Latest / The Financial Exchange Show / Why did markets react so harshly to Trump's tweet about China last week?

Transcript

Why did markets react so harshly to Trump's tweet about China last week? · The Financial Exchange Show

0:00
Speaker 1: The Financial Exchange is produced by Money Matters Radio and
0:02
Speaker 1: is hosted by employees of the Armstrong Advisory Group, a
0:05
Speaker 1: registered investment advisor. All opinions expressed are solely those of
0:08
Speaker 1: the hosts. Do not reflect the opinions of Armstrong Advisory
0:11
Speaker 1: or anyone else. Investments can lose money. This program does
0:14
Speaker 1: not offer any specific financial or investment advice. Please consult
0:17
Speaker 1: your own financial, tax, and estate planning advisors before making
0:20
Speaker 1: any investment decisions. Armstrong Advisory and the advertisers heard on
0:23
Speaker 1: this program do not endorse each other or their services.
0:25
Speaker 1: Armstrong and Money Matters Radio do not compensate each other
0:28
Speaker 1: for referrals and are not affiliated. This is the Financial
0:34
Speaker 1: Exchange with Chuck Zada and Mike Armstrong, Your exclusive look
0:38
Speaker 1: at business and financial news affecting your day, your city,
0:42
Speaker 1: your world. Stay informed and up to date about economic
0:46
Speaker 1: and market trends plus breaking business news every day. The
0:50
Speaker 1: Financial Exchange is a proud partner of the Disabled American
0:53
Speaker 1: Veterans Department of Massachusetts. Help us support our great American
0:57
Speaker 1: heroes by visiting DAV five KT Boston and making a
1:01
Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
1:06
Speaker 1: and Mike Armstraw.
1:11
Speaker 2: Monday here on the Financial Exchange. Normally this would be
1:14
Speaker 2: a pretty busy week ahead for economic data and earnings.
1:19
Speaker 2: This week still busy week for earnings. But here's the
1:22
Speaker 2: economic data that we are not going to be getting
1:24
Speaker 2: because of the government's shutdown. We're not gonna be getting
1:28
Speaker 2: retail sales. We're not going to be getting producer price indecks,
1:31
Speaker 2: we're not gonna be getting weekly jobless claims. We're not
1:35
Speaker 2: gonna be getting building permits and housing starts, and we're
1:38
Speaker 2: not gonna be getting consumer price indecks.
1:40
Speaker 3: So building permits are a federal data.
1:42
Speaker 2: Yes they are Census Bureau. So overall we've got a
1:45
Speaker 2: bunch of stuff that we're not getting. So instead we
1:48
Speaker 2: have to excite ourselves over Jay Powell is going to
1:50
Speaker 2: give a speech at twelve to twenty pm tomorrow, and
1:54
Speaker 2: Jamie Diamond's gonna tell us how wow his company performed
1:57
Speaker 2: in the most recent quarter. I think at least you
2:00
Speaker 2: can get some interesting signals about, you know, what's going
2:03
Speaker 2: on in the in the economy. So I do think
2:05
Speaker 2: that the banks can can tell us something kind of interesting.
2:08
Speaker 2: But am I gonna get all geared up for you know,
2:11
Speaker 2: Neil Kashgari to give a speech at six pm on Wednesday.
2:16
Speaker 3: Thursday.
2:16
Speaker 2: Rather, No, I'm not, I'm I'm over it. You know,
2:20
Speaker 2: I don't need more FED speakers I need. I was
2:26
Speaker 2: trying to think of a witty rhyme on the spot,
2:28
Speaker 2: but I couldn't get anywhere passed.
2:30
Speaker 4: I guess said, it's gonna generate the same level of
2:32
Speaker 4: enthusiasm that my daughter's hockey games.
2:34
Speaker 3: Well, immediate family only if Neil's parents in the crowd.
2:40
Speaker 2: If Neil's your your son, do you show up to
2:43
Speaker 2: all of his speeches?
2:44
Speaker 3: At this point, I most certainly.
2:46
Speaker 4: Would accomplished in his field. Yeah, yeah, I would be
2:51
Speaker 4: at everyone traveling on the road show.
2:53
Speaker 2: If you're the FED chair, do you get to show
2:56
Speaker 2: up to j Powell? Like, if you're the FED chair's family,
2:59
Speaker 2: do you get comp tickets to his press conference?
3:01
Speaker 3: Oh? Probably not. It's my son up there, but my
3:05
Speaker 3: son in the game, got the boys play. Come on.
3:09
Speaker 4: Markets in the meantime, making up about half the ground
3:13
Speaker 4: that they lost on Friday, will be covering the US
3:16
Speaker 4: China tension news today, but markets were down. SMP was
3:20
Speaker 4: off nearly one point nine percent on No, two point
3:23
Speaker 4: seven sorry, two point seven percent, one hundred and eighty
3:27
Speaker 4: seven two points I think so, Yeah, making up about
3:30
Speaker 4: half of that this morning in early trading as some
3:32
Speaker 4: announcements there, but those are the big pieces for this
3:36
Speaker 4: week as we look forward.
3:38
Speaker 3: And what day is the are we into the government shutdown?
3:41
Speaker 2: Here?
3:41
Speaker 3: Tucker? What number is this? Eleven thirteen? Oh good, he knew.
3:46
Speaker 3: Its an odd number.
3:46
Speaker 2: If it started on the first, and today's the thirteenth,
3:49
Speaker 2: it makes it pretty easy. Day, Like, the math is
3:52
Speaker 2: not particularly complicated.
3:54
Speaker 3: I didn't recall when it started.
3:55
Speaker 2: So in any case, Friday, obviously, the big move was
4:00
Speaker 2: after the Trump post about the potential increase in tariffs
4:06
Speaker 2: and increased tensions between the US.
4:07
Speaker 3: And China got eleven am on Friday, Yeah.
4:10
Speaker 2: Just before eleven am, and so you know, you saw
4:12
Speaker 2: stocks basically fall continuously throughout the day. The real damage,
4:17
Speaker 2: quite honestly, was not in equity markets. Do either of
4:21
Speaker 2: you know anyone who is big into crypto?
4:24
Speaker 3: No, yes, but no, didn't talk to them on Friday.
4:29
Speaker 3: Probably a good thing.
4:30
Speaker 2: The folks that I've talked to in the crypto world
4:33
Speaker 2: have said that Friday was basically the biggest liquidation event
4:38
Speaker 2: that they have ever seen. Like I don't know exactly,
4:42
Speaker 2: you know, what precipitated in this and that, but in particular,
4:46
Speaker 2: when you get past some of the more well known
4:49
Speaker 2: cryptocurrencies and towards some of the you know, off brand
4:53
Speaker 2: the so called alt coins and stuff like that, there
4:56
Speaker 2: was some real damage with like some intra day moves
4:59
Speaker 2: being you know, nine percent plus down, and like the
5:03
Speaker 2: stories that you've heard and seen are you know, people
5:06
Speaker 2: losing millions of dollars in a single day and and
5:11
Speaker 2: people just being entirely wiped out in a number of cases.
5:15
Speaker 2: So I think the interesting thing to me when we
5:20
Speaker 2: look at markets and this China situation, markets have not
5:26
Speaker 2: cared about this in any real way since May. I
5:29
Speaker 2: know that the market bottomed in April, but it's really
5:32
Speaker 2: been since May. In that first round of you know, negotiations,
5:35
Speaker 2: and I think it was Geneva at the time where
5:38
Speaker 2: those take place. We've had subsequent rounds. I think maybe
5:40
Speaker 2: another one engine even then one in Madrid, I think
5:43
Speaker 2: it was Again. I'm just trying to you know, keep
5:46
Speaker 2: track of all this, but ultimately it's been still about
5:50
Speaker 2: five months since markets cared about this, and I think
5:52
Speaker 2: the biggest reason is there hasn't really been much of
5:56
Speaker 2: a threat you know, out there from either China to
6:00
Speaker 2: the US in direct fashion since then, or any response
6:04
Speaker 2: from the US either, right.
6:05
Speaker 4: I mean, it's not to say that there haven't been
6:07
Speaker 4: real impacts on the ground. Go talk to anyone in
6:10
Speaker 4: the farming community, and you're not having basically any Chinese
6:13
Speaker 4: purchases of American agricultural goods. There are other effects and
6:17
Speaker 4: impacts throughout the economy, but in terms of the stuff
6:20
Speaker 4: that's driven markets, it's been pretty quiet between the US
6:23
Speaker 4: and China.
6:24
Speaker 2: So why did market suddenly pick up on this on Friday?
6:29
Speaker 2: And I have a couple theories as to why. The
6:31
Speaker 2: first is, look, this is the first you know, kind
6:34
Speaker 2: of re escalation that we've seen in a public facing
6:37
Speaker 2: manner in a few months. So I think that, you know,
6:40
Speaker 2: maybe that's meaningful in some way, shape or form. But
6:43
Speaker 2: it's not like markets have really cared about tariffs a
6:46
Speaker 2: whole lot over the last few months, even where there
6:49
Speaker 2: have been other sporadic you know changes and things like that.
6:52
Speaker 2: We had you know, higher tariff rates that went into
6:54
Speaker 2: effect in August. The market didn't really care about those.
6:58
Speaker 2: They weren't directed to China, which is obviously a major
7:00
Speaker 2: US trading partner, But the market didn't really care about
7:03
Speaker 2: the August ones, some of the sector specific ones market
7:06
Speaker 2: hasn't really cared about the last month or two.
7:08
Speaker 3: So I think some of this.
7:11
Speaker 2: Obviously is just you know, overall, when you talk about
7:13
Speaker 2: the two biggest economies in the world, if they start
7:15
Speaker 2: to be more on you know, a collision course, yeah,
7:18
Speaker 2: markets take notice a little bit. The other thing, quite honestly, is,
7:24
Speaker 2: and this is gonna sound weird to begin with, but
7:26
Speaker 2: what if this wasn't actually about China, but just where
7:29
Speaker 2: the market was at this particular point in time, and
7:33
Speaker 2: just kind of any catalyst could have caused this.
7:35
Speaker 3: And what I mean by this is.
7:39
Speaker 2: This has been a very very calm market over the
7:43
Speaker 2: last five or six months, almost historically calm in terms
7:47
Speaker 2: of actual realized volatility in markets. And the big reason
7:52
Speaker 2: why this has been the case has been what we
7:55
Speaker 2: can call dispersion, which is a fancy way of saying
7:58
Speaker 2: not everything in the index is been moving in the
8:00
Speaker 2: same direction. In fact, it's been moving in really different directions.
8:04
Speaker 2: If you've watched this market for the for the last
8:06
Speaker 2: six months, or so. It's been something where you say, hey,
8:09
Speaker 2: you know, tech stocks are up and bank stocks are
8:11
Speaker 2: lagging today, and but still we're moving up. And then
8:14
Speaker 2: the next day, hey, industrials are up, and we've got
8:18
Speaker 2: you know, utilities lagging, but the you know, industrials are
8:21
Speaker 2: dragging the index up.
8:23
Speaker 3: So ultimately, this dispersion.
8:24
Speaker 2: Has resulted in a really calm market, even though under
8:27
Speaker 2: the surface individual stocks have been moving a decent amount.
8:32
Speaker 2: And one of the things that we then saw in
8:35
Speaker 2: the last week and a half or so is, as
8:40
Speaker 2: you started to see the last two weeks progressing for markets,
8:45
Speaker 2: the way that markets typically progresses by climbing a wall
8:48
Speaker 2: of worry, and the way that you can measure that
8:50
Speaker 2: wall of worries through something called the VIX. VIX is
8:52
Speaker 2: all often called the fear index, but it basically measures, hey,
8:55
Speaker 2: what is the implied volatility of the S and P
8:59
Speaker 2: five hundred over the next month based on options that
9:01
Speaker 2: are out there. How much do market participants think the
9:04
Speaker 2: market's gonna move on any particular day or over any
9:07
Speaker 2: particular month. And generally what you see is when stocks
9:11
Speaker 2: climb the wall of whorrer its stocks up vics down.
9:14
Speaker 2: That's what you generally see because as stocks do better,
9:17
Speaker 2: people think, okay, stocks are going to continue to do better, sure,
9:20
Speaker 2: which is generally how they perform all time highs, beget
9:23
Speaker 2: more all time highs. That's the general trend. For the
9:27
Speaker 2: last couple of weeks, we saw this kind of weird
9:29
Speaker 2: thing in markets where it was stock's moving up, but
9:33
Speaker 2: the vix moving up as well. And where this starts
9:37
Speaker 2: to cause problems is there's an awful lot of money
9:40
Speaker 2: that is traded in what we call systematic fashion. And
9:44
Speaker 2: this is a fancy way of saying it's rules based trading.
9:47
Speaker 2: I'm not talking about high frequency trading, but rules based
9:50
Speaker 2: trading where there are these funds that are out there
9:53
Speaker 2: called volatility control funds, or you also have trend following
9:56
Speaker 2: strategies and things like that, but a lot of it
9:59
Speaker 2: is based off of, hey, how much volatility is in markets,
10:02
Speaker 2: and when volatility goes up, we pull back in order
10:05
Speaker 2: to protect our investors from moves and markets. That's how
10:09
Speaker 2: volatility control funds typically work. And eventually you get to
10:13
Speaker 2: a breaking point where if the vix goes up enough,
10:15
Speaker 2: they start selling and things start moving. And so I
10:18
Speaker 2: guess my question on this is is, Yes, like the
10:22
Speaker 2: China thing could have been the initial catalyst, but the
10:25
Speaker 2: rest of the move isn't necessarily related to investors being like,
10:30
Speaker 2: oh no, this is you know, this huge, you know
10:32
Speaker 2: China thing. But maybe the market was just primed for
10:34
Speaker 2: this because of how the underlying market structure was set up.
10:39
Speaker 3: And I suppose, but you still needed the news for
10:41
Speaker 3: it to be.
10:41
Speaker 2: You needed some kind of catalyst. I guess my point
10:44
Speaker 2: is if it wasn't, this might have been something.
10:46
Speaker 3: It could have been.
10:47
Speaker 2: Something else, you know, something else comes out on first
10:49
Speaker 2: brands today, or something comes out, you know, on a
10:51
Speaker 2: financial earnings report this week, and that's the impetus for
10:55
Speaker 2: this move.
10:55
Speaker 3: Anyway, I guess I just.
10:56
Speaker 4: Find it intriguing that. Look, when it comes to tensions
10:59
Speaker 4: between the US and China, takes two to tango.
11:01
Speaker 3: The you would kick off, but occasionally you can tangle
11:04
Speaker 3: by yourself.
11:05
Speaker 4: You would kick you kick this off on what was
11:07
Speaker 4: it Wednesday night when the Chinese announced these new restrictions.
11:10
Speaker 3: Yeah, and I have markets didn't react at all.
11:14
Speaker 4: No, it took the post from the president at eleven
11:18
Speaker 4: am just spark this sell off in markets. And so
11:22
Speaker 4: again this is kind of why I don't take it
11:23
Speaker 4: all that fundamentally seriously at the end of the day,
11:26
Speaker 4: and why I hope and think that it's ends up
11:31
Speaker 4: being more posturing than much else, because.
11:33
Speaker 3: Which is what we speculated at the time.
11:35
Speaker 4: Yeah, we speculated that on Thursday, that yeah, you're posturing
11:38
Speaker 4: ahead of a negotiation. And frankly, the commentary from the
11:42
Speaker 4: President of the United States over the weekend seem to
11:45
Speaker 4: insinuate the same.
11:46
Speaker 2: Let's take a quick break when we return. Let's see
11:51
Speaker 2: should we talk rare earths after this?
11:54
Speaker 1: Oh?
11:54
Speaker 3: I think we should.
11:58
Speaker 1: The Financial Exchange streams on YouTube. Subscribe to our page
12:02
Speaker 1: and stay up to date on breaking business news all morning.
12:05
Speaker 1: Long face. He's the Financial Exchange Radio Network. The Financial
12:10
Speaker 1: Exchange Show podcast drops every day on Apple, Spotify, and iHeartRadio.
12:14
Speaker 1: Hit that subscribe button and leave us a five star review.
12:18
Speaker 1: You're listening to the Financial Exchange Radio Network.
12:28
Speaker 5: This segment of The Financial Exchange is brought to you
12:31
Speaker 5: by the US Virgin Islands Department of Tourism. Looking for
12:35
Speaker 5: a getaway that's easy, warm, and unforgettable. Discover the magic
12:38
Speaker 5: of the US Virgin Islands. Saint Croix, Saint Thomas, and
12:41
Speaker 5: Saint John just a short flight from New England with
12:44
Speaker 5: no passport needed and no money to exchange. Soak up
12:48
Speaker 5: the sun strong along white sand beaches and feel the
12:51
Speaker 5: rhythm of the heartbeat of the islands. The USVII is
12:54
Speaker 5: America's Caribbean paradise. Plan your fall escape now at visit
12:58
Speaker 5: USBI dot com. That's visit USBI dot com.
13:02
Speaker 2: So the center of all the hubbub last week between
13:04
Speaker 2: the US and China is China's new export restrictions on
13:09
Speaker 2: rare earth materials, and specifically, basically what China is putting
13:15
Speaker 2: in place here is it says, Look, if you have
13:18
Speaker 2: any product that uses more than point one percent of
13:22
Speaker 2: rare earth's in its construction.
13:24
Speaker 3: I think it is.
13:24
Speaker 4: More if the value of the product is more than
13:27
Speaker 4: point one percent derived from those rare earths.
13:29
Speaker 2: But then we have the ability to restrict your sales
13:33
Speaker 2: of that product worldwide.
13:35
Speaker 4: Is it the sales the productor or your ability to
13:36
Speaker 4: get the No, we will like not necessarily license you
13:40
Speaker 4: to be able to sell your product worldwide, meaning you
13:44
Speaker 4: can sell whatever you want, but we won't give you
13:46
Speaker 4: any new rare earth.
13:47
Speaker 3: That's a nice business you've got.
13:49
Speaker 2: There would be a shame if anything happened to your
13:51
Speaker 2: rare earth supply, right is basically the sign here no
13:55
Speaker 2: over the weekend, they've tried to you know, soften that
13:57
Speaker 2: stance too. Well, we're likely going to app I prove
14:00
Speaker 2: most of these it's really just for military applications and
14:03
Speaker 2: this and that, to which then you get into okay,
14:06
Speaker 2: like some of this stuff you see and you say, okay,
14:08
Speaker 2: here's a clear military application. But there's a very easy
14:13
Speaker 2: way that you could say that semiconductors are being used
14:15
Speaker 2: for you know, military applications because they are and it's
14:19
Speaker 2: it's impossible to prove exactly where they go. This is
14:22
Speaker 2: also now a critical problem for the United States because
14:25
Speaker 2: one would imagine, hey, even if you know, China is
14:29
Speaker 2: approving rare earth exports for you know, GM or Forward
14:35
Speaker 2: or whoever you know is building cars and whatever, they're
14:38
Speaker 2: probably gonna be a little bit stringent about it when
14:40
Speaker 2: it comes to oh, I don't know, raytheon. And you
14:43
Speaker 2: do need this stuff when you're building Patriot missiles because
14:46
Speaker 2: in order to build a motor that doesn't melt when
14:49
Speaker 2: you need to turn the missile very quickly in a
14:51
Speaker 2: short period of time, you need these rare earths. Yes,
14:55
Speaker 2: so what does this actually mean. We're gonna have to
14:58
Speaker 2: see what the implementation is. But this is why it's
15:01
Speaker 2: potentially a devastating blow to you know, the ability for
15:05
Speaker 2: companies across a wide range of industries to operate if
15:09
Speaker 2: they can't get the rare earths that they want.
15:12
Speaker 4: And now all the posturing back and forth, you know,
15:15
Speaker 4: you've had many US lawmakers coming out and saying that
15:19
Speaker 4: the United States is far more leverage on China than
15:22
Speaker 4: they do on US. I really would encourage everybody just
15:26
Speaker 4: turn that stuff off, because it's a game of chicken.
15:30
Speaker 3: It doesn't matter. It does not matter first.
15:33
Speaker 4: It's about who is more will yeah, who blinks first,
15:36
Speaker 4: who is more willing to accept more pain.
15:39
Speaker 3: The whole It's the whole game.
15:41
Speaker 4: And I would argue, by the way, that we won't
15:42
Speaker 4: get there because all of this looks to me like
15:45
Speaker 4: a bunch of posturing ahead of a scheduled meeting between
15:48
Speaker 4: the two presidents so that each of them is able
15:51
Speaker 4: to soften their position during that.
15:53
Speaker 2: Negotiation and come aways saying Yep, we got concessions on
15:56
Speaker 2: this and everything's great.
15:58
Speaker 3: That's if we're being honest. That's probably the most likely outcome.
16:01
Speaker 2: But yeah, you don't know, because there is no stable
16:04
Speaker 2: equilibrium in a game of chicken. Now, we also then
16:07
Speaker 2: get this piece this morning, JP Morgan to invest ten
16:09
Speaker 2: billion dollars in US company's critical to national security. The
16:13
Speaker 2: subheadter Bank pledges to take stakes in companies such as
16:16
Speaker 2: mineral producers, artificial intelligence firms, and others. Let me say
16:23
Speaker 2: something when it comes to like rare earths and anything
16:28
Speaker 2: related to them, even tangentially or even just like general
16:31
Speaker 2: mining related. While I do think that over the next
16:36
Speaker 2: couple of years, you like, like pricing on this stuff
16:39
Speaker 2: could get nuts as everyone competes for it, doesn't it
16:43
Speaker 2: feel like we're ultimately heading for a massive oversupply on
16:47
Speaker 2: this stuff, like five to seven years from now, like
16:49
Speaker 2: because now that everyone's talking about it, there's all this
16:52
Speaker 2: money that's gonna seek it out and say, yes, like
16:55
Speaker 2: we let's do this, Let's figure out how to do this,
16:57
Speaker 2: let's chase this.
16:59
Speaker 3: There is a.
17:00
Speaker 4: Path for the US government basically saying that there is
17:02
Speaker 4: now a price floor for certain rareer It's coming out
17:05
Speaker 4: of the United States totally right, like that that is
17:07
Speaker 4: very likely where this could all And I'm not saying
17:09
Speaker 4: this is a bad thing.
17:10
Speaker 3: Sure, what I am saying is terrible business.
17:14
Speaker 2: It's not necessarily good for the overall business of rare earths,
17:18
Speaker 2: because eventually, if you overproduce this stuff, then the US
17:21
Speaker 2: government's gonna say, okay, let's pump the brakes. And if
17:24
Speaker 2: your business is dependent on the US government to be
17:27
Speaker 2: the buyer of last resorts, once you reach that oversupply
17:31
Speaker 2: and you have you know, a national neobidium supply, you know,
17:35
Speaker 2: that's you know, stuck aside. I think that's one of
17:37
Speaker 2: the rares. I might have just made that name up,
17:39
Speaker 2: but it sounded good.
17:41
Speaker 3: Good.
17:42
Speaker 2: Yeah, you know, like you're you're going to reach a
17:46
Speaker 2: point where you overproduce this stuff even if US, which
17:49
Speaker 2: is fine, I'll add it's it's because the risk of
17:53
Speaker 2: underproducing Yeah, pretty bad we're seeing right now.
17:56
Speaker 4: Even if the US doesn't overproduce it for our own
18:00
Speaker 4: domestic consumption needs, you can be sure that the Chinese
18:04
Speaker 4: have the ability to. And so again, if this is,
18:08
Speaker 4: if this reaches a point where for profit companies are
18:12
Speaker 4: trying to compete with Chinese ones on rare earth materials,
18:17
Speaker 4: which I don't think is what we're going towards but
18:20
Speaker 4: you know, in a free capital market, at least on
18:24
Speaker 4: the US side, they'll be put out of business by
18:27
Speaker 4: Chinese counterparts because they will flood the market like they
18:30
Speaker 4: have done with many other items, which is how we
18:32
Speaker 4: ended up here in the first place. Right, Like, if
18:34
Speaker 4: you look at the defining characteristics of the US and
18:36
Speaker 4: Chinese economies, the US we've never met a debt. We
18:40
Speaker 4: didn't like China, we can always sell more of it
18:45
Speaker 4: cheaper than you.
18:45
Speaker 3: Yeah, Like that's those.
18:47
Speaker 2: Are like the defining characteristics in terms of where the
18:51
Speaker 2: excess comes from.
18:52
Speaker 3: The US.
18:53
Speaker 2: Well, we can buy more than you can China, yeah,
18:56
Speaker 2: but we can produce more than you can.
18:58
Speaker 3: Yeah.
18:58
Speaker 2: That's that's kind of the tension that you have between
19:02
Speaker 2: the two systems and the way that they are set up.
19:04
Speaker 4: Which is great for TVs and bad for rare earth materials.
19:09
Speaker 2: What about rare earth TVs? A TV that spins because
19:13
Speaker 2: of a magnet in it sounds like it'd cause cancer
19:17
Speaker 2: or just dizziness.
19:18
Speaker 3: Let's take a quick break.
19:19
Speaker 2: When one returns, one will do Wall Street watch after this.
19:40
Speaker 1: Like us on Facebook and follow us on Twitter at
19:43
Speaker 1: TFE show. Breaking business news is always first right here
19:47
Speaker 1: on the Financial Exchange Radio Network. Time now for Wall
19:53
Speaker 1: Street Watch a complete look at what's moving market so
19:56
Speaker 1: far today right here on the Financial Exchange Radio Network.
20:00
Speaker 5: It's a rebounding to begin the week after Friday's selloff,
20:03
Speaker 5: after President Trump followed up his social media post yesterday
20:07
Speaker 5: saying don't worry about China, it will all be fine.
20:10
Speaker 5: Trump's initial post on Friday was critical of China threatening
20:14
Speaker 5: massive tariffs. Right now, the Dow is up nearly one percent,
20:18
Speaker 5: are four hundred and twenty points higher. S and P
20:20
Speaker 5: five hundred up one point two percent or eighty three
20:23
Speaker 5: points higher, Nasdaq up one point eight percent or four
20:27
Speaker 5: hundred and eight points. Hire Russell two thousand is up
20:30
Speaker 5: over two percent. Bond market closed today in observance of
20:35
Speaker 5: the holiday, and crude oil up one and a half
20:38
Speaker 5: percent today, treating a fifty nine dollars in seventy seven
20:41
Speaker 5: cents a barrel m B excuse me. NP Material stocks
20:46
Speaker 5: surging twenty percent after the Pentagon recently took a stake
20:49
Speaker 5: in the rare Earth's producer, adding to its recent rally
20:52
Speaker 5: last week. China tightened rare earth export controls other miners,
20:56
Speaker 5: including US A rare earth critical metals in energy fuels
21:00
Speaker 5: are also seeing strong gains on the day. Meanwhile, shares
21:04
Speaker 5: in Broadcom rallying nearly nine percent following news that OpenAI
21:08
Speaker 5: signed a multi year packed with Broadcom to collaborate on
21:11
Speaker 5: custom chips and networking equipment, where the two companies will
21:15
Speaker 5: jointly build and deploy ten gigawatts of custom AI accelerators. Elsewhere,
21:20
Speaker 5: Shares in Warner Brothers Discovery rising over four percent following
21:24
Speaker 5: reports that the company had rejected Paramount Skydance's proposed buyout
21:28
Speaker 5: of roughly twenty dollars a share. Furthermore, reports also say
21:32
Speaker 5: that Paramount CEO David Ellison is making a play to
21:35
Speaker 5: buy all of Warner before it splits. It may take
21:39
Speaker 5: his offer directly two shareholders, JP Morgan Chase up over
21:43
Speaker 5: two percent after the bank said it would directly invest
21:46
Speaker 5: ten billion dollars in companies it deems critical to national security,
21:51
Speaker 5: speaking of which JP Morgan Chase and other major banks
21:54
Speaker 5: including Wells Fargo, Goldman, Sachs, Blackrock, and City Group will
21:58
Speaker 5: post their third quarter earn ahead of tomorrow's open Outside
22:02
Speaker 5: of banks Johnson and Johnson, Ericsson, Dominoes, and Alpertson's will
22:06
Speaker 5: also report their third quarter results ahead of the opening bell.
22:10
Speaker 5: I'm Tucker Silva and that is Walltree watch.
22:13
Speaker 3: Piece here from US. This is Bloomberg.
22:15
Speaker 2: Yeah, from Tricolor to Sacks, bonds are now crashing at
22:20
Speaker 2: breakneck speed.
22:22
Speaker 3: Well, I mean, I think that's.
22:24
Speaker 2: Kind of broad. I mean, bonds as a whole are
22:26
Speaker 2: generally fine. In fact, the ten year Treasury had a
22:28
Speaker 2: nice little bid to it on Friday and all.
22:31
Speaker 3: Of the commotion and hubbub.
22:33
Speaker 2: But yes, I think that the general stance of hey,
22:38
Speaker 2: if your company has way more debt than investors thought
22:42
Speaker 2: and you declare bankruptcy, your bonds are going to crash
22:45
Speaker 2: is a pretty like respectable place to.
22:48
Speaker 4: Land, by the way, I mean, yeah, crashing to me
22:53
Speaker 4: implies something different than what we see. I'm taking a
22:55
Speaker 4: look at data from Saint Louis Fan. It's the b
22:59
Speaker 4: of a US High Yield Index option adjusted spread, so
23:02
Speaker 4: that they're looking at junk versus risk free asset, and
23:07
Speaker 4: we were sitting at a spread of two and three
23:11
Speaker 4: quarters last Monday.
23:14
Speaker 3: We're up to two nine five.
23:17
Speaker 4: It doesn't seem like spreads have blown out on the
23:19
Speaker 4: riskier bucket now. I will acknowledge for a minute here
23:23
Speaker 4: that many are arguing that the junk market, which is
23:27
Speaker 4: what we're actually measuring here, has been partly de risked
23:31
Speaker 4: by this exact factor of private credit, and so maybe
23:35
Speaker 4: that's not where the risk lives and we should be
23:37
Speaker 4: more focused on this private credit industry. That you can't
23:39
Speaker 4: meaning clean measure. But yeah, it does not at the
23:44
Speaker 4: very least, it is not a risk off everything type
23:47
Speaker 4: of trade right now in bonds.
23:49
Speaker 3: No.
23:49
Speaker 2: Now, that also doesn't mean that you're going to be fine.
23:53
Speaker 2: As an example, if you look at the historical spreads
23:59
Speaker 2: on triple seed debt, just as an example, which is
24:02
Speaker 2: basically like the lowest quality of junk debt before you
24:06
Speaker 2: get to defaulting. In May of two thousand and five,
24:10
Speaker 2: the spreads on triple ceed debt were nine and a
24:13
Speaker 2: half percent, So you got paid have to, you know,
24:16
Speaker 2: a nice little margin to do that to endo those companies. Again,
24:20
Speaker 2: that's the spread between treasuries of a certain of a
24:23
Speaker 2: similar maturity, Yes.
24:24
Speaker 3: Got it.
24:25
Speaker 2: By June of seven that spread was down to four
24:28
Speaker 2: point one percent. Well, we all know what happened afterwards.
24:32
Speaker 2: Those spreads blew out during the financial crisis and in
24:36
Speaker 2: November of two thousand and eight, that spread was north
24:40
Speaker 2: of forty four percent. So I do think that credit
24:45
Speaker 2: spreads are not usually they're not usually a great leading indicator.
24:49
Speaker 2: They're often a coincident indicator. Now, they did start to
24:53
Speaker 2: show problems. So from June of seven through March of eight,
24:58
Speaker 2: that triple C spread went from four up to twelve. Yeah,
25:01
Speaker 2: so like you started to see it building towards the
25:03
Speaker 2: financial crisis there, and then obviously when everything happened in
25:06
Speaker 2: the fall of eight, like they went, you know, just
25:09
Speaker 2: just nutty.
25:10
Speaker 3: But so what if that signal's gone now?
25:13
Speaker 2: And this is the problem is the private credit industry
25:16
Speaker 2: has taken a lot of below investment grade debt and
25:20
Speaker 2: taken it out of public markets where you get accurate
25:23
Speaker 2: price discovery on a daily basis, and instead it might
25:27
Speaker 2: be just one company that's holding all of that debt,
25:29
Speaker 2: and so it doesn't reprice. It might be a few,
25:32
Speaker 2: but it still doesn't reprice because there's no secondary market
25:34
Speaker 2: for it and it doesn't trade. And so the two
25:37
Speaker 2: questions that are out there. Number one is, hey, have
25:42
Speaker 2: we lost you know, an aspect of price discovery in
25:45
Speaker 2: the junk bond market because so much of it is
25:47
Speaker 2: held privately as opposed to in publicly traded bonds. Now
25:52
Speaker 2: and the second piece there, and this is the part
25:55
Speaker 2: to me that is reminiscent of seven is it's in
25:59
Speaker 2: a different area. In O seven it was, hey, we're
26:02
Speaker 2: holding all of this, these mortgage backed securities? Are these
26:07
Speaker 2: worth anything?
26:08
Speaker 3: Was the question?
26:08
Speaker 2: Then now the question is, realistically, hey, we're holding all
26:13
Speaker 2: of these, you know, privately made loans. What if there's
26:18
Speaker 2: more first brands? And if there are, is what we're
26:22
Speaker 2: holding worth anything?
26:23
Speaker 3: Right? And who is left holding?
26:25
Speaker 2: And so these are the questions that every private credit
26:29
Speaker 2: lender is asking right now, and they don't have answers.
26:33
Speaker 4: I'll be the first say that SMP, as a rating
26:36
Speaker 4: agency frequently gets some things wrong here and there. But
26:41
Speaker 4: Financial Time is reporting that the rating agency SMP has
26:44
Speaker 4: warned us ensures of the risks of the complexity and
26:48
Speaker 4: lack of disclosure in the private credit market.
26:50
Speaker 3: So if you're wondering, again, what is one holder of.
26:54
Speaker 4: All this debt that you interact with very frequently, it
26:57
Speaker 4: might be your insurance company.
26:59
Speaker 2: Not just one, Michael, a massive one. Insurers over the
27:05
Speaker 2: last three to five years have been some of the
27:07
Speaker 2: biggest buyers of collateralized loan obligations from private credit. And
27:13
Speaker 2: the reason why is simple. If you are in a
27:16
Speaker 2: competition to you know, keep the lowest rates possible and
27:20
Speaker 2: you know, not raise your rates because of you know,
27:23
Speaker 2: all of the things going on in the world over
27:24
Speaker 2: the last five six years and also look attractive to
27:27
Speaker 2: your investors from a growing profitability standpoint.
27:30
Speaker 3: Correct.
27:30
Speaker 2: One of the best ways that you can do that
27:32
Speaker 2: is say, yeah, if I can go out and buy
27:34
Speaker 2: a pool of private credit that's yielding twelve percent instead
27:36
Speaker 2: of holding treasuries yielding five.
27:38
Speaker 3: With your premiums.
27:39
Speaker 2: By the way, sure like of course insurers are going
27:42
Speaker 2: to say yeah, like it's you know, highly rated.
27:44
Speaker 3: Why wouldn't I do that?
27:46
Speaker 2: And this is the part where there are some real
27:48
Speaker 2: echoes of the financial crisis, right and you just don't
27:53
Speaker 2: know what the scales, you don't know what the scope
27:55
Speaker 2: of it is.
27:56
Speaker 4: It is that would really suck if we took it
27:58
Speaker 4: out of the uh, you know, too big to feel,
28:01
Speaker 4: too big to fail banks, we took all the risk
28:03
Speaker 4: out of there, and we put it into a bunch
28:05
Speaker 4: of insurance companies who are also too big to fail. Well,
28:07
Speaker 4: and it's what if what if three insurers went down
28:10
Speaker 4: in the United States and it would sink the entire market,
28:13
Speaker 4: And it's all.
28:13
Speaker 2: The this whole mechanism is, Hey, the banks aren't making
28:17
Speaker 2: these loans. It's all non bank lending that's going on.
28:20
Speaker 2: It's all you know, these asset managers that said, yeah,
28:24
Speaker 2: we have these vehicles that we're setting up in order
28:26
Speaker 2: to lend money to companies, and you're gonna get yields
28:30
Speaker 2: of you know, eight to twelve percent on this.
28:32
Speaker 3: But don't worry.
28:33
Speaker 2: It's it's it's fine, like it's you know, it's safer
28:36
Speaker 2: than public markets because it doesn't trade.
28:39
Speaker 3: Well.
28:39
Speaker 2: No, that just means there's no mark to market efficiency
28:41
Speaker 2: that you get there, and so you don't know what
28:43
Speaker 2: the value is.
28:44
Speaker 4: And it'd be one thing if the insurance company's businesses
28:48
Speaker 4: were relatively stable in the first place, which they're which
28:51
Speaker 4: they're not.
28:52
Speaker 2: Look, I I gotta tell you, I hope I'm wrong
28:56
Speaker 2: about this, but I'm getting this not great feeling about
28:59
Speaker 2: this whole space now.
29:01
Speaker 3: And it's it's not that everything's gonna be a mess.
29:03
Speaker 2: It's not that it's gonna be you know, financial crisis
29:05
Speaker 2: two point zero, but it's rare that you just see
29:09
Speaker 2: like two defaults in the auto sector and then everything else.
29:13
Speaker 3: Is fine, hunky dory like.
29:15
Speaker 2: That that doesn't really feel like what's happening here? And
29:22
Speaker 2: I'm just like, my spidy sense is just tingling a
29:25
Speaker 2: little bit in this whole space right now. And of
29:28
Speaker 2: course then you also get the piece in the Wall
29:30
Speaker 2: Street Journal Jeffrey seeks to calm worries over First Brands
29:33
Speaker 2: because hey, when First Brands has ten billion dollars in
29:36
Speaker 2: debt and Jeffries, you know one of their investment funds
29:41
Speaker 2: point benit a capital investment held like seven percent of
29:45
Speaker 2: that in one fund. You're like, do you guys understand
29:49
Speaker 2: the principles of diversification amongst poorly rated like lending risks?
29:56
Speaker 3: Now, next question, and this is where his.
29:59
Speaker 2: Story, like, you give banks a lot of credit because
30:02
Speaker 2: aside from like two thousand and eight, the thing about
30:05
Speaker 2: banks is normally they're really conservative. Like the biggest problem
30:10
Speaker 2: that you get with banks especially you can even make
30:12
Speaker 2: the case since then banks don't really like making loans,
30:16
Speaker 2: like they're scared to make loans for a number of
30:20
Speaker 2: different reasons. This here, when you look at what's going
30:23
Speaker 2: on in private credit. It's just the wild West. It's
30:26
Speaker 2: oh sure, I can underwrite that for you know this,
30:28
Speaker 2: of course we can do that for you. And it
30:34
Speaker 2: just gives me the willies. Right now, I've got the willies.
30:39
Speaker 2: Let's take a quick break here, and when we come back,
30:42
Speaker 2: we'll talk about the September CPI report that we're actually
30:45
Speaker 2: going to get next Friday.
30:46
Speaker 1: Right after this, the latest news on inflation, the Fed,
30:50
Speaker 1: the economy, and how the markets are reacting. Every morning
30:54
Speaker 1: right here on the Financial Exchange Radio Network, tanks US
30:58
Speaker 1: six one seven to thirteen eighty five, with your comments
31:02
Speaker 1: and questions about today's show, and let us know what
31:05
Speaker 1: you think about the stories we are covering. This is
31:07
Speaker 1: the Financial Exchange Radio Network.
31:24
Speaker 3: All right.
31:24
Speaker 2: So late last week we did get word from the
31:27
Speaker 2: BOS that they were calling their CPI staff. Imagine being like,
31:34
Speaker 2: if you're running that reporter, you the director of inflation.
31:37
Speaker 3: Oh yeah, what does it say on your business card?
31:41
Speaker 3: Director of Inflation, I would hope.
31:44
Speaker 2: But in any case, they were calling the staff in
31:46
Speaker 2: order to make them essential from non essential, the reason
31:49
Speaker 2: being the September CPI report directly feeds into the cost
31:53
Speaker 2: of living adjustment for Social Security next year. And so
31:59
Speaker 2: this is obviously some thing that you need to get
32:01
Speaker 2: in a timely fashion just because there's you know, a
32:03
Speaker 2: lot that goes into then making that work. I don't
32:07
Speaker 2: think you just like go in and, you know, say,
32:09
Speaker 2: inflate everything by x percent and it works immediately. I
32:12
Speaker 2: think there's probably a little bit of a process to
32:14
Speaker 2: it there. So we aren't going to be getting CPI
32:16
Speaker 2: this week as we were supposed to. It's gonna be
32:18
Speaker 2: next Friday, on the twenty fourth instead, which will be
32:21
Speaker 2: ahead of the FED meeting, yep, ahead of.
32:23
Speaker 3: The FED meeting.
32:24
Speaker 2: And so still I think a valuable data point for us,
32:27
Speaker 2: who are you know, kind of starved for data points
32:29
Speaker 2: amongst the series that we're used to. But also means
32:33
Speaker 2: that we will know that Social Security cost of living
32:35
Speaker 2: adjustment in short order as well.
32:37
Speaker 4: Yeah, you'll get all sorts of other adjustments that are
32:40
Speaker 4: used for tax filence. I think we already got the brackets,
32:42
Speaker 4: but things like for one K contribution limits and items
32:45
Speaker 4: like that would would come in as part of this
32:48
Speaker 4: as well.
32:49
Speaker 3: But I think the important.
32:52
Speaker 4: Piece of all this chuck is it does feel right
32:55
Speaker 4: now as though there are some increased concerns among vesters,
33:01
Speaker 4: all while experiencing an absence of reliable data about this economy,
33:06
Speaker 4: which has not really led to anything terribly dramatic, and
33:10
Speaker 4: I don't really expect that it will during the government
33:12
Speaker 4: shutdown itself. But when you have this absence of information,
33:17
Speaker 4: investors are more and more reliant upon you know, tweets
33:20
Speaker 4: and announcements, earnings reports that are going to be ongoing.
33:24
Speaker 4: And if you are finding yourself in a position where
33:26
Speaker 4: you're trying to sort these things through, we would love
33:31
Speaker 4: for you to join us. You know, obviously you're listening
33:33
Speaker 4: to this program now and we'd love to see you
33:35
Speaker 4: at our live event this Thursday in Chestnut Hill. We
33:39
Speaker 4: did one of these last week. It was well attended
33:41
Speaker 4: in a really fun time. Spoke to the you know,
33:43
Speaker 4: got to speak to people during the program, during the
33:45
Speaker 4: breaks during the program, but got to speak to people
33:47
Speaker 4: during the program and talk about these subjects on a
33:51
Speaker 4: real one on one basis. It led to a really
33:53
Speaker 4: great series of conversations. And we're doing another one of
33:56
Speaker 4: these this Thursday again in Chestnut Hill at the show
33:59
Speaker 4: case Super Lucks. It's free to attend. It's a live
34:02
Speaker 4: broadcast of this show followed by lunch and a chat
34:05
Speaker 4: with Chuck, myself and the staff of Armstrong Advisory Group
34:08
Speaker 4: really focused on our own outlook of what's going on
34:12
Speaker 4: in markets, what's going on the economy, and what does
34:14
Speaker 4: it mean for average investors of all different types. So
34:19
Speaker 4: we would love for you to join us. You do
34:20
Speaker 4: have to register ahead of time. Obviously we're closing in
34:23
Speaker 4: here on the date. It's this Thursday at the showcase
34:26
Speaker 4: Super Lucks and Chestnut Hill. The numbers eight hundred three
34:30
Speaker 4: nine three four zero zero one. If you're driving around
34:32
Speaker 4: right now, don't have time to call check us out
34:34
Speaker 4: when you get home or when you get to work
34:36
Speaker 4: at Armstrong.
34:36
Speaker 3: Advisory dot Com.
34:38
Speaker 4: All the details right at the top of the page there,
34:40
Speaker 4: but this Thursday Showcase, super Lucks Chestnut Hill eight hundred
34:43
Speaker 4: three nine three for zero zero one to reserve your spot.
34:46
Speaker 1: The proceeding was paid for by Armstrong Advisory Group, a
34:48
Speaker 1: registered investment advisor. Nothing in the ad or in any
34:51
Speaker 1: Armstrong guide a specific financial, legal or tax advice. Consult
34:54
Speaker 1: your own financial, tax into state planning advisors before making
34:57
Speaker 1: any investment decisions. Armstrong may contact you to offer advisory services.
35:01
Speaker 2: Piece in the Wall Street Journal more working class Americans
35:03
Speaker 2: than ever are investing in the stock market.
35:07
Speaker 3: Great news long term, terrible news short term. Why is
35:09
Speaker 3: it terrible news short term? Ah? I guess it hasn't
35:12
Speaker 3: been for the last four years.
35:13
Speaker 4: But my guess would be that many of them jumped
35:16
Speaker 4: in over the course the last few years during COVID
35:18
Speaker 4: and other events and invest on. There's probably a lot
35:26
Speaker 4: more investors as a percentage of the total that are
35:29
Speaker 4: not terribly experienced with market downturns, would be my guess.
35:32
Speaker 3: That's fair.
35:33
Speaker 2: And look, every investor at some point goes through some
35:36
Speaker 2: kind of large drawdown, usually due to their own poor
35:39
Speaker 2: risk management and setup of their accounts. I know when
35:43
Speaker 2: I was starting out, I certainly had my days where
35:46
Speaker 2: I'm like, oh boy, that really sucks, Like that's not great.
35:49
Speaker 2: You're not supposed to see, you know, that kind of loss.
35:52
Speaker 2: But you hopefully, you know, learn from me mistakes. Don't
35:54
Speaker 2: make the same one twice. And look, I'm a big
35:57
Speaker 2: believer in this because ultimately, when when we at the
36:00
Speaker 2: playing field between labor and capital over the last forty years,
36:03
Speaker 2: can we all agree that capital buy and large has
36:07
Speaker 2: been winning. Yes, Doesn't it make sense then to play
36:10
Speaker 2: on the same side as capital hundred percent and isn't
36:13
Speaker 2: investing in equity markets the way to do that, Yes,
36:15
Speaker 2: so long as you can stick with it when times
36:18
Speaker 2: get rough correct because they will not just be linear.
36:21
Speaker 2: They're not always just going to go up. And especially look,
36:24
Speaker 2: we have not had a prolonged bear market in fifteen
36:27
Speaker 2: years or so.
36:28
Speaker 3: Yeah, you know it's.
36:30
Speaker 4: Short ones, but you know the ones people need remind
36:33
Speaker 4: you of this, Like the eight bear market took four
36:36
Speaker 4: and a half years before it got back to its
36:38
Speaker 4: base level.
36:39
Speaker 2: Forget that one, Mike, the tech bubble the Nasdaq took
36:42
Speaker 2: like fourteen years to get back to its previous level,
36:45
Speaker 2: So that might be more relevant to folks that are
36:47
Speaker 2: not in such a diversified portfolio. Just understand these things
36:51
Speaker 2: have ups and downs, they are not linear, and volatility
36:54
Speaker 2: is the price of admission to.
36:58
Speaker 3: Equity markets.
36:59
Speaker 4: Before we move on to the next story, Chuck, I've
37:01
Speaker 4: been thinking about them calling back the CPI staff, and
37:03
Speaker 4: all I've been going to is Keanu Reeves and the replacements.
37:06
Speaker 4: And I know it's not replacement staff, but I do
37:09
Speaker 4: like the idea of a ragtag group of statisticians being
37:13
Speaker 4: called in to put together the CPI report on next week.
37:18
Speaker 4: I don't think that's gonna happen.
37:19
Speaker 1: Though.
37:19
Speaker 2: If if you covered the CPI for the BLS, what
37:22
Speaker 2: would you like to cover?
37:24
Speaker 3: Like? What what section? If food?
37:27
Speaker 4: Because the most relatable I would like to be the
37:29
Speaker 4: Minister of eggs, although then I'd probably be one thousand
37:32
Speaker 4: pounds constantly.
37:33
Speaker 3: You don't have to pay the prices in order to know.
37:35
Speaker 3: They might just be constantly talking about food. This takes
37:39
Speaker 3: so expensive and I'm already fall No, no, no, off me.
37:44
Speaker 3: I'm starving New England. Theer's are fed up with leaf
37:48
Speaker 3: keeping tourists ruining their fall. Get over yourselves.
37:51
Speaker 2: You can't bite the hand that feeds you, like, I'm sorry.
37:54
Speaker 2: If tourism is what supplies you know, the the revenue
37:58
Speaker 2: four your town, that's kind of how it is. Yeah,
38:02
Speaker 2: Like it's I don't really know what else to say
38:05
Speaker 2: about that.
38:06
Speaker 3: That's it.
38:06
Speaker 4: Tourists are terrible and I get that they shouldn't be
38:09
Speaker 4: trespassing on your lawn, but yeah, that comes with the Yeah, territory.
38:14
Speaker 2: It's it's just what it is. Let's take a quick
38:16
Speaker 2: break when we return. Hour two coming up