollars in thirty two cents a barrel,
20:44
Speaker 6: and Vidia shares up about half of one percent after
20:47
Speaker 6: the chip and AI giant rallied to a new record
20:50
Speaker 6: high yesterday, making it once again the largest company by
20:53
Speaker 6: market capitalization, surpassing Microsoft, another chip maker, and Micron notched
20:59
Speaker 6: a big leap in quarterly sales and earnings. However, That's
21:02
Speaker 6: stock now down by two percent after being higher in
21:05
Speaker 6: pre market trading. Meanwhile, Meta shares rising nearly two percent
21:09
Speaker 6: after CEO Mark Zuckerberg successfully poached three open AI researchers
21:14
Speaker 6: and a recent recruiting initiative intended to boost the Facebook's
21:18
Speaker 6: owners AI effort. After The Wall Street Journal reported yesterday
21:23
Speaker 6: that Shell was in early talks to buy BP, Shell
21:26
Speaker 6: has come out and denied that report. Shell is up
21:29
Speaker 6: by about two percent while BP stock is edging higher. Elsewhere,
21:33
Speaker 6: food spice maker McCormick beat earnings expectations for the previous quarter,
21:37
Speaker 6: that stock jumping nearly five percent higher, and Nike will
21:42
Speaker 6: post their earnings after today's closing bell. I'm Tucker Silva
21:47
Speaker 6: and that is Wall Street Watch And the trivia question
21:50
Speaker 6: we asked in the previous segment was how many books
21:52
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21:57
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22:00
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22:03
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22:10
Speaker 2: There's been a general call for push, mainly from the
22:15
Speaker 2: private equity space, but a push to open up the
22:19
Speaker 2: individual investor market in private equity, and I generally get
22:25
Speaker 2: suspicious of anybody who wants to, you know, gain access
22:29
Speaker 2: to the retail investor after exclusively serving institutional clients.
22:33
Speaker 5: That's the whole investment industry. Unfortunately.
22:35
Speaker 2: Yeah, oftentimes it's yeah, that's fair. Oftentimes it's just a
22:41
Speaker 2: push for cash.
22:42
Speaker 4: And so Blackrock is kind of one of.
22:47
Speaker 2: The leaders in this space, and they are going to be,
22:50
Speaker 2: apparently reportedly at least from the Wall Street Journal Journal,
22:53
Speaker 2: pushing private equity investments out to the masses in not
22:59
Speaker 2: every one K would be my guest, but in some
23:01
Speaker 2: approved for one K plans where they intend to offer
23:05
Speaker 2: target date funds with a five to twenty percent allocation
23:09
Speaker 2: to private investments. So let's not go with the dramatic
23:14
Speaker 2: what could go wrong, but let's start with private equity
23:16
Speaker 2: in general. And you know whether or not it is
23:19
Speaker 2: served by being placed into four one well served by
23:22
Speaker 2: being placed into four to one ks, and what that
23:25
Speaker 2: practically means for people.
23:26
Speaker 3: I mean possibly, So these are private These are investments
23:30
Speaker 3: in private that is, non publicly listed in non publicly
23:33
Speaker 3: traded companies that need money, and just about any big
23:36
Speaker 3: publicly traded company Apple is a example. There are many
23:40
Speaker 3: many others. They started out as small, privately owned companies,
23:43
Speaker 3: and many of them took outside money from a part
23:47
Speaker 3: a part of the private equity spectrum of investors called
23:50
Speaker 3: venture capital. There are others too that buy existing companies
23:53
Speaker 3: and improve them and then sell them.
23:55
Speaker 2: This can range to anything for anything from you know,
23:58
Speaker 2: giant unicorn company like Uber that was private for years
24:02
Speaker 2: before going public, to you know, your local dentist office
24:05
Speaker 2: being bought up by a private equity investor.
24:07
Speaker 3: So on his face, most companies are private. Therefore, there's
24:11
Speaker 3: a big investment universe out there. There's a big part
24:14
Speaker 3: of the overall investment universe. I should say that most
24:17
Speaker 3: people don't have access to should they Are these investments
24:21
Speaker 3: likely to outperform say the S and P five hundred
24:23
Speaker 3: or whatever you're preferred benchmark is for help performance of
24:27
Speaker 3: public markets. The answer is not as simple as well,
24:30
Speaker 3: they're smaller, they should grow faster.
24:32
Speaker 5: So yes.
24:33
Speaker 3: The fact is, Look, most pension funds, most larger, more
24:37
Speaker 3: sophisticated pension funds, and certainly college endowments have for decades
24:41
Speaker 3: now been investing in private equity. It's done through partnerships,
24:47
Speaker 3: so a general partner with a firm that maybe you've
24:51
Speaker 3: heard of, like an Apollo or a KKR, but there
24:54
Speaker 3: are many smaller ones that do it for pension funds,
24:57
Speaker 3: and it's institutional investors. Is just a wish from us
25:00
Speaker 3: as retail investors. So pension funds have been doing this
25:02
Speaker 3: for a long time. Sure the results have been sort
25:05
Speaker 3: of mixed though. Fact is you need to exercise tremendous
25:09
Speaker 3: skill in picking the private companies you invest in. It's
25:12
Speaker 3: not as easy as just buying a small company and
25:14
Speaker 3: assuming it's going to grow. Many of these investors get
25:17
Speaker 3: involved with the operations and management of their companies, so
25:21
Speaker 3: it's a big investment universe, or sub part of the
25:25
Speaker 3: investment universe, a big part of the investment universe. So
25:27
Speaker 3: I get the rationale given the mixed success that very
25:32
Speaker 3: sophisticated pension funds have had investing in private equity, and
25:37
Speaker 3: by mixed success, I mean most of them have not
25:38
Speaker 3: outperformed public markets. So after you factor in fees and
25:43
Speaker 3: the time you spend doing as they say in that industry,
25:46
Speaker 3: the due diligence that needs to be done on these managers,
25:50
Speaker 3: you don't come out ahead. So I would they're going
25:53
Speaker 3: to put this into a target date fund. It'll be
25:55
Speaker 3: a very small portion of a target data, which is
25:57
Speaker 3: a mix of stocksponds, and cash that were balances automatically
26:00
Speaker 3: gets more conservative as you get older, So it's probably
26:02
Speaker 3: not going to move the needle much either way. And
26:05
Speaker 3: if that's the case, like why bother true? Couple that
26:09
Speaker 3: with the.
26:10
Speaker 2: There's a democratization argument I think happening here in part two. Hey,
26:14
Speaker 2: this is the exclusive thing that's only been available to
26:17
Speaker 2: the billionaires. We want to democratize.
26:19
Speaker 3: The most cynical marketing line I've ever heard. I mean,
26:21
Speaker 3: finance is pretty You're gonna be pretty damn cynical if
26:24
Speaker 3: you're in finance. That is that pretty much takes the cake.
26:27
Speaker 3: Give me a break. This is not like the women's
26:30
Speaker 3: suffrage movement here looking to liberate the masses so that
26:34
Speaker 3: we can all get fleeced by I'm not going to
26:37
Speaker 3: specify a company, but when anybody in finance is trying
26:40
Speaker 3: to sell you something, you should be skeptic. I'm not
26:42
Speaker 3: saying they're trying to rip you. Whenever they use high
26:44
Speaker 3: minded terms like democratization to describe their framework by which
26:50
Speaker 3: they charge one percent on assets and then they get
26:52
Speaker 3: a so called carry on profits above seven or eight percent,
26:57
Speaker 3: below seven or eight percent, so there's a hurl rate
26:59
Speaker 3: that have to meet, and then they used to be.
27:01
Speaker 4: The two and twenty rule. Right Like hedge funds are.
27:04
Speaker 3: Hedge funds are a little different. Private equities fee structures different.
27:08
Speaker 3: These guys make all call them exorbitant fees. They do
27:10
Speaker 3: interesting work, most of them exorbitant fees. So the democrazation
27:15
Speaker 3: argument is absolutely cynical. As you can tell, I'm skeptical
27:18
Speaker 3: of this concept. But so any big investment consultant that
27:21
Speaker 3: you talk to would also be skeptical of this concept
27:23
Speaker 3: because they know how hard it is to do diligence
27:25
Speaker 3: on private equity and to actually select a manager that's
27:28
Speaker 3: worth the compensation and the risk that you incur by
27:32
Speaker 3: hiring them.
27:32
Speaker 2: In either case, it looks as though there are changes
27:36
Speaker 2: coming to your for a one case. Whether it is
27:39
Speaker 2: this new feature that black Rocks talking about, and I'm
27:41
Speaker 2: sure others are as well, whether it's the push for
27:45
Speaker 2: annuities to be able to be available in for a
27:48
Speaker 2: one K plans. What I am seeing today is a
27:51
Speaker 2: push for more complexity in the number one savings tool
27:56
Speaker 2: that folks are using for their retirement. If you are
28:01
Speaker 2: facing these types of changes and are confused as to
28:03
Speaker 2: what it might mean for you, or just have questions
28:06
Speaker 2: about it, Armstrong Advisor Groups here to help guide you
28:09
Speaker 2: through this stuff. We would love to chat with you
28:12
Speaker 2: about what your savings goals are and how it's going
28:15
Speaker 2: to fit into your overall retirement plan. The number for
28:18
Speaker 2: the Armstrong Advisor Group it's eight hundred three nine three
28:21
Speaker 2: four zero zero one. These are immensely complex products. The
28:26
Speaker 2: four oh one K on its own is complicated before
28:29
Speaker 2: you layer in the complexities of annuities or private equity investments.
28:33
Speaker 2: If you have questions about how to properly use yours,
28:36
Speaker 2: call us at eight hundred three nine three four zero
28:39
Speaker 2: zero one.
28:40
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
28:43
Speaker 1: registered investment advisor. Nothing in the ad or in any
28:45
Speaker 1: Armstrong guide a specific financial, legal, or tax advice. Consult
28:48
Speaker 1: your own financial, tax into state planning advisors before making
28:51
Speaker 1: any investment decisions. Armstrong may contact you to offer investment
28:54
Speaker 1: advisory services.
28:56
Speaker 2: Speaking of self serving investment universe backs are back. What
28:59
Speaker 2: could go wrong this time? We haven't heard this story?
29:03
Speaker 2: Following a surge in new listings by special purpose acquisition companies.
29:08
Speaker 2: If you don't know this term, just go take a
29:10
Speaker 2: look at some stuff that happened back in twenty twenty
29:13
Speaker 2: and twenty twenty one. These are basic shell companies that
29:15
Speaker 2: are created for the sole purpose of acquiring another company.
29:19
Speaker 2: It allows you to circumvent the process of an initial
29:22
Speaker 2: public offering that has a whole lot of regulatory hurdles,
29:25
Speaker 2: to get around a whole lot of things that you
29:28
Speaker 2: aren't allowed to say about going public that you are
29:30
Speaker 2: allowed to when you go via the spack method. And
29:34
Speaker 2: quite honestly, I think why now is probably because you
29:37
Speaker 2: have somebody else in control of the SEC that would
29:40
Speaker 2: typically regulate this stuff, that won't care about it quite
29:43
Speaker 2: as much. And I think the only message I have
29:46
Speaker 2: is buyer beware, because that was definitely the lesson.
29:49
Speaker 3: Oh yes time when it comes to this new stuff
29:51
Speaker 3: in four oh one K's and elsewhere, the bouncer is
29:53
Speaker 3: not at the door anymore. Everything there's got crypto's going
29:55
Speaker 3: and hey, come on in, everybody, get every hair brain
29:57
Speaker 3: scam to come down the now. Look, some of them
29:59
Speaker 3: could to end up allocating capital to higher and better uses.
30:04
Speaker 3: But this stuff and I'm not saying anybody's putting spack
30:07
Speaker 3: in a four to one K, although it's being worked
30:08
Speaker 3: on right now, and I'm ninety nine percent confident the
30:11
Speaker 3: sec the DL will allow it. Under this new group,
30:15
Speaker 3: this a lot like private equity. It's a blind trust,
30:17
Speaker 3: so you don't know where your money is going to go.
30:20
Speaker 3: And this is not a criticism. These vehicles may be
30:22
Speaker 3: able to again more efficiently direct capital to a higher,
30:25
Speaker 3: better use, which is the whole point of financial markets,
30:27
Speaker 3: to match up sabers and investors. The reputation, though, and
30:31
Speaker 3: the types of characters that have tended to gravitate toward this,
30:35
Speaker 3: and to some aspects of private markets too, by the way,
30:37
Speaker 3: because they're less stringently regulated, should raise red flegs.
30:42
Speaker 2: The message I have is not do or don't do.
30:45
Speaker 2: It's yeah, understand what you are doing and understand that
30:49
Speaker 2: sometimes the investment schemes that are out there are much
30:52
Speaker 2: more akin to gambling and putting it all on black
30:55
Speaker 2: than they are to what most would consider to be
30:58
Speaker 2: long term investing.
30:59
Speaker 3: Yeah, understand what you're doing. In you like to your
31:01
Speaker 3: last point, ask questions are here four h one K
31:04
Speaker 3: or anywhere off your financial advisor right, yeah, anywhere, ask questions.
31:07
Speaker 4: Let's take a quick break. When we come back. Stack Roulette.
31:11
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31:48
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32:22
Speaker 4: Pronunciation beaches was pretty close.
32:24
Speaker 6: Yeah, pretty close there, Tucker Baches.
32:28
Speaker 4: What do you have for us for Stack who left
32:30
Speaker 4: this out this morning? Mark?
32:31
Speaker 5: Pretty close to what?
32:32
Speaker 4: Don't worry about it.
32:33
Speaker 3: Oh, this is something we were gonna get to. You
32:37
Speaker 3: didn't have time, So now I guess it makes sense.
32:39
Speaker 3: From the financial time spheres over US debt load and
32:41
Speaker 3: inflation ignite exodus from long term.
32:45
Speaker 5: Bonds, uh exodus.
32:47
Speaker 3: The broad market Bloomberg aggregate is up three and a
32:51
Speaker 3: half percent this year. Rates have been coming down. The
32:54
Speaker 3: long term out look is terrible, but it's always been terrible.
32:58
Speaker 3: You and Chucks out to talk about this a lot,
33:00
Speaker 3: like right like every time there's a little wiggle, And
33:02
Speaker 3: I'm not saying, by the way, I don't think the
33:04
Speaker 3: US fiscal situation is dire and that I don't think
33:07
Speaker 3: rates will be higher than they are today long term
33:09
Speaker 3: rates will be in the long term. I do our
33:11
Speaker 3: our fiscal manager, our mismanagement has been very fiscal management
33:16
Speaker 3: has been atrocious. And this tax bill work.
33:18
Speaker 4: Like twenty five years.
33:19
Speaker 5: Yeah, for my whole life.
33:20
Speaker 3: Basically, people have been wringing their hands about deficis. At
33:23
Speaker 3: some point they'll actually matter, I suppose, But this headline
33:28
Speaker 3: seems tone deaf and congruous. I don't know what the
33:31
Speaker 3: right term is.
33:32
Speaker 2: Doesn't that about what's actually happening here? So what are
33:34
Speaker 2: they saying is happening that the feurs over the US
33:37
Speaker 2: deatload is igniting this exodus from long.
33:39
Speaker 3: Term Look, true, institutional investors like those pension funds that
33:43
Speaker 3: we're talking about in the last segment, they are reducing
33:45
Speaker 3: their allocation to longer term bonds because they're worried about
33:48
Speaker 3: yields going up in their four bond prices going down.
33:51
Speaker 3: Those two variable those those two things are inversely related.
33:55
Speaker 3: So long long term investors with long term liabilities like
33:59
Speaker 3: pension funds are reducing the interest rate sensitivity their bond
34:02
Speaker 3: portfolios to the extent that they can.
34:04
Speaker 4: That much is true, if significant, then can you explain
34:07
Speaker 4: to me why the yield on the thirty year US
34:09
Speaker 4: bond on January first of this year was four point
34:12
Speaker 4: seven seven nine percent and today it's four point eight
34:15
Speaker 4: four percent. This article makes.
34:17
Speaker 2: It seem as though there's been this Well, they use
34:19
Speaker 2: the word dramatic exodus out of long term government.
34:22
Speaker 5: Pretty dramatic exodus.
34:24
Speaker 2: Sounds pretty severe to me, and we've barely seen yields move.
34:28
Speaker 2: So I just I don't like journalists that overstate things,
34:35
Speaker 2: and I'm worried that this is overstating what's actually I think.
34:38
Speaker 3: When you write something like this, I've never been a
34:41
Speaker 3: financial journalist. But they talk to a lot of highly
34:44
Speaker 3: regarded bond investors, and these guys can but I have
34:48
Speaker 3: diligence to a lot of managers. You can get very
34:50
Speaker 3: worked up after listening to them. Sure, they're very compelling,
34:53
Speaker 3: so you walk away thinking, oh my god, this is
34:55
Speaker 3: a crisis. PIMCO is right, double line, I'm naming too
34:58
Speaker 3: prominent bond managers.
34:59
Speaker 5: They're right.
34:59
Speaker 3: So I think part of the hysteria comes from managers
35:01
Speaker 3: who are trying to push things in their direction.
35:04
Speaker 5: They're talking up their books, so to speak.
35:06
Speaker 3: There will be, undoubtedly, Mike a reckoning in bond markets.
35:10
Speaker 3: We're just not seeing it right now, which is why
35:12
Speaker 3: this headline struck me as strange. That's not to say
35:15
Speaker 3: that institutional investors specifically are not reducing interest rate sensitivity.
35:19
Speaker 5: They are.
35:19
Speaker 3: That much is true, but so far it's been a
35:22
Speaker 3: above average year, especially by recent standards for bond market performance.
35:25
Speaker 3: A little strangely, I'm talking total bond market now, not
35:28
Speaker 3: the long end of the curve that you mentioned.
35:30
Speaker 2: I was having a conversation with someone yesterday about artificial
35:33
Speaker 2: intelligence and the players in the space and who is
35:36
Speaker 2: going to be the winners and losers, and I keep
35:40
Speaker 2: going back to the dot com space, and this comes
35:43
Speaker 2: to a story from Bloomberg today. The Salesforce CEO is
35:46
Speaker 2: saying now that thirty percent of internal work is being
35:49
Speaker 2: handled by artificial intelligence. Keep going back to this story
35:53
Speaker 2: about what jobs is it going to eliminate? I continue
35:57
Speaker 2: to come to this conclusion. So I don't know if
35:59
Speaker 2: I talking to you about it or Paul about it.
36:01
Speaker 2: But in nineteen ninety nine, can you name the top
36:05
Speaker 2: four tech companies in the US by Mark Capp in
36:07
Speaker 2: nineteen ninety nine, I.
36:08
Speaker 5: Mean Intel, Microsoft, IBM.
36:13
Speaker 2: Yeah, you just guys got them the top four. Microsoft
36:16
Speaker 2: was first, but those are the other three. Microsoft's the
36:21
Speaker 2: only ones still in the list, right. And you know
36:24
Speaker 2: when we were talking about these giant tech companies in
36:26
Speaker 2: nineteen ninety nine, what we were talking about. We were talking
36:29
Speaker 2: about their role in shaping the Internet and how much
36:32
Speaker 2: they were going to benefit from it.
36:34
Speaker 4: Maybe it is different this time, and maybe what would
36:38
Speaker 4: you describe as.
36:39
Speaker 2: The four largest tech companies now in video, Apple, Microsoft,
36:43
Speaker 2: you know.
36:44
Speaker 5: Like Test and Facebook.
36:46
Speaker 2: Maybe it is different to this time, and their motes
36:48
Speaker 2: are so deep that they are going to be the
36:50
Speaker 2: ones to benefit from what I would argue is the
36:53
Speaker 2: most revolutionary technology since the advent of the Internet.
36:57
Speaker 4: I don't know, it could be wrong, but you know
36:58
Speaker 4: that's how AI is.
37:00
Speaker 5: You know, let's go on, let's pretend it is.
37:01
Speaker 2: I'd be more willing to bet that the companies that
37:04
Speaker 2: truly revolutionize and take advantage of this new emerging technology
37:08
Speaker 2: have not even been dreamed up today.
37:10
Speaker 3: Yeah, they're in private equity actually, but they're not going
37:12
Speaker 3: to get them in our four to one game.
37:13
Speaker 5: But there is private equity.
37:14
Speaker 6: Yeah.
37:14
Speaker 2: You know, Facebook wasn't being talked about in nineteen ninety nine.
37:18
Speaker 2: Why because Zuckerberg was an infant.
37:23
Speaker 4: No, maybe not in high school. It's like ten years old.
37:25
Speaker 4: You know.
37:26
Speaker 2: Uber wasn't being talked about because we didn't have Internet
37:29
Speaker 2: on our phones yet and so not that Facebook and
37:32
Speaker 2: Uber are the largest companies out there, but Amazon barely
37:35
Speaker 2: existed in its current format, and so I find it
37:38
Speaker 2: interesting that salesforces, you know, completing thirty percent of internal tasks.
37:42
Speaker 2: I'd be willing to bet that the truly revolutionary stuff
37:45
Speaker 2: that ties on to artificial intelligence has not been dreamed.
37:49
Speaker 3: It has to permeate the wider economy. This was true
37:51
Speaker 3: of the tech revolution too. It benefited the the tech
37:55
Speaker 3: producing sector mainly. That's why the productivity boost was so
37:59
Speaker 3: short lived.
38:01
Speaker 2: That is all the time we have today for the
38:03
Speaker 2: financial exchange markets are up more than half a percent
38:07
Speaker 2: really across the board in the US at the moment,
38:09
Speaker 2: flirting with all time highs. We will be back at
38:11
Speaker 2: it tomorrow. Folks, have a great rest of your day.