June 24, 2024 • 38 mins
Mike Armstrong and Paul Lane preview this week's all important PCE release. How did we go from six anticapted rate cuts to only one potential cut? How long can high rates last? Could it be forever? Apple hit by first charges under new European tech law. Holiday travel is booming. Why are airlines doing so badly? China and the EU agree to talks in bid to head off trade war.
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DAV five K Boston is presented byVeterans Development Corporation face is the Financial Exchange
with Mike Armstrong and Paul Lane.Good morning, Happy Monday, and welcome
back to the Financial Exchange. It'sanother inflation week here as we've got the
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feeder reserves preferred measure of inflation comingout this Friday. That's the PCE Price
Index, and we'll be diving inright there. It's Mike Armstrong, Paul
Lane, and Ben Kitchen with you. And as Paul and Ben know,
I'm actually broadcasting here from Arizona.So I have one important question for you
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guys, which is did we ordid we not get a tornado over the
weekend, because that's all my phonewas telling me while I was away.
The winds were quite brutal, butI wouldn't say it was anywhere near a
twister level, not even in thesame stratosphere. It seemed like New Hampshire
was more harder impacted than the Ariarea. Ben, I don't know if
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you experienced anything different over the courseof the weekend, He's shaking his head
violently that he did not. Sookay, so you're you're in the clear
and your house is probably still standingfor when you get back here. So
that's excellent. So let's move onfrom the nineteen ninety six classic and move
instead onto the Fed's preferred measure ofinflation. Of course, because it's a
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day that ends with why we're goingto have several FED governors speaking today and
every day this week, starting offwith Christopher Waller, who actually already spoke
because he was speaking in Rome thismorning at three am, so I unfortunately
did not tune into that one.But we will get the Fed's preferred measure
of inflation, the PCE price Index. In terms of expectations here, it's
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for the pc index to increase littleto nothing month over month, so zero
point zero percent, coming at twopoint six percent year over year, core
prices moving up zero point one percentand two point six percent year over year.
It does beg the question, Paul, or maybe it doesn't. Maybe
maybe it just raises the question,why do we care so much more about
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this one than CPI? Or shouldwe should the average person care about this
Friday's inflation reading and what it mightmean for the Federal Reserve policy? Not
necessary. I don't think that theyshould really care a tremendous amount, because
isn't it the case, Mike,that you can kind of parcel together what
this number is going to be basedon some other data components that typically come
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out earlier in the month. Ifyou're able to string together those calculations,
yeah, I can't, but Ithink that others generally can, and that
would be one big piece of thisis the revisions or the guesses on where
inflation is going to be on thisprice index are usually a lot closer to
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where they actually kind in because wedo know so much already about the CPI,
but they do measure different things,you know, Pce the measure that
we're going to get on inflation thisweek this Friday, actually measures and updates
their basket of items on a quarterlybasis. So for that reason, it
better accounts for substitution effects. Right, If you're remeasuring what people are actually
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buying every quarter, and you know, reindexing it, then hypothetically you should
pick up a little bit faster ona trend of say, beef prices are
through the roof, so people arebuying chicken instead, and you know what's
that substitution effect come to. Nonetheless, this is the measure that the Federal
Reserve cares about. This is theone that they are going to be looking
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at, and it's the one thatwill really end up moving interest rates one
direction or another. And as wementioned, this has been surprising the Federal
Reserve for the first three months ofthis year, but the most recent reading
for the month of April kind ofproved out their overall theory, which was,
Hey, this is a bump inthe road, and it's going to
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come back down to a more reasonablelevel of price increases, allowing us to
maintain our overall policy. So thenext FED meeting isn't until July. What
is it, twelfth, Paul thirtyfirst? Oh, excuse me, yes,
July thirty first. So we've gota ways to go before then,
and things could change by then,but seemingly pretty small chance that the Fed
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is actually going to be cutting ratesat that meeting. Yeah. I think
the backdrop that we should provide listenersif they are not focusing on the inflation
picture as much as we do ona day to day basis is, we
went into this year, Mike,with the expectation that investors or the economic
community, we're pricing in six ratecuts. We sit at almost the end
of June here where none have occurred, and what has happened is the first
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three months of the year, wesaw inflation reports that really proved out that
inflation was much more resilient than theFED would have anticipated if you had asked
them back in December, and theirpredictions sort of proved that out. Looking
backwards now, what we've seen isthere was a concern there in the month
of March and April that perhaps itwas going to be a reignition of inflation.
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The last couple reports, the lastreport that we've seen on the inflation
front, to your point, hassort of proven out that perhaps it was
just a blip on the radar whatwe saw in Q one, and that
inflation was resuming the progress that wesaw at the end of last year.
And so where we sit today lookingforward is can we continue to have those
progressive inflation readings come out over thecourse of the next couple months. Can
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we keep our eye in the labormarket and make sure that that is not
eroding quicker than we may be anticipating. Those are the things that we're going
to be focused on on. That'swhat the FED is going to be monitoring
as they head into the end ofJuly meeting. From all indications, out
there, it looks like we arejust anticipating one rate cut at the moment
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to occur in September, in themiddle of September at their next meeting,
not the one in July, butI guess I should say the subsequent meeting.
That's really what we're we're keying inon, is perhaps one rate cut
in September. That's where we sitat the moment from an inflative perspective.
Well, then perhaps you can explainwhy, Paul, we talked about how
lower rates can be a tailwind forinvestors for stocks in particular, right the
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lower rates are or the anticipation oflower rates, you know, allows you
know, analysts investors to look atstocks at a different in a different way
and perhaps price them more expensively.Perhaps you can explain why, as you
know, anticipation was for six ratecuts this year, we've gotten none so
far, and we're gonna be closingout the last week of the month,
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the last quarter, the last weekof the quarter, and the last week
of the first half of twenty twentyfour, and the S and P five
hundred's up what over fifteen percent forthe first half of this year so far.
Where has that tailwind come from.If it has certainly hasn't come from
lower rates or you know, anyanticipation of those lower rates, that whole
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narrative has completely reversed. And yetI think despite a lot of people's expectations,
stocks have remained elevated and accelerated fromthere. It has been a crazy
six months mic from that front,where we haven't seen a tremendous amount of
earnings growth if you look at theS and P five hundred as a whole,
there was a piece that we arecovering last week that if you strip
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out a lot of these behemoth sizedcompanies that we talk about so frequently that
have over a trillion dollars of marketcap, and I'm speaking of Google,
Meta, Apple, Microsoft, Amazon, and Nvidia, the rest of the
companies in the S and P fundone hundred this year year to date are
sort of mixed to slightly flat toslightly negative if you look at them.
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It's been in Nvidia that has beenthe major story, and AI and anything
that really touches that realm of computerchips, servers, cloud infrastructure. All
of those companies have really been leadingthe charge this year. And it's a
compelling thought to consider, jeez,how much more can in Vidia? Can
we ride the coattails of Nvidia fromthis market perspective when they are growing sales
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over the last five years at sixtyplus percent tremendous numbers, But how long
can this keep up for? Andif Nvidia is to falter and we see
AI spending cool, are there othersectors of the economy in the market of
the sp five hundred that can pickup the slock. That's really where we
sit. That's why without the ratecuts, we've still seen a resilient market
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this year. Yeah. Yeah,It's just important to understand, right,
it is not as though companies havebecome fifteen percent more profitable over the last
six months. It is that mostlyinvestors have been willing to pay considerably more
for their stocks than they were lastyear in spite of those changes and expectations
on both inflation and rate cuts fromthe Federal Reserve. Let's take a quick
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break when we come back. Thebond market is saying something a little bit
interesting about where long term rates aregoing to land and where that neutral is
going to land for the Federal Reserve. What does that mean for mortgage rates,
CD rates, credit card rates,all the above will be covering that
next. If you're on the FinancialExchange, the Financial Exchange is now available
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com. Paul. There's a piecefrom Bloomberg today that I just have to
pick apart the language here quote howlong can high rates last? Bond of
markets say maybe forever? Do wordshave no meaning anymore? I feel like
this always gets you. This isnot the first time that they've used forever
in a headline, and it infuriatesyou. It does like it's the same
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thing as us describing minor issues insome specific market as a recession. Like
the word forever does not describe what'sgoing to happen for the next five years,
which is basically what Bloomberg is layingout here. So I will get
over my hatred for this headline becausethe word forever means forever till the end
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of time, and that's not whatwe are talking about when we're talking about
neutral interest. And this does infuriateme. I'm sorry, but language is
important and words matter. What weare talking about here is expectations both from
markets and from the Federal Reserve onwhat's referred to as the neutral rate.
Now there is no This isn't likethe boiling point of water. Okay,
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so this is weird economics where thereis no actual science behind it in the
way that physics or chemistry has sciencebehind it. But the neutral rate is
this hypothetical idea, which is there'sa rate of interest where the cost to
borrow money neither stimulates the economy norslows the growth in the economy. And
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most economists would agree that right now, with mortgage rates at seven percent,
for example, that we are slowingthe economy with interest rates, meaning the
rates right now are above neutral.The question is where is neutral right I
don't think it's at mortgage rates atthree in a quarter. I keep using
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mortgage rates that's not actually what theFederal Reserve refers to, but I think
that's the most attainable and easy tounderstand rates for the everyday person. I
don't think neutral rates back at threepercent interest on a thirty year mortgage,
but it's probably not at seven percenteither. And the question is are we
at a new normal now where hey, we're never getting back to three and
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a quarter percent mortgagees or heck,I've even seen a few thirty years,
especially for retired military, that aresub three percent. You know, will
we ever get back to those levels? I think is an interesting question to
ask, or at least again,forever is a useless term. Will we
get back to those levels in thenext thirty years, I think is an
interesting question. That is the morereasonable question to ask if you're looking at,
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you know, five years out.The problem with this piece beyond your
hatred for the headline, which tobe clear, they're probably just trying to
get eyeballs on it and mission accomplishedthat it has been pulled as part of
our stack today. But the problemis this idea that interest rates are the
neutral rate is higher than it waspreviously, is that difectations can dramatically change
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so quickly, Mike, I mean, we've seen it over the course of
the last six months. If wehave an economic slow down and rates are
to be cut, then you'd thinktheoretically that neutral rate would drop pretty quickly.
Here, I would argue that it'sa fair point that you make.
It's really going to be difficult toreplicate where that nut rate was before,
or just our rate expectations previously wereso low that if you look at rate
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cycles, it's it's hard to imaginethat we could continue at where we were
in the twenty eighteen through twenty twentyone period or even going back further there.
But the neuturer rate in general,it is such a hard concept to
pin down. It does seem like, certainly for the moment, people are
getting a little bit more accustomed tothis idea that hey, we can collect
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some interest on cash, and thefact that we're going to borrow. We're
barring at levels that are I wouldsay, from a mortgage perspective, more
akin to what you'd see over thelast forty fifty years in terms of averages,
but certainly not the last ten orfifteen years. Here. So the
neutral rate in terms of where it'sbeing priced right now, which is not
necessarily where it is, is aroundthree point six percent. That's the five
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year rate on treasuries and would indicatea rate that's about a full percentage point
above the last decade. So thatwould indicate, Hey, you know,
investors seem to think rates are goingto be higher than they were for the
last ten years, and I thinkthat's a fair assumption based on demographics,
our recent inflation deficits, whatever youwant to point at. I think the
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other question that I have is whatdoes it mean for the housing market right
if you have rates that don't everget back to the three percent range,
will you see inventories next thirty years? I think is useless to guess at,
but you know there won't be atremendous amount of new building over the
next five years. So will weget inventory levels that get back to pre
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COVID levels and just or a mind, folks, or give folks an update
on where those sit. Here inNew England, in the state of Massachusetts,
housing inventory levels are sitting at fortyI'm going to round here, forty
five percent of where they were inMay of twenty nineteen. In May,
in Maine that numbers forty percent.In New Hampshire it's forty percent. In
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Vermont, it's only twenty eight percent. In Rhode Island it's thirty one percent.
And in Connecticut it's twenty three percentof May twenty nineteen levels of inventory.
So nowhere in New England are housinglevels even half of what they were
in twenty nineteen. And I thinkmany would point to interest rates as being
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the dominant reason behind that, Noquestion, that is the biggest issue.
And I just was thinking in myhead, Mike, eventually will have to
wash away those people who are lockedin at you know, four three percent.
Eventually they'll have to come back inon the market because of just life
changes, whether they need to moveto a bigger home. And we've talked
about all the different life changing eventsthat can occur on the housing market front,
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but that's been really what has beenso perplexing this year. If you're
talking about the interest rate discussion thatwe had earlier, where there's only been
you know, no cuts this year, or perhaps there'll be one versus the
six that were projected. A lotof that came off the heels of this
idea that shelter costs would come down, which make up a third of the
inflationary data, and they haven't.And you gave me a good amount of
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grief for just saying, at somepoint this is going to happen this year.
Eventually you said to me, Paul, it's not happening. You know,
we're sitting six months in the year, and just give up on the
dream. And I have given up. I'm with you there. That has
been what has been confounding is thatif you look at the Northeast and the
Midwest, to further your point aboutjust the limited amount of inventory out there,
the rental inflation that we're seeing,we've really only made a quarter of
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the progress there. We've only gotit down slightly from a decrease in pricing
there from where it was pre pandemiclevels. In the South and the West,
because there's a lot more multifamilies comingon the market, we have seen
some relief there, but the Northeastand Midwest it has not been the case,
and it because of that supply pointthat you're mentioning, Mike. So
on the rate side of things,perhaps even if rates come down to that
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six or five percent range, youmight get more inventory in the market,
but it's not going to be solvedovernight. The amount of inventory in these
areas there just isn't enough of abuilding tailwind in place. I will also
say, though, that part ofthis is just policy, because there are
states in the country that aren't facingthese same inventory problems. In Arizona,
where I happen to be broadcasting fromright now, inventory levels are ninety eight
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percent of where they were in Maytwenty nineteen. In Florida they're ninety six
percent. In Texas theyre one hundredand two percent. So there are states
across the country that actually build homesand don't make it absolutely impossible to get
a new project approved for you know, multifamily or a new development of ho
like we do here across New England. This is not just a Massachusetts thing.
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This is across New England. Wemake it tremendously difficult to build new
housing, both from a labor costperspective, as well as zoning rules and
beyond interest rates. That is abig contributing factor to why home prices are
so ludicrously expensive in this area isbecause we don't want to build new housing.
We don't like it. Let's takea quick break. When we come
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back full market update with Wall StreetWatch. Like us on Facebook and follow
us on Twitter at TFE show.Breaking business news is always first right here
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on the Financial Exchange Radio Network.Time now for Wall Street Watch a complete
look and what's moving market today righthere on the Financial Exchange Radio Network.
All Right, markets are in slightlymixed territory as we begin the final week
of the month, the quarter,and the first half of the year.
The Dow Jones is up three hundredand forty one points, the S and
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P five hundred is up three tenthsof a percent, and the Nasdaq is
down two tenths of a percent.We'll kick things off with RXO. The
freight stock is up eighteen percent.After buying Coyote, the Coyote logistics unit
from UPS. RXO paid ups morethan one billion dollars for Coyote. UPS
shares are up one point two percent. The Nvidia stock is down three point
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seven to six percent, building onlast week's draw down, with the megacap
technology retreating around four percent to snapan eight week winning streak. Jeffries raised
its priced target on the stock overthe weekend, implying that shares now had
about nineteen percent upside from last week'sclosing level. Ferrari shares are up two
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percent as Well Street digested the company'selectric vehicle plans. Ubs raised its price
target on the stock after seeing Ferrari'snew factory unveiled on Friday. The by
Now Pay Later stock a firm,is up seven percent on the heels of
Goldman Sacks initiation at a buy rating. Goldman said the company was a leader
in the modern credit space and notedits strong underwriting business. Ibmstock is up
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three point twenty five percent after GoldmanStacks initiated coverage with a buy rating.
The firm said IBM is on trackto sustain long term revenue and free cash
flow growth driven by growth in AIproductions and services. I am ben Kitchen,
and that was Wall Street Watch.Apple has become the first company charged
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under the European Union. European Union'sNew Digital Markets act. Investors don't seem
to care, as the stock isup one percent this morning, but this
is significant to the penalties that canbe imposed by the digital market. Acts
are massive. So under European rules, companies that are found guilty of violating
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this can be charged as much asten percent of their worldwide revenue. So
this is a serious potential impact toApple if anything were actually to be found.
And again these are just early chargesagainst Apple. But what I guess
is the rule here that they areallegedly violating. And you know what has
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Apple done so far, Paul Mike. Really what it comes down to is
their practices surrounding their app store.So if any of our listeners out there
have their iPhone phones, I knowMike does not want Wan want, but
if you are buying anything within theapps on your phone through the app store,
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then what happens is Apple takes athirty percent cut twenty five to thirty
percent cut of whatever you purchase therefor every dollar that is spent and there.
So let's say I subscribe to Netflixand I do that on my phone
and put in my credit card information, then Apple's going to take a hypothetically
thirty percent cut maybe they've got aspecial deal worked out with Netflix, but
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thirty percent cut of that revenue,Whereas if I had just gone to Netflix
website and subscribed there, then Appledoesn't get any cut whatsoever, and I
can still watch Netflix on my phoneexactly. And so the business practices that
they've been involved in is making itextremely difficult for you, Mike, to
determine the workaround that you just mentionedright there, where you could just go
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to Netflix and just avoid the thirtypercent take rate that Netflix has on that
purchase. And developers have had realdifficulty being able to advertise the fact that
hey, you can actually consume ourgoods or our offerings elsewhere through our site
at perhaps a cheaper rate. Applehas really made that a challenging practice in
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the EUS consideration here, it's beensomething that they're really going after them for.
They actually got hit with another twobillion dollar fine related to their app
store earlier this year, I believein the month of March. So the
eregulars have been up there. Youknow what's really coming after Apple and the
app store? Now, I thinkI look at this in a few different
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ways. I mean, one,I don't really know on what planet I
would expect Apple, when I openup their app store and download the Netflix
app, to prompt me to say, hey, by the way, if
you go right to Netflix website onyour web browser and pay them that way,
you won't face any discount, butwe won't get our haircut. I
don't know on what planet you wouldrequire a company to do that, and
(24:45):
that sounds like the actions of theEuropean Union wants Apple to take. So
I struggle with that piece a littlebit because what other business is required to
do that? Like you walk intoa Walmart and generally speaking, they don't
go up to you and say,hey, by the way, you can
find that product about six dollars cheaperby just going on Amazon. That doesn't
(25:08):
happen, and that, to meis kind of what this is akin to.
I think the European Union's real problemwith Apple is the same problem that
I have with Apple, which isthey dominate the market. There wouldn't be
a problem if there were fifteen differentapp stores, all of which you could
choose from and face varying prices andvarying experiences. In Europe, it's a
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little bit different because there's slightly morecompetition, But in the United States,
for example, what percentage of smartphonesout there are dominated by the App store.
It's more than half, I knowin the United States. And so
you really, you really look atthis and say, Okay, it's Apple
and it's Google. Both of themact the exact same way, and makes
(25:52):
sense. They're getting a thirty percentpayment haircut. Is this a competitive market?
And what can we do about it? And I think in the European
Union's case to say, look,we have no authority to break up an
American company, so this is thenext best thing. We're just gonna find
them into oblivion until they start complyingwith what we believe would be competitive rules,
(26:12):
even though they be really strange andweird. Like again, I would
never expect Apple to have to promptme to say, hey, go to
Netflix instead and pay there and youcan save the company thirty percent. Yeah,
it seems like Mike. They treatthem much more closely to what an
electric utility would be around this areawhere basically you and I have one choice
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in terms of who provides our electricityto our home, and as a result,
there are price you know, stopsimpediments in place where it's heavily regulated
and they are almost viewing Apple inthe same way as that they are to
what you mentioned an antitrust concern,where they are the end all be all
marketplace and as such they need tobe more heavily regulated to provide consumers with
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alternatives. Now, my analogy fallsapart where you don't. You can't just
go to another town to pick whereyou get your electricity from, or go
to a company. But that's theway they're viewing it is basically that they
dominate the market and as such theyshould behave in a compliant with the EU.
You know, deems to be acompliant fashion. Now, there are
(27:15):
a few pieces of what Apple doesthat I do find to be really anti
competitive, and I don't know ifthis stuff exists in the EU. But
for instance, let's say Netflix recognizesthey're thirty percent and wants to, you
know, offer people to discount tosign up in a different way, like,
Hey, come to our website,we don't have to pay Apple thirty
percent, and we'll give you atwenty percent price cut. I do not
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believe Apple allowed other applications to dothat. I think that they specifically kicked
off games and downloads that would offerthat sort of price discount. And the
example here if anybody remembers the lawsuitwith Fortnite maker what was it, Epic
Games. Yes, yeah, afew years ago they were doing exactly that.
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They were saying, hey, we'regoing to allow you to process payments
on the game. You're with adifferent payment processing system that's going to avoid
Apple's thirty percent haircut, will offerdiscounts for that. And Apple basically and
Google, by the way, itbasically booted them off the platform and said
no, that's not going to happen, and those types of behaviors, Like,
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it's one thing to say, no, we're not going to advertise different
ways to go get a price discountsomewhere else, there should be no expectation
of that. But for Apple tosay, hey, Netflix, if you
advertise that your price is cheaper somewhereelse, then we're going to kick you
off the platform and not let peopledownload your app. That's kind of the
definition of anti competitive And doesn't matterif there's ten other you know, if
(28:41):
there's ten other businesses operating in theecosystem that will price things differently, that's
one thing. But when it's justApple and Google are the only players out
there to say, hey, Iwant to watch Netflix on my smartphone.
Well, then yeah, that typeof behavior I think I think most people
would look at and say, that'sthat seemed that seems illegal in a lot
(29:04):
of ways, and we should crackdown on that. So I think those
are the types of things that Isee as problematic for Apple. But I
don't know how. I don't knowhow the EU fixes any of that with
the lawsuits that they're trying to bringhere in response or not directly in response,
but in a thinly veiled response,Apple's basically saying, hey, we're
(29:26):
not going to be rolling out ournew artificial intelligence tools on our iPhones in
Europe because we're so worried about thesenew digital competition and digital market acts in
Europe, which I don't know anythingabout Apple's AI tool, but I don't
think it has any reasonable concern ofbeing regulated by this Digital Markets Act.
(29:47):
It seems to me like a thinlyveiled threat of saying, hey, Europe,
you keep finding us, we're notrolling out the latest and greatest that
we have. It seems like,you know, they mentioned the potential modive
here was the and I quote levelof access it would need to grant third
parties. They don't feel comfortable,you know, unveiling those features on Apple
Intelligence to all of the four hundredand fifty million users throughout the EU.
(30:10):
But I agree, Mike, it'sprobably another way of saying, all right,
if you're gonna mess with us thisway, guess what, you know,
your users are not getting the latestand greatest. We're gonna really screech.
Come to a screeching hall in termsof new features there and maybe try
to irritant irritate the constituents there bynot having the newest features on their iPhone.
(30:30):
Let's take a quick break when wecome back a little bit more on
the EU, specifically when it comesto recent talks with China or pending talks
with China about the car market overin the European Union. That's next on
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(30:52):
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the Financial Exchange Radio Network, Paul, I know we're going to talk a
(31:18):
little bit about China and the Uand trade and cars specifically, but I
want to talk a little bit abouttravel. I traveled last week out to
Arizona to go see some family.Airports are packed. Summer travel season looks
like it's going to be even hotterthan it was in twenty nineteen in terms
of total volume through US airports,and yet on average US airline stocks are
(31:44):
down about forty percent over the pastfive years. And it's not merely investors,
you know, shifting preferences towards AIstocks. These airlines themselves are making
a lot less in the way ofprofit over the last five years as well.
And I'm interested in your take becausefrom everything that I'm reading here,
(32:06):
there are some things around the edgesthat have changed in terms of preferences that
make it less profitable for airlines.But a lot of this just seems like
missteps and poor management on the partof airlines themselves to me, Mike,
when I was reading through the story, the first thing that came to mind
was, was Boeing really is thatthe reason that there is such a significant
impact to some of these airlines outthere, because the problem that you have
(32:30):
in the airplane space is that thereare really only two manufacturers out there.
It's Boeing and Airbus that dominate asignificant amount of the market share, and
where some of these companies I believeSouthwest Southwest Okay, yeah, exactly,
are tethered just to one company that'sbeen an absolute you know what show over
the last several years. And asa result, if you're projecting future earnings
(32:52):
growth from these companies and they're notgoing to have the supply commensurate with the
demand that they're seeing on the travelside, you have to discount future cash
flows, so you have to discountfuture earning. So that was one of
the things that came to my mind. You know, this idea that fuel
costs are more expensive than they werea pre pandemic to me. I raised
my eyebrow at that a bit.You know, they're not exorbitant. Certainly
(33:15):
they're higher than they were, Mike, but I would be a little bit
more hesitant to blame the cost onthat side of things as a concern.
Ryan airr did a good job ofhedging their fuel situation so that they were
impact as much, but I thinkit's two factors Boeing and the supply side,
and then the labor input side.The fact that you have a lot
(33:37):
of pilots that retired right around thepandemic or were forced out the door.
It's been a real struggle to getpeople back in and negotiate with the unions
in order to get that side ofthe cost equation down. Yeah, on
the cost side of the equation,I agree between fuel prices, which again
those can be hedged if done properly, and Ryan Air as an example of
where they really hedged their fuel priceexposure and are doing far better than other
(33:59):
air lines. But if it werepurely a Boeing problem, then I would
expect that one of the issues airlinesbe facing would be not enough capacity.
And in fact they're reporting that,hey, we have more capacity than is
needed on a whole bunch of theseroutes, and so I get a little
bit confused by all this. Itseems to me that you know, airlines
(34:21):
over you know, are supplying morecapacity than is needed at the same time
that they can't buy enough planes,can't find enough flight attendants and pilots,
and therefore they're seeing prices that arebasically flat in spite of you know,
all of their input costs being higher. And I recognize that this is a
somewhat competitive market, and so youcan't, you know, American airlines can't
(34:42):
just decrease capacity and see prices goup. But just really confusing. The
last piece on this business travel isabout thirteen percent lower than in twenty nineteen,
and those were big ticket items.And so yeah, even though a
lot more people are flying these days, if it it's not occurring with last
minute business travel being charged to thecompany credit card like it was in twenty
(35:06):
nineteen, then I can see howthese airlines aren't quite making quite as much.
But honestly, a lot of thisdoes not seem to me at least
like failures at Boeing, which arecertainly contributing or purely labor costs increases.
It's decisions that have been made byairline executives to push out a ton of
capacity when the demand isn't there forit at the moment. Well, also,
it harkens back to, you know, what Warren Buffett has said about
(35:29):
these businesses. Airlines are just reallydifficult businesses to scale and run proferably because
they require so much capital in orderto get growth. I mean, just
think about how expensive it is tobuy a plane, and then they operate
on razor thin margins too, SoI mean those two things. In general,
It's just always been a hard placeto invest, and I guess this
(35:50):
year is no different really, onlyif you could have timed it as to
buying in the twenty twenty lows.I'm sure you're sitting, you know,
smiling looking at that trade. Butit's just hard year to year, uh,
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and are not affiliated. The powerand influence of Germany is likely to be
tested in terms of their influence overthe European Union over the coming weeks and
months. Unlike in the United States, where we have a tariff rate of
(37:20):
over one hundred percent on imported Chinesevehicles, in Europe that sits at only
ten percent, but they're considering aproposed tariff of up to thirty eight percent
on evs from China that would beon top of the ten percent, bring
it up to nearly a fifty percentrate. Based on the heavily subsidized actions
of the Chinese Communist Party and theI mentioned the influence of Germany here because
(37:45):
obviously we all associated with Volkswagen BMWand you know, some of the largest
automakers out there, and how muchthey will be able to push this off
from other the influence of other countrieswhere you know, I would imagine if
you live in Portugal, you surewouldn't mind being able to buy a ten
thousand dollars Chinese EV So I thinkthis will be an interesting play out and
(38:09):
we will have to see where itgoes over the next few weeks here in
terms of Germany's influence over it,particularly because you have Chinese cars being manufactured
in Europe. That's tricky. Quickbreak markets remain mixed, but largely and
positive territory at least on the Dowup three hundred and ninety points. We
will be right back after this onthe financial exchange
The Financial Exchanges produced by Money MattersRadio and is hosted by employees of the
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money. This program does not offerany specific financial or investment advice. Please
(00:21):
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DAV five K Boston is presented byVeterans Development Corporation face is the Financial Exchange
with Mike Armstrong and Paul Lane.Good morning, Happy Monday, and welcome
back to the Financial Exchange. It'sanother inflation week here as we've got the
(01:23):
feeder reserves preferred measure of inflation comingout this Friday. That's the PCE Price
Index, and we'll be diving inright there. It's Mike Armstrong, Paul
Lane, and Ben Kitchen with you. And as Paul and Ben know,
I'm actually broadcasting here from Arizona.So I have one important question for you
(01:44):
guys, which is did we ordid we not get a tornado over the
weekend, because that's all my phonewas telling me while I was away.
The winds were quite brutal, butI wouldn't say it was anywhere near a
twister level, not even in thesame stratosphere. It seemed like New Hampshire
was more harder impacted than the Ariarea. Ben, I don't know if
(02:06):
you experienced anything different over the courseof the weekend, He's shaking his head
violently that he did not. Sookay, so you're you're in the clear
and your house is probably still standingfor when you get back here. So
that's excellent. So let's move onfrom the nineteen ninety six classic and move
instead onto the Fed's preferred measure ofinflation. Of course, because it's a
(02:29):
day that ends with why we're goingto have several FED governors speaking today and
every day this week, starting offwith Christopher Waller, who actually already spoke
because he was speaking in Rome thismorning at three am, so I unfortunately
did not tune into that one.But we will get the Fed's preferred measure
of inflation, the PCE price Index. In terms of expectations here, it's
(02:53):
for the pc index to increase littleto nothing month over month, so zero
point zero percent, coming at twopoint six percent year over year, core
prices moving up zero point one percentand two point six percent year over year.
It does beg the question, Paul, or maybe it doesn't. Maybe
maybe it just raises the question,why do we care so much more about
(03:16):
this one than CPI? Or shouldwe should the average person care about this
Friday's inflation reading and what it mightmean for the Federal Reserve policy? Not
necessary. I don't think that theyshould really care a tremendous amount, because
isn't it the case, Mike,that you can kind of parcel together what
this number is going to be basedon some other data components that typically come
(03:38):
out earlier in the month. Ifyou're able to string together those calculations,
yeah, I can't, but Ithink that others generally can, and that
would be one big piece of thisis the revisions or the guesses on where
inflation is going to be on thisprice index are usually a lot closer to
(03:58):
where they actually kind in because wedo know so much already about the CPI,
but they do measure different things,you know, Pce the measure that
we're going to get on inflation thisweek this Friday, actually measures and updates
their basket of items on a quarterlybasis. So for that reason, it
better accounts for substitution effects. Right, If you're remeasuring what people are actually
(04:20):
buying every quarter, and you know, reindexing it, then hypothetically you should
pick up a little bit faster ona trend of say, beef prices are
through the roof, so people arebuying chicken instead, and you know what's
that substitution effect come to. Nonetheless, this is the measure that the Federal
Reserve cares about. This is theone that they are going to be looking
(04:41):
at, and it's the one thatwill really end up moving interest rates one
direction or another. And as wementioned, this has been surprising the Federal
Reserve for the first three months ofthis year, but the most recent reading
for the month of April kind ofproved out their overall theory, which was,
Hey, this is a bump inthe road, and it's going to
(05:03):
come back down to a more reasonablelevel of price increases, allowing us to
maintain our overall policy. So thenext FED meeting isn't until July. What
is it, twelfth, Paul thirtyfirst? Oh, excuse me, yes,
July thirty first. So we've gota ways to go before then,
and things could change by then,but seemingly pretty small chance that the Fed
(05:25):
is actually going to be cutting ratesat that meeting. Yeah. I think
the backdrop that we should provide listenersif they are not focusing on the inflation
picture as much as we do ona day to day basis is, we
went into this year, Mike,with the expectation that investors or the economic
community, we're pricing in six ratecuts. We sit at almost the end
of June here where none have occurred, and what has happened is the first
(05:48):
three months of the year, wesaw inflation reports that really proved out that
inflation was much more resilient than theFED would have anticipated if you had asked
them back in December, and theirpredictions sort of proved that out. Looking
backwards now, what we've seen isthere was a concern there in the month
of March and April that perhaps itwas going to be a reignition of inflation.
(06:13):
The last couple reports, the lastreport that we've seen on the inflation
front, to your point, hassort of proven out that perhaps it was
just a blip on the radar whatwe saw in Q one, and that
inflation was resuming the progress that wesaw at the end of last year.
And so where we sit today lookingforward is can we continue to have those
progressive inflation readings come out over thecourse of the next couple months. Can
(06:35):
we keep our eye in the labormarket and make sure that that is not
eroding quicker than we may be anticipating. Those are the things that we're going
to be focused on on. That'swhat the FED is going to be monitoring
as they head into the end ofJuly meeting. From all indications, out
there, it looks like we arejust anticipating one rate cut at the moment
(06:56):
to occur in September, in themiddle of September at their next meeting,
not the one in July, butI guess I should say the subsequent meeting.
That's really what we're we're keying inon, is perhaps one rate cut
in September. That's where we sitat the moment from an inflative perspective.
Well, then perhaps you can explainwhy, Paul, we talked about how
lower rates can be a tailwind forinvestors for stocks in particular, right the
(07:19):
lower rates are or the anticipation oflower rates, you know, allows you
know, analysts investors to look atstocks at a different in a different way
and perhaps price them more expensively.Perhaps you can explain why, as you
know, anticipation was for six ratecuts this year, we've gotten none so
far, and we're gonna be closingout the last week of the month,
(07:40):
the last quarter, the last weekof the quarter, and the last week
of the first half of twenty twentyfour, and the S and P five
hundred's up what over fifteen percent forthe first half of this year so far.
Where has that tailwind come from.If it has certainly hasn't come from
lower rates or you know, anyanticipation of those lower rates, that whole
(08:01):
narrative has completely reversed. And yetI think despite a lot of people's expectations,
stocks have remained elevated and accelerated fromthere. It has been a crazy
six months mic from that front,where we haven't seen a tremendous amount of
earnings growth if you look at theS and P five hundred as a whole,
there was a piece that we arecovering last week that if you strip
(08:22):
out a lot of these behemoth sizedcompanies that we talk about so frequently that
have over a trillion dollars of marketcap, and I'm speaking of Google,
Meta, Apple, Microsoft, Amazon, and Nvidia, the rest of the
companies in the S and P fundone hundred this year year to date are
sort of mixed to slightly flat toslightly negative if you look at them.
(08:43):
It's been in Nvidia that has beenthe major story, and AI and anything
that really touches that realm of computerchips, servers, cloud infrastructure. All
of those companies have really been leadingthe charge this year. And it's a
compelling thought to consider, jeez,how much more can in Vidia? Can
we ride the coattails of Nvidia fromthis market perspective when they are growing sales
(09:07):
over the last five years at sixtyplus percent tremendous numbers, But how long
can this keep up for? Andif Nvidia is to falter and we see
AI spending cool, are there othersectors of the economy in the market of
the sp five hundred that can pickup the slock. That's really where we
sit. That's why without the ratecuts, we've still seen a resilient market
(09:28):
this year. Yeah. Yeah,It's just important to understand, right,
it is not as though companies havebecome fifteen percent more profitable over the last
six months. It is that mostlyinvestors have been willing to pay considerably more
for their stocks than they were lastyear in spite of those changes and expectations
on both inflation and rate cuts fromthe Federal Reserve. Let's take a quick
(09:50):
break when we come back. Thebond market is saying something a little bit
interesting about where long term rates aregoing to land and where that neutral is
going to land for the Federal Reserve. What does that mean for mortgage rates,
CD rates, credit card rates,all the above will be covering that
next. If you're on the FinancialExchange, the Financial Exchange is now available
(10:13):
on your alexis smart speaker has toplay the Financial Exchange and catch up on
anything you might have missed. Thisis the Financial Exchange Radio Network, breaking
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(10:37):
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(10:58):
com. Paul. There's a piecefrom Bloomberg today that I just have to
pick apart the language here quote howlong can high rates last? Bond of
markets say maybe forever? Do wordshave no meaning anymore? I feel like
this always gets you. This isnot the first time that they've used forever
in a headline, and it infuriatesyou. It does like it's the same
(11:24):
thing as us describing minor issues insome specific market as a recession. Like
the word forever does not describe what'sgoing to happen for the next five years,
which is basically what Bloomberg is layingout here. So I will get
over my hatred for this headline becausethe word forever means forever till the end
(11:46):
of time, and that's not whatwe are talking about when we're talking about
neutral interest. And this does infuriateme. I'm sorry, but language is
important and words matter. What weare talking about here is expectations both from
markets and from the Federal Reserve onwhat's referred to as the neutral rate.
Now there is no This isn't likethe boiling point of water. Okay,
(12:11):
so this is weird economics where thereis no actual science behind it in the
way that physics or chemistry has sciencebehind it. But the neutral rate is
this hypothetical idea, which is there'sa rate of interest where the cost to
borrow money neither stimulates the economy norslows the growth in the economy. And
(12:33):
most economists would agree that right now, with mortgage rates at seven percent,
for example, that we are slowingthe economy with interest rates, meaning the
rates right now are above neutral.The question is where is neutral right I
don't think it's at mortgage rates atthree in a quarter. I keep using
(12:54):
mortgage rates that's not actually what theFederal Reserve refers to, but I think
that's the most attainable and easy tounderstand rates for the everyday person. I
don't think neutral rates back at threepercent interest on a thirty year mortgage,
but it's probably not at seven percenteither. And the question is are we
at a new normal now where hey, we're never getting back to three and
(13:15):
a quarter percent mortgagees or heck,I've even seen a few thirty years,
especially for retired military, that aresub three percent. You know, will
we ever get back to those levels? I think is an interesting question to
ask, or at least again,forever is a useless term. Will we
get back to those levels in thenext thirty years, I think is an
interesting question. That is the morereasonable question to ask if you're looking at,
(13:37):
you know, five years out.The problem with this piece beyond your
hatred for the headline, which tobe clear, they're probably just trying to
get eyeballs on it and mission accomplishedthat it has been pulled as part of
our stack today. But the problemis this idea that interest rates are the
neutral rate is higher than it waspreviously, is that difectations can dramatically change
(14:01):
so quickly, Mike, I mean, we've seen it over the course of
the last six months. If wehave an economic slow down and rates are
to be cut, then you'd thinktheoretically that neutral rate would drop pretty quickly.
Here, I would argue that it'sa fair point that you make.
It's really going to be difficult toreplicate where that nut rate was before,
or just our rate expectations previously wereso low that if you look at rate
(14:26):
cycles, it's it's hard to imaginethat we could continue at where we were
in the twenty eighteen through twenty twentyone period or even going back further there.
But the neuturer rate in general,it is such a hard concept to
pin down. It does seem like, certainly for the moment, people are
getting a little bit more accustomed tothis idea that hey, we can collect
(14:48):
some interest on cash, and thefact that we're going to borrow. We're
barring at levels that are I wouldsay, from a mortgage perspective, more
akin to what you'd see over thelast forty fifty years in terms of averages,
but certainly not the last ten orfifteen years. Here. So the
neutral rate in terms of where it'sbeing priced right now, which is not
necessarily where it is, is aroundthree point six percent. That's the five
(15:11):
year rate on treasuries and would indicatea rate that's about a full percentage point
above the last decade. So thatwould indicate, Hey, you know,
investors seem to think rates are goingto be higher than they were for the
last ten years, and I thinkthat's a fair assumption based on demographics,
our recent inflation deficits, whatever youwant to point at. I think the
(15:35):
other question that I have is whatdoes it mean for the housing market right
if you have rates that don't everget back to the three percent range,
will you see inventories next thirty years? I think is useless to guess at,
but you know there won't be atremendous amount of new building over the
next five years. So will weget inventory levels that get back to pre
(15:56):
COVID levels and just or a mind, folks, or give folks an update
on where those sit. Here inNew England, in the state of Massachusetts,
housing inventory levels are sitting at fortyI'm going to round here, forty
five percent of where they were inMay of twenty nineteen. In May,
in Maine that numbers forty percent.In New Hampshire it's forty percent. In
(16:19):
Vermont, it's only twenty eight percent. In Rhode Island it's thirty one percent.
And in Connecticut it's twenty three percentof May twenty nineteen levels of inventory.
So nowhere in New England are housinglevels even half of what they were
in twenty nineteen. And I thinkmany would point to interest rates as being
(16:40):
the dominant reason behind that, Noquestion, that is the biggest issue.
And I just was thinking in myhead, Mike, eventually will have to
wash away those people who are lockedin at you know, four three percent.
Eventually they'll have to come back inon the market because of just life
changes, whether they need to moveto a bigger home. And we've talked
about all the different life changing eventsthat can occur on the housing market front,
(17:03):
but that's been really what has beenso perplexing this year. If you're
talking about the interest rate discussion thatwe had earlier, where there's only been
you know, no cuts this year, or perhaps there'll be one versus the
six that were projected. A lotof that came off the heels of this
idea that shelter costs would come down, which make up a third of the
inflationary data, and they haven't.And you gave me a good amount of
(17:29):
grief for just saying, at somepoint this is going to happen this year.
Eventually you said to me, Paul, it's not happening. You know,
we're sitting six months in the year, and just give up on the
dream. And I have given up. I'm with you there. That has
been what has been confounding is thatif you look at the Northeast and the
Midwest, to further your point aboutjust the limited amount of inventory out there,
the rental inflation that we're seeing,we've really only made a quarter of
(17:55):
the progress there. We've only gotit down slightly from a decrease in pricing
there from where it was pre pandemiclevels. In the South and the West,
because there's a lot more multifamilies comingon the market, we have seen
some relief there, but the Northeastand Midwest it has not been the case,
and it because of that supply pointthat you're mentioning, Mike. So
on the rate side of things,perhaps even if rates come down to that
(18:18):
six or five percent range, youmight get more inventory in the market,
but it's not going to be solvedovernight. The amount of inventory in these
areas there just isn't enough of abuilding tailwind in place. I will also
say, though, that part ofthis is just policy, because there are
states in the country that aren't facingthese same inventory problems. In Arizona,
where I happen to be broadcasting fromright now, inventory levels are ninety eight
(18:41):
percent of where they were in Maytwenty nineteen. In Florida they're ninety six
percent. In Texas theyre one hundredand two percent. So there are states
across the country that actually build homesand don't make it absolutely impossible to get
a new project approved for you know, multifamily or a new development of ho
like we do here across New England. This is not just a Massachusetts thing.
(19:03):
This is across New England. Wemake it tremendously difficult to build new
housing, both from a labor costperspective, as well as zoning rules and
beyond interest rates. That is abig contributing factor to why home prices are
so ludicrously expensive in this area isbecause we don't want to build new housing.
We don't like it. Let's takea quick break. When we come
(19:26):
back full market update with Wall StreetWatch. Like us on Facebook and follow
us on Twitter at TFE show.Breaking business news is always first right here
(19:51):
on the Financial Exchange Radio Network.Time now for Wall Street Watch a complete
look and what's moving market today righthere on the Financial Exchange Radio Network.
All Right, markets are in slightlymixed territory as we begin the final week
of the month, the quarter,and the first half of the year.
The Dow Jones is up three hundredand forty one points, the S and
(20:14):
P five hundred is up three tenthsof a percent, and the Nasdaq is
down two tenths of a percent.We'll kick things off with RXO. The
freight stock is up eighteen percent.After buying Coyote, the Coyote logistics unit
from UPS. RXO paid ups morethan one billion dollars for Coyote. UPS
shares are up one point two percent. The Nvidia stock is down three point
(20:38):
seven to six percent, building onlast week's draw down, with the megacap
technology retreating around four percent to snapan eight week winning streak. Jeffries raised
its priced target on the stock overthe weekend, implying that shares now had
about nineteen percent upside from last week'sclosing level. Ferrari shares are up two
(20:59):
percent as Well Street digested the company'selectric vehicle plans. Ubs raised its price
target on the stock after seeing Ferrari'snew factory unveiled on Friday. The by
Now Pay Later stock a firm,is up seven percent on the heels of
Goldman Sacks initiation at a buy rating. Goldman said the company was a leader
in the modern credit space and notedits strong underwriting business. Ibmstock is up
(21:25):
three point twenty five percent after GoldmanStacks initiated coverage with a buy rating.
The firm said IBM is on trackto sustain long term revenue and free cash
flow growth driven by growth in AIproductions and services. I am ben Kitchen,
and that was Wall Street Watch.Apple has become the first company charged
(21:47):
under the European Union. European Union'sNew Digital Markets act. Investors don't seem
to care, as the stock isup one percent this morning, but this
is significant to the penalties that canbe imposed by the digital market. Acts
are massive. So under European rules, companies that are found guilty of violating
(22:07):
this can be charged as much asten percent of their worldwide revenue. So
this is a serious potential impact toApple if anything were actually to be found.
And again these are just early chargesagainst Apple. But what I guess
is the rule here that they areallegedly violating. And you know what has
(22:27):
Apple done so far, Paul Mike. Really what it comes down to is
their practices surrounding their app store.So if any of our listeners out there
have their iPhone phones, I knowMike does not want Wan want, but
if you are buying anything within theapps on your phone through the app store,
(22:51):
then what happens is Apple takes athirty percent cut twenty five to thirty
percent cut of whatever you purchase therefor every dollar that is spent and there.
So let's say I subscribe to Netflixand I do that on my phone
and put in my credit card information, then Apple's going to take a hypothetically
thirty percent cut maybe they've got aspecial deal worked out with Netflix, but
(23:11):
thirty percent cut of that revenue,Whereas if I had just gone to Netflix
website and subscribed there, then Appledoesn't get any cut whatsoever, and I
can still watch Netflix on my phoneexactly. And so the business practices that
they've been involved in is making itextremely difficult for you, Mike, to
determine the workaround that you just mentionedright there, where you could just go
(23:34):
to Netflix and just avoid the thirtypercent take rate that Netflix has on that
purchase. And developers have had realdifficulty being able to advertise the fact that
hey, you can actually consume ourgoods or our offerings elsewhere through our site
at perhaps a cheaper rate. Applehas really made that a challenging practice in
(24:00):
the EUS consideration here, it's beensomething that they're really going after them for.
They actually got hit with another twobillion dollar fine related to their app
store earlier this year, I believein the month of March. So the
eregulars have been up there. Youknow what's really coming after Apple and the
app store? Now, I thinkI look at this in a few different
(24:21):
ways. I mean, one,I don't really know on what planet I
would expect Apple, when I openup their app store and download the Netflix
app, to prompt me to say, hey, by the way, if
you go right to Netflix website onyour web browser and pay them that way,
you won't face any discount, butwe won't get our haircut. I
don't know on what planet you wouldrequire a company to do that, and
(24:45):
that sounds like the actions of theEuropean Union wants Apple to take. So
I struggle with that piece a littlebit because what other business is required to
do that? Like you walk intoa Walmart and generally speaking, they don't
go up to you and say,hey, by the way, you can
find that product about six dollars cheaperby just going on Amazon. That doesn't
(25:08):
happen, and that, to meis kind of what this is akin to.
I think the European Union's real problemwith Apple is the same problem that
I have with Apple, which isthey dominate the market. There wouldn't be
a problem if there were fifteen differentapp stores, all of which you could
choose from and face varying prices andvarying experiences. In Europe, it's a
(25:32):
little bit different because there's slightly morecompetition, But in the United States,
for example, what percentage of smartphonesout there are dominated by the App store.
It's more than half, I knowin the United States. And so
you really, you really look atthis and say, Okay, it's Apple
and it's Google. Both of themact the exact same way, and makes
(25:52):
sense. They're getting a thirty percentpayment haircut. Is this a competitive market?
And what can we do about it? And I think in the European
Union's case to say, look,we have no authority to break up an
American company, so this is thenext best thing. We're just gonna find
them into oblivion until they start complyingwith what we believe would be competitive rules,
(26:12):
even though they be really strange andweird. Like again, I would
never expect Apple to have to promptme to say, hey, go to
Netflix instead and pay there and youcan save the company thirty percent. Yeah,
it seems like Mike. They treatthem much more closely to what an
electric utility would be around this areawhere basically you and I have one choice
(26:32):
in terms of who provides our electricityto our home, and as a result,
there are price you know, stopsimpediments in place where it's heavily regulated
and they are almost viewing Apple inthe same way as that they are to
what you mentioned an antitrust concern,where they are the end all be all
marketplace and as such they need tobe more heavily regulated to provide consumers with
(26:53):
alternatives. Now, my analogy fallsapart where you don't. You can't just
go to another town to pick whereyou get your electricity from, or go
to a company. But that's theway they're viewing it is basically that they
dominate the market and as such theyshould behave in a compliant with the EU.
You know, deems to be acompliant fashion. Now, there are
(27:15):
a few pieces of what Apple doesthat I do find to be really anti
competitive, and I don't know ifthis stuff exists in the EU. But
for instance, let's say Netflix recognizesthey're thirty percent and wants to, you
know, offer people to discount tosign up in a different way, like,
Hey, come to our website,we don't have to pay Apple thirty
percent, and we'll give you atwenty percent price cut. I do not
(27:37):
believe Apple allowed other applications to dothat. I think that they specifically kicked
off games and downloads that would offerthat sort of price discount. And the
example here if anybody remembers the lawsuitwith Fortnite maker what was it, Epic
Games. Yes, yeah, afew years ago they were doing exactly that.
(27:57):
They were saying, hey, we'regoing to allow you to process payments
on the game. You're with adifferent payment processing system that's going to avoid
Apple's thirty percent haircut, will offerdiscounts for that. And Apple basically and
Google, by the way, itbasically booted them off the platform and said
no, that's not going to happen, and those types of behaviors, Like,
(28:18):
it's one thing to say, no, we're not going to advertise different
ways to go get a price discountsomewhere else, there should be no expectation
of that. But for Apple tosay, hey, Netflix, if you
advertise that your price is cheaper somewhereelse, then we're going to kick you
off the platform and not let peopledownload your app. That's kind of the
definition of anti competitive And doesn't matterif there's ten other you know, if
(28:41):
there's ten other businesses operating in theecosystem that will price things differently, that's
one thing. But when it's justApple and Google are the only players out
there to say, hey, Iwant to watch Netflix on my smartphone.
Well, then yeah, that typeof behavior I think I think most people
would look at and say, that'sthat seemed that seems illegal in a lot
(29:04):
of ways, and we should crackdown on that. So I think those
are the types of things that Isee as problematic for Apple. But I
don't know how. I don't knowhow the EU fixes any of that with
the lawsuits that they're trying to bringhere in response or not directly in response,
but in a thinly veiled response,Apple's basically saying, hey, we're
(29:26):
not going to be rolling out ournew artificial intelligence tools on our iPhones in
Europe because we're so worried about thesenew digital competition and digital market acts in
Europe, which I don't know anythingabout Apple's AI tool, but I don't
think it has any reasonable concern ofbeing regulated by this Digital Markets Act.
(29:47):
It seems to me like a thinlyveiled threat of saying, hey, Europe,
you keep finding us, we're notrolling out the latest and greatest that
we have. It seems like,you know, they mentioned the potential modive
here was the and I quote levelof access it would need to grant third
parties. They don't feel comfortable,you know, unveiling those features on Apple
Intelligence to all of the four hundredand fifty million users throughout the EU.
(30:10):
But I agree, Mike, it'sprobably another way of saying, all right,
if you're gonna mess with us thisway, guess what, you know,
your users are not getting the latestand greatest. We're gonna really screech.
Come to a screeching hall in termsof new features there and maybe try
to irritant irritate the constituents there bynot having the newest features on their iPhone.
(30:30):
Let's take a quick break when wecome back a little bit more on
the EU, specifically when it comesto recent talks with China or pending talks
with China about the car market overin the European Union. That's next on
The Financial Exchange miss any of theshow. The Financial Exchange Show podcast is
available on Apple, Spotify, andiHeartRadio. Hit the subscribe button and leave
(30:52):
us a five star review. Thisis the Financial Exchange Radio network. The
Financial Exchange Show podcast drops every dayon Apple, Spotify, and iHeartRadio.
That subscribe button, then leave usa five star review. You're listening to
the Financial Exchange Radio Network, Paul, I know we're going to talk a
(31:18):
little bit about China and the Uand trade and cars specifically, but I
want to talk a little bit abouttravel. I traveled last week out to
Arizona to go see some family.Airports are packed. Summer travel season looks
like it's going to be even hotterthan it was in twenty nineteen in terms
of total volume through US airports,and yet on average US airline stocks are
(31:44):
down about forty percent over the pastfive years. And it's not merely investors,
you know, shifting preferences towards AIstocks. These airlines themselves are making
a lot less in the way ofprofit over the last five years as well.
And I'm interested in your take becausefrom everything that I'm reading here,
(32:06):
there are some things around the edgesthat have changed in terms of preferences that
make it less profitable for airlines.But a lot of this just seems like
missteps and poor management on the partof airlines themselves to me, Mike,
when I was reading through the story, the first thing that came to mind
was, was Boeing really is thatthe reason that there is such a significant
impact to some of these airlines outthere, because the problem that you have
(32:30):
in the airplane space is that thereare really only two manufacturers out there.
It's Boeing and Airbus that dominate asignificant amount of the market share, and
where some of these companies I believeSouthwest Southwest Okay, yeah, exactly,
are tethered just to one company that'sbeen an absolute you know what show over
the last several years. And asa result, if you're projecting future earnings
(32:52):
growth from these companies and they're notgoing to have the supply commensurate with the
demand that they're seeing on the travelside, you have to discount future cash
flows, so you have to discountfuture earning. So that was one of
the things that came to my mind. You know, this idea that fuel
costs are more expensive than they werea pre pandemic to me. I raised
my eyebrow at that a bit.You know, they're not exorbitant. Certainly
(33:15):
they're higher than they were, Mike, but I would be a little bit
more hesitant to blame the cost onthat side of things as a concern.
Ryan airr did a good job ofhedging their fuel situation so that they were
impact as much, but I thinkit's two factors Boeing and the supply side,
and then the labor input side.The fact that you have a lot
(33:37):
of pilots that retired right around thepandemic or were forced out the door.
It's been a real struggle to getpeople back in and negotiate with the unions
in order to get that side ofthe cost equation down. Yeah, on
the cost side of the equation,I agree between fuel prices, which again
those can be hedged if done properly, and Ryan Air as an example of
where they really hedged their fuel priceexposure and are doing far better than other
(33:59):
air lines. But if it werepurely a Boeing problem, then I would
expect that one of the issues airlinesbe facing would be not enough capacity.
And in fact they're reporting that,hey, we have more capacity than is
needed on a whole bunch of theseroutes, and so I get a little
bit confused by all this. Itseems to me that you know, airlines
(34:21):
over you know, are supplying morecapacity than is needed at the same time
that they can't buy enough planes,can't find enough flight attendants and pilots,
and therefore they're seeing prices that arebasically flat in spite of you know,
all of their input costs being higher. And I recognize that this is a
somewhat competitive market, and so youcan't, you know, American airlines can't
(34:42):
just decrease capacity and see prices goup. But just really confusing. The
last piece on this business travel isabout thirteen percent lower than in twenty nineteen,
and those were big ticket items.And so yeah, even though a
lot more people are flying these days, if it it's not occurring with last
minute business travel being charged to thecompany credit card like it was in twenty
(35:06):
nineteen, then I can see howthese airlines aren't quite making quite as much.
But honestly, a lot of thisdoes not seem to me at least
like failures at Boeing, which arecertainly contributing or purely labor costs increases.
It's decisions that have been made byairline executives to push out a ton of
capacity when the demand isn't there forit at the moment. Well, also,
it harkens back to, you know, what Warren Buffett has said about
(35:29):
these businesses. Airlines are just reallydifficult businesses to scale and run proferably because
they require so much capital in orderto get growth. I mean, just
think about how expensive it is tobuy a plane, and then they operate
on razor thin margins too, SoI mean those two things. In general,
It's just always been a hard placeto invest, and I guess this
(35:50):
year is no different really, onlyif you could have timed it as to
buying in the twenty twenty lows.I'm sure you're sitting, you know,
smiling looking at that trade. Butit's just hard year to year, uh,
to invest in these type of companies. Revocable and irrevcable trusts are commonly
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and are not affiliated. The powerand influence of Germany is likely to be
tested in terms of their influence overthe European Union over the coming weeks and
months. Unlike in the United States, where we have a tariff rate of
(37:20):
over one hundred percent on imported Chinesevehicles, in Europe that sits at only
ten percent, but they're considering aproposed tariff of up to thirty eight percent
on evs from China that would beon top of the ten percent, bring
it up to nearly a fifty percentrate. Based on the heavily subsidized actions
of the Chinese Communist Party and theI mentioned the influence of Germany here because
(37:45):
obviously we all associated with Volkswagen BMWand you know, some of the largest
automakers out there, and how muchthey will be able to push this off
from other the influence of other countrieswhere you know, I would imagine if
you live in Portugal, you surewouldn't mind being able to buy a ten
thousand dollars Chinese EV So I thinkthis will be an interesting play out and
(38:09):
we will have to see where itgoes over the next few weeks here in
terms of Germany's influence over it,particularly because you have Chinese cars being manufactured
in Europe. That's tricky. Quickbreak markets remain mixed, but largely and
positive territory at least on the Dowup three hundred and ninety points. We
will be right back after this onthe financial exchange
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