April 9, 2024 • 38 mins
Mike Armstrong and Marc Fandetti take a look at how Treasury yields hit a yearly high before the latest CPI report comes out. Commodities rally reflects a better economy but presents inflation risks. What you should know about Gold's curious rally. Is Jamie Dimon right about how impactful AI will be for humanity? What is the trick to becoming a 401(k) millionaire?
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five K Boston is presented by VeteransDevelopment Corporation FACE is the Financial Exchange with
Mike Armstrong and Mark Fandetti. Finallystarting to feel a little bit like spring
out there, folks, I'm suremaybe not for those in Maine where you're
probably still working on getting your powerback after the last storm, but finally
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starting to feel a little bit likespring out there as we wait with baited
breath for tomorrow's inflation report on CPI, the Consumer Price Index and bond yields
climb to twenty twenty four highs.It's Mike Armstrong, Mark Fandetti and Tucker
Silva with you this morning. Andyeah, like I said, tomorrow,
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we're going to be getting the CPIreport for the month of March, the
Consumer Price Index out at eight thirtya m. Which, you know,
I think many markets are looking atTory and get a glimpse into whether or
not this is truly just a bumpin the road on the way down to
the Fed's target of two percent inflation, or whether this is something a bit
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more serious in terms of a reaccelerationof prices. And honestly, I don't
have a real course in the racehere. I'm not really sure which direction
this is going. I can't firmlysay whether I think it's a reacceleration or
just a blip on the radar,a bump in the road. So time
will tell here and we'll see whatwe get tomorrow morning. In the meantime,
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top story today treasury yields reaching atwenty twenty four high. As of
a look this morning, you've gotthe ten year treasury sitting at four point
three seven six. That is,of course, moving all sorts of different
real life measurements of interest rates.It's not that US ten year treasuries are
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not real life, but most peoplearen't out there actually buying a US ten
year treasury on a day to daybasis. So taking a look at instead
the NASH average of a thirty yearfixed rate mortgage. Let's see according to
bank rate, Well, that's nothelpful bank rate, it's not four point
four percent. That's a savings account. I'll take a look at the overall
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thirty year fixed rate mortgage. Butwhen we talk about treasury yields being higher,
there are obviously impacts across the economy. Mark the mortgage rates are tied
directly to it, credit card rates, savings rates a little bit more tied
into the federal reserves own short terminterest rates. But this premise of higher
for longer or at least the expectationsfor rates coming down this year, whether
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it's a whole lot longer or justa bit longer, this has been the
news this year is rates that wereexpected to come down might end up staying
higher for longer. And I'd liketo start with what does that mean for
all sorts of different asset classes,And maybe we can start with equities,
so stocks generally speaking, why dointerest rates matter or do interest rates matter
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in the short term? I guesswould be a starting premise here. So
the ten year Treasury is a foundationalasset class. Every asset in the world
arguably is priced off of it becausethe US government has no credit risk.
Everything every security issued by the no. In fact, there's no credit risk
with the US government. There's inflationrisk. They're not going to default.
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They can print money yep, sono credit risks full stop, unlike a
corporate bond, which at and Tor Microsoft, no matter how financially solid,
can't print money. So it isimportant to distinguish between different types of
risks when you're talking about bonds.So for purposes of this discussion. For
purposes of finance, generally, treasuriesare risk free, not inflation risk free,
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but credit risk free, the typeof risk that most people would be
kept awake by at night. Sothey're important to get to your point about
their relevance for other asset classes likeequities, because if you're making a di
decision as to how to invest,you start with what you can get on
a risk free security. I canget about four point four percent on a
ten year treasury YEP, that's beforethat's including inflation, and you could buy
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an inflation adjusted risk free treasury.We call them tips treasure inflation protected securities
yield on there is somewhere and whatreally yield right now with two point two
ish, So the difference is themarket's best guas on what inflation will average
over the next ten years. Treasuryrates matter for equities because again, you
start, when you're pricing any asset, you price it against the risk free
asset. Right. You don't priceit against zero. It's not what if
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I buried this money in my backyard. You're pricing it against what could I
get from a risk free So youstart that asset that's considered risk free which
is about four point four percent today, and all l SQL when treasury rates
go up, because you're comparing otherassets to treasuries, not just today,
but at every point in time overyour holding period, all l SQL higher
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rates, higher discount rates, technicallya lower present value. And we've all
run into that. If you boughtan annuity, you run into that.
The higher the interest rate, thelower the current price of an immediate say
annuity the lump sum. Just becauseof the relationship between what money is worth
to you today, what it's worthto you and say ten years, those
two things are inversely related. Anotherway to think about it is you've got
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to put less money aside today tohit your goal in ten years, the
higher the interest rate. That's adifferent way of saying the same thing.
So it's it's vitally important whether ornot you own treasuries, Mike, as
you suggested, the yield on theten year treasury is. How about when
it comes to fixed income markets.So we've got as I mentioned, ten
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your treasury yields reaching a new highfor this year, still well below where
they hit back in October of lastyear when they had them, you know,
hitting up at the five percent range, but we're again back up there
at four point four percent. Whenyou look at credit markets out there,
Let's say you own existing bonds youmentioned AT and T. So maybe I
bought a bond from AT and Tlast year and I see yields on treasuries
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rising. What does that do tomy existing investment that I have in bonds?
It depends, but all LSE equalrising risk free rates. And again
I use risk free in a verystrict sense here I mean default risk,
which the federal government does not carry. Whatever you think of deficits in their
explosive path, they can always printmoney, so compared to risk, when
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risk free rates go up, allrates should go up all l SQL unless
there's some weird The AT and Tor any company issued bond could carry options
that complicate that relationship, which iswhy finance types adjust them for options.
But we look at so called spreadsto gauge how the market is pricing risk
of one issuer versus treasuries, andall l SQL everything should just kind of
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go up with treasuries. All elseis almost never equal, but Mike,
it probably pushes up longer term interestrates on similar term to maturity issues bonds.
But we have to be clear therebecause I don't think this is necessarily
obvious to every person. When youare pushing up yields on bonds, what
you are doing is pushing down priceson easy thing. So the way to
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think about that is, if yieldshave gone up on newly issued bonds,
the only way to make outstanding bondscompetitive. Outstanding bonds are out there circulation.
Sure, I'm not going to takethe old coupon which was lower.
I need to pay less to getthe equivalent of a higher yield on a
newly issued bonds. It is.It's actually really straightf guys. Yeah,
if I've got a bond out therethat only paying two percent interest, I'm
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not going to pay the one hundreddollars that you paid for it to get
my hands on. You're gonna wantthe same yield, which means pay less.
Very straightforward when you think about it. The other pieces would be,
you know, other big asset classesthat I think of. Interest rates you
know, certainly impact the real estatemarket, and mainly because we finance a
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lot of real estate, well partlybecause we finance a lot of real estate
purchases with debt. So the higherthe rate on the debt is, the
less affordable the purchase becomes. Butalso partly, just like you would look
at it from an equity perspective,if I'm buying a piece of real estate
as an investment, forget about yourprimary residence here for a moment. If
I'm buying a office building as aninvestment, and I'm looking at the future
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cash flows of that investment, again, I'm discounting those future cash flows against
This is a great conversation because you'regetting at the heart of what makes one
investment type or asset class in financeterms, asset class is just the type
of investment. What makes one typedifferent from an other? Wire stocks different
than bonds. Well, stocks giveyou a claim on future growth. They
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have unlimited upside. Bonds have quitelimited upside. You get the face value
when they mature, unless you owna bond fund, in which case everything's
always turning over under your surface.You don't see that. Real estate a
little bit different. It's kind ofa hybrid. You collect rents, which
are like a coupon, and there'supside. You could say it's a limited
appreciation. Yeah, so you gethigh real estate is considered a hybrid bidy
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by people who do asset allocation likeI do in my day job. We
think about what mix of ingredients isright for an individual. Do they need
growth or a safety paramount, orneed more as is more commonly the case,
they need some combination of the two. And then you furthermore think about,
okay, what mix of asset classesof investment ingredients, if you like,
is likely to get them to wearthe individual to where they need to
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be at the end of their timehorizon. I was talking about it earlier,
by the way, but the yieldon the thirty year fixed rate mortgage,
according to Mortgage News Daily, gotas low recently as just under seven
percent. That was earlier this excuseme, earlier last week. We're sitting
right now above seven point one percentfor the average thirty year fixed rate mortgage
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right now. Taking a look alittle bit before that, you had,
you know, back in December thiswas touching about six and two thirds of
percent, So we haven't seen ahuge move back and forth. But you
know, I think a lot ofpeople who were anticipating that rate to get
down into the six percent range ofthis year so far have been disappointed.
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Heading right into the spring housing market. In either case, let's take a
quick break. When we come back. We had that conversation about interest rates
where they have gone so far thisyear. Another item that has been perhaps
surprising some investors has been commodity moves. We've talked a little bit Yester about
oil. I want to talk aboutgold as well. Commodity exposure and what
it might mean for inflation and theoverall market. Is next on The Financial
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A few pieces here about commodities,both from the Wall Street Journal, and
I want to start with just abasic premise here, which is that an
index of global commodity prices, theSMPGSCI, has advanced by twelve percent this
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year. That's outpacing the SMP's climb. Obviously a lot of this coming from
oil copper prices, but gold toois having an up year, posting fresh
records rising thirteen percent over I'm notsure if that's year to date or over
a certain time period, but ineither case, commodities having a bit of
a moment here, probably for anumber. Whenever you talk about asset prices
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moving, I hate when people allpoint to one reason, like, oh,
it's you know, it's the stuffgoing on in Israel, or it's
inflation, or it's interest rates moving. Like it's probably a culmination of factors.
But before we go to oil,I want to start with gold.
And I sometimes like just picking apartarticles piece from the Wallster journals what you
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need to know about gold's curious rally, And I guess I just want to
first establish that if I don't owngold as an investment, should I care
at all about the curious rally ingold this year, Like, does it
tell me anything about the larger economyor investment universe that gold is moving in
one direction or another? It might, as might other metals. Prices is
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a leading indicator for anything, Iguess, is the question to me?
Yeah, good question. It's relationship, which we've tested here with things,
and it's not that hard to do. So this is not the result of
some sophisticated analysis, but it's relationshipwith things like inflation, economic growth,
stock prices. I'll just describe itas unstable. There are times when gold
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does a very good job of hedginginflation, and namely the nineteen seventies,
most of you and certainly myself formedan opinion of gold as a result of
its performance. Then for about fifteenyears after that point, I heard a
lot of talk about people buying goldcoins and stuff, and again by hedging
inflation. What we're talking about hereis when inflation goes up, gold gold
goes up, so it helps combatto the price or the price hike of
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overall items. But to that point, I think you were getting and started
to cut you off. As twentytwenty two we saw the worst inflation in
four decades. Yeah, relationship kindof broke down at some point in the
eighties. So relationships that are strongin one decade or period or market cycle
aren't necessarily predictive of how two thingsare going to interact in a similar or
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different environment in the future. There'sthat problem. And this is true not
just of gold. I tend tobe kind of a gold bug. I
like the idea of a hedge againstprofligate governments like ours today, massive debts,
no fiscal discipline, insight. Anygovernment that can print money without without
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backing so called fiat currency, it'sprobably going to get its come up and
at some point, And people whoown gold tend to be hedging, and
when I'm using hedge as a synonymfor insuring, because there's really no way
to do it in finance other thanbuying gold, tend to be hedging against
that contingency. But gold has beenan awful investment over the very long term.
And to be clear, what isthat contingency? Like, I don't
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collapse of the US dollar. Idon't know what some people are like,
why would you go to cost goand buy a gold bar. How are
you going to use that as amedium of exchange in the event that,
as you say, the bonds thathold us together, is a society fall
apart. Yeah, I've always boughtI don't know the gold arguments, like,
hey, I'm going to speculate onthe price of gold. When people
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tell me they're buying it for theyou know, collapse of our capitalist society,
that's when I just start scratching myhead, like, well, I
just don't know how you work anddo shave part of it off something that
brings it to the and then barterit for something. Oh look all this.
I've found cound goods and nips toprobably be a more successful version of
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that personally, but who knows.I don't quote these numbers to change anybody's
mind, but just to make thepoint that gold has been a terrible long
term investment. It's real or inflationadjusted value peaked in January nineteen eighty.
Okay, it's returns by decade nineteeneighties negative two percent, nineteen nineties,
negative three percent, two thousands,as we all remember, had a great
decade fourteen percent a year twenty twentyso far. So this is last ten
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years up to twenty twenty, sothis is not quite using the same time
frame here, up so far fourpercent a year, after increasing about three
point three in the twenty tens.Sorry, I just threw a lot of
numbers out there, but I justwant to compare them to equities using a
couple quick examples. In the nineteeneighties, equities up eighteen percent, same
nineteen nineties, twenty tens up fourteenpercent, twenty twenty so far, last
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ten years up to the end oflast year, up twelve percent. That's
annualized average. You may, hey, you conveniently skipped the two thousands,
and I did when stocks which area negative one percent and gold returned,
what did I say for the fourteenpercent? So twenty twenties are one example
of gold being a good hedge,But again, those relationships aren't stable.
So as an asset allocator, assomeone who for a living mixes stocksponds,
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and cash to help people achieve theirgolds. Hard to make a case for
gold in a portfolio, but asinsurance against a small but potentially very harmful
outcome like a currency collapse, maybeyou want to own a little It comes
down a personal preference. Yeah,I suppose, you know, if I
lived in a less stable country,I might be a bit more interested.
You know, if I lived inVenezuela, I might be very interested in
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earning gold. But I'm just,yeah, what's what's the problem with gold?
It's not Janet. It was thesame problem with bitcoin. It's not
generative. You can't use it tounlike the stocks a little bit. There's
some industrial uses of gold. Butyeah, I didn't mean that by that.
I meant it doesn't have a yield, got it. It doesn't earn
in the way a share and acompany does. Now the counterpoint to that
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is, well, goal lasts forever. It will always have a use,
either as jewelry or some industrial orother use that we can't even anticipate today.
It's got really interesting properties. SoI'm not obviously taking a position either
way, just pointing out that it'snot generative, and relative to traditional asset
classes, it's performance, with somenotable exceptions, has been awful. So
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I mean, you can point toa number of different Like I said,
I hate when anybody tries to attributeone single thing to what's going on with
GOLDA I don't think that's what's happeninghere right I mean, there could be
the argument that, hey, thewhole global economy is in a recovery mode
right now and growing GDP, sodemand for all sorts of commodities is up.
I think that's a good explanation.For oil, for example, you
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have a bunch of overseas countries thatare potentially buying because of concerning issues going
on in Russia and Ukraine or Israeland the Middle East. But you know,
to that end, you also haveto question if you're buying gold now,
what is going to be the nextleg up? What's going to be
and maybe you know, our geopoliticaltensions are going to get worse. But
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plenty out there, you know,plenty out there. Greg Scharer, now
head of Commodities that PIMCO is amongthose questioning whether the latest rally can continue
given all the stuff that has alreadyhappened. Let's go ahead and take a
quick break here. Markets remain openahead of our big CPI report, and
at last look they were slightly mixedfor the day. We'll have a full
report on Wall Street coming up nextwith Wall Street. Watch Like us on
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Facebook and follow us on Twitter atTFE show. Breaking business news is always
first right here on the Financial ExchangeRadio Network. Time now for Wall Street.
Watch a complete look at what's movingmarket so far today right here on
the Financial Exchange Radio Network. Well, markets are dipping into negative territory as
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investors continue to monitor treasury yields andcommodity prices and ready for tomorrow morning's key
inflation reading in the Consumer Price Index. Right now, the Dow is off
by about a third of a percent, or one hundred and nineteen points,
SMP five hundred is down over aquarter percent, and the Nasdaq down by
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twenty four points. RUSS two thousandis up by a third of a percent.
Tenure treasury iel down by five basispoints now at four point thirty six
percent, and crude oil is downby two thirds of a percent, trating
just below eighty six dollars a barrel. BP shares up by one percent after
the British energy giants that it anticipateshigher oil and gas production to boost its
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first quarter profit. Meanwhile, Tesla'sshares are up by two percent after the
electric car maker reached a settlement withthe family of an Apple engineer who died
in a twenty eighteen crash involved itsautopilot system. Days before opening statements from
attorneys elsewhere, Pfiser said that itsrespiratory virus vaccine showed potential to protect adults
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under sixty years old from getting severelysick. Stock is up by three percent
and taking a look at a fewstock grade updates this morning, where American
Eagle Outfitters was upgraded by JP Morganto overweight from neutral, citing the retailers
at merchandising, merchandising initiatives and operationalchanges that stock up by third of a
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percent. Freeport Macmaran was upgraded byBank of America to buy from neutral,
saying the American mining company has bluechip copper exposure. That stock up by
two percent. Goldman Sachs upgraded MoulsenCores to buy, saying the brewing giant
can benefit as it expands its shelfspace in retailers that stock up by one
percent. I'm Tucker Silva and that'sWallstreet watch mark. The current national average
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for gallon of gas is just overthree dollars and sixty cents. One month
ago, was sitting about three dollarsand forty cents, and in Massachusetts,
New Hampshire, we're actually a littlebit below that national average, whereas Vermonton,
Maine or sitting right around that nationalaverage. Here's my question for you.
We're going to be getting the CPIreport tomorrow. In the most recent
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CPI report, we saw that energywas one of the key areas of continued
inflation. So that was let's seethree point eight percent inflation on gasoline,
and we've just continued that. Whenwe speak of commodities as a whole,
I think everybody's pretty aware that gasprices are up. You might be less
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aware about the things like copper andother commodities that are also having a rally
right now, But those two areseeing a rally. And I guess the
question that I have is does thistell us anything about the future or is
it purely coincident? And I don'tmean like random coincidence. I mean does
it tell us anything about the futureor does do commodities generally just move with
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overall economic activity and inflation rather thanleading them. There was some work done
in the early nineties that suggested oilis a decent thing to have in your
models if you're an economist trying toforecast inflation. I've not seen any strong
evidence on other widely followed commodities someof the metals you mentioned in their ability
to forecast inflation. They are,of course a component of things that we
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buy. So in a definitional sense, if the price of inputs goes up
overall prices or the average prices,which is what inflation. I regularly think
about how the palladium you shoot becauseit's it's in the emissions system of your
vehicle, right, Isn't palladiumgommons?I think palladium is the main item.
Does doesn't pladium adams capture some ofthese noxious stud things? What's the what's
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the car item that people keep stillingconverter? Yes, yeah, I believe
it is one of the metals thatwill that those noxious like nitrogenoxide. So
the higher palladiums are, the higherI can assume my current serence prices will
be. Yes, I think there'sprobably one point. No, Actually,
Mike, you made I know you'reyou're trying to be goofy I am,
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but I think you're probably That isan excellent example of how commodity prices make
their way seemingly obscure. Commodity pricescan make their way into the overall change
or the average changing prices measured bythings like CPI. So short answer is,
by definition, yeah they matter.They're not great longer term forecasters.
And here's can I tell you why? Yes? Please, if you don't
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mind, don't just tease me.But in the long run, inflation is
the Fed's problem. Supply shocks likewe experienced at the beginning of COVID,
they come and go, they maketheir way through the system. The question
is how the FED reacts. Doesit accommodate them by leaving rates the same
or indeed loosening policy to maintain purchasingmaintain people's purchasing power. If so,
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inflation can become embedded. So ultimately, even an oil price shock, and
Milton Friedman I use that name alot because I know you know them,
especially people of a certain age.He made the point that why should at
the average price of things you buygo up if oil prices go up?
And I can get the answer tothat, but his point was, well,
you have less to spend on otherthings, So don't blame an oil
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price shock necessarily, or a goalprice shock, or a palladium price shock,
or an anchovy price shock. Weactually had one in the early seventies
that drove up member chicken price.Yssal drove up chicken prices, I think,
or something. Why should these thingsmatter to average prices? The answer
is all prices don't change with thesame frequency. So oil goes up by
a lot, nothing else changes.Therefore inflation goes up or the average price
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goes up. Ultimately, it's theFed's job to tamp that down before it
becomes embedded. So in a sense, commodity prices matter by a lot.
They're a contributed to the CPI orthe PCE DEFLAT or that other measure of
inflation that we follow. As I'vebrought up, I have no idea whether
oil will end up really contributing tohigher overall inflation in the long term,
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especially because it's such a way inthe long term. I just explained,
because in the long term inflation ismonetary, right, it's the fault,
if you like, of the FED. One thing that I'm fairly certain it
will contribute to is people's optimism orpessimism about inflation. Like there is no
single item that I can think ofthat we measure the price of regularly that
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is more in people's faces and morenegatively impacts their view on the economy than
what they pay to fill up theirtank. So you raise an important point,
that's one about expectations and how theyfeed into inflation. People demand higher
wages that gets passed through to prices, So there's another channel through which commodity
prices, the most conspicuous ones,as you point out, can make their
way into the inflation process. Wewere talking yesterday about Jamie Diamond, who's
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been talking a whole bunch ahead ofhis company's release of quarterly earnings on Friday.
And you know, whether or notwe should pay attention to him is
certainly debatable, But look, he'sthe largest ZO of the largest US bank,
His words do have actions behind them, and he's the only large bank
CEO to have managed a bank sincebefore the Great Financial Crisis. So for
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a number of reasons, lend somecredibility to the words that he states.
And I thought he had some interestingpoints about inflation during this during this address
here where he pointed to a numberof factors that we ourselves have talked about
as potentially contributing to maybe right.We talked about long term inflation versus short
term inflation, And the point thathe made was things such as ongoing fiscal
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spending which does not seem to beslowing down the United States, remilitarization of
the world, restructuring of global trade, capital needs of the new green economy.
All of those, in his view, not necessarily would, but could
hypothetically contribute to higher overall prices inthe long term. Right, if you
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buy into the fact that hey,global trade and free trade policies over the
previous three decades helped contribute to lowerinflation, then do you buy into a
less global economy and a less freetrade economy contributing to higher overall prices?
Is the argument that I think he'smaking. Some of the fact you have
to abstract from this and put itin terms of a framework. I find
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that helpful, and economists would say, think about it in terms of demand.
So some of the things he mentionedare going to push demand to the
right if you like, they're goingto increase it more stimulative federal spending on
the military. This was the casefrom the nineteen eighties. California boomed during
the Reagan build up the naval bases. They're benefited heavily in the communities that
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surrounded them did. That's just themost conspicuous example in my mind. And
at the same time he's talking aboutsupply moving in the other direction. If
you're thinking trade barriers, more conflict, that's gonna that's gonna futs with supply
chains and stuff like that. Soyou've got demand going this way. Sorry,
everybody, I'm doing this with onearm and this with the other,
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and only mke can see it,and he's not impressed. You've got supply
moving in just like Katman. Tuckeris utterly unimpressed, and so you got
supply moving in the wrong direction.Think think about what happened during COVID,
right, We we stuffed everybody's pockets, both Trump and Biden with all kinds
of stimulus. We said, goout and buy stuff. But Target didn't
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have anything on the shelves because allthe cargo was sitting at ports because nobody
was staffing them. So you hadsupply moving in an adverse direction, demand
moving, I guess, in afun direction. From a consumer's point of
view, what did you get?Shortages, higher prices. What Diamond is
talking about, on a slightly differentlevel and over a slightly different timeframe,
are the movement these two forces,right, And I think that's the interesting
(30:02):
part is we got a direct lessonin this over the last couple of years
on a shorter term basis. Right, COVID was not a permanent scenario,
and the things that are being talkedabout here probably are not permanent either,
because almost nothing is. But youcould envision some of these being on a
much longer time scale, probably beingless inflationary in any one given year over
(30:25):
another. But again, if we'recomparing the next thirty years to the previous
thirty, these are the trends youstart to think, like, now we
got a story here and just tohere and elsewhere in the stack about a
technology that could move supply in amore favorable direction. I refer, of
course to any but don't tell tellthem. We gotta tease them. I
couldn't have figured it out. I'mat your yammer about it every day.
(30:47):
Let's take a quick break, andthen when we come back, Mark,
you can talk to us a littlebit of the magical technology paid that's going
to fix all of our inflation problems. That's next on the Financial Exchange.
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(31:11):
visiting Financial Exchange Show dot com andclicking the on demand icon where you'll find
all of our interviews and full showers. This is your home for the latest
business and financial news in New Englandand around the country. This is the
Financial Exchange Radio Network. So asyou may have guessed the technology that we're
(31:44):
referring to that could be the saviorof all of our inflation woes and worries,
it would be artificial intelligence. Andyou know, Jamie Diamond in his
speech continued to talk about AI andthe potential capabilities there in terms of being
what you say, as in pactfulto the world, as on humanity,
as the printing press, electricity andcomputers, and a jeez, Jamie,
(32:07):
this kind of hyperbole. How howin the world could I be more impactful
than technologies on which it relies tooperate? May that may be ignorant and
this is not my area, andmaybe there are other examples of something being
more like you could say, well, air conditioning was more impactful than electricity.
It relies on it, but itNo, I don't think so.
(32:29):
I think, you know, withoutthe ladder, you can't have the former.
Without the Internet, you can't haveI mean, the Internet was transformational.
I think back to the nineties.We all remember going from really primitive
internal email to all of a sudden, you can send attachments outside your company,
to oh my god, I cando this from home, to oh
my god, I can do thiswith a with an Ethernet connection. It
was just one sure breakthrough that madeyour life better after an hour, or
(32:51):
any of them more impactful than thecomputer itself. Probably not. Yeah,
that's fair. Yeah, I don'twell to me, yes, because I
just don't appreciate the difference. Butyou can't have the one without the other.
So I just I have a hardtime buying into the idea that it's
this elixir. Look, it's trulygroundbreaking technology that's fascinating that can be used
for all sorts of potential productive uses. I will reiterate that I don't think
(33:15):
any of those productive uses have beenlargely capitalized on or found yet. So
if you're trying to account for increasesin productivity right now based on AI,
I don't think that they exist.But with a great technology comes obviously great
risks too. Write Like, youknow, when I think about the advent
of the Internet, it has allowedfor pretty amazing things. It has also
(33:37):
allowed for all sorts of problems whenit comes to the ability to scam people
out of their money. This thing, Oh yeah, nobody cares, we
are. There's another piece about howsocial order could collapse in an ai area,
according to two Japanese companies, andit's always interesting to compare Wait wait,
why what was the bat? Theydid not really get all that specifically
(34:00):
well in this article, but Imean, you know, to me,
the areas that you could have socialorder collapsing would be in the ability to
manipulate pay people based on thinking somethingis real. And I think that'll be
a lot easier with artificial intelligence thanit has been previously. So I don't
know. Brief example, I'm writingfor politics, and I want to win
(34:22):
an election, I can create,especially in a place where there's not much,
you know, media challenging my narrative. I can create a bunch of
dummy videos and photographs of my maincompetitor in problematic situations that you know,
most of the population would believe istrue without the without the advent of the
(34:42):
challenge. So yeah, could socialorder collapse? Yes, But I think
generally speaking, the the extreme viewson artificial intelligence are just that, probably
the unlikely extreme views on one wayout of there much rather, I mean
that that veers off into the realmof sort of fantasy sci fi and things
just that are beyond the grasp ofmy imagination. In terms of economic growth,
(35:04):
is it gonna The question for peoplein finance, our day jobs,
and probably for you listening, becauseif you're tuned in, you're interested in
the performance of your investments, iswill it meaningfully increase economic growth? And
by meaningfully I mean will it bumpthe trend line up? If the long
term trend is about three percent realthat is after inflation, and that includes
electricity, air conditioning, everybody travelingby jet plane and stuff, is this
(35:27):
gonna bump that trend? Law is? And that trend has slowed since since
since the nineteen eighties, it's beenmore like two percent, particularly since two
thousand. Are we going to getback to three or even the four percent
growth of the fifties and sixties becauseof this, that's the question on everybody's
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Fox Business has some groundbreaking research forUS mark on the trick to become
a four to oh one K millionaire. Do you want to know what the
trick is? I think I know, But go ahead, start twenty years
ago. Oh sure, yeah,yeah, there you go. There you
(36:51):
have it. You want to becomea four o one K millionaire? Compounding
interest really actually works. So starttwenty years ago and put a bunch of
your money away and able to doit. Yes, it's probably going to
be I mean, you're you're sayingthis sarcastically because we think the future is
not going to be like the past. I think that's probably a safe bet
it never is. And we alsomight be looking at lower returns going forward
(37:12):
for reasons that you talk about alot on the show. Valuations or I
we can get into that, andeconomic growth might be slower than it's been
historically if AI doesn't pan out,So you might want to count on having
to save a little bit more asa consequence of you could still get there.
You're just gonna have to put awaymore than maybe current limits in your
four to one klol. I'll alsosay that becoming a four to one K
millionaire is an arbitrary and unimportant goal, well, particularly after inflation. I
(37:37):
just I have no idea what howthat is useful at all? Right,
has anybody ever looked at, youknow, do four to one k millionaires
on average, probably on average ormore successful in their retirement than other people?
But it's an arbitrary goal of becominga four to one k millionaire and
does not tell you anything whatsoever aboutyour own personal finances and what you need
(38:00):
to do. For some people,that's not nearly enough. For others,
it's way more more than enough,and they might end up working themselves into
the grave because they're trying to accomplisha unimportant goal. Let's take a quick
break, but a whole lot moreto cover in the second hour of the
Financial Exchange, including a ranking ofAmerica's hottest job markets by city. We'll
cover that next coming up on theFinancial Exchange
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five K Boston is presented by VeteransDevelopment Corporation FACE is the Financial Exchange with
Mike Armstrong and Mark Fandetti. Finallystarting to feel a little bit like spring
out there, folks, I'm suremaybe not for those in Maine where you're
probably still working on getting your powerback after the last storm, but finally
(01:26):
starting to feel a little bit likespring out there as we wait with baited
breath for tomorrow's inflation report on CPI, the Consumer Price Index and bond yields
climb to twenty twenty four highs.It's Mike Armstrong, Mark Fandetti and Tucker
Silva with you this morning. Andyeah, like I said, tomorrow,
(01:46):
we're going to be getting the CPIreport for the month of March, the
Consumer Price Index out at eight thirtya m. Which, you know,
I think many markets are looking atTory and get a glimpse into whether or
not this is truly just a bumpin the road on the way down to
the Fed's target of two percent inflation, or whether this is something a bit
(02:08):
more serious in terms of a reaccelerationof prices. And honestly, I don't
have a real course in the racehere. I'm not really sure which direction
this is going. I can't firmlysay whether I think it's a reacceleration or
just a blip on the radar,a bump in the road. So time
will tell here and we'll see whatwe get tomorrow morning. In the meantime,
(02:30):
top story today treasury yields reaching atwenty twenty four high. As of
a look this morning, you've gotthe ten year treasury sitting at four point
three seven six. That is,of course, moving all sorts of different
real life measurements of interest rates.It's not that US ten year treasuries are
(02:50):
not real life, but most peoplearen't out there actually buying a US ten
year treasury on a day to daybasis. So taking a look at instead
the NASH average of a thirty yearfixed rate mortgage. Let's see according to
bank rate, Well, that's nothelpful bank rate, it's not four point
four percent. That's a savings account. I'll take a look at the overall
(03:14):
thirty year fixed rate mortgage. Butwhen we talk about treasury yields being higher,
there are obviously impacts across the economy. Mark the mortgage rates are tied
directly to it, credit card rates, savings rates a little bit more tied
into the federal reserves own short terminterest rates. But this premise of higher
for longer or at least the expectationsfor rates coming down this year, whether
(03:38):
it's a whole lot longer or justa bit longer, this has been the
news this year is rates that wereexpected to come down might end up staying
higher for longer. And I'd liketo start with what does that mean for
all sorts of different asset classes,And maybe we can start with equities,
so stocks generally speaking, why dointerest rates matter or do interest rates matter
(04:01):
in the short term? I guesswould be a starting premise here. So
the ten year Treasury is a foundationalasset class. Every asset in the world
arguably is priced off of it becausethe US government has no credit risk.
Everything every security issued by the no. In fact, there's no credit risk
with the US government. There's inflationrisk. They're not going to default.
(04:24):
They can print money yep, sono credit risks full stop, unlike a
corporate bond, which at and Tor Microsoft, no matter how financially solid,
can't print money. So it isimportant to distinguish between different types of
risks when you're talking about bonds.So for purposes of this discussion. For
purposes of finance, generally, treasuriesare risk free, not inflation risk free,
(04:45):
but credit risk free, the typeof risk that most people would be
kept awake by at night. Sothey're important to get to your point about
their relevance for other asset classes likeequities, because if you're making a di
decision as to how to invest,you start with what you can get on
a risk free security. I canget about four point four percent on a
ten year treasury YEP, that's beforethat's including inflation, and you could buy
(05:11):
an inflation adjusted risk free treasury.We call them tips treasure inflation protected securities
yield on there is somewhere and whatreally yield right now with two point two
ish, So the difference is themarket's best guas on what inflation will average
over the next ten years. Treasuryrates matter for equities because again, you
start, when you're pricing any asset, you price it against the risk free
asset. Right. You don't priceit against zero. It's not what if
(05:34):
I buried this money in my backyard. You're pricing it against what could I
get from a risk free So youstart that asset that's considered risk free which
is about four point four percent today, and all l SQL when treasury rates
go up, because you're comparing otherassets to treasuries, not just today,
but at every point in time overyour holding period, all l SQL higher
(05:57):
rates, higher discount rates, technicallya lower present value. And we've all
run into that. If you boughtan annuity, you run into that.
The higher the interest rate, thelower the current price of an immediate say
annuity the lump sum. Just becauseof the relationship between what money is worth
to you today, what it's worthto you and say ten years, those
two things are inversely related. Anotherway to think about it is you've got
(06:20):
to put less money aside today tohit your goal in ten years, the
higher the interest rate. That's adifferent way of saying the same thing.
So it's it's vitally important whether ornot you own treasuries, Mike, as
you suggested, the yield on theten year treasury is. How about when
it comes to fixed income markets.So we've got as I mentioned, ten
(06:40):
your treasury yields reaching a new highfor this year, still well below where
they hit back in October of lastyear when they had them, you know,
hitting up at the five percent range, but we're again back up there
at four point four percent. Whenyou look at credit markets out there,
Let's say you own existing bonds youmentioned AT and T. So maybe I
bought a bond from AT and Tlast year and I see yields on treasuries
(07:03):
rising. What does that do tomy existing investment that I have in bonds?
It depends, but all LSE equalrising risk free rates. And again
I use risk free in a verystrict sense here I mean default risk,
which the federal government does not carry. Whatever you think of deficits in their
explosive path, they can always printmoney, so compared to risk, when
(07:27):
risk free rates go up, allrates should go up all l SQL unless
there's some weird The AT and Tor any company issued bond could carry options
that complicate that relationship, which iswhy finance types adjust them for options.
But we look at so called spreadsto gauge how the market is pricing risk
of one issuer versus treasuries, andall l SQL everything should just kind of
(07:51):
go up with treasuries. All elseis almost never equal, but Mike,
it probably pushes up longer term interestrates on similar term to maturity issues bonds.
But we have to be clear therebecause I don't think this is necessarily
obvious to every person. When youare pushing up yields on bonds, what
you are doing is pushing down priceson easy thing. So the way to
(08:13):
think about that is, if yieldshave gone up on newly issued bonds,
the only way to make outstanding bondscompetitive. Outstanding bonds are out there circulation.
Sure, I'm not going to takethe old coupon which was lower.
I need to pay less to getthe equivalent of a higher yield on a
newly issued bonds. It is.It's actually really straightf guys. Yeah,
if I've got a bond out therethat only paying two percent interest, I'm
(08:33):
not going to pay the one hundreddollars that you paid for it to get
my hands on. You're gonna wantthe same yield, which means pay less.
Very straightforward when you think about it. The other pieces would be,
you know, other big asset classesthat I think of. Interest rates you
know, certainly impact the real estatemarket, and mainly because we finance a
(08:54):
lot of real estate, well partlybecause we finance a lot of real estate
purchases with debt. So the higherthe rate on the debt is, the
less affordable the purchase becomes. Butalso partly, just like you would look
at it from an equity perspective,if I'm buying a piece of real estate
as an investment, forget about yourprimary residence here for a moment. If
I'm buying a office building as aninvestment, and I'm looking at the future
(09:15):
cash flows of that investment, again, I'm discounting those future cash flows against
This is a great conversation because you'regetting at the heart of what makes one
investment type or asset class in financeterms, asset class is just the type
of investment. What makes one typedifferent from an other? Wire stocks different
than bonds. Well, stocks giveyou a claim on future growth. They
(09:35):
have unlimited upside. Bonds have quitelimited upside. You get the face value
when they mature, unless you owna bond fund, in which case everything's
always turning over under your surface.You don't see that. Real estate a
little bit different. It's kind ofa hybrid. You collect rents, which
are like a coupon, and there'supside. You could say it's a limited
appreciation. Yeah, so you gethigh real estate is considered a hybrid bidy
(09:58):
by people who do asset allocation likeI do in my day job. We
think about what mix of ingredients isright for an individual. Do they need
growth or a safety paramount, orneed more as is more commonly the case,
they need some combination of the two. And then you furthermore think about,
okay, what mix of asset classesof investment ingredients, if you like,
is likely to get them to wearthe individual to where they need to
(10:20):
be at the end of their timehorizon. I was talking about it earlier,
by the way, but the yieldon the thirty year fixed rate mortgage,
according to Mortgage News Daily, gotas low recently as just under seven
percent. That was earlier this excuseme, earlier last week. We're sitting
right now above seven point one percentfor the average thirty year fixed rate mortgage
(10:41):
right now. Taking a look alittle bit before that, you had,
you know, back in December thiswas touching about six and two thirds of
percent, So we haven't seen ahuge move back and forth. But you
know, I think a lot ofpeople who were anticipating that rate to get
down into the six percent range ofthis year so far have been disappointed.
(11:01):
Heading right into the spring housing market. In either case, let's take a
quick break. When we come back. We had that conversation about interest rates
where they have gone so far thisyear. Another item that has been perhaps
surprising some investors has been commodity moves. We've talked a little bit Yester about
oil. I want to talk aboutgold as well. Commodity exposure and what
it might mean for inflation and theoverall market. Is next on The Financial
(11:24):
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USVII dot com and book your triptoday. That's visit USVII dot com.
A few pieces here about commodities,both from the Wall Street Journal, and
I want to start with just abasic premise here, which is that an
index of global commodity prices, theSMPGSCI, has advanced by twelve percent this
(12:31):
year. That's outpacing the SMP's climb. Obviously a lot of this coming from
oil copper prices, but gold toois having an up year, posting fresh
records rising thirteen percent over I'm notsure if that's year to date or over
a certain time period, but ineither case, commodities having a bit of
a moment here, probably for anumber. Whenever you talk about asset prices
(12:52):
moving, I hate when people allpoint to one reason, like, oh,
it's you know, it's the stuffgoing on in Israel, or it's
inflation, or it's interest rates moving. Like it's probably a culmination of factors.
But before we go to oil,I want to start with gold.
And I sometimes like just picking apartarticles piece from the Wallster journals what you
(13:13):
need to know about gold's curious rally, And I guess I just want to
first establish that if I don't owngold as an investment, should I care
at all about the curious rally ingold this year, Like, does it
tell me anything about the larger economyor investment universe that gold is moving in
one direction or another? It might, as might other metals. Prices is
(13:37):
a leading indicator for anything, Iguess, is the question to me?
Yeah, good question. It's relationship, which we've tested here with things,
and it's not that hard to do. So this is not the result of
some sophisticated analysis, but it's relationshipwith things like inflation, economic growth,
stock prices. I'll just describe itas unstable. There are times when gold
(13:58):
does a very good job of hedginginflation, and namely the nineteen seventies,
most of you and certainly myself formedan opinion of gold as a result of
its performance. Then for about fifteenyears after that point, I heard a
lot of talk about people buying goldcoins and stuff, and again by hedging
inflation. What we're talking about hereis when inflation goes up, gold gold
goes up, so it helps combatto the price or the price hike of
(14:20):
overall items. But to that point, I think you were getting and started
to cut you off. As twentytwenty two we saw the worst inflation in
four decades. Yeah, relationship kindof broke down at some point in the
eighties. So relationships that are strongin one decade or period or market cycle
aren't necessarily predictive of how two thingsare going to interact in a similar or
(14:43):
different environment in the future. There'sthat problem. And this is true not
just of gold. I tend tobe kind of a gold bug. I
like the idea of a hedge againstprofligate governments like ours today, massive debts,
no fiscal discipline, insight. Anygovernment that can print money without without
(15:05):
backing so called fiat currency, it'sprobably going to get its come up and
at some point, And people whoown gold tend to be hedging, and
when I'm using hedge as a synonymfor insuring, because there's really no way
to do it in finance other thanbuying gold, tend to be hedging against
that contingency. But gold has beenan awful investment over the very long term.
And to be clear, what isthat contingency? Like, I don't
(15:26):
collapse of the US dollar. Idon't know what some people are like,
why would you go to cost goand buy a gold bar. How are
you going to use that as amedium of exchange in the event that,
as you say, the bonds thathold us together, is a society fall
apart. Yeah, I've always boughtI don't know the gold arguments, like,
hey, I'm going to speculate onthe price of gold. When people
(15:46):
tell me they're buying it for theyou know, collapse of our capitalist society,
that's when I just start scratching myhead, like, well, I
just don't know how you work anddo shave part of it off something that
brings it to the and then barterit for something. Oh look all this.
I've found cound goods and nips toprobably be a more successful version of
(16:07):
that personally, but who knows.I don't quote these numbers to change anybody's
mind, but just to make thepoint that gold has been a terrible long
term investment. It's real or inflationadjusted value peaked in January nineteen eighty.
Okay, it's returns by decade nineteeneighties negative two percent, nineteen nineties,
negative three percent, two thousands,as we all remember, had a great
decade fourteen percent a year twenty twentyso far. So this is last ten
(16:33):
years up to twenty twenty, sothis is not quite using the same time
frame here, up so far fourpercent a year, after increasing about three
point three in the twenty tens.Sorry, I just threw a lot of
numbers out there, but I justwant to compare them to equities using a
couple quick examples. In the nineteeneighties, equities up eighteen percent, same
nineteen nineties, twenty tens up fourteenpercent, twenty twenty so far, last
(16:55):
ten years up to the end oflast year, up twelve percent. That's
annualized average. You may, hey, you conveniently skipped the two thousands,
and I did when stocks which area negative one percent and gold returned,
what did I say for the fourteenpercent? So twenty twenties are one example
of gold being a good hedge,But again, those relationships aren't stable.
So as an asset allocator, assomeone who for a living mixes stocksponds,
(17:18):
and cash to help people achieve theirgolds. Hard to make a case for
gold in a portfolio, but asinsurance against a small but potentially very harmful
outcome like a currency collapse, maybeyou want to own a little It comes
down a personal preference. Yeah,I suppose, you know, if I
lived in a less stable country,I might be a bit more interested.
You know, if I lived inVenezuela, I might be very interested in
(17:41):
earning gold. But I'm just,yeah, what's what's the problem with gold?
It's not Janet. It was thesame problem with bitcoin. It's not
generative. You can't use it tounlike the stocks a little bit. There's
some industrial uses of gold. Butyeah, I didn't mean that by that.
I meant it doesn't have a yield, got it. It doesn't earn
in the way a share and acompany does. Now the counterpoint to that
(18:03):
is, well, goal lasts forever. It will always have a use,
either as jewelry or some industrial orother use that we can't even anticipate today.
It's got really interesting properties. SoI'm not obviously taking a position either
way, just pointing out that it'snot generative, and relative to traditional asset
classes, it's performance, with somenotable exceptions, has been awful. So
(18:23):
I mean, you can point toa number of different Like I said,
I hate when anybody tries to attributeone single thing to what's going on with
GOLDA I don't think that's what's happeninghere right I mean, there could be
the argument that, hey, thewhole global economy is in a recovery mode
right now and growing GDP, sodemand for all sorts of commodities is up.
I think that's a good explanation.For oil, for example, you
(18:45):
have a bunch of overseas countries thatare potentially buying because of concerning issues going
on in Russia and Ukraine or Israeland the Middle East. But you know,
to that end, you also haveto question if you're buying gold now,
what is going to be the nextleg up? What's going to be
and maybe you know, our geopoliticaltensions are going to get worse. But
(19:06):
plenty out there, you know,plenty out there. Greg Scharer, now
head of Commodities that PIMCO is amongthose questioning whether the latest rally can continue
given all the stuff that has alreadyhappened. Let's go ahead and take a
quick break here. Markets remain openahead of our big CPI report, and
at last look they were slightly mixedfor the day. We'll have a full
report on Wall Street coming up nextwith Wall Street. Watch Like us on
(19:44):
Facebook and follow us on Twitter atTFE show. Breaking business news is always
first right here on the Financial ExchangeRadio Network. Time now for Wall Street.
Watch a complete look at what's movingmarket so far today right here on
the Financial Exchange Radio Network. Well, markets are dipping into negative territory as
(20:04):
investors continue to monitor treasury yields andcommodity prices and ready for tomorrow morning's key
inflation reading in the Consumer Price Index. Right now, the Dow is off
by about a third of a percent, or one hundred and nineteen points,
SMP five hundred is down over aquarter percent, and the Nasdaq down by
(20:25):
twenty four points. RUSS two thousandis up by a third of a percent.
Tenure treasury iel down by five basispoints now at four point thirty six
percent, and crude oil is downby two thirds of a percent, trating
just below eighty six dollars a barrel. BP shares up by one percent after
the British energy giants that it anticipateshigher oil and gas production to boost its
(20:48):
first quarter profit. Meanwhile, Tesla'sshares are up by two percent after the
electric car maker reached a settlement withthe family of an Apple engineer who died
in a twenty eighteen crash involved itsautopilot system. Days before opening statements from
attorneys elsewhere, Pfiser said that itsrespiratory virus vaccine showed potential to protect adults
(21:10):
under sixty years old from getting severelysick. Stock is up by three percent
and taking a look at a fewstock grade updates this morning, where American
Eagle Outfitters was upgraded by JP Morganto overweight from neutral, citing the retailers
at merchandising, merchandising initiatives and operationalchanges that stock up by third of a
(21:33):
percent. Freeport Macmaran was upgraded byBank of America to buy from neutral,
saying the American mining company has bluechip copper exposure. That stock up by
two percent. Goldman Sachs upgraded MoulsenCores to buy, saying the brewing giant
can benefit as it expands its shelfspace in retailers that stock up by one
percent. I'm Tucker Silva and that'sWallstreet watch mark. The current national average
(21:57):
for gallon of gas is just overthree dollars and sixty cents. One month
ago, was sitting about three dollarsand forty cents, and in Massachusetts,
New Hampshire, we're actually a littlebit below that national average, whereas Vermonton,
Maine or sitting right around that nationalaverage. Here's my question for you.
We're going to be getting the CPIreport tomorrow. In the most recent
(22:19):
CPI report, we saw that energywas one of the key areas of continued
inflation. So that was let's seethree point eight percent inflation on gasoline,
and we've just continued that. Whenwe speak of commodities as a whole,
I think everybody's pretty aware that gasprices are up. You might be less
(22:44):
aware about the things like copper andother commodities that are also having a rally
right now, But those two areseeing a rally. And I guess the
question that I have is does thistell us anything about the future or is
it purely coincident? And I don'tmean like random coincidence. I mean does
it tell us anything about the futureor does do commodities generally just move with
(23:07):
overall economic activity and inflation rather thanleading them. There was some work done
in the early nineties that suggested oilis a decent thing to have in your
models if you're an economist trying toforecast inflation. I've not seen any strong
evidence on other widely followed commodities someof the metals you mentioned in their ability
to forecast inflation. They are,of course a component of things that we
(23:30):
buy. So in a definitional sense, if the price of inputs goes up
overall prices or the average prices,which is what inflation. I regularly think
about how the palladium you shoot becauseit's it's in the emissions system of your
vehicle, right, Isn't palladiumgommons?I think palladium is the main item.
Does doesn't pladium adams capture some ofthese noxious stud things? What's the what's
(23:55):
the car item that people keep stillingconverter? Yes, yeah, I believe
it is one of the metals thatwill that those noxious like nitrogenoxide. So
the higher palladiums are, the higherI can assume my current serence prices will
be. Yes, I think there'sprobably one point. No, Actually,
Mike, you made I know you'reyou're trying to be goofy I am,
(24:17):
but I think you're probably That isan excellent example of how commodity prices make
their way seemingly obscure. Commodity pricescan make their way into the overall change
or the average changing prices measured bythings like CPI. So short answer is,
by definition, yeah they matter.They're not great longer term forecasters.
And here's can I tell you why? Yes? Please, if you don't
(24:40):
mind, don't just tease me.But in the long run, inflation is
the Fed's problem. Supply shocks likewe experienced at the beginning of COVID,
they come and go, they maketheir way through the system. The question
is how the FED reacts. Doesit accommodate them by leaving rates the same
or indeed loosening policy to maintain purchasingmaintain people's purchasing power. If so,
(25:03):
inflation can become embedded. So ultimately, even an oil price shock, and
Milton Friedman I use that name alot because I know you know them,
especially people of a certain age.He made the point that why should at
the average price of things you buygo up if oil prices go up?
And I can get the answer tothat, but his point was, well,
you have less to spend on otherthings, So don't blame an oil
(25:26):
price shock necessarily, or a goalprice shock, or a palladium price shock,
or an anchovy price shock. Weactually had one in the early seventies
that drove up member chicken price.Yssal drove up chicken prices, I think,
or something. Why should these thingsmatter to average prices? The answer
is all prices don't change with thesame frequency. So oil goes up by
a lot, nothing else changes.Therefore inflation goes up or the average price
(25:49):
goes up. Ultimately, it's theFed's job to tamp that down before it
becomes embedded. So in a sense, commodity prices matter by a lot.
They're a contributed to the CPI orthe PCE DEFLAT or that other measure of
inflation that we follow. As I'vebrought up, I have no idea whether
oil will end up really contributing tohigher overall inflation in the long term,
(26:10):
especially because it's such a way inthe long term. I just explained,
because in the long term inflation ismonetary, right, it's the fault,
if you like, of the FED. One thing that I'm fairly certain it
will contribute to is people's optimism orpessimism about inflation. Like there is no
single item that I can think ofthat we measure the price of regularly that
(26:32):
is more in people's faces and morenegatively impacts their view on the economy than
what they pay to fill up theirtank. So you raise an important point,
that's one about expectations and how theyfeed into inflation. People demand higher
wages that gets passed through to prices, So there's another channel through which commodity
prices, the most conspicuous ones,as you point out, can make their
way into the inflation process. Wewere talking yesterday about Jamie Diamond, who's
(26:56):
been talking a whole bunch ahead ofhis company's release of quarterly earnings on Friday.
And you know, whether or notwe should pay attention to him is
certainly debatable, But look, he'sthe largest ZO of the largest US bank,
His words do have actions behind them, and he's the only large bank
CEO to have managed a bank sincebefore the Great Financial Crisis. So for
(27:22):
a number of reasons, lend somecredibility to the words that he states.
And I thought he had some interestingpoints about inflation during this during this address
here where he pointed to a numberof factors that we ourselves have talked about
as potentially contributing to maybe right.We talked about long term inflation versus short
term inflation, And the point thathe made was things such as ongoing fiscal
(27:48):
spending which does not seem to beslowing down the United States, remilitarization of
the world, restructuring of global trade, capital needs of the new green economy.
All of those, in his view, not necessarily would, but could
hypothetically contribute to higher overall prices inthe long term. Right, if you
(28:15):
buy into the fact that hey,global trade and free trade policies over the
previous three decades helped contribute to lowerinflation, then do you buy into a
less global economy and a less freetrade economy contributing to higher overall prices?
Is the argument that I think he'smaking. Some of the fact you have
to abstract from this and put itin terms of a framework. I find
(28:36):
that helpful, and economists would say, think about it in terms of demand.
So some of the things he mentionedare going to push demand to the
right if you like, they're goingto increase it more stimulative federal spending on
the military. This was the casefrom the nineteen eighties. California boomed during
the Reagan build up the naval bases. They're benefited heavily in the communities that
(28:56):
surrounded them did. That's just themost conspicuous example in my mind. And
at the same time he's talking aboutsupply moving in the other direction. If
you're thinking trade barriers, more conflict, that's gonna that's gonna futs with supply
chains and stuff like that. Soyou've got demand going this way. Sorry,
everybody, I'm doing this with onearm and this with the other,
(29:17):
and only mke can see it,and he's not impressed. You've got supply
moving in just like Katman. Tuckeris utterly unimpressed, and so you got
supply moving in the wrong direction.Think think about what happened during COVID,
right, We we stuffed everybody's pockets, both Trump and Biden with all kinds
of stimulus. We said, goout and buy stuff. But Target didn't
(29:41):
have anything on the shelves because allthe cargo was sitting at ports because nobody
was staffing them. So you hadsupply moving in an adverse direction, demand
moving, I guess, in afun direction. From a consumer's point of
view, what did you get?Shortages, higher prices. What Diamond is
talking about, on a slightly differentlevel and over a slightly different timeframe,
are the movement these two forces,right, And I think that's the interesting
(30:02):
part is we got a direct lessonin this over the last couple of years
on a shorter term basis. Right, COVID was not a permanent scenario,
and the things that are being talkedabout here probably are not permanent either,
because almost nothing is. But youcould envision some of these being on a
much longer time scale, probably beingless inflationary in any one given year over
(30:25):
another. But again, if we'recomparing the next thirty years to the previous
thirty, these are the trends youstart to think, like, now we
got a story here and just tohere and elsewhere in the stack about a
technology that could move supply in amore favorable direction. I refer, of
course to any but don't tell tellthem. We gotta tease them. I
couldn't have figured it out. I'mat your yammer about it every day.
(30:47):
Let's take a quick break, andthen when we come back, Mark,
you can talk to us a littlebit of the magical technology paid that's going
to fix all of our inflation problems. That's next on the Financial Exchange.
The Financial Exchange stream is live onYouTube. Like our page and stay up
to date on breaking business news allmorning long. This is the Financial Exchange
Radio Network. Miss any of theshow. Catch up at your convenience by
(31:11):
visiting Financial Exchange Show dot com andclicking the on demand icon where you'll find
all of our interviews and full showers. This is your home for the latest
business and financial news in New Englandand around the country. This is the
Financial Exchange Radio Network. So asyou may have guessed the technology that we're
(31:44):
referring to that could be the saviorof all of our inflation woes and worries,
it would be artificial intelligence. Andyou know, Jamie Diamond in his
speech continued to talk about AI andthe potential capabilities there in terms of being
what you say, as in pactfulto the world, as on humanity,
as the printing press, electricity andcomputers, and a jeez, Jamie,
(32:07):
this kind of hyperbole. How howin the world could I be more impactful
than technologies on which it relies tooperate? May that may be ignorant and
this is not my area, andmaybe there are other examples of something being
more like you could say, well, air conditioning was more impactful than electricity.
It relies on it, but itNo, I don't think so.
(32:29):
I think, you know, withoutthe ladder, you can't have the former.
Without the Internet, you can't haveI mean, the Internet was transformational.
I think back to the nineties.We all remember going from really primitive
internal email to all of a sudden, you can send attachments outside your company,
to oh my god, I cando this from home, to oh
my god, I can do thiswith a with an Ethernet connection. It
was just one sure breakthrough that madeyour life better after an hour, or
(32:51):
any of them more impactful than thecomputer itself. Probably not. Yeah,
that's fair. Yeah, I don'twell to me, yes, because I
just don't appreciate the difference. Butyou can't have the one without the other.
So I just I have a hardtime buying into the idea that it's
this elixir. Look, it's trulygroundbreaking technology that's fascinating that can be used
for all sorts of potential productive uses. I will reiterate that I don't think
(33:15):
any of those productive uses have beenlargely capitalized on or found yet. So
if you're trying to account for increasesin productivity right now based on AI,
I don't think that they exist.But with a great technology comes obviously great
risks too. Write Like, youknow, when I think about the advent
of the Internet, it has allowedfor pretty amazing things. It has also
(33:37):
allowed for all sorts of problems whenit comes to the ability to scam people
out of their money. This thing, Oh yeah, nobody cares, we
are. There's another piece about howsocial order could collapse in an ai area,
according to two Japanese companies, andit's always interesting to compare Wait wait,
why what was the bat? Theydid not really get all that specifically
(34:00):
well in this article, but Imean, you know, to me,
the areas that you could have socialorder collapsing would be in the ability to
manipulate pay people based on thinking somethingis real. And I think that'll be
a lot easier with artificial intelligence thanit has been previously. So I don't
know. Brief example, I'm writingfor politics, and I want to win
(34:22):
an election, I can create,especially in a place where there's not much,
you know, media challenging my narrative. I can create a bunch of
dummy videos and photographs of my maincompetitor in problematic situations that you know,
most of the population would believe istrue without the without the advent of the
(34:42):
challenge. So yeah, could socialorder collapse? Yes, But I think
generally speaking, the the extreme viewson artificial intelligence are just that, probably
the unlikely extreme views on one wayout of there much rather, I mean
that that veers off into the realmof sort of fantasy sci fi and things
just that are beyond the grasp ofmy imagination. In terms of economic growth,
(35:04):
is it gonna The question for peoplein finance, our day jobs,
and probably for you listening, becauseif you're tuned in, you're interested in
the performance of your investments, iswill it meaningfully increase economic growth? And
by meaningfully I mean will it bumpthe trend line up? If the long
term trend is about three percent realthat is after inflation, and that includes
electricity, air conditioning, everybody travelingby jet plane and stuff, is this
(35:27):
gonna bump that trend? Law is? And that trend has slowed since since
since the nineteen eighties, it's beenmore like two percent, particularly since two
thousand. Are we going to getback to three or even the four percent
growth of the fifties and sixties becauseof this, that's the question on everybody's
mind. The US Virgin Islands isSaint Croix, Saint Thomas, Saint John.
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Fox Business has some groundbreaking research forUS mark on the trick to become
a four to oh one K millionaire. Do you want to know what the
trick is? I think I know, But go ahead, start twenty years
ago. Oh sure, yeah,yeah, there you go. There you
(36:51):
have it. You want to becomea four o one K millionaire? Compounding
interest really actually works. So starttwenty years ago and put a bunch of
your money away and able to doit. Yes, it's probably going to
be I mean, you're you're sayingthis sarcastically because we think the future is
not going to be like the past. I think that's probably a safe bet
it never is. And we alsomight be looking at lower returns going forward
(37:12):
for reasons that you talk about alot on the show. Valuations or I
we can get into that, andeconomic growth might be slower than it's been
historically if AI doesn't pan out,So you might want to count on having
to save a little bit more asa consequence of you could still get there.
You're just gonna have to put awaymore than maybe current limits in your
four to one klol. I'll alsosay that becoming a four to one K
millionaire is an arbitrary and unimportant goal, well, particularly after inflation. I
(37:37):
just I have no idea what howthat is useful at all? Right,
has anybody ever looked at, youknow, do four to one k millionaires
on average, probably on average ormore successful in their retirement than other people?
But it's an arbitrary goal of becominga four to one k millionaire and
does not tell you anything whatsoever aboutyour own personal finances and what you need
(38:00):
to do. For some people,that's not nearly enough. For others,
it's way more more than enough,and they might end up working themselves into
the grave because they're trying to accomplisha unimportant goal. Let's take a quick
break, but a whole lot moreto cover in the second hour of the
Financial Exchange, including a ranking ofAmerica's hottest job markets by city. We'll
cover that next coming up on theFinancial Exchange
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