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Bond Selloff Puts Markets on Edge · The Financial Exchange Show

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Speaker 1: is The Financial Exchange with Mike Armstrong and Paul Lane.
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Speaker 2: Good morning and welcome back to The Financial Exchange on
1:16
Speaker 2: a jobs week here. It's Mike Paul and Tucker with
1:20
Speaker 2: you on a Thursday where we had a weekly jobless
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Speaker 2: claims this morning. ISM manufacturing data released just minutes ago. Uh,
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Speaker 2: we have a jobs report coming out tomorrow. Micron earnings
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Speaker 2: that came out earlier this weekend and a recap of, um,
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Speaker 2: a September that I guess lived up to expectations of
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Speaker 2: negative returns on the S and P 500. We'll take
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Speaker 2: a look at all and any of those, but the, um,
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Speaker 2: The story that financial media, and frankly beyond financial media,
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Speaker 2: I know it's a big deal when I have people
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Speaker 2: that never ask questions about markets and the economy asking
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Speaker 2: about it, but interest rates are very clearly front and
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Speaker 2: center and being talked about even in circles outside of
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Speaker 2: the ones that Paul and I operate in, financial conversations,
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Speaker 2: debt markets, treasury yields, etc.
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Speaker 1: It is.
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Speaker 2: To me reminiscent of when I had an Uber driver
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Speaker 2: asking me about his crypto portfolio, which I had no
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Speaker 2: comment on. But the amount of attention being paid now
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Speaker 2: to the price on U.S. government debt, inflation, and where
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Speaker 2: yields have climbed to is definitely, other than AI, the
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Speaker 2: main story that people want to talk about today and yesterday.
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Speaker 2: We had the U.S. 10-year Treasury yield, which had been
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Speaker 2: sitting around levels that we hadn't seen since 2007. climb
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Speaker 2: even higher to a point now that we haven't seen
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Speaker 2: since the early 2000s, Paul. Yeah.
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Speaker 3: As we speak, Mike, we have well eclipsed that 5.30 mark, 5.3% mark,
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Speaker 3: sitting at around 5.33% on the U.S.
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Speaker 4: 10-year treasury.
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Speaker 3: And the reason why this is so significant and Mike
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Speaker 3: and I and the show continues to cover this subject
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Speaker 3: is because the U.S. 10-year treasury is the bellwether for
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Speaker 3: lending markets today domestically and then even more in abroad too.
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Speaker 3: It has a significant impact just because of the amount
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Speaker 3: of volume that operates on the U.S.
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Speaker 4: 10-year treasury. Oftentimes in finance.
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Speaker 3: Here, the risk-free rate is tied to the U.S. 10-year
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Speaker 3: treasury just because the U.S. has always had such strong
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Speaker 3: credit quality in its ability to pay back its investors
3:44
Speaker 3: who lend them money. And for years, the U.S. has
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Speaker 3: benefited from this premium that they're able to possess from
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Speaker 3: a reputational standpoint, that they are able to offer their
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Speaker 3: debt at far lower rates of interest than, say, Greece
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Speaker 3: or Argentina, other nations out there that don't have the
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Speaker 3: financial strength that we.
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Speaker 4: Have as a country.
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Speaker 3: But the reason why it is so significant is because
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Speaker 3: this rate of interest that we're speaking about here at 5.32%
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Speaker 3: is directly tied with strong correlation to mortgage market. I
4:17
Speaker 3: was trying to get an up-to-date look on where the U.S.
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Speaker 3: 30-year fixed mortgage, I saw around 7.5% yesterday. I don't
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Speaker 3: have an up-to-date figure today, but having a 7.5% 30-year
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Speaker 3: fixed mortgage on top of a real estate market that
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Speaker 3: has continued to see price increases, that can have a
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Speaker 3: negative impact in terms of slowing economic activity. Then you
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Speaker 3: go beyond the housing market just in terms of investors
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Speaker 3: who have a portfolio of a mix of equities and bonds.
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Speaker 3: It's really important and hard for novice investors to try
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Speaker 3: and wrap their minds around this, but if you own
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Speaker 3: bonds that you bought, say, at 3% or 4%, and
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Speaker 3: now the U.S. 10-year treasury sits at 5.3%, you can't
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Speaker 3: just sell those and get all of your money back.
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Speaker 3: In order to sell them, you have to sell them
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Speaker 3: at a loss to go out and buy the new bonds.
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Speaker 3: So it has a really significant impact on so many
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Speaker 3: different areas of the economy.
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Speaker 2: Yeah, on balanced portfolios, Paul and I were talking about
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Speaker 2: this offline, but probably an increasing bias on part of
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Speaker 2: investors against bonds because of the performance in 2022 and
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Speaker 2: now in 2026, where Yeah, you've just lost value on
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Speaker 2: your bond portfolio on what is supposed to be this steady,
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Speaker 2: predictable return part of the portfolio. The other reason it's
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Speaker 2: there is historically insurance against equity market crash, and we're
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Speaker 2: not getting... We're not getting those scenarios, right?
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Speaker 3: The problem is we're not getting the equity crash, right?
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Speaker 3: All we're getting is the reason that rates have run
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Speaker 3: up these last two times over the course of the
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Speaker 3: last five years is inflationary pressure. That means the economy
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Speaker 3: is running too hot, so borrowing costs run up as
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Speaker 3: a result, and your value of your bonds go down.
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Speaker 3: Usually where bonds shine the most, and they haven't gotten
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Speaker 3: the chance to do this... For good reason, because the
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Speaker 3: equity market is probably where more people have a lot
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Speaker 3: of more of their allocation towards is because the equity
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Speaker 3: market or economic growth hasn't slowed, which typically will bring
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Speaker 3: rates down and help your bonds buffer against those equity losses.
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Speaker 4: But that has not happened.
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Speaker 2: To be clear, the phenomenon we're seeing in bond market
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Speaker 2: is not U.S. centric. It is a global phenomenon, global
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Speaker 2: bonds across Europe. the developed world are seeing a slump.
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Speaker 2: On Thursday, the yield on the UK 30-year bond hit 6%,
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Speaker 2: which is the first time it's done that since 1998.
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Speaker 2: In France, the premium on 10-year debt over what's considered
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Speaker 2: to be a safer German bond jumped to 134 bps.
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Speaker 2: That's the highest since 2012. Across the globe, you are
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Speaker 2: seeing these higher interest rates. What has been a saving
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Speaker 2: grace for the U.S. economy is as well as some
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Speaker 2: developing Asian economies, has been the fact that we have
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Speaker 2: so much exposure to technology, to artificial intelligence here domestically,
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Speaker 2: and again, in some parts of the developing world. Think Korea,
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Speaker 2: think Chinese markets, where a lot of the hardware for
7:13
Speaker 2: this development comes out of. And so, increasingly, I'm less
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Speaker 2: concerned about why the interest rate increase is happening. I
7:23
Speaker 2: think we will be talking about why it might be happening.
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Speaker 2: There's likely a number of different reasons. But here in
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Speaker 2: the United States, at least, it is not slowing things down.
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Speaker 2: In fact, we are starting to see, after revisions to
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Speaker 2: GDP data, actual acceleration in the U.S. economy, and not
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Speaker 2: only from the AI sector. We're seeing consumer spending tick up.
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Speaker 2: We're seeing other pieces of the typical U.S. economy accelerating.
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Speaker 2: And to me, it all comes down to the fact
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Speaker 2: that this technology sector, this AI trade, is not terribly
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Speaker 2: interest rate sensitive. And it's kind of the only area
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Speaker 2: of the economy that isn't all that interest rate sensitive.
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Speaker 2: You talked about housing. The rate, by the way, that
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Speaker 2: we hit yesterday, according to Mortgage News Daily, 7.6% on
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Speaker 2: that 30-year mortgage. Agriculture, right? Yeah. Pretty tough to go
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Speaker 2: borrow money now to get the crop out of the ground.
8:17
Speaker 2: You might need to borrow it to pay for elevated
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Speaker 2: diesel prices. That's not a terribly attractive place to be.
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Speaker 2: You go talk about health care or any of these
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Speaker 2: other sectors, they are fairly interest rate sensitive when we
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Speaker 2: get up to levels of this sort. but building out
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Speaker 2: AI data centers does not appear to be right now.
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Speaker 2: Doesn't mean that it won't change in the future. You
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Speaker 2: still do need to borrow money.
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Speaker 3: That's where I was going to go, is that, yeah,
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Speaker 3: a lot of the build-out for this year has been
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Speaker 3: funded by cash flows from the big hyperscalers, but there
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Speaker 3: still has been $ 500 billion of bond issuance in the
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Speaker 3: corporate bond market, a lot of that from AI data centers,
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Speaker 3: and that's only going to get more significant next year
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Speaker 3: in terms of issuance. The other factor that's worth noting here, Mike,
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Speaker 3: is the government has $ 40 trillion of debt. I'm sure
9:06
Speaker 3: listeners may have heard.
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Speaker 2: I've heard of that, yeah.
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Speaker 4: May have heard.
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Speaker 3: You just had this year for the first time the
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Speaker 3: amount that the U.S. government paid in interest exceeded the
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Speaker 3: defense budget. What this now means is that it can
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Speaker 3: create this snowball effect where as borrowing costs increase, like
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Speaker 3: we were just talking about with the 10-year eclipsing 5.3%,
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Speaker 3: that means bigger interest payments. And so the longer this persists,
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Speaker 3: and to be clear... interest rates can move very quickly
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Speaker 3: in one direction or another. So this is just a
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Speaker 3: point in time. But it means more of a burdensome
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Speaker 3: cost for the government, which is already running a fiscal
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Speaker 3: deficit on a year-to-year basis of 6% of GDP with
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Speaker 3: no signs of slowdown there.
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Speaker 2: It's also meant that equity markets without exposure to this
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Speaker 2: tech that is struggling. In the face of higher interest rates,
9:59
Speaker 2: go take a look. at indices in Europe, for example,
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Speaker 2: and very much struggling to produce much of an outsized
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Speaker 2: return when we have so much pressure on energy costs, inflation,
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Speaker 2: and now higher interest rates. If you don't have that
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Speaker 2: semiconductor business, if you don't have that very tech-forward economy,
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Speaker 2: then it is increasingly difficult to see any sort of
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Speaker 2: price return on your stock.
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Speaker 3: Consumer staples, financials, real estate, so many sectors of the economy,
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Speaker 3: you're right, tethered to either the interest rate, the borrowing
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Speaker 3: side of things, or being subject to the commodity shocks
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Speaker 3: that we've seen to a degree.
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Speaker 2: Let's take a quick break. When we return, I want
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Speaker 2: to talk a little bit more about this surge in
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Speaker 2: interest rates, what might be causing it, And then I
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Speaker 2: look back at September. Again, I mentioned it held to
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Speaker 2: form in the month of September, and Paul is going
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Speaker 2: to give us a nice earth, wind, and fire rendition
10:56
Speaker 2: when we return.
10:58
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11:40
Speaker 2: You know, Tucker, I was falling asleep, and then you
11:42
Speaker 2: came back with Daft Punk.
11:44
Speaker 4: Let's go. Let's go.
11:46
Speaker 2: I want to run through this glass wall right here
11:49
Speaker 2: after this one. Paul Tucker, after, once again, a typical September,
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Speaker 2: the S & P 500 is on average negative in
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Speaker 2: the month of September. It's the only... month of the
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Speaker 2: year that the S & P 500 actually averages a
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Speaker 2: negative return, and it held to true form this time.
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Speaker 2: I'll keep in mind and point out that while averages
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Speaker 2: are useful, I think, wasn't it something like 45% of
12:21
Speaker 2: the time it's positive? So it's not really indicative of
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Speaker 2: a whole lot, but on average it is negative. S
12:26
Speaker 2: & P 500 finished down by half a percent for
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Speaker 2: the month of September, while still up significantly for the quarter.
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Speaker 2: In fact, nine out of 11 sectors in the S
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Speaker 2: & P 500 finished down for the month. So I'm
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Speaker 2: going to actually list these out because it's pretty severe.
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Speaker 2: So while information technology and communications were both up by 4.4%
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Speaker 2: and 4.3% respectively, financials down 7.3%, materials down 6.9%, real
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Speaker 2: estate down 6.7%, utilities down 6.1%, consumer discretionary down 5.9%,
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Speaker 2: industrials 4.5%, consumer staples 3.5%, energy 2.8% in spite of
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Speaker 2: the fact that it's energy, right? Healthcare down 1%. Overall,
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Speaker 2: most stocks were off in the month of September, partly
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Speaker 2: probably in response to higher interest rates and energy disruptions,
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Speaker 2: but Information technology just continuing along, and communication services, people
13:28
Speaker 2: always get confused as to why we're talking about this.
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Speaker 2: The two biggest companies in the communication services sector are
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Speaker 2: not what you would think AT & T, Verizon. They are,
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Speaker 2: in fact, Alphabet and Google's parent company, Alphabet, and Facebook's
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Speaker 2: parent company, Meta. And so we have this market today
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Speaker 2: that is, as we've talked about, all reliant on on technology, right?
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Speaker 2: You can have a market where most sectors are down significantly.
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Speaker 2: But so long as tech's holding on, it's pretty much
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Speaker 2: holding flat.
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Speaker 3: When 40% of the pie is up, you can hold
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Speaker 3: on and survive the rest of it being negative for
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Speaker 3: the month of September. This isn't new in the sense
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Speaker 3: that if you look at prior years, that had been
14:15
Speaker 3: the story as well, where tech was a huge contributor
14:17
Speaker 3: from a performance perspective. But I think looking back through
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Speaker 3: at least August data, the tech sector was up 30%
14:26
Speaker 3: for the last three years. And I'm sure with the
14:28
Speaker 3: most recent positive month performance that that number may be
14:32
Speaker 3: even higher. That truly has been the story with the market.
14:36
Speaker 3: There's always concerns that loom with having over-concentration to one sector,
14:43
Speaker 3: but that is the benefit that investors do have when
14:46
Speaker 3: you have a diversified index of the S & P 500.
14:50
Speaker 3: As an example, you have 11 different sectors and the
14:53
Speaker 3: weightings to each one can help sort of buffer against
14:58
Speaker 3: downturns in other sectors. But there's obviously concern that if
15:02
Speaker 3: investors gravitate too much towards one sector, obviously you don't
15:05
Speaker 3: want to have your eggs all in one basket.
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Speaker 2: Where are we today? Tech is 39% of the S
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Speaker 2: & P 500?
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Speaker 4: Just about 40. Yeah, 39, 40.
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Speaker 2: It's nothing new that tech is driving this market. What
15:16
Speaker 2: is new is that this one sector... that we're all
15:19
Speaker 2: very familiar with, and the companies underneath it, Apple, Nvidia, Microsoft,
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Speaker 2: and many, many others. Those have been driving returns for years,
15:28
Speaker 2: whether we talk about the Mag 7 or any number
15:31
Speaker 2: of different names for it. What is new is that
15:34
Speaker 2: it has never made up this much of the S
15:37
Speaker 2: & P 500. From a market cap weighting standpoint, the
15:40
Speaker 2: peak you got to even during the dot-com bubble was
15:44
Speaker 2: a third. Yeah, 33% to 35%. So this part is new.
15:49
Speaker 2: The market concentration is real. It's not as bad as
15:52
Speaker 2: it is in other nations, but it is, if you
15:54
Speaker 2: consider it to be a bad thing, as bad as
15:56
Speaker 2: it has ever been here in the United States. I
15:59
Speaker 2: don't know if maybe there's a different point in time where,
16:02
Speaker 2: you know, pre-Great Depression it looked different, but in modern
16:05
Speaker 2: markets it has never been as concentrated in one sector
16:08
Speaker 2: as it is now. And I doubt it's ever been
16:12
Speaker 2: as concentrated in 10 companies as it is now.
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Speaker 4: That was my next thought.
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Speaker 2: I don't know.
16:15
Speaker 3: And maybe we'll take a look at that. I'm sure
16:18
Speaker 3: in other eras of time, maybe we'll have to look
16:21
Speaker 3: at automotive or energy.
16:22
Speaker 2: Yeah, if you want to go back far enough, then
16:24
Speaker 2: I'm sure you can find a market where the top
16:26
Speaker 2: 10 were bigger.
16:27
Speaker 4: Standard Oil was just.
16:28
Speaker 2: There probably weren't 500 publicly traded companies back then. So
16:32
Speaker 2: there you have it. In terms of the causes behind
16:37
Speaker 2: the sell-off, one key thing that we've pointed to has
16:40
Speaker 2: been rising interest rates for the month of September. They've
16:44
Speaker 2: risen approximately half a percent in a month. That is
16:47
Speaker 2: irregular when we talk about something that is as stable
16:51
Speaker 2: as U.S. government bonds. Rates overall up a good one
16:56
Speaker 2: and a quarter to one and a half percent now
16:58
Speaker 2: since the outbreak of war in Iran. And it does
17:00
Speaker 2: have people scratching their heads, okay, what is the real
17:02
Speaker 2: cause behind this? I do believe that were you to
17:06
Speaker 2: see energy prices come down, that rates probably would come
17:09
Speaker 2: down with it. You don't have to be a genius
17:12
Speaker 2: to figure that out. Just go look at a chart
17:15
Speaker 2: on interest rates and plot out when we started bombing
17:19
Speaker 2: Iran to right now, and they've gone up in line. However...
17:26
Speaker 2: there are a bunch of other things that have gone
17:28
Speaker 2: on at that same time, right? We've had the continued
17:31
Speaker 2: growth of AI. We have had, uh, you know, all
17:34
Speaker 2: sorts of other positive stories that are probably also contributing
17:38
Speaker 2: to these higher rates. And I, like I said, I
17:42
Speaker 2: don't think figuring out why rates are moving is the
17:44
Speaker 2: most crucial thing, but it certainly can, uh, And what's
17:51
Speaker 2: your opinion in terms of what's going to happen next?
17:54
Speaker 2: And that is pretty important.
17:56
Speaker 3: Yeah, I would agree that the reprieve that we could
17:59
Speaker 3: get on the interest rate front is any progression between
18:02
Speaker 3: the U.S. and Iran war, any sort of resolution there.
18:06
Speaker 3: But it is worth noting that there are other factors.
18:09
Speaker 3: Like you're mentioning, we've got the deficits that this country
18:12
Speaker 3: runs and the amount of debt that always has loomed
18:14
Speaker 3: out there. That's not new news, but certainly the Federal
18:17
Speaker 3: Reserve pivoting their approach on interest rates and hiking in September.
18:22
Speaker 3: That's another factor there that has led to pressure on
18:25
Speaker 3: interest rates. And then what we talked about earlier in
18:27
Speaker 3: the program, the AI infrastructure build out has led to
18:31
Speaker 3: a tremendous amount of demand for all sorts of types
18:34
Speaker 3: of equipment. So that has put pressure on again, more
18:37
Speaker 3: on a supply shock side of things. So all of
18:39
Speaker 3: this leads to inflationary pressure, the war, the build out
18:43
Speaker 3: here of AI infrastructure, and you kind of mix that
18:45
Speaker 3: cocktail together and you have a recipe for, at the moment,
18:50
Speaker 3: a lot of pressure on interest rates. But it is
18:52
Speaker 3: worth noting that there are factors that could sort of
18:55
Speaker 3: alleviate some of the pressure that we're seeing now. But
18:58
Speaker 3: at the time being, it is certainly a rough month
19:01
Speaker 3: for the bond market that we just closed out for September.
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Speaker 2: Yeah, I Got to be honest, I don't see a
19:08
Speaker 2: real great path for lower interest rates without reprieve on
19:11
Speaker 2: energy prices. Yeah. We'll be talking about that a little
19:14
Speaker 2: bit because oil has been flowing a little bit more
19:17
Speaker 2: from the Mideast than has happened over the last several months.
19:21
Speaker 2: So maybe we do get some of that reprieve. But
19:23
Speaker 2: for now, we've got to take a quick break. Full
19:26
Speaker 2: market recap is next with Wall Street Watch.
19:40
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20:01
Speaker 5: Markets are somewhat choppy to begin October after the 10-year
20:04
Speaker 5: Treasury yield hit its highest mark since 2002. Traders are
20:07
Speaker 5: also writing for the all-important jobs report. due out tomorrow
20:10
Speaker 5: morning right now the dow is down four tenths of
20:13
Speaker 5: a percent or 200 points lower s & p 500
20:15
Speaker 5: is down over a tenth of a percent nasdaq is
20:18
Speaker 5: dipping by only nine points mostly flat russell 2000 is
20:22
Speaker 5: down half a percent 10-year treasury yield is up one
20:25
Speaker 5: basis point at 5.31 crude oil up one and a
20:30
Speaker 5: third percent trading in 91 dollars while brent is trading
20:32
Speaker 5: at 100 apparel Micron Technology falling 3% despite the semiconductor
20:38
Speaker 5: company posting a jump in quarterly profit and revenue, citing
20:41
Speaker 5: the shortage of memory chips, helping propel its explosive growth
20:45
Speaker 5: in the past year. Meanwhile, Google parent Alphabet unveiled its
20:48
Speaker 5: latest AI model, Gemini 4 Argonne, with improvements in cybersecurity, coding,
20:54
Speaker 5: and complex professional work. Alphabet down by over half a percent. Elsewhere,
20:59
Speaker 5: global professional services company Accenture is seeing its stock rally
21:02
Speaker 5: increase 22% after posting stronger than expected quarterly results. Dollar
21:07
Speaker 5: Tree received an upgrade from Loop Capital, citing the current
21:11
Speaker 5: macroeconomic backdrop being favorable to the discount retailer as the
21:15
Speaker 5: holiday season approaches. Dollar Tree shares are up by half
21:19
Speaker 5: a percent and struggling sportswear giant Nike will report earnings
21:24
Speaker 5: after today's closing bell. I'm Tucker Silva and that is
21:28
Speaker 5: Wall Street Watch.
21:30
Speaker 2: Paul, we have a jobs report tomorrow. Expectations are for 84,000
21:34
Speaker 2: jobs to be created. Business Insider has a piece. The
21:38
Speaker 2: Fed and bond market are sending opposite signals ahead of
21:41
Speaker 2: a crucial jobs report. I got to tell you, I
21:44
Speaker 2: don't think this jobs report is crucial. Yes, it is, Mike. Yes,
21:47
Speaker 2: it is. Straight up.
21:48
Speaker 4: Listen to the show tomorrow.
21:50
Speaker 2: You should listen to the show tomorrow. It's very important
21:52
Speaker 2: that you do so. This jobs report is not crucial.
21:56
Speaker 2: If it knocks the cover off the ball like it
21:59
Speaker 2: did the last month, The Fed will need to hike rates.
22:02
Speaker 2: If it doesn't, they might have another month where they
22:05
Speaker 2: can buy themselves doing nothing until December. At least that's
22:08
Speaker 2: what one of the Fed members who spoke yesterday, you know, quote,
22:13
Speaker 2: didn't give forward guidance on, but did give forward guidance on.
22:17
Speaker 2: Expectations for that next meeting are pretty mixed right now.
22:21
Speaker 2: So a week ago, everyone was sure that they were
22:25
Speaker 2: going to raise rates. There's a 70%, 68.6% chance of
22:26
Speaker 2: a rate hike at the next meeting. after some weak
22:31
Speaker 2: data this week, plus speeches from Federal Reserve members, in
22:36
Speaker 2: which one of them was Akash Kari that gave the speech.
22:41
Speaker 3: John Williams was at the University of Buffalo, where he
22:43
Speaker 3: basically said we don't need to necessarily hike.
22:45
Speaker 2: We can wait until December. Yeah, so then quickly things flopped.
22:50
Speaker 2: You get a strong jobs report tomorrow, you might get
22:53
Speaker 2: it going the other direction. You also had a weaker-than-anticipated
22:56
Speaker 2: inflation report that came out yesterday. although they changed all
22:59
Speaker 2: the methodology on us. So what the heck does that mean?
23:04
Speaker 2: I don't know. This is why you don't look at
23:06
Speaker 2: any single data point, I suppose, is the answer here.
23:09
Speaker 2: But you made an interesting point during the last segment,
23:12
Speaker 2: which was, hey, rates are up. And you listed a
23:15
Speaker 2: bunch of reasons, one of which was the Fed speaking
23:18
Speaker 2: more hawkishly about inflation, which interestingly, just an interesting thought exercise.
23:24
Speaker 2: Do you think that the 10-year Treasury rate would be
23:27
Speaker 2: higher or lower than it is today had the Fed
23:31
Speaker 2: not hiked rates at the last meeting?
23:33
Speaker 4: Higher.
23:34
Speaker 2: Right?
23:34
Speaker 3: Higher, yeah, because it would show that they don't have
23:38
Speaker 3: a seriousness in controlling inflation, and that would lead to concerns.
23:42
Speaker 4: I think, on the long run.
23:43
Speaker 2: I think so, too.
23:44
Speaker 3: Even though there's not supposed to be a direct correlation,
23:47
Speaker 3: but there is some trickle down.
23:49
Speaker 2: So, interestingly, I think that you can make an argument
23:52
Speaker 2: that if you want to move those higher, you know,
23:54
Speaker 2: those longer-term interest rates that everyone actually cares about, right?
23:58
Speaker 2: You know, I'm not saying you don't care about the
24:00
Speaker 2: rate on your money market or your home equity line
24:03
Speaker 2: or your credit card, but that's the rate that the
24:04
Speaker 2: Fed is controlling is those shorter-term benchmark rates. You want
24:08
Speaker 2: to get control of the longer end of the curve.
24:11
Speaker 2: You need to convince investors that, hey, if I'm going
24:13
Speaker 2: to loan money to the U.S. government in U.S. dollars
24:18
Speaker 2: and then be paid back 10 years later, that those
24:21
Speaker 2: dollars I get paid back in are actually worth something
24:23
Speaker 2: and not eaten up entirely by inflation. And so that's the... Yeah,
24:28
Speaker 2: that's the interesting counterpoint here is, should the Fed get
24:32
Speaker 2: really serious about inflation and talk a big game and
24:35
Speaker 2: follow it through with action at each of the next
24:37
Speaker 2: few meetings? By the way, we always talk about the
24:41
Speaker 2: next meeting. But if we take a look at where
24:44
Speaker 2: investors are pricing rates a year from now, the market
24:50
Speaker 2: at the moment is pricing in... that rates would be
24:56
Speaker 2: at least, there's like a 70, 80% chance that rates
24:59
Speaker 2: would at least be three quarters of a percent higher.
25:01
Speaker 2: So three more hikes between now and a year from now, 50,
25:04
Speaker 2: 50 chance that they are a full percentage point higher.
25:08
Speaker 2: If the Fed can actually convince people that, hey, we
25:12
Speaker 2: are so serious about inflation that we are willing to
25:15
Speaker 2: sink the AI trade and sink this economy on the
25:17
Speaker 2: backs of it to control it, then that might be
25:21
Speaker 2: what's needed to get these rates under control. Because I'll
25:24
Speaker 2: be honest, I thought that Warsh did a pretty good
25:26
Speaker 2: job at the last press conference. I thought that the
25:29
Speaker 2: unanimous action to raise rates was fundamentally a pretty serious thing.
25:35
Speaker 2: And in spite of that, when was the date of
25:38
Speaker 2: the last meeting, guys?
25:40
Speaker 4: The 16th of September. That sounds right.
25:43
Speaker 2: In spite of that, you've had rates climb straight upwards
25:47
Speaker 2: since the meeting. So I don't think it was a
25:50
Speaker 2: credibility problem with Warsh and the Fed. I think they
25:53
Speaker 2: followed through on everything they could have followed through on.
25:56
Speaker 2: And yet bond investors are saying, we demand higher rates
26:00
Speaker 2: for this economy. And again, part of that is inflation expectations.
26:06
Speaker 2: Part of it might just be, hey, look, even if
26:08
Speaker 2: they are successful on inflation, we don't think that economic
26:11
Speaker 2: activity is going to die down. There's just too much
26:13
Speaker 2: borrowing going on between the government. It's war. and the
26:17
Speaker 2: AI issuers, so we need higher rates. But I was
26:22
Speaker 2: kind of betting that if the Fed were really serious
26:24
Speaker 2: about tamping down inflation, which they were, you might get
26:28
Speaker 2: some control over the long end of the curve. And
26:30
Speaker 2: it hasn't happened in September.
26:31
Speaker 3: It's not as simple as this, because there's obviously numerous
26:34
Speaker 3: variables that go into it. But I feel like the
26:38
Speaker 3: pessimism around a solution between the US and Iran conflict
26:41
Speaker 3: has sort of negated the impacts of the Fed coming
26:46
Speaker 3: out and doing probably what the right thing was from
26:48
Speaker 3: a market perspective to try and control rate expectations down.
26:53
Speaker 3: But the only thing I was thinking of this morning,
26:55
Speaker 3: what would be the quick fix if you're the administration
26:57
Speaker 3: to try and get this U.S. 10-year treasury down? The
27:01
Speaker 3: war is the easiest, not the easiest, but it's the
27:04
Speaker 3: lowest hanging fruit if you could find some sort of
27:06
Speaker 3: resolution there. Otherwise, it would take a effort from all
27:12
Speaker 3: parts of the House to get the deficit. Yeah, exactly.
27:16
Speaker 3: Get the deficit or show some sort of meaningful focus
27:20
Speaker 3: on bringing down the deficit or debt issuance, and that's
27:24
Speaker 3: not going to happen in October 1st. That's not something
27:28
Speaker 3: that's going to occur in the next week or two.
27:30
Speaker 2: You can end the war to bring down energy prices
27:35
Speaker 2: and fix things there, or you can come up with
27:37
Speaker 2: a comprehensive plan bipartisan solution to raise taxes and cut
27:41
Speaker 2: spending and reform programs like Social Security and Medicare.
27:44
Speaker 4: Which one sounds easier to you? I might play on
27:45
Speaker 4: the Celtics this year, too.
27:49
Speaker 2: Let's take a quick break. When we return, there's an
27:52
Speaker 2: interesting op-ed from the editorial board of the Wall Street
27:54
Speaker 2: Journal about the U.S. economy and the signs they are
27:58
Speaker 2: seeing of an acceleration. Let's take a quick break and
28:00
Speaker 2: talk about that next on the Financial Exchange.
28:07
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28:11
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28:14
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28:39
Speaker 2: Is that a seagull? I feel like I'm walking down
28:51
Speaker 2: the boardwalk of the Jersey Shore in like 1920. The U.S.
28:57
Speaker 2: economy is accelerating. We've got this piece from the editorial
28:59
Speaker 2: board of the Wall Street Journal, which always has a
29:02
Speaker 2: certain political tilt that we were talking about here. But
29:07
Speaker 2: They bring up a number of, I think, important facts
29:10
Speaker 2: in understanding why interest rates are where they are right now.
29:13
Speaker 2: So first, Commerce Department has raised its GDP growth estimate
29:18
Speaker 2: for the first quarter. It rose it to 2.5% from 2.1%.
29:20
Speaker 2: Second got increased to 2.2% from 1.5%. You have some
29:21
Speaker 2: data about consumer spending that has been growing rapidly. I mean,
29:33
Speaker 2: this is bad for individuals, but good for the economy.
29:36
Speaker 2: Consumer spending growing faster than personal incomes in the last
29:38
Speaker 2: few quarters. Practically what that means is that people are
29:41
Speaker 2: either spending savings or borrowing money to spend. Take your pick,
29:46
Speaker 2: probably both. Business investment up half a percent in the
29:52
Speaker 2: most recent quarter, largely because of artificial intelligence spending. And
29:57
Speaker 2: they point out that in spite of all of this,
30:00
Speaker 2: People seem pissed.
30:01
Speaker 3: It comes back to what we've learned over the last
30:04
Speaker 3: five or six years, starting in 2022, is inflation.
30:07
Speaker 4: Really ticks people off quite a bit.
30:10
Speaker 3: It really frustrates folks to fill up their tank and
30:14
Speaker 3: have it be $ 70 when it was $ 50 before or
30:18
Speaker 3: whatever the dollar amount breaks out to. That has been...
30:23
Speaker 3: The continuous concern. And it really is why probably the
30:27
Speaker 3: biggest reason why, you know, Biden was, you know, or
30:30
Speaker 3: Kamala Harris, why Trump took over again is because a
30:33
Speaker 3: lot of constituents were very frustrated by inflation. I think
30:36
Speaker 3: you and I have said this on the show before that.
30:39
Speaker 3: Our takeaway is that that irritates people, consumers and citizens
30:44
Speaker 3: the most by far is inflationary impacts to have to
30:48
Speaker 3: buy the same goods that are 15, 20 percent more
30:51
Speaker 3: expensive than they were in years prior. It really upsets
30:54
Speaker 3: some people. But it has been a byproduct of because
30:58
Speaker 3: the economy has continued to really clear any hurdle that
31:03
Speaker 3: has come in its path. I mean, to overcome, there
31:07
Speaker 3: was coverage that we did earlier this week on the
31:09
Speaker 3: inversion of interest rates, where if shorter-term rates get higher
31:13
Speaker 3: than longer-term interest rates... Typically, that's preceded, I believe, eight
31:17
Speaker 3: of the last recessions. We had that occur in 23,
31:22
Speaker 3: and still no recession came about. There has just been
31:25
Speaker 3: numerous instances where the economy has been able to shrug
31:29
Speaker 3: off what seem like signs of trouble. So it is
31:33
Speaker 3: worth noting that as much as people love to complain
31:37
Speaker 3: about the economy, the statistics under the hood have been
31:40
Speaker 3: good for the last few years. The one that you
31:43
Speaker 3: could beat up is, is inflation, uh, this year.
31:46
Speaker 2: Yeah. I think where this piece loses me, I'm going
31:49
Speaker 2: to quote it. So if the economy is so good,
31:51
Speaker 2: why do Americans feel so glum? The likely answer is
31:54
Speaker 2: the hangover from the Biden inflation, which continues to erode
31:58
Speaker 2: wage gains and make it hard to save. I got
32:01
Speaker 2: to tell you, that was definitely 23, 24, probably the
32:05
Speaker 2: reason Harris lost the election. Uh, It's 2026. I don't
32:09
Speaker 2: know that you can blame people's discomfort with the economy
32:13
Speaker 2: on what happened four years ago in inflation.
32:16
Speaker 3: And this dates back, whether it's Democrat or Republican, this
32:19
Speaker 3: issue of fiscal stimulus and lowering tax rates, all these
32:24
Speaker 3: things that have been good for the taxpayer have stimulated
32:29
Speaker 3: more demand and stimulated more consumption and spending. But as
32:33
Speaker 3: a result of that, that has propelled the economy forward
32:36
Speaker 3: to a point where it's run a little too hot.
32:39
Speaker 3: And we've seen the negative ramifications that come with it.
32:41
Speaker 2: To be clear, I don't think you should listen to
32:44
Speaker 2: consumer sentiment surveys. I don't think they're useful in 2026.
32:46
Speaker 2: We've talked about just how they don't seem to direct
32:52
Speaker 2: us to anything. We've also talked at length about how
32:55
Speaker 2: people respond purely political to anything sentiment these days. Do
32:59
Speaker 2: you think the economy is good? Well, tell me who
33:00
Speaker 2: the president is and I'll tell you whether or not
33:02
Speaker 2: I think the economy is good, which is and I
33:08
Speaker 2: don't know the word I'm looking for, but it's not
33:12
Speaker 2: something that I like, but I think it is the reality.
33:14
Speaker 4: Not great, Bob.
33:15
Speaker 2: It's not great, Bob. And that, more than anything, seems
33:19
Speaker 2: to be driving. So I don't think we should pay
33:20
Speaker 2: attention to these consumer sentiment surveys. I don't know that
33:23
Speaker 2: they are going to drive anything with elections or drive
33:27
Speaker 2: us into a recession. That having been said, this all
33:31
Speaker 2: seems to ignore... They do acknowledge it in one sentence.
33:35
Speaker 2: But one thing that I think is very clear, while
33:38
Speaker 2: I believe that the U.S. 10-year Treasury price is the
33:40
Speaker 2: most important price in the economy, I also think that
33:43
Speaker 2: the price of gasoline is the single most important price
33:48
Speaker 2: for affecting consumer sentiment.
33:49
Speaker 4: Psychological sentiment, yeah.
33:51
Speaker 2: I think there's nothing more important than the price of
33:54
Speaker 2: a gallon of gasoline here in the United States to
33:56
Speaker 2: drive people's feelings about the economy. And guess what? We're
33:59
Speaker 2: sitting at a pretty darn... heavy price on the gallon
34:02
Speaker 2: of gasoline. And so you want to tell me why
34:06
Speaker 2: people are, you know, dour on the economy? It could
34:10
Speaker 2: be because AI executives keep telling us that the world's
34:12
Speaker 2: going to end, combined with the fact that it's pretty
34:15
Speaker 2: expensive to fill up your truck. God knows if you
34:18
Speaker 2: drive a diesel one, it's, you know, a mortgage payment.
34:21
Speaker 3: Yeah, just think about the segments of the economy that
34:24
Speaker 3: got beaten up last month. It's a lot of different areas.
34:28
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35:41
Speaker 2: Micron Technology, which I still can't believe is now a $ 1. 2
35:44
Speaker 2: trillion company.
35:46
Speaker 3: Tenth biggest in the S & P 500.
35:48
Speaker 2: Again, this was a company that a few years ago
35:50
Speaker 2: nobody cared about. Right? They manufacture computer memory and data storage. Like,
35:57
Speaker 2: who cares? They did something that nobody else really wanted
36:02
Speaker 2: to do because it was such a low margin business.
36:05
Speaker 2: So much competition from the Chinese and Koreans. And it
36:09
Speaker 2: doesn't really matter now because people are willing, not people,
36:14
Speaker 2: companies are willing to pay just about any price for
36:17
Speaker 2: the product that they are able to deliver because data centers.
36:23
Speaker 2: The company reported pretty good earnings, guided for around $ 25
36:27
Speaker 2: billion in CapEx in the first half of the year,
36:31
Speaker 2: including $ 11. 5 billion in the first quarter. So they, too,
36:35
Speaker 2: are trying to build out their capacity to be able
36:37
Speaker 2: to sell more stuff at these record profits. The question is,
36:40
Speaker 2: how quickly can they bring it to market? In spite
36:42
Speaker 2: of that, like we've seen with many companies with very
36:46
Speaker 2: sky-high expectations, stock is down about 2.25% today. About 5%
36:52
Speaker 2: for the week.
36:54
Speaker 3: These numbers, you said pretty good quarter. And I think
36:57
Speaker 3: you're saying it because we kind of knew what the
36:59
Speaker 3: numbers were going to be going in. But these are
37:01
Speaker 3: insane numbers, just to have a concept.
37:04
Speaker 4: They did $ 3.
37:05
Speaker 3: Billion in profit last year in this same quarter. Well,
37:08
Speaker 3: this quarter came out, they did $ 38 billion in profit.
37:11
Speaker 3: So think about if you're.
37:14
Speaker 4: Running a business on a quarterly basis.
37:15
Speaker 3: Let's say you do a million dollars of profit a quarter,
37:18
Speaker 3: and then the next year you're doing 10 times more
37:21
Speaker 3: than that just for the quarter. That's crazy. That's incredible growth.
37:26
Speaker 3: And I know it's all built into the stock price.
37:28
Speaker 3: That's how the market works is that you're always looking
37:31
Speaker 3: at forward guidance and can it sustain. But truly to
37:34
Speaker 3: look back, that is incredible to 10 times your profit increase.
37:38
Speaker 3: year over year in a given quarter.
37:40
Speaker 2: Yeah. I mean, forget about a company. Put this in
37:43
Speaker 2: the place of you as an individual worker. I brought
37:47
Speaker 2: my income from $ 100, 000 to like $ 1. 2 million over the
37:51
Speaker 2: course of 12 months. Yeah. It's unheard of. As such,
37:54
Speaker 2: by the way, I don't think investors are terribly disappointed
37:57
Speaker 2: about today's results because over the course of the last
38:01
Speaker 2: 12 months, the stock's up 472%. Yeah, it's done all right.
38:03
Speaker 2: For good reason. Let's take a quick break. We've got
38:08
Speaker 2: a lot more to cover in the second hour, including
38:11
Speaker 2: energy flows out of the Middle East. Not really bringing
38:13
Speaker 2: down oil prices much. That's next here on The Financial Exchange.