July 10, 2024 • 36 mins
Chuck Zodda and Marc Fandetti wonder if the housing market is being held down because too many homes are for sale. What to watch for when bank earnings season kicks off. Market strategists finally abandon S&P 500 targets. American workers have quit quitting. Will AI ever pay off?
Mark as Played
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DAV five K Boston is presented byVeterans Development corporation face. He's the Financial
Exchange with Chuck Zada and Mark Vandetti. A little bit after eleven, it's
Chuck, Mark and Tucker with youin. Stocks are slightly positive, with
the S and P five hundred knockingon the door of fifty six hundred,
(01:23):
but not quite there yet. TheDow is up forty two points right now,
the SMP's up eleven, and theNasdaq up forty seven, So again
pretty quiet in advance of the CPIrelease tomorrow morning at eight thirty am.
Tenure US Treasury not really moving either, down three tenths of a basis point
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to four point two nine to fivepercent. Oil West Texas Intermediate up forty
five cents to eighty one eighty six. The triple A national average for gas
prices also bumping up one point ninecents to three fifty three and eight tenths,
largely driven by just a little bitof refinery outages down in the Gulf
(02:08):
Coast area after Hurricane Beryl came through. That is it Beryl? I think
it was b r y L.I think that was it? Sounds right?
Sure, yep? Beryl? Whichhow you ever meet anyone named Beryl?
No I've met meryls. Never meta Meryl either. You've never met
a Maryl. No, never Meryl. Oh, you have a Marl and
(02:29):
a barrel, and it's it's allgood, you know, it's no problem.
Barrel anyways, I wonder where Berylfalls on the list of most common
baby names. It was it wasreally hot in nineteen twenty six. I
would expect that Eryl and Ebenezer Ithink were the that those were my great
grandparents. They actually weren't, butthey they might as well have been.
(02:53):
Anyways. So oil price is movingup just to touch gold, up fourteen
sixty ounce to twenty three eight twoand fifty cents. Market's talk a little
bit about the housing market, andspecifically a piece from CNBC Today talks about
how one of the things that we'reseeing is that the supply of new homes
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is drastically outpacing the supply of existinghomes currently. Your thoughts and whether I
don't know matter, Yeah, doesit matter? That's the big question.
Is it predictive of anything? Startsdon't look alarmingly low by the lateeen standards,
but the market has been it wasjolted, which is an understatement.
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It was turned on its head duringthe Great Recession. It just doesn't seem
to have recovered. It doesn't seemto be behaving according to any patterns that
suggest things have rebalanced, if youlike, I'm being deliberately vague, So
I don't really know what to howto characterize this. But starts look okay,
a new home starts. I'm lookingat the series produced by what is
(04:00):
it, Department of the Housing andUrban Development? Excuse me? So,
yeah, it's sense pure. Butby supply metrics such as those maintained by
the National Association of Realtors, there'sa problem on the more affordable end,
less of a problem on the higherend. I e. There's more supply
(04:20):
according to this article on the moreexpensive end of the home range new home
sales price range. But I've alwaysbeen skeptical of that supply measure. When
they say there's four point four monthsof supply, that's based on recent sales
base, right, which has beenslow. So if the market is if
(04:41):
there's less turnover relative to history,that number could look artificially big, making
it of limited usefulness. I justdon't know what metric to use, Chuck
to gauge the health If you like, or the normalcy if you like,
of the housing market. Sorry.Well, and the other thing that you
have to remember is that it stillis very much a regional and not even
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regionals. It's a very local market. You can go right now down to
parts of Texas and Florida and you'vegot higher inventory levels than you did back
in twenty nineteen. Before you know, inventory has started being restricted nationwide.
You take a look around Connecticut asan example, and you're still running only
about a quarter of pre pandemic inventory. You go through Massachusetts main New Hampshire,
(05:28):
you're running fifty to seventy percent ofpre pandemic inventory. It is all
a very localized phenomenon still, Soto say hey, there's like if you
tell someone right now from Connecticut,wow, there's too many homes on the
market, they look at you.They're like, you are absolutely insane,
and I won't believe anything you say. You talk to someone in Austin,
(05:49):
Texas and say, yeah, there'stoo many homes on the market, they're
like, yep, been trying tosell my place for six months and can't
get any bids. So it verymuch is a local nomenon still, and
that's something that I really think wehave to pay attention to in terms of
discussing real estate. This is nota unified market like it was in twenty
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twenty two when everyone was trying tobuy and he had, you know,
ten competing offers thirty percent o forasking price. It's it's not that.
It's also you know, not oneof those all bad situations like in twenty
eleven where hey, banks got abunch of foreclosures they're trying to unload and
they can't find a bit anywhere.It's like, it's it's not that either.
(06:32):
It's very much a regional phenomenon rightnow in New England. That phenomenon
is pointing towards tight market still inthe southeastern parts of the southwester who starting
to loosen up. But it's it'snot a unified market in any way,
shape or form. And that's alwaysbeen the case, as you know,
and for that reason, nobody thoughta nationwide collapse in home prices in eight,
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starting with Ben Bernanke who sort offamously said that he was ruling that
out and others based on history,totally reasonable precedent. Because it's so fragmented
as our other markets, its homesmight be unique. But you know,
unemployment is, Employment patterns are disjointed. Inflation patterns even are variable geographically,
(07:20):
not to the extent that housing is. But I guess that's why we got
so fooled by the downturn in twothousand and eight, the nationwide nature of
it. I do want to tackon a couple data points from Mike Simonson,
who we interview occasionally on the show, and his data from this is
from Altus Research. They currently showsix hundred and fifty three thousand single family
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homes available in the United States.That's up forty percent now over this time
last year. It still is runningonly about sixty five percent of where you
typically were at this time of yearpre pandemic. So normally you'd have about
a million. Last year, youonly had, you know, four hundred
and eighty thousand or something like that, four hundred and seventy thousand, whatever
it is. So you're getting backto normal, but you're still not there
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other things that you are seeing,according to his data, price cuts.
Thirty eight percent of listings now haveprice cuts on them. Typical at this
time of year is around thirty oneto thirty two percent, So you're seeing
a higher percentage of properties with pricecuts than you would normally see. And
he also has noted that on aregional basis, you are now seeing year
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over year price drops in places likeFlorida and Texas. You are not seeing
that in you know, New Yorkand North at this point, just because
New England is still very inventory restricted. But you're starting to see some signs
of loosening in northern markets and maybeyou start to get there by the second
half of the you know, thetail end of this year. So we'll
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see where things go on that Front'stake a quick break here. When we
return, let's talk a little bit. I want to preview bank earnings after
this, just because earning season.I don't know about you, Mark,
but it really snuck up on mehere on this one, and so I
want to start talking a little bitabout earnings because hey, next three weeks,
we're right into it. So we'lldiscuss bank earnings when we return.
(09:16):
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(09:39):
Spotify, and iHeartRadio. Hit thesubscribe button and leave us a five star
review. This is the Financial ExchangeRadio Network. I just saw my my
favorite quote from j Powell's trip upto Capitol Hill this week. This was
eighteen minutes ago, and Jan Vargas, who represents the fifty second District of
(10:03):
California, said to Powell, andthis is real, this is not a
bit said quote. You're being prettyboring here to be Frank Powell responds,
thank you, Ah, I mean, isn't that just the whole ballgame right
there? It's perfect? Yeah,it really is just great. Let's talk
a little bit about bank earning season, because all's answer should be that short,
(10:24):
by the way, right, likeyou really wish that that's just what
we could be done with this awhole lot faster. So earning season kicks
off this Friday in Earnest JP Morgan, Wells, Fargo, City Group Bank,
New York Mellon. So getting rightinto the big banks Monday, you
got Goldman Sachs Tuesday, Bank ofAmerica and Morgan Stanley, and then you're
(10:48):
right into it with you know,Johnson and Johnson, Netflix, Abbott,
Intuitive Surgical, Blackstone, American Express. You know, they're all going.
And then the week after that isyou know, when the real heavy hitters
come out, Microsoft Alphabet Tesla.So we're we've got kind of a two
week build now to you know,the peak of earning season. But bank
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earnings first ones to come through.And you can't tell a ton from bank
earnings, in my opinion, unlessyou actually know how to read financial statements
from banks, because they're kind ofopaque and honestly, they have so many
tricks to move things around on balancesheets and this and that that it's it's
not like you can look in andbe like, oh, like the economy
(11:31):
is good or bad. You canjust kind of figure out what's happening under
the surface, but you don't reallyhave a great view. But in terms
of the risks to the banking sectorover the last couple of years, there
have been two primary ones that we'vetalked about. The first is commercial real
estate and which banks are going tohave problems because of that. And again,
(11:52):
unless you're actually going through the propertiesthat they own. You don't know
until you know, and like,I'm not going through the properties, so
I don't know. The other onethat we've talked about had cast some problems
in March of last year was what'swhat's going on over there? Mark Chuck?
My microphone smells fine. I don'twant to cast suspicion on anybody who
(12:13):
may have been here in the segmentimmediately preceding this one. But it's it's
I feel like I'm talking. Itsmells like I'm talking into a bass,
a trap, some sort of riverfish. Difficult to maintain. No,
this is this is a river fish. This is a this is a Cleveland
river. You could take white theriver. You could take a wipe to
(12:35):
that market. That's fine. It'sjust a little difficulty. You say that
because the smell is The guest whowas on before you is originally from Ohio.
Okay, did he have p verfish? Did he have perch this
morning? Did he have that perchasandwich for breakfast? Again? Because he's
always on the run and he's losestrack of time. I don't know if
(12:58):
they're serving those what it saying.It could be a carryover from Mike yesterday.
You never know, day, oldriver fish. It could have been
me from earlier and it could havebeen you. Yeah, but I used
lilistering altar clean this morning, andI scrubbed my tongue with a wire brush
that I used for my car rims. So I don't think. I don't
(13:18):
think it's me. It's maybe it'seineering. Let's go back to bankers.
It's okay. The other thing thatwe've been worried about when it comes to
the banks, it just got anotherwhiff of it. Well, I pulled
back and went, I moved backin and I almost made contact that time.
I don't want this disease, thisfungus. Okay, sorry, I
(13:39):
know that it's fine. It's notme, it's you. In any case,
let's talk a little bit about theother piece, which is hey.
Back in twenty twenty three, thething that brought down Silicon Valley Bank and
threatened a number of others was thefact that they were holding a lot of
these long duration mortgages bonds whatever youwant to call them, and they were
(14:01):
basically not They basically became insolvent becauseas interest rates rose, the value of
them went down, and as theytries to raise capital to shore up their
balance sheet, they weren't able todo so they had to run on their
bank at Silicon Valley Bank, andthat was the issue. So the question
that's out there is, look,these unrealized losses that are on banks books,
(14:26):
are they getting better? Are theygetting worse? Are they causing problems?
Now, in theory, this shouldbe something that over time goes away
because each year that you go forward, those bonds are moving one year close
to maturity. They're getting closer topar. It's not going to be an
issue that brings them down if thebank's because they bought them under the assumption
(14:48):
that hey, when we finally whenthese bonds mature, we're going to get
par for them and we'll be fine, okay. And so at some point
it's not like these were, youknow, eighty year bonds that you have
to worry about for wherever. Ina lot of cases it was you know,
ten, fifteen, twenty year bonds. And so you're a couple of
years closer now to that maturity thanyou used to be. It should be
becoming less of an issue. Butyou always have to pay attention to this.
(15:11):
And so this is something that bankanalysts will be looking at as well.
That there's more to the sector thanbanks. As you know, they're
expected to report lousey earnings the bankcomponent of the financial services or the financial
sector. But there's insurance, whichis which I'll tell you that's a place
that I'm very interested to see whatthey're saying the insurance companies. Yeah,
(15:31):
two reasons. Look. The firstis just as it relates to inflation.
Some of the biggest places that we'vebeen seeing cost inflation in the last couple
of years homeowners and auto insurance.So you want to see, hey,
if they're reporting good levels of profitability, maybe you start to see those increases
leveling off or even some premium decreasesthat can come in as you go forward
here. So that's part one.The second piece is when you look at
(15:54):
insurance companies, they own a bunchof bo like and how insurance companies finance
themselves. They get a bunch ofpremiums, they go and buy a bunch
of bonds. Hey, what arethey reporting in terms of their stability as
it relates to you know, theirtheir not earnings, but the gains that
they're seeing, the income they're ableto generate on those bond portfolios. There
(16:15):
are you seeing any changes potentially comingon that side of things. Yeah,
they're very fixed income heavy their generalaccounts because they have they have to meet
liquidity to mean correct payout, correctpayout. So I think those will be
things that I'm interested in seeing onthe insurance side of things, anything else
that you're looking at and financial Iwas just gonna I was going to echo
your cautionary statement at the beginning,which is you can't use there are eleven
(16:37):
sectors in the S and P withinfinancials, which is what we're talking about
right now, there are several There'syou know, capital markets, there's insurance,
there's banking, and probably a coupleof others that I'm missing off the
top of my head. Reinsurance mightbe a separate sector. As I look
at fact sets preview of this week'searnings, you can't use the same metrics
or tools to evaluate company and he'sin different sector, sometimes even companies within
(17:02):
the same sector. So that's whatwe have going on as far as earnings
kicking off really later this week withsome of the big banks and a couple
other financials, and expectations are highfor this earning season. You know,
it's not something where this is onewhere you can get by with, you
know, a couple percentage point increasein earnings and everyone says, okay.
(17:22):
According to facts that earnings growth forQ two is expected to be eight point
eight percent for the S and Pfive hundred, your career stocks are up
what nearly eighteen percent year to date. So to the extent that earnings don't
rise point for point with that,that means stocks are getting more more expensive
on a P to E basis,And by the way, they already are
expensive. They're trading twenty one pointtwo times forward earnings right now, which
(17:45):
is a generous The five year averageis nineteen point three, the ten year
is seventeen point nine. So you'vegot stocks trading as if, hey,
the soft landing is going to continueand earnings won't be threatened. Earnings start
to look threatened. We've got somequestions there. Bringing the latest financial news
(18:11):
straight to your radio every day,it's the Financial Exchange on the Financial Exchange
Radio network. The Financial Exchange isnow available on your Alexis smart speaker has
to play the Financial Exchange and catchup on anything you might have missed.
This is the Financial Exchange Radio Network. Mark a piece here from Bloomberg Opinion
(18:37):
something that I actually welcome. Marketstrategists thankfully abandon S and P five hundred
targets. So all those predictions ofyou know, analyst from this bank thinks
that it's going to hit X onyou know, December thirty. First,
I've always thought they're dumb for afew reasons. Not the analyst, but
the need to make the predictions.We're both in some instances. The analysts
(19:00):
they're smart. They're just trying todo the impossible. Sorry, here's why
I think it's it right, it'sa losing game for them. First,
let's say that you get the predictionfor the S and P five hundred completely
right. What what do you win? Yeah, bragging rights for a little
bit. You get feted by themedia for about a week. Like that's
(19:21):
that. That's it, Like that'sall you get. Furthermore, Yeah,
let's say that you have the predictionexactly right. It doesn't tell you anything
about the path that you took toget there. So, as an example,
let's say that this year you hada prediction that the S and P
five hundred was going to hit sixthousand at year end. If the S
and P five hundred loses twenty percentand goes down to thirty five hundred and
(19:44):
then ends up at six thousand,it's a very different path from the S
and P going to eight thousand andthen coming down to six thousand. You
get to the same place at theend, but they mean very different things
for investors over the course of theyear. And so I think how having
these arbitrary price targets where it's,oh, like, this is our target
for year end, well, A, who cares? And B what's the
(20:07):
path that you actually took to getthere? Because that's a conversation stopper.
Well, here's the thing, ifyou'll thank you for that information, But
who cares. If you're a longterm investor, you don't care about the
S and P five hundred price targetfor the end of the year. If
you are a short term investor,you don't care about the S and P
five hundred price target for the endof the year because you're trading different timeframes
in that anyway, Like, noone invests with the mindset of, well,
(20:30):
here's what the S and P isgoing to be at December thirty first,
and I think this is what I'mgoing to buy as a result.
If you're in the capital markets partof the financial sector that we were talking
about in the last segment, you'redoing earnings projections, like any businesses,
what do you think we'll do insales this year? Do you think we'll
do in earnings this year? Soa big part of their forecasting job is
(20:51):
where's the stock market gonna end up, what are our assets going to be
at, and how much money arewe going to make. So if you're
if you're a treasurer for a company, you got some stock investments, then
you might care. But for thetypical retirement oriented or long term investor,
it's really irrelevant. You're just relyingon stocks going up on average whatever your
return target is over time. Andif you're that person who if let's say
you're, you know again treasurer fora company, as you note, you're
(21:15):
probably gonna be doing your own researchon that or have a team that's doing
that. Anyways, you don't needto rely on you know, hey,
here's what the analyst from you know, Barclay's. Actually they probably would look
to their bank for help with that. Yeah, a lot of them is
I'm thinking a lot of the smallcompanies locally, even up and down one
twenty eight. These are multi billiondollar business is very sophisticated, but their
treasurers don't necessarily have the resources todo their own, for example, economic
(21:37):
forecasts or stock market forecasts. Alot of them are still running their own
little pensions. They're frozen closed tonew employees, but they'd still like to
know because they want to know howmuch money they got to put in the
pension at the end of the year. I'm sorry, I'm thinking of all
these ticki tech counter examples. Ofcourse, I agree with you in principle,
don't worry about the stock market ifyou're a long term investor. There
are some people who, yeah,they might be ind in knowing what the
(22:00):
consensus is among investment banks anything elseon index price targets. I think we
said don't sweat it, or canwe move back to who cares? Now,
let's talk a little bit about quitting. And it seems I don't know
why, but it seems like wheneverwe talk about the labor market, it
(22:23):
has to be that something's wrong,like you can never just be back in,
and there are times when things arewrong, you know, back in
twenty twenty two, labor market wasway too tight, and like we were
seeing it very clearly, and wesaid at the time, look, if
(22:44):
you're trying to negotiate, you know, a raise or something like, this
is the time introduce too tight.There are a lot of people who still
don't think it was too tight.I think it was just the supply shocks
that drove up inflation. But anyway, and then we moved into the phase
where, you know, remember whenemployers were complaining about quiet quitting, which
was workers just doing their jobs andnot going you know, over and above.
And now we're talking about how there'snot enough quitting in the workforce,
(23:08):
which is like, well, what'sit gonna be, man? Like a
year ago, you told me notto just do my job because that was
basically quitting on the company. Nowyou're telling me I'm not quitting enough.
What's it gonna be? Man?Because the piece from the New York Times
American workers have quit quitting for now. Well, a quits rate has been
level for the past few months,though it's come down. It's back to
(23:29):
pre pandemic norms. Yeah, andit's been pretty flat the past few quits
rate is just people leave their jobsvoluntarily, I think is a percentage of
the labor force. Correct. SoI think that again, in a number
of surveys, we're seeing data suggestingthat workplace satisfaction is actually close to the
highest it's been in years, whichis, you know, pretty remarkable given
all the stories that come out abouthey, you won't quit enough and you're
(23:52):
quitting too much and this and that. But this Times piece also, I'm
sorry, This Wall Street Journal piece, through the anecdotes that it expresses,
I think tells us some interesting thingsabout where the labor market may be tighter
or looser. As an example,there's a woman that they interview from Los
Angeles and she says, applying forjobs right now, it's like hitting your
(24:15):
head against the wall. And yousay, okay, what does this woman
do? And it turns out thatshe is the director of social strategy and
copywriting at a firm in Los Angeles. A couple questions first is why would
you agree to be interviewed by theWall Street Journal If you're like, isn't
your employer going to be like,hey, you're looking around at jobs right
(24:37):
now? Like what gives? Butright doesn't that seem kind of weird.
Yeah, Like if an employee thatworked for you got interviewed and said,
yeah, I'm looking around for jobsright now, wouldn't you be like,
okay, why you still hear then? But the other thing, director of
social strategy and copywriting, isn't thatan area that is right in like prime
(25:00):
time for potential either augmentation or replacementby AI in the short term. Copywriting
in particular, you know, socialstrategy, okay, fine, but copywriting
is right in the nexus of whatcan be targeted by AI today. So
I found that kind of interesting justin terms of, you know, what
it says about that part of thelabor market. Another area you know when
(25:27):
we talk about you know, placesthat are potentially being impacted right now.
I don't know if you saw,but Deer just announced six hundred layoffs.
Yes I did. Remember last yearthey had that big union negotiation in order
to get that new contracted or maybeit was the end of twenty two or
early twenty three, I can't rememberexactly where it was. But you look
(25:48):
at something like that and you say, Okay, they negotiated this big contract
a year and a half two yearsago, and now they're trying to downsize
their workforce because those compensation costs aremade your driver. That's pushing against their
margins right now. And this isone of the things that I think could
become a theme later this year,is companies cutting headcount to maintain margins now
(26:11):
that they're losing pricing power. Andso I think that's another thing that we're
seeing as we, you know,kind of look at what the labor market
might look like the next six tonine months into it. Just announced eighteen
hundred employees right the cutting, didthey? Yeah? I will send it
to you now. It's from theWall Street Journal. Look the jump of
the unemployment right, I'll just backup from a higher level and note something
(26:34):
we've already talked about. It's theunemployment rate has gone up seven tens of
a percent from about what three pointfour last year, roughly spring, I
think April May, yeah, totoday. And in historical using history as
a reference point, that's a bigjump in a relatively short period of time.
It usually signals trouble. Sure,So I think just taking that on
(27:00):
its face, combining it with theseanecdotes points to the easing of pressure price
pressure in labor markets that fetch yourPowell has been talking about the past couple
days and that we've been talking abouthere, as have other people who cover
the economy for the past couple months. To take a quick break here.
When we come back, we'll doa little bit of stack roulettes. Find
(27:21):
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dot com mark, what do youhave for me? For Stackrooletts. In
Bloomberg Today, opinion columnist Dave Leeasks will AI ever pay off those footing
(28:27):
the bill or worrying already? Andhe points out something that I know you
and Mike Armstrong have talked about,Chuck, that businesses are spending several hundred
billion dollars a billion with a Bon the hardware necessary to run the models
that support AI. So that's abig investment, and they're going to have
(28:51):
to make similar sized investments more orless continuously because chips get better and the
software that they're writing to implement theseAI so called models gets more demanding.
Yet the cumulative the combined revenue notcumulative, the combined revenue of companies like
open Aithers is only several billion dollars, so a fraction less than ten percent
(29:17):
of what's required to run these thingsin the first place. And the author
here asks is we've asked, andas a lot of people have asked,
at what point do these investments actuallyhave to pay off to keep up the
feverish pace of investments to keep Nvidiochip sales growing at forty fifty percent a
year or Nvidia revenues, they shouldsay growing at forty fifty percent a year.
(29:41):
Yeah. I look, there aretwo ways that you can look at
the AI chip boom that's going onright now. The first, the way
that markets are interpreting this is thisis an ever increasing spend that companies are
going to have to make in orderto be competitive. It's almost a cost
(30:03):
of doing business. It's like turningthe lights on. You know, it's
like an electric bill because it basicallyis an electric bill once you actually run
the chips. That's how it's beinginterpreted right now. The alternate explanation for
it, and kind of how I'mlooking at it is what if this is
just a capex cycle, just likeall the other capex cycles that we've seen
(30:25):
in semiconductors over the last thirty fortyyears. And when that capex cycle ends,
it doesn't mean these companies go outof business or they're bad. But
hey, it was just a cycle, and that's all it is. It's
just a really big one. Imean that's Yeah. There are growth implications
if AID doesn't pan out, becausepeople are hoping for a productivity miracle as
(30:45):
a result of AI. Sure peoplewill lose jobs too, But on balance,
like with any new technology, theexpected gains probably exceed the expected losses
in labor markets anyway, somewhat differentsubject, and so their implications, So
the economy as a whole. IfAI is a success, it'll translate into
higher economic growth. Whether that translatesin a higher per capita income slightly different
(31:08):
question, but anyway, And thenof course there's this, There are stock
market implications, given that most ofthe gains this year and last have come
from AI and AI adjacent as theylike to say, companies, If valuations
in that sector compress, what doesthat mean for markets as a whole?
What's the return engine going to be? Who knows? Can we go down
(31:30):
the AI rabbit hole for a littlebit just to know? There's something actually
really interesting that I want to talkabout along along these lines, which is
the way in the last year anda half that AI has been approached is
hey, in order to be thecompany that dominates AI, you buy a
bunch of really expensive chips, Youbuild you know, a huge large language
(31:52):
model or a huge you know,visual model, whatever it is that you're
trying to be able to generate,and then when someone queries that you basically
send that query into that central database, use a ton of computing power,
and spit something back to them ontheir device. That's how it's been used
to this point. It's what's knownas cloud AI. The other term that
(32:12):
you're starting to see thrown around atall is edge AI, and EDGEAI is
basically a fancy way of saying itdoesn't take place on some centralized cloud.
It takes place on your device,so the data doesn't have to go back
and forth. Couple things on this. The first is if you actually need
to use a ton of computing power, doesn't make a ton of sense because
(32:36):
you can't get that much computing powerinto a phone or a light bulb or
a smart TV or a smart stoveor whatever the heck it is you're doing.
You're not gonna have ten thousand inVidia chips in every home, I
hope, so you can't do stuffquite that powerful. But what you can
do because of a couple benefits,you have the potential to do small things
(33:00):
that are still using a predictive modelframework that takes place only on the device,
so you're not sending all of thatdata back and forth. So as
an example, and again this isfrom looking at more of what Apple is
trying to do now with their developmentthat they announced at the Worldwide Developer Conference
a couple weeks ago. They basicallysaid, look, whatever they're calling it,
(33:22):
was it Apple Intelligence, I thinkis what they branded it. The
premise of it is that they'll stilldo their model training centrally in terms of
if X then Y, but thenthat model training framework gets put onto your
device and basically used for small littlethings. Not ask me to write a
(33:42):
novel about this, because that's notwhat people want to do on their phones,
but much more. Hey, ifI text someone, I'll be over
at five point thirty. The AIknows that. Great, I'm going to
give you directions to their house atthe time that I need to based on
the traffic that Apple maps is predictingthings along those lines that are still generative
(34:07):
in the context of your life.But not write me this and that's the
stuff that's gonna be actually useful tous. But the downside, in terms
of how it affects the current AIboom, you don't need to have a
billion in Vidia chips in order todo that. Those are the types of
little changes on the margin that I'mlooking for from AI. So when I
(34:29):
open my phone at seven forty fivein the morning, it knows I'm gonna
check traffic on my way to work, because that's what I do every damn
time I open the phone. Thefact that I have to go through a
series of steps to accomplish that issort of infuriating. Or when I use
PowerPoint and I put the same objectlike a chart, in multiple slides,
it should know I want them formattedthe same way. And that's where I
think it's sep'er infuriating. But that'swhere I think the actually useful that would
(34:52):
be going there to be. Butit's also completely different from what's being priced
in now, and that is noteconomic growth trend changing, don't think,
and even cumulatively and an aggregate.So again, just in terms of where
AI goes, this is something thatI think we need to talk about in
those terms. Edge AI versus cloudAI. I think you're going to become
(35:13):
more front and center over the nextyear or two. Is edges local.
It's running on your YEP exactly,and the other thing there because it's not
sending anything back to a central server. It's more private, stays on your
device. The whole time. Whydo they call it edge? It's on
the edge, man, it's onthe edge. Okay, I don't know.
(35:35):
Okay, thanks Chuck. They hadto brand again. How about local
AI. That sounds edge sounds likeget that. That's why I like it.
Okay. We could find something that'skind of happy in the middle.
I don't know what it would be, local edge AI. Let's take a
quick break for the rest of theday and when we return tomorrow it's CPI
(35:58):
day. We'll see you then,sh
The Financial Exchanges produced by Money MattersRadio and is hosted by employees of the
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(01:02):
DAV five K Boston is presented byVeterans Development corporation face. He's the Financial
Exchange with Chuck Zada and Mark Vandetti. A little bit after eleven, it's
Chuck, Mark and Tucker with youin. Stocks are slightly positive, with
the S and P five hundred knockingon the door of fifty six hundred,
(01:23):
but not quite there yet. TheDow is up forty two points right now,
the SMP's up eleven, and theNasdaq up forty seven, So again
pretty quiet in advance of the CPIrelease tomorrow morning at eight thirty am.
Tenure US Treasury not really moving either, down three tenths of a basis point
(01:45):
to four point two nine to fivepercent. Oil West Texas Intermediate up forty
five cents to eighty one eighty six. The triple A national average for gas
prices also bumping up one point ninecents to three fifty three and eight tenths,
largely driven by just a little bitof refinery outages down in the Gulf
(02:08):
Coast area after Hurricane Beryl came through. That is it Beryl? I think
it was b r y L.I think that was it? Sounds right?
Sure, yep? Beryl? Whichhow you ever meet anyone named Beryl?
No I've met meryls. Never meta Meryl either. You've never met
a Maryl. No, never Meryl. Oh, you have a Marl and
(02:29):
a barrel, and it's it's allgood, you know, it's no problem.
Barrel anyways, I wonder where Berylfalls on the list of most common
baby names. It was it wasreally hot in nineteen twenty six. I
would expect that Eryl and Ebenezer Ithink were the that those were my great
grandparents. They actually weren't, butthey they might as well have been.
(02:53):
Anyways. So oil price is movingup just to touch gold, up fourteen
sixty ounce to twenty three eight twoand fifty cents. Market's talk a little
bit about the housing market, andspecifically a piece from CNBC Today talks about
how one of the things that we'reseeing is that the supply of new homes
(03:15):
is drastically outpacing the supply of existinghomes currently. Your thoughts and whether I
don't know matter, Yeah, doesit matter? That's the big question.
Is it predictive of anything? Startsdon't look alarmingly low by the lateeen standards,
but the market has been it wasjolted, which is an understatement.
(03:38):
It was turned on its head duringthe Great Recession. It just doesn't seem
to have recovered. It doesn't seemto be behaving according to any patterns that
suggest things have rebalanced, if youlike, I'm being deliberately vague, So
I don't really know what to howto characterize this. But starts look okay,
a new home starts. I'm lookingat the series produced by what is
(04:00):
it, Department of the Housing andUrban Development? Excuse me? So,
yeah, it's sense pure. Butby supply metrics such as those maintained by
the National Association of Realtors, there'sa problem on the more affordable end,
less of a problem on the higherend. I e. There's more supply
(04:20):
according to this article on the moreexpensive end of the home range new home
sales price range. But I've alwaysbeen skeptical of that supply measure. When
they say there's four point four monthsof supply, that's based on recent sales
base, right, which has beenslow. So if the market is if
(04:41):
there's less turnover relative to history,that number could look artificially big, making
it of limited usefulness. I justdon't know what metric to use, Chuck
to gauge the health If you like, or the normalcy if you like,
of the housing market. Sorry.Well, and the other thing that you
have to remember is that it stillis very much a regional and not even
(05:02):
regionals. It's a very local market. You can go right now down to
parts of Texas and Florida and you'vegot higher inventory levels than you did back
in twenty nineteen. Before you know, inventory has started being restricted nationwide.
You take a look around Connecticut asan example, and you're still running only
about a quarter of pre pandemic inventory. You go through Massachusetts main New Hampshire,
(05:28):
you're running fifty to seventy percent ofpre pandemic inventory. It is all
a very localized phenomenon still, Soto say hey, there's like if you
tell someone right now from Connecticut,wow, there's too many homes on the
market, they look at you.They're like, you are absolutely insane,
and I won't believe anything you say. You talk to someone in Austin,
(05:49):
Texas and say, yeah, there'stoo many homes on the market, they're
like, yep, been trying tosell my place for six months and can't
get any bids. So it verymuch is a local nomenon still, and
that's something that I really think wehave to pay attention to in terms of
discussing real estate. This is nota unified market like it was in twenty
(06:11):
twenty two when everyone was trying tobuy and he had, you know,
ten competing offers thirty percent o forasking price. It's it's not that.
It's also you know, not oneof those all bad situations like in twenty
eleven where hey, banks got abunch of foreclosures they're trying to unload and
they can't find a bit anywhere.It's like, it's it's not that either.
(06:32):
It's very much a regional phenomenon rightnow in New England. That phenomenon
is pointing towards tight market still inthe southeastern parts of the southwester who starting
to loosen up. But it's it'snot a unified market in any way,
shape or form. And that's alwaysbeen the case, as you know,
and for that reason, nobody thoughta nationwide collapse in home prices in eight,
(06:55):
starting with Ben Bernanke who sort offamously said that he was ruling that
out and others based on history,totally reasonable precedent. Because it's so fragmented
as our other markets, its homesmight be unique. But you know,
unemployment is, Employment patterns are disjointed. Inflation patterns even are variable geographically,
(07:20):
not to the extent that housing is. But I guess that's why we got
so fooled by the downturn in twothousand and eight, the nationwide nature of
it. I do want to tackon a couple data points from Mike Simonson,
who we interview occasionally on the show, and his data from this is
from Altus Research. They currently showsix hundred and fifty three thousand single family
(07:43):
homes available in the United States.That's up forty percent now over this time
last year. It still is runningonly about sixty five percent of where you
typically were at this time of yearpre pandemic. So normally you'd have about
a million. Last year, youonly had, you know, four hundred
and eighty thousand or something like that, four hundred and seventy thousand, whatever
it is. So you're getting backto normal, but you're still not there
(08:07):
other things that you are seeing,according to his data, price cuts.
Thirty eight percent of listings now haveprice cuts on them. Typical at this
time of year is around thirty oneto thirty two percent, So you're seeing
a higher percentage of properties with pricecuts than you would normally see. And
he also has noted that on aregional basis, you are now seeing year
(08:30):
over year price drops in places likeFlorida and Texas. You are not seeing
that in you know, New Yorkand North at this point, just because
New England is still very inventory restricted. But you're starting to see some signs
of loosening in northern markets and maybeyou start to get there by the second
half of the you know, thetail end of this year. So we'll
(08:52):
see where things go on that Front'stake a quick break here. When we
return, let's talk a little bit. I want to preview bank earnings after
this, just because earning season.I don't know about you, Mark,
but it really snuck up on mehere on this one, and so I
want to start talking a little bitabout earnings because hey, next three weeks,
we're right into it. So we'lldiscuss bank earnings when we return.
(09:16):
Tune in for Trivia brought to youby Applebee's every day at eleven twenty for
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(09:39):
Spotify, and iHeartRadio. Hit thesubscribe button and leave us a five star
review. This is the Financial ExchangeRadio Network. I just saw my my
favorite quote from j Powell's trip upto Capitol Hill this week. This was
eighteen minutes ago, and Jan Vargas, who represents the fifty second District of
(10:03):
California, said to Powell, andthis is real, this is not a
bit said quote. You're being prettyboring here to be Frank Powell responds,
thank you, Ah, I mean, isn't that just the whole ballgame right
there? It's perfect? Yeah,it really is just great. Let's talk
a little bit about bank earning season, because all's answer should be that short,
(10:24):
by the way, right, likeyou really wish that that's just what
we could be done with this awhole lot faster. So earning season kicks
off this Friday in Earnest JP Morgan, Wells, Fargo, City Group Bank,
New York Mellon. So getting rightinto the big banks Monday, you
got Goldman Sachs Tuesday, Bank ofAmerica and Morgan Stanley, and then you're
(10:48):
right into it with you know,Johnson and Johnson, Netflix, Abbott,
Intuitive Surgical, Blackstone, American Express. You know, they're all going.
And then the week after that isyou know, when the real heavy hitters
come out, Microsoft Alphabet Tesla.So we're we've got kind of a two
week build now to you know,the peak of earning season. But bank
(11:11):
earnings first ones to come through.And you can't tell a ton from bank
earnings, in my opinion, unlessyou actually know how to read financial statements
from banks, because they're kind ofopaque and honestly, they have so many
tricks to move things around on balancesheets and this and that that it's it's
not like you can look in andbe like, oh, like the economy
(11:31):
is good or bad. You canjust kind of figure out what's happening under
the surface, but you don't reallyhave a great view. But in terms
of the risks to the banking sectorover the last couple of years, there
have been two primary ones that we'vetalked about. The first is commercial real
estate and which banks are going tohave problems because of that. And again,
(11:52):
unless you're actually going through the propertiesthat they own. You don't know
until you know, and like,I'm not going through the properties, so
I don't know. The other onethat we've talked about had cast some problems
in March of last year was what'swhat's going on over there? Mark Chuck?
My microphone smells fine. I don'twant to cast suspicion on anybody who
(12:13):
may have been here in the segmentimmediately preceding this one. But it's it's
I feel like I'm talking. Itsmells like I'm talking into a bass,
a trap, some sort of riverfish. Difficult to maintain. No,
this is this is a river fish. This is a this is a Cleveland
river. You could take white theriver. You could take a wipe to
(12:35):
that market. That's fine. It'sjust a little difficulty. You say that
because the smell is The guest whowas on before you is originally from Ohio.
Okay, did he have p verfish? Did he have perch this
morning? Did he have that perchasandwich for breakfast? Again? Because he's
always on the run and he's losestrack of time. I don't know if
(12:58):
they're serving those what it saying.It could be a carryover from Mike yesterday.
You never know, day, oldriver fish. It could have been
me from earlier and it could havebeen you. Yeah, but I used
lilistering altar clean this morning, andI scrubbed my tongue with a wire brush
that I used for my car rims. So I don't think. I don't
(13:18):
think it's me. It's maybe it'seineering. Let's go back to bankers.
It's okay. The other thing thatwe've been worried about when it comes to
the banks, it just got anotherwhiff of it. Well, I pulled
back and went, I moved backin and I almost made contact that time.
I don't want this disease, thisfungus. Okay, sorry, I
(13:39):
know that it's fine. It's notme, it's you. In any case,
let's talk a little bit about theother piece, which is hey.
Back in twenty twenty three, thething that brought down Silicon Valley Bank and
threatened a number of others was thefact that they were holding a lot of
these long duration mortgages bonds whatever youwant to call them, and they were
(14:01):
basically not They basically became insolvent becauseas interest rates rose, the value of
them went down, and as theytries to raise capital to shore up their
balance sheet, they weren't able todo so they had to run on their
bank at Silicon Valley Bank, andthat was the issue. So the question
that's out there is, look,these unrealized losses that are on banks books,
(14:26):
are they getting better? Are theygetting worse? Are they causing problems?
Now, in theory, this shouldbe something that over time goes away
because each year that you go forward, those bonds are moving one year close
to maturity. They're getting closer topar. It's not going to be an
issue that brings them down if thebank's because they bought them under the assumption
(14:48):
that hey, when we finally whenthese bonds mature, we're going to get
par for them and we'll be fine, okay. And so at some point
it's not like these were, youknow, eighty year bonds that you have
to worry about for wherever. Ina lot of cases it was you know,
ten, fifteen, twenty year bonds. And so you're a couple of
years closer now to that maturity thanyou used to be. It should be
becoming less of an issue. Butyou always have to pay attention to this.
(15:11):
And so this is something that bankanalysts will be looking at as well.
That there's more to the sector thanbanks. As you know, they're
expected to report lousey earnings the bankcomponent of the financial services or the financial
sector. But there's insurance, whichis which I'll tell you that's a place
that I'm very interested to see whatthey're saying the insurance companies. Yeah,
(15:31):
two reasons. Look. The firstis just as it relates to inflation.
Some of the biggest places that we'vebeen seeing cost inflation in the last couple
of years homeowners and auto insurance.So you want to see, hey,
if they're reporting good levels of profitability, maybe you start to see those increases
leveling off or even some premium decreasesthat can come in as you go forward
here. So that's part one.The second piece is when you look at
(15:54):
insurance companies, they own a bunchof bo like and how insurance companies finance
themselves. They get a bunch ofpremiums, they go and buy a bunch
of bonds. Hey, what arethey reporting in terms of their stability as
it relates to you know, theirtheir not earnings, but the gains that
they're seeing, the income they're ableto generate on those bond portfolios. There
(16:15):
are you seeing any changes potentially comingon that side of things. Yeah,
they're very fixed income heavy their generalaccounts because they have they have to meet
liquidity to mean correct payout, correctpayout. So I think those will be
things that I'm interested in seeing onthe insurance side of things, anything else
that you're looking at and financial Iwas just gonna I was going to echo
your cautionary statement at the beginning,which is you can't use there are eleven
(16:37):
sectors in the S and P withinfinancials, which is what we're talking about
right now, there are several There'syou know, capital markets, there's insurance,
there's banking, and probably a coupleof others that I'm missing off the
top of my head. Reinsurance mightbe a separate sector. As I look
at fact sets preview of this week'searnings, you can't use the same metrics
or tools to evaluate company and he'sin different sector, sometimes even companies within
(17:02):
the same sector. So that's whatwe have going on as far as earnings
kicking off really later this week withsome of the big banks and a couple
other financials, and expectations are highfor this earning season. You know,
it's not something where this is onewhere you can get by with, you
know, a couple percentage point increasein earnings and everyone says, okay.
(17:22):
According to facts that earnings growth forQ two is expected to be eight point
eight percent for the S and Pfive hundred, your career stocks are up
what nearly eighteen percent year to date. So to the extent that earnings don't
rise point for point with that,that means stocks are getting more more expensive
on a P to E basis,And by the way, they already are
expensive. They're trading twenty one pointtwo times forward earnings right now, which
(17:45):
is a generous The five year averageis nineteen point three, the ten year
is seventeen point nine. So you'vegot stocks trading as if, hey,
the soft landing is going to continueand earnings won't be threatened. Earnings start
to look threatened. We've got somequestions there. Bringing the latest financial news
(18:11):
straight to your radio every day,it's the Financial Exchange on the Financial Exchange
Radio network. The Financial Exchange isnow available on your Alexis smart speaker has
to play the Financial Exchange and catchup on anything you might have missed.
This is the Financial Exchange Radio Network. Mark a piece here from Bloomberg Opinion
(18:37):
something that I actually welcome. Marketstrategists thankfully abandon S and P five hundred
targets. So all those predictions ofyou know, analyst from this bank thinks
that it's going to hit X onyou know, December thirty. First,
I've always thought they're dumb for afew reasons. Not the analyst, but
the need to make the predictions.We're both in some instances. The analysts
(19:00):
they're smart. They're just trying todo the impossible. Sorry, here's why
I think it's it right, it'sa losing game for them. First,
let's say that you get the predictionfor the S and P five hundred completely
right. What what do you win? Yeah, bragging rights for a little
bit. You get feted by themedia for about a week. Like that's
(19:21):
that. That's it, Like that'sall you get. Furthermore, Yeah,
let's say that you have the predictionexactly right. It doesn't tell you anything
about the path that you took toget there. So, as an example,
let's say that this year you hada prediction that the S and P
five hundred was going to hit sixthousand at year end. If the S
and P five hundred loses twenty percentand goes down to thirty five hundred and
(19:44):
then ends up at six thousand,it's a very different path from the S
and P going to eight thousand andthen coming down to six thousand. You
get to the same place at theend, but they mean very different things
for investors over the course of theyear. And so I think how having
these arbitrary price targets where it's,oh, like, this is our target
for year end, well, A, who cares? And B what's the
(20:07):
path that you actually took to getthere? Because that's a conversation stopper.
Well, here's the thing, ifyou'll thank you for that information, But
who cares. If you're a longterm investor, you don't care about the
S and P five hundred price targetfor the end of the year. If
you are a short term investor,you don't care about the S and P
five hundred price target for the endof the year because you're trading different timeframes
in that anyway, Like, noone invests with the mindset of, well,
(20:30):
here's what the S and P isgoing to be at December thirty first,
and I think this is what I'mgoing to buy as a result.
If you're in the capital markets partof the financial sector that we were talking
about in the last segment, you'redoing earnings projections, like any businesses,
what do you think we'll do insales this year? Do you think we'll
do in earnings this year? Soa big part of their forecasting job is
(20:51):
where's the stock market gonna end up, what are our assets going to be
at, and how much money arewe going to make. So if you're
if you're a treasurer for a company, you got some stock investments, then
you might care. But for thetypical retirement oriented or long term investor,
it's really irrelevant. You're just relyingon stocks going up on average whatever your
return target is over time. Andif you're that person who if let's say
you're, you know again treasurer fora company, as you note, you're
(21:15):
probably gonna be doing your own researchon that or have a team that's doing
that. Anyways, you don't needto rely on you know, hey,
here's what the analyst from you know, Barclay's. Actually they probably would look
to their bank for help with that. Yeah, a lot of them is
I'm thinking a lot of the smallcompanies locally, even up and down one
twenty eight. These are multi billiondollar business is very sophisticated, but their
treasurers don't necessarily have the resources todo their own, for example, economic
(21:37):
forecasts or stock market forecasts. Alot of them are still running their own
little pensions. They're frozen closed tonew employees, but they'd still like to
know because they want to know howmuch money they got to put in the
pension at the end of the year. I'm sorry, I'm thinking of all
these ticki tech counter examples. Ofcourse, I agree with you in principle,
don't worry about the stock market ifyou're a long term investor. There
are some people who, yeah,they might be ind in knowing what the
(22:00):
consensus is among investment banks anything elseon index price targets. I think we
said don't sweat it, or canwe move back to who cares? Now,
let's talk a little bit about quitting. And it seems I don't know
why, but it seems like wheneverwe talk about the labor market, it
(22:23):
has to be that something's wrong,like you can never just be back in,
and there are times when things arewrong, you know, back in
twenty twenty two, labor market wasway too tight, and like we were
seeing it very clearly, and wesaid at the time, look, if
(22:44):
you're trying to negotiate, you know, a raise or something like, this
is the time introduce too tight.There are a lot of people who still
don't think it was too tight.I think it was just the supply shocks
that drove up inflation. But anyway, and then we moved into the phase
where, you know, remember whenemployers were complaining about quiet quitting, which
was workers just doing their jobs andnot going you know, over and above.
And now we're talking about how there'snot enough quitting in the workforce,
(23:08):
which is like, well, what'sit gonna be, man? Like a
year ago, you told me notto just do my job because that was
basically quitting on the company. Nowyou're telling me I'm not quitting enough.
What's it gonna be? Man?Because the piece from the New York Times
American workers have quit quitting for now. Well, a quits rate has been
level for the past few months,though it's come down. It's back to
(23:29):
pre pandemic norms. Yeah, andit's been pretty flat the past few quits
rate is just people leave their jobsvoluntarily, I think is a percentage of
the labor force. Correct. SoI think that again, in a number
of surveys, we're seeing data suggestingthat workplace satisfaction is actually close to the
highest it's been in years, whichis, you know, pretty remarkable given
all the stories that come out abouthey, you won't quit enough and you're
(23:52):
quitting too much and this and that. But this Times piece also, I'm
sorry, This Wall Street Journal piece, through the anecdotes that it expresses,
I think tells us some interesting thingsabout where the labor market may be tighter
or looser. As an example,there's a woman that they interview from Los
Angeles and she says, applying forjobs right now, it's like hitting your
(24:15):
head against the wall. And yousay, okay, what does this woman
do? And it turns out thatshe is the director of social strategy and
copywriting at a firm in Los Angeles. A couple questions first is why would
you agree to be interviewed by theWall Street Journal If you're like, isn't
your employer going to be like,hey, you're looking around at jobs right
(24:37):
now? Like what gives? Butright doesn't that seem kind of weird.
Yeah, Like if an employee thatworked for you got interviewed and said,
yeah, I'm looking around for jobsright now, wouldn't you be like,
okay, why you still hear then? But the other thing, director of
social strategy and copywriting, isn't thatan area that is right in like prime
(25:00):
time for potential either augmentation or replacementby AI in the short term. Copywriting
in particular, you know, socialstrategy, okay, fine, but copywriting
is right in the nexus of whatcan be targeted by AI today. So
I found that kind of interesting justin terms of, you know, what
it says about that part of thelabor market. Another area you know when
(25:27):
we talk about you know, placesthat are potentially being impacted right now.
I don't know if you saw,but Deer just announced six hundred layoffs.
Yes I did. Remember last yearthey had that big union negotiation in order
to get that new contracted or maybeit was the end of twenty two or
early twenty three, I can't rememberexactly where it was. But you look
(25:48):
at something like that and you say, Okay, they negotiated this big contract
a year and a half two yearsago, and now they're trying to downsize
their workforce because those compensation costs aremade your driver. That's pushing against their
margins right now. And this isone of the things that I think could
become a theme later this year,is companies cutting headcount to maintain margins now
(26:11):
that they're losing pricing power. Andso I think that's another thing that we're
seeing as we, you know,kind of look at what the labor market
might look like the next six tonine months into it. Just announced eighteen
hundred employees right the cutting, didthey? Yeah? I will send it
to you now. It's from theWall Street Journal. Look the jump of
the unemployment right, I'll just backup from a higher level and note something
(26:34):
we've already talked about. It's theunemployment rate has gone up seven tens of
a percent from about what three pointfour last year, roughly spring, I
think April May, yeah, totoday. And in historical using history as
a reference point, that's a bigjump in a relatively short period of time.
It usually signals trouble. Sure,So I think just taking that on
(27:00):
its face, combining it with theseanecdotes points to the easing of pressure price
pressure in labor markets that fetch yourPowell has been talking about the past couple
days and that we've been talking abouthere, as have other people who cover
the economy for the past couple months. To take a quick break here.
When we come back, we'll doa little bit of stack roulettes. Find
(27:21):
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dot com mark, what do youhave for me? For Stackrooletts. In
Bloomberg Today, opinion columnist Dave Leeasks will AI ever pay off those footing
(28:27):
the bill or worrying already? Andhe points out something that I know you
and Mike Armstrong have talked about,Chuck, that businesses are spending several hundred
billion dollars a billion with a Bon the hardware necessary to run the models
that support AI. So that's abig investment, and they're going to have
(28:51):
to make similar sized investments more orless continuously because chips get better and the
software that they're writing to implement theseAI so called models gets more demanding.
Yet the cumulative the combined revenue notcumulative, the combined revenue of companies like
open Aithers is only several billion dollars, so a fraction less than ten percent
(29:17):
of what's required to run these thingsin the first place. And the author
here asks is we've asked, andas a lot of people have asked,
at what point do these investments actuallyhave to pay off to keep up the
feverish pace of investments to keep Nvidiochip sales growing at forty fifty percent a
year or Nvidia revenues, they shouldsay growing at forty fifty percent a year.
(29:41):
Yeah. I look, there aretwo ways that you can look at
the AI chip boom that's going onright now. The first, the way
that markets are interpreting this is thisis an ever increasing spend that companies are
going to have to make in orderto be competitive. It's almost a cost
(30:03):
of doing business. It's like turningthe lights on. You know, it's
like an electric bill because it basicallyis an electric bill once you actually run
the chips. That's how it's beinginterpreted right now. The alternate explanation for
it, and kind of how I'mlooking at it is what if this is
just a capex cycle, just likeall the other capex cycles that we've seen
(30:25):
in semiconductors over the last thirty fortyyears. And when that capex cycle ends,
it doesn't mean these companies go outof business or they're bad. But
hey, it was just a cycle, and that's all it is. It's
just a really big one. Imean that's Yeah. There are growth implications
if AID doesn't pan out, becausepeople are hoping for a productivity miracle as
(30:45):
a result of AI. Sure peoplewill lose jobs too, But on balance,
like with any new technology, theexpected gains probably exceed the expected losses
in labor markets anyway, somewhat differentsubject, and so their implications, So
the economy as a whole. IfAI is a success, it'll translate into
higher economic growth. Whether that translatesin a higher per capita income slightly different
(31:08):
question, but anyway, And thenof course there's this, There are stock
market implications, given that most ofthe gains this year and last have come
from AI and AI adjacent as theylike to say, companies, If valuations
in that sector compress, what doesthat mean for markets as a whole?
What's the return engine going to be? Who knows? Can we go down
(31:30):
the AI rabbit hole for a littlebit just to know? There's something actually
really interesting that I want to talkabout along along these lines, which is
the way in the last year anda half that AI has been approached is
hey, in order to be thecompany that dominates AI, you buy a
bunch of really expensive chips, Youbuild you know, a huge large language
(31:52):
model or a huge you know,visual model, whatever it is that you're
trying to be able to generate,and then when someone queries that you basically
send that query into that central database, use a ton of computing power,
and spit something back to them ontheir device. That's how it's been used
to this point. It's what's knownas cloud AI. The other term that
(32:12):
you're starting to see thrown around atall is edge AI, and EDGEAI is
basically a fancy way of saying itdoesn't take place on some centralized cloud.
It takes place on your device,so the data doesn't have to go back
and forth. Couple things on this. The first is if you actually need
to use a ton of computing power, doesn't make a ton of sense because
(32:36):
you can't get that much computing powerinto a phone or a light bulb or
a smart TV or a smart stoveor whatever the heck it is you're doing.
You're not gonna have ten thousand inVidia chips in every home, I
hope, so you can't do stuffquite that powerful. But what you can
do because of a couple benefits,you have the potential to do small things
(33:00):
that are still using a predictive modelframework that takes place only on the device,
so you're not sending all of thatdata back and forth. So as
an example, and again this isfrom looking at more of what Apple is
trying to do now with their developmentthat they announced at the Worldwide Developer Conference
a couple weeks ago. They basicallysaid, look, whatever they're calling it,
(33:22):
was it Apple Intelligence, I thinkis what they branded it. The
premise of it is that they'll stilldo their model training centrally in terms of
if X then Y, but thenthat model training framework gets put onto your
device and basically used for small littlethings. Not ask me to write a
(33:42):
novel about this, because that's notwhat people want to do on their phones,
but much more. Hey, ifI text someone, I'll be over
at five point thirty. The AIknows that. Great, I'm going to
give you directions to their house atthe time that I need to based on
the traffic that Apple maps is predictingthings along those lines that are still generative
(34:07):
in the context of your life.But not write me this and that's the
stuff that's gonna be actually useful tous. But the downside, in terms
of how it affects the current AIboom, you don't need to have a
billion in Vidia chips in order todo that. Those are the types of
little changes on the margin that I'mlooking for from AI. So when I
(34:29):
open my phone at seven forty fivein the morning, it knows I'm gonna
check traffic on my way to work, because that's what I do every damn
time I open the phone. Thefact that I have to go through a
series of steps to accomplish that issort of infuriating. Or when I use
PowerPoint and I put the same objectlike a chart, in multiple slides,
it should know I want them formattedthe same way. And that's where I
think it's sep'er infuriating. But that'swhere I think the actually useful that would
(34:52):
be going there to be. Butit's also completely different from what's being priced
in now, and that is noteconomic growth trend changing, don't think,
and even cumulatively and an aggregate.So again, just in terms of where
AI goes, this is something thatI think we need to talk about in
those terms. Edge AI versus cloudAI. I think you're going to become
(35:13):
more front and center over the nextyear or two. Is edges local.
It's running on your YEP exactly,and the other thing there because it's not
sending anything back to a central server. It's more private, stays on your
device. The whole time. Whydo they call it edge? It's on
the edge, man, it's onthe edge. Okay, I don't know.
(35:35):
Okay, thanks Chuck. They hadto brand again. How about local
AI. That sounds edge sounds likeget that. That's why I like it.
Okay. We could find something that'skind of happy in the middle.
I don't know what it would be, local edge AI. Let's take a
quick break for the rest of theday and when we return tomorrow it's CPI
(35:58):
day. We'll see you then,sh
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