August 12, 2024 • 38 mins
Chuck Zodda and Mike Armstrong preview a busy week for economic data that could dictate the Fed's plans for September. Investors borrowed like crazy during the rally. Now they're paying the price. Inflation hurts most for the things we can't skimp on. Bonds are back as a hedge after failling investors for years. OPEC slightly trims oil demand forecast, citing softness in China. Harris joins Trump in proposing to eliminate taxes on tips.
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Speaker 1 (00:00):
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Speaker 2 (01:13):
I hope everyone had a great weekend. It's Chuck, Mike
and Ben with you today and we're kicking things off
this week, and what is going to be busy week
of economic data overall. We've got producer price index data
out tomorrow at eight thirty am, Consumer price index data
out Wednesday at eight thirty, retail sales data and weekly
jobbles claims Thursday at eight thirty, and then Friday at
(01:36):
eight thirty Sensing a pattern here, we get housing starts
and building permits, and then Friday at ten am consumer
sentiment data from the University of Michigan. So we've got
something every day this week aside from today. Today is
just kind of boring, which is fine if you don't
want to repeat the excitement of last Monday, when that
(01:56):
was exciting, when every not everyone, when a bunch of
people thought that the financial world was ending, acting as
if they had not been through two thousand and eight,
when in fact they had lived through it. So in
terms of where we sit today, at the close on Friday,
(02:19):
the S and P five hundred was almost back to
where it was the previous Friday, which, again, if you've
been through you know, downturns in markets, they don't typically
go like two thousand and eight, where they just fall
thirty five percent in the span of you know, three weeks.
Typically downturns might have multiple legs. But look, this one is,
you know, certainly not playing out as that you know
(02:42):
March of twenty of twenty twenty period did in that, Hey,
we've had a little bit of a bounce. The S
and P is now less than six percent off its
all time high, and we're going to see how the
data develops over the next month or so to see
where the next leg of this puppy ends up going.
Speaker 3 (02:56):
Basically back to where we were on Friday's close.
Speaker 2 (02:59):
If you freaked out up Monday, look, there's two different
things to say. If you were just nervous because hey,
the market's down and I don't know what to do, natural,
totally normal. If you're going around saying that the financial
world is ending in the Fed needs to cut interest
rates and this is going to be the greatest market
(03:19):
collapse ever, which some people were saying, yes, then you
need to check yourself before you wreck yourself.
Speaker 3 (03:27):
Because you look a little bit foolish today, you look
really stupid. We also have earnings from Walmart and Home Depot,
not exactly the biggest market movers out there, but you know,
interesting earnings to report employer in the nation.
Speaker 2 (03:41):
Consumer spending for both of them. What are people spending
money on? Like, that's what matters. I don't care what
they're going to say about how they're hiring. I care
what they're going to say about, Hey, how are you
actually seeing sales moving? Is it like spring of twenty
twenty two when you're saying, hey, there's a real problem
here or is it yeah, like things have slowed a
little bit, but we're fine.
Speaker 3 (04:02):
I would describe Wednesday's Wednesday is CPI correct?
Speaker 2 (04:05):
Ah?
Speaker 3 (04:06):
Yes, I would describe Wednesday's CPI report as the least
important inflation report that we've received so far this year.
Depends obviously, if it, you know, burns down the barn,
then it's a really important one. But looking at things
right now, inflation has been a really important data point.
(04:26):
It was higher than anticipated in Q one. We were
waiting for it to cool. It did cool. I am
gonna consider it going into it. This is the one
that I'm probably least concerned about and least interested in
so far this year.
Speaker 2 (04:41):
I don't think it's the most important release of the week,
and so I think you can say that in that Hey,
as long as it goes to expectations, yeah, it's not
gonna change things at all. If it comes in hot,
then all of a sudden you've got this problem where
you're like, oh, what the heck do we do now?
Speaker 3 (04:57):
Yeah, but then you have the stagflation folks coming back exactly.
Speaker 2 (05:00):
Then Jay Powell would be able to see both the
stag and the flation, and that would be problematic for
him since a couple months ago he remarked that he
could not see the stag nor the flation. That was
actually a quote from him. Again, this is where we
are today. The most important release of the week, in
my opinion, is that retail sales data on Thursday. And
(05:22):
the reason why is that the concern that we are
seeing right now is largely centered around consumer spending. And
granted we've been hearing it a lot from airlines and
hotels and Disney, and those aren't going to show up
in retail sales because they're not retailers. They sell services
and experiences and stuff like that, and retail sales is
(05:45):
again exactly what it sounds. Just look at the categories
that they split it into. Its gas stations, furniture stores,
electronics stores, building material, food and beverage, health and personal care, clothing,
boarding goods, general merchandise, miscellaneous store retailers, nonstore like Amazon,
(06:05):
food services, and drinking places. It's stuff that you can
walk into a place with with money and walk out
with stuff like Those are the stores we're talking about.
So I do think this is an important one because
right now the estimates are for a point two to
two point three percent monthly growth in retail sales spending.
(06:26):
If we are able to show that, hey we're starting
to rebound and build a multi month trend. Last month
was better than expected after upward revisions to the prior month. Okay,
now we've got something that's going on here where Yeah,
the rumors of the consumer's demise would be greatly exaggerated.
Maybe maybe it's just the reverse of the shift that
(06:49):
we saw in twenty twenty two when people went from
buying grills to going on trips. Maybe now what we're
seeing is, hey, we've done enough travel for the last
little bit. We're pulling back on that spending, But we're
buying more grills again because it's been a while, and
you know, there are people that now have houses that
didn't back in twenty twenty two. There are people that
(07:09):
have moved into new places because remember, even with housing
activity being low, you're still seeing four million existing homes
a year that are being bought and sold. Yeah, and
that means that people have changes in situation where they
might need new stuff, and so you get new people
coming into the pipeline who might want to buy things
that didn't back in twenty twenty two.
Speaker 3 (07:28):
The other economic data point that I don't mean to
make too much of because we do get it every
single week. But now that we have crossed that sum
rule threshold that we spent all last week talking about
every single week, the Thursday weekly jobless claims matter a lot.
They again, we get them every single week, so it's
not as though it's you know, once a month or
once a quarter report that we're waiting on. But now
(07:50):
that we have crossed that threshold, they do matter a
lot more and a lot of focus is going to
be on them, even if you just get a one
week blip, which we tend to tell you to ignore
is to get a lot of attention from investors, and
so that's another item to keep an eye on.
Speaker 2 (08:03):
So that's what we've got going on in markets this week.
Just do a quick little recap of last week. There's
a piece from the Wall Street Journal here. It's titled
investors borrowed like crazy during the rally. Now they're paying
the price, and it's talking about tales old as time,
how a little bit too much leverage led to a
(08:24):
big problem for a number of investors. Listen, this is
what it always is, that there are only two things.
This is not my quote. It's from a guy by
the name of Ben Hunt that I follow, and he says, look,
there's two things that always end up blowing up markets.
Leverage and securitization. There's the only tools that financial institutions
actually have. It's how can we borrow against this and
(08:46):
how can we package it up to sell it.
Speaker 3 (08:49):
That's it.
Speaker 2 (08:49):
There's nothing else that's new. It's whether you're talking about
you know, mortgages back in two thousand and eight, whether
you're talking about the carry trade this week, whether you're
talking about you know, FTX back in you know two
that was a twenty one when it blew up or
twenty two, I don't even remember. Now the story is
the same each time. It's too much leverage and trying
(09:11):
to securitize all of the stuff that you've leveraged that
ends up blowing you up.
Speaker 3 (09:16):
That's what does we consistently see the securitization piece, right,
I mean, was it just this year last year that
the bitcoiny tfs were approved Early this year was like February,
I think, So we've got that securitization. Recently we've covered
things like the boomer Candy articles, these new securitized options
trades that are available to So this is a constant,
(09:39):
constant move on the part of the financial industry. And
last week we saw a relatively minor blow up at
least domestically, but it was this overseas it was bigger.
Speaker 2 (09:49):
Yes, you know, if you were in Japan and you're like, hey,
the market's down twenty percent in three days, what gives Well,
remember then rallied ten percent the day after, which doesn't
get you back to where you were, but sure it
makes you feel a little better or at least. But
the premise here is, look, a lot of these strategies
that are employed by hedge funds. They don't just go
out and say, yeah, we're gonna do this, you know,
(10:09):
just with with the money that we have. They might
employ ten and twenty and thirty x leverage in order
to generate the returns they want to. And when something
moves against them and they have to unwind that, you
get this violent snap in markets where you have these
kinds of weeks of volatility like this, and it takes
a little bit of time just to still see you
(10:31):
know what, everyone, it's the Warren Buffin quote. You know, hey,
when the tide goes out, you see who's swimming naked.
We're still looking for bathing suits right now.
Speaker 3 (10:41):
Is there a not to my knowledge, I don't believe
there is. I mean, is there a good way to
be able to monitor leverage being taken in certain markets?
I'm sure in like I know, for instance, the Saint
Louis FED publishes domestic us margin balances, but that wouldn't
have told you really anything about bets being placed on
Japanese yen, for example, which is what causes most recent
(11:04):
blow up. Like, I don't know how you search for
a debt bubble.
Speaker 2 (11:09):
The average retail investor can't there are some tools and
things that are available to you know, hedge funds where
they can you know, get a sense of what other
investor positioning looks like and where a leverage might be.
But even those are not exactly the most accurate all
the time.
Speaker 3 (11:26):
It's insinuations.
Speaker 2 (11:28):
Yeah, it's something where I don't think a retail investor
is going to have any meaningful success trying to play
that game. Let's take a quick break here. When we
come back, we'll talk a little bit about what's going
on in fixed income markets with bonds, and then a
little bit more chatter on inflation.
Speaker 1 (11:48):
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Speaker 2 (12:43):
There is a piece in Bloomberg today. It's titled bonds
are Back as a hedge after failing investors for years.
So a couple things that we need to talk about here.
The first is that in terms of bonds failing investors,
it really was twenty twenty two when bonds.
Speaker 3 (13:01):
Failed and failed investors.
Speaker 2 (13:02):
Yeah, the Bloomberg US aggregate bond indecks at its bottom
that year, which was in October of twenty two, was
down about eighteen and a half percent, which was again
admittedly not fun. When the thing that you buy in
order to you know, have some ballast in your portfolio
and you say, hey, I want this to be stable
loses almost a fifth, it's.
Speaker 3 (13:23):
Kind of an important thing for us to define, actually, Like,
there are a lot of reasons why investors buy bonds.
But when it comes to the average individual investor.
Speaker 2 (13:31):
It's, hey, this is my money that I want to
be able to rely on if my stocks go down.
Speaker 3 (13:35):
Yeah, that's really the only reason that I can think
of for the average you know, individual person to go
buy bonds. It's yeah, I need a hedge.
Speaker 2 (13:43):
And so the draw down there was significant again in
eighteen percent draw down, You're like, what gives what happened? Well,
here's the thing, and this is why I kind of
look at you know, after years of you know, after
failing investors for years, Well that was the bottom of
the bond The Bloomberg US Aggregate Bond Index never touched
that level again and is now up about eleven percent
(14:06):
off of that low.
Speaker 3 (14:08):
Meaning it hasn't made its way back to those highs. Right,
it has not yet gotten back to all time highs. Right,
I'm not This is just the index. I don't know
how they calculate. I think it's total return, or maybe
it's the level. Whatever it is, the index is saying
it's not there. But the other thing is, if you
look back to this index's creation, which was back in
(14:29):
the mid nineties, at least in the format that I
have data going back to this is the only time
that there was anything more than a ten percent draw down,
and the next largest one was about five percent, and
that was back in two thousand and eight for a
very brief period when the financial world was ending. Other
than that, you basically don't have any meaningful drawdowns. So
(14:50):
I do take issue with the fact that bonds have
failed investors for years. They had a bad year in
twenty twenty two, and other than that there were turns
haven't been great because interest rates were low, But it's
hard to say that they failed investors for years in
any meaningful way. They acted predictably for most years other
than twenty twenty two.
Speaker 2 (15:10):
Correct, Now our bonds actually back well. First of all,
what does it mean for bonds to be back, Mike?
Is this is this piece making the case that hey,
now it's safe to buy them and you don't need
to worry. Is this making the case that they're doing
what they should do in times of stress? What are
they making is the case?
Speaker 3 (15:29):
The only case that they're making is that they are
no longer correlating to equities, and we saw that over
the last week, especially when people got spooked about the
state of markets in the economy and where did they
pour into? Largely bonds, long term government bonds.
Speaker 2 (15:44):
So this is important in that it means something today
in that we have what's called a negative correlation between
stocks and bonds. When your stocks go up, your bonds
are going down. And when your bonds go I'm sorry,
when your stocks go down, your bonds have moved up.
The thing about correlations is they're stable until they're not,
(16:04):
and they don't always move the same way. And in
the case of this stock bond correlation, it's been one
that's been very volatile over the last couple of years.
There has been no consistent correlation between them. So the
thing that I would caution about this piece, and you know,
just about reading this in the situation in general, is hey,
just because you had one instance of a few weeks
(16:27):
where stocks went down and bond values went up, it's
not inherently predictive of what we're going to see over
the next few weeks, months, or years. And you can't
take anything from what just happened.
Speaker 3 (16:39):
No, but but it's tough for me to envision without
another bout of inflation, a circumstance where we get back
to twenty twenty two. Yes, I'd say that's fair, Like, yeah,
it's possible, difficult for me to vision, but yeah, we
should definitely not read into what's happened over the last
(16:59):
week as oh, well, now we're back to normal where
bonds do the opposite of stocks forever.
Speaker 2 (17:05):
Yeah, I think that's fair. Another piece from the Wall
Street Journal, inflation hurts most for the things that we
can't skimp on. Look, you can file that under you know,
really obvious headlines, because yes, if the things that you
can't skimp on go up in price, of course it's
gonna hurt the most there. And what it's talking about
is the fact that the places where we've seen improvement
(17:25):
in prices are not typically thought of as necessities. You're
not seeing, you know, meaningful improvement in food prices and
stuff like that. Yes, the rate of inflation hasn't gone up,
but as we talk about quite often, it's not like
the prices for those who have gone down. The places
where you are seeing prices going down are the same
(17:46):
places that we usually see prices going down. TVs great
Now you can get a sixty five inch TV for
four hundred dollars instead of a fifty five inch Okay,
that's that's fine. Plane tickets, all right, Well, I don't
need to go on a flight, So that's great if
I'm available to and if I can afford to, but
that's not necessarily helping me. Car prices have come down. Again,
(18:10):
it's not really a necessity for families in terms of
like buying a new car. You might need transportation, but
you might be able to fix your old when or
buy a used one.
Speaker 3 (18:18):
Here's where I'll disagree not with you, Chuck, but with
the writers of this article, because they seem to have
cherry picked some stuff here. They do accurately point out. Look,
rent electricity bills both up ten percent or more over
the past two years. Car insurance. Again, the car price.
You might not need a new car, but the car
insurance you pretty much have to have nationwide, other than
in New Hampshire. I think New Hampshire might be the
(18:38):
only state that doesn't require car insurance. Those car insurance
rates are up forty percent. So they're cherry picking these
data points. But to your point, they completely ignored the
fact that food inflation basically been zero for the last
twelve months. Yeah, and again, that does not mean that
food prices are back to twenty nineteen levels. That doesn't
(18:59):
mean that it's comfortable to go to the grocery store.
I'm not making any of those claims, but the authors
here seem to be pointing out, Oh, you know, every
price for everything that you need to buy is continuing
up at a stubborn rate. And that's not really what
I'm seeing. It's very much a mixed bag.
Speaker 2 (19:16):
No, And I think that's fair because when you go
and plug through the CPI data, you do see that, hey,
it is more of a mixed bag over the last
twelve months. Like, yes, if you're looking at the last
two years, of course everything everything, Yes, you'd be hard
pressed to find stuff that isn't up meaningfully. The last
year has been a different picture. To take a quick
(19:37):
break here. When we come back, it's Wall Street Watch
and we're talking oil.
Speaker 1 (19:42):
Like us on Facebook and follow us on Twitter. Act
TFE show breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch. A complete look at what's moving markets so
far today right here Financial Exchange Radio Network.
Speaker 4 (20:03):
Alright, markets are in currently are currently in mixed territory.
To start the week, the Dow Jones is down fifty
six points, or zero point one four percent. The S
and P five hundred is up fifteen points, or three
tenths of a percent. The Nasdag's up one hundred and
four points, or up six tenths of a percent. Shares
of Starbucks are up three point seven four percent after
(20:26):
The Wall Street Journal reported activist investors Starboard Value took
a stake in the chain in an effort to boost
its stock price. Pharma stock Eli Lilly is flat following
an upgrade at Deutsche Bank to buy from hold. The
bank cited Eli Lilly's recent earnings beat and called the
stock a low beta, high growth Unicorn. Jet Blue Airways
(20:47):
shares are down thirteen percent after the airline announced plans
to offer four hundred million dollars of convertible senior notes
due in twenty twenty nine. Robinhood shares are up three
percent on the back of an upgrade to overweight from
neutral by Piper Sandler. The firm said Robinhood will benefit
in the long haul from quote continued growth in global
retail and derivatives trading, as well as the generational wealth
(21:11):
transfer from baby boomers to their children, and finally, Dane
to look at Qualcom. The shares are down two point
six percent after Wolf Research downgraded the chip maker to
peer performed from outperform. The firm said Apple using its
own internal modem will finally have an impact on Qualcom,
adding that premium Android has been by now been normalized
(21:34):
and IoT growth will likely be a tougher sell to investors.
I am Ben Kitchen and that was Wall Street Watch, Mike.
Speaker 2 (21:41):
We've got a piece here from the Wall Street Journal
talking about opekan their projections for oil demand, and I
don't know what to make of this exactly, but here's
what it says that the Vienna based cartel now forecast
demand to grow by two point one one million barrels
a day this year, reaching a total of one hundred
(22:02):
and four point three million barrels a day. They had
previously expected gross to be two point two five million
barrels a day, so they're saying it's going to be
about one hundred and forty thousand barrels lower than they anticipated,
largely because of softness in the Chinese market.
Speaker 3 (22:19):
So I guess I have two takeaways on this one.
We always generally discuss how data from China is pretty
notoriously unreliable in terms of telling you what's going on
in the economy. Yeah, this is one of those indicators
that you can take a look at and say, as
little as I trust Opek, I'm willing to bet that
they have a pretty good forecast of how much China
(22:39):
is going to consume in oil. The second piece that
I am pretty shocked by U and I would want
to dive into the details a little bit more here,
But the historical average pre COVID for demand was only
sitting at one point four million barrels per day. So
you're telling me that since COVID we've seen a fifty
(23:01):
percent surge in demand for oil. I know the economy
is still kicking.
Speaker 2 (23:07):
Is that one point four million mean? I was trying
to understand that because we use like one hundred million
barrels a day worldwide. So when it says demand demand
is still at healthy levels, well above the historical average
of one point four million barrels a day seen before
the pandemic, what is that? I don't know what it
feels like there's a word missing in the article.
Speaker 3 (23:28):
Again. Where I'm landing is they're saying the forecast now
is two point eleven, whereas previously, like five years ago,
is the insinuation, we were at one point four, which
would be a fifty percent surgeon daily demand. I don't
know if Wall Street.
Speaker 2 (23:42):
Journals is incorrectly we don't use We use one hundred
million barrels a day.
Speaker 3 (23:45):
Mike, right, Okay, So so I don't know what that
one point for is referencing.
Speaker 2 (23:50):
Yeah like that that's I don't know what any of
this means in this piece.
Speaker 3 (23:56):
Maybe it's alst average growth was one point four min
prior to the pandemic, and now we're growing our demand faster.
Speaker 2 (24:05):
But that's dumb too, because the world has more people
than that.
Speaker 3 (24:07):
Yeah, not a helpful metric.
Speaker 2 (24:09):
And the other thing that would be useful is, hey,
how accurately does OPEC typically forecast actual oil demand? Like?
Is this something where they're usually really good at it?
Are they off whenever we get into energy markets? I
just look at it and I go, I don't know
what you're actually trying to tell me? And what is
just noise when I read these pieces?
Speaker 3 (24:30):
So what conclusion, if any, do we have here? Chinese
oil demand is slightly weakening compared to previous forecasts.
Speaker 2 (24:37):
And the world uses oil.
Speaker 3 (24:39):
Okay, we've concluded those two items.
Speaker 2 (24:41):
Other than that, like, I kind of look at this
and I'm like, I don't know what this means. And
here's the other thing on China, just like you don't
know that this is necessarily an indicator of the Chinese
economy because fifty percent of all new vehicles being sold
in China now are electric are electric. Yeah, So it
(25:01):
sort of loses the proxy. It loses the value of
being a proxy of Chinese growth if most of the
growth in vehicle demand is now on the ev side,
which is being fueled by coal and that gas not
by oil. So I struggle to figure out what this
is other than like an opek.
Speaker 3 (25:21):
Hopefully some bad news for opek.
Speaker 2 (25:23):
Well here's here are other places that my mind goes, Okay,
so they think it's going to be slower growth. Does
that give them cover to cut production if they want
to do they actually need to cut production? Or is
growth going to be stronger than that. It's too gamey
and not like you know when you're eating elk. It's
just it's too much of a game being played.
Speaker 3 (25:45):
It feels like, yeah, maybe maybe this is again you know,
you and I have talked at length about how the
most difficult thing that we can imagine, or one of
the more difficult things to imagine, is playing the game
of predicting oil prices and betting on that. And so
perhaps this is just us leaking into this story a
little bit too much, but it seems like a completely
(26:07):
opaque forecast in terms of what they're actually predicting here
and what it means for markets.
Speaker 2 (26:12):
You know, it's like you look at Opek and you say, okay,
the president of the Republic of the Congo probably a
bad example because their production is on the lighter side
of the cartel. But you go on, you say, okay,
the UAE produces, you know, three million barrels a day
(26:32):
of oil. If the leader of the UAE wakes up
and says, you know what, having a bad day, let's
just stick it to Europe today, how do you know, Like,
how do you make sense of that? It's not a market,
it's one guy deciding what's gonna happen. And that's why
I struggle so much with it.
Speaker 3 (26:53):
It's more of a market today than it was thirty
years ago. Fortunately it is right like with domestic with
the US free production being a much bigger chunk of this.
It's it's much less possible for what the scenario that
you just described to occur today compared to say, the
nineteen seventies. And that's the good news sort of.
Speaker 2 (27:15):
But also, I mean, the three biggest countries in OPEC
are Saudi Arabia, Iraq, and Iran. Saudi awake, Saudi Arabia.
Speaker 3 (27:22):
Wait, sorry, production wise or.
Speaker 2 (27:24):
Production wise, Saudi Arabia wakes up and says, gee, all
this stuff with Iran is really grinding our gears. You
know what we're gonna do. We're just gonna turn on
the spigots and screw the Iranians.
Speaker 3 (27:36):
Yeah, like it could happen.
Speaker 2 (27:37):
It could happen, and you just you don't know what
pushes them over the edge, as opposed to, Hey, you know,
McDonald's is discounting this and taking about okay, like we
understand how human behavior is gonna workause there's millions of
people who go and buy those things and work there
and YadA, YadA. This is just kind of well, we
don't like you today, so screw it. We're gonna hit
(27:59):
this button. And that's literally what happened in twenty fifteen
and twenty sixteen, when Russia said, hey, we're tired of
losing market share to US shale. We're tired of losing
market share to US shale. You know what we're gonna do.
Speaker 3 (28:15):
Try and put them out of it.
Speaker 2 (28:16):
We're gonna pump everything that we can. And so gas
prices fell by about thirty percent over the subsequent six months.
A bunch of people lost their A bunch of people, right,
A bunch of people in Texas, North Dakota, and Pennsylvania
lost their jobs, all because the Russian government woke up
and said, you know what, we don't want you taking
market share from US.
Speaker 3 (28:37):
Pretty tough to predict that type of thing, Yeah.
Speaker 2 (28:39):
It really is. Do you know who the newest member
of OPEK is, the Congo No? Yeah, they got admitted
in twenty eighteen. How does one apply to join OPEK?
I would imagine it's pretty shady, you know. Is there
a form that I can fill out on the website?
Speaker 3 (28:56):
No, no, there's not. You have to do some really
dangerou stuff would be my guess.
Speaker 2 (29:00):
Other questions that I have how are some of these
countries in OPEK?
Speaker 3 (29:06):
Well, it's always entertaining to go through them because they
all run they have very little in common, and too
many of them hate each other.
Speaker 2 (29:14):
Yes, they don't really like each other. But here's the
one that gets me right now. Equatorial Guinea. It's in
Central Africa. It's been in Opek since twenty seventeen, so
it's a new admission. They produce eighty thousand barrels a
(29:35):
day of oil.
Speaker 3 (29:37):
So what gets you there?
Speaker 2 (29:39):
That's like one really big well on an offshore rig?
Speaker 1 (29:45):
What like?
Speaker 2 (29:46):
Why why did Opek want them? What did they want
from Opek? What are we really doing? How come they're
included in Opek but Russia's in Opek? Pus you know?
Speaker 3 (29:58):
Like yeah, like I said, I think that the answer
is that it's just really shady. And so scratch my back,
I'll scratch yours. I want an investment in a newport
from Saudi Arabia. Great, you have to join OPEK and
listen to what we say.
Speaker 2 (30:19):
So just it's very confusing. Yeah, let's take a quick
break here. When we come back, Mike, should we talk
uh tip taxing again?
Speaker 3 (30:28):
Yeah, let's talk a little bit about taxes on tips.
Speaker 2 (30:30):
Let's talk about taxes on tips. Yeah, that sounds like
a great plan.
Speaker 3 (30:33):
When we return, this is.
Speaker 1 (30:35):
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Speaker 2 (31:04):
All right, Mike, it's time to talk a little bit
about tips again, which normally we only do around I
don't know, a few times a year when we just
complain about the spreading of tipping into places where it
previously didn't exist.
Speaker 3 (31:17):
I think it's usually around the holidays, no holiday tipping.
Speaker 2 (31:20):
I don't have a problem with No. That's when we
talk about it, though, oh maybe, Yeah, we complain about
it several other regularly scheduled intervals throughout the year, though indeed,
but it was brought up a couple of weeks ago
simply because Donald Trump said, hey, I want to as
part of my platform, make any revenue, any income collected
by individuals as tips tax free. And we said, hey,
(31:45):
this is not a great idea, because you're just going
to get a bunch of people trying to classify more
stuff as tips. Why would you want to exclude an
entire classification of income from being taxed.
Speaker 3 (31:55):
You'll make the Social Security and Medicare problems worse.
Speaker 2 (31:58):
Whole big thing.
Speaker 3 (31:59):
Yeah.
Speaker 2 (32:00):
Over the weekend, Kamala Harris comes out and says, hey,
I'm for getting rid of taxes on tips as.
Speaker 3 (32:07):
Well, because which I want to win Nevada two, Which.
Speaker 2 (32:09):
Now means that we are just mindlessly pandering to those
who work in the hospitality industry in Nevada. Granted it
would apply, you know.
Speaker 3 (32:20):
That's where the big service industry is. But look, think
about what we're doing to the tax code. If you
do this now, it's all of a sudden, Hey, and
we're doing this, you know, carve out for tips, which
we then have to define and then we have to
have the lawsuits about what classifies as a tip and
what isn't. Just I want to go through real specifics here. Okay,
So let's say that I operate a restaurant and every
(32:42):
check has a mandatory gratuity, which are fairly common. Is
that not every check usually six people or something like that. Hypothetically,
you could say, look, I've seen now tipping. It's now
eighteen percent cretuity on every single bill. Is that tax free?
It's not really a tip. I didn't choose to do it.
It's gratuity, it's mandatory. Is that a tip? If so,
(33:06):
and I am a CPA who does individual tax returns
at H and R Block, yep. Can I say that
my tax return cost just went from three hundred dollars
down to two hundred, but every single bill comes with
a fifty percent gratuity baked into it?
Speaker 2 (33:19):
I don't know, can I?
Speaker 3 (33:20):
I'm not sure? What if we determine that this is
only specific to certain industries that ought to fix the problem,
only the restaurant industry, and uh, this specific industry fixes
this problem? Well, okay, then if I own a restaurant,
let me just think this through for a minute. Here,
can I share in gratuities? Because if so, if I
(33:42):
own that restaurant, or I'm the manager of the restaurant,
and I can share in gratuities, what I would like
to do is make every menu on my item, item
on my menu five dollars with a five hundred percent
mandatory gratuity. Is that all right? This is so needlessly complicated.
Speaker 2 (33:59):
Well, let's go let's go even just you know another. Basically,
let's say let's say I'm a restaurant owner. Hey, my
employees are now not being not being taxed on those tips.
I want to try to lower the minimum wage further
for restaurant workers reduce my costs.
Speaker 3 (34:12):
Sure, so I've just brought up some of the really
complex issues with trying to draft the legislation around this.
I mean, the other stuff that I think people are
gonna find distasteful. You can bet that if they don't
draft this properly, then the first people to implement tipping
are going to be like hedge fund managers. That's what
(34:33):
I would do. I don't know how I would do it,
but I would go and change it. I pay for
the attorneys. I would change it. I would change the
structure to make sure that a good portion of my
hedge fund profits are coming from gratuities instead of major charges.
The other really important things here again not that gratuities
today are a massive portion of total incomes across our nation,
(34:57):
although I suspect that they would grow if we suddenly
made them complete the tax free. They are a portion
of what pays for so security and medicare. So you're
just you know, you're ruining that even income stream and
making those problems a little bit worse. And then finally,
if you thought that tipping was annoying, now wait until
(35:17):
you see what it looks like when the income received
from tips is completely tax free. It's going to be everywhere.
It's going to be every single time you do anything
that requires exchanging money. Right, there's going to be that
annoying tip screen with that person staring in front of you,
and they should because you're not gonna pay any taxes
(35:41):
on that tip. That's a huge deal. You're gonna see
it everywhere you go if you go this route.
Speaker 2 (35:46):
Be honest, let's just talk about something more fundamental. Even
if you are working and earning a living through your work,
why should someone working at a restaurant who receives their
income through tips receive different tax treatment from you because
(36:11):
you work at I don't know Target. You're you're you're
both waking up and doing a full day's work and
you get told no just because you're at Target and
not at I don't know Abe and Lewis that. I mean,
those an't quite comparable in terms of the price point,
(36:33):
but you know Target versus Applebee's. Hey, why are you
being treated differently from a tax perspective? It's just not
something that clicks. You're you're both showing up and doing
an honest day's work, and just because one person receives
more of their income and tips as opposed to not,
(36:53):
it's silly. You're gonna have it be completely different.
Speaker 3 (36:57):
It's absolutely silly, and it's just pandering to a very
important state for the election, let's be clear about that.
But yeah, the consequences I would classify this on the
same scale of stupidity as the California fast food minimum
wage law. I think it gets to that level for
me because clearly no one has thought through the consequences. Nobody,
(37:21):
and it's going to distort markets so horrifically, except this
time it'll be nationally. And the concerning piece to me
is you have both major presidential candidates now pushing it
as a campaign promise right like that makes it far
more likely to go through. Think about tariffs, think about trade.
(37:42):
These are areas where both parties fundamentally seem to agree,
and whether you agree or not, that has meant much
higher tariffs in place.
Speaker 2 (37:51):
If you want to improve the conditions of working people
from a tax perspective, why not just lower tax rates
for people making lower incomes. Hey, I'm gonna cut taxes
for people making under seventy five thousand by ten percent,
by twenty percent. I'm gonna get rid of it altogether.
(38:12):
If that's what you really want to do. I'm not
saying this is good or bad, but let's let's get
rid of the the this. Let's take a quick break.
We got more financial exchange coming up an hour two
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(01:04):
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Speaker 2 (01:13):
I hope everyone had a great weekend. It's Chuck, Mike
and Ben with you today and we're kicking things off
this week, and what is going to be busy week
of economic data overall. We've got producer price index data
out tomorrow at eight thirty am, Consumer price index data
out Wednesday at eight thirty, retail sales data and weekly
jobbles claims Thursday at eight thirty, and then Friday at
(01:36):
eight thirty Sensing a pattern here, we get housing starts
and building permits, and then Friday at ten am consumer
sentiment data from the University of Michigan. So we've got
something every day this week aside from today. Today is
just kind of boring, which is fine if you don't
want to repeat the excitement of last Monday, when that
(01:56):
was exciting, when every not everyone, when a bunch of
people thought that the financial world was ending, acting as
if they had not been through two thousand and eight,
when in fact they had lived through it. So in
terms of where we sit today, at the close on Friday,
(02:19):
the S and P five hundred was almost back to
where it was the previous Friday, which, again, if you've
been through you know, downturns in markets, they don't typically
go like two thousand and eight, where they just fall
thirty five percent in the span of you know, three weeks.
Typically downturns might have multiple legs. But look, this one is,
you know, certainly not playing out as that you know
(02:42):
March of twenty of twenty twenty period did in that, Hey,
we've had a little bit of a bounce. The S
and P is now less than six percent off its
all time high, and we're going to see how the
data develops over the next month or so to see
where the next leg of this puppy ends up going.
Speaker 3 (02:56):
Basically back to where we were on Friday's close.
Speaker 2 (02:59):
If you freaked out up Monday, look, there's two different
things to say. If you were just nervous because hey,
the market's down and I don't know what to do, natural,
totally normal. If you're going around saying that the financial
world is ending in the Fed needs to cut interest
rates and this is going to be the greatest market
(03:19):
collapse ever, which some people were saying, yes, then you
need to check yourself before you wreck yourself.
Speaker 3 (03:27):
Because you look a little bit foolish today, you look
really stupid. We also have earnings from Walmart and Home Depot,
not exactly the biggest market movers out there, but you know,
interesting earnings to report employer in the nation.
Speaker 2 (03:41):
Consumer spending for both of them. What are people spending
money on? Like, that's what matters. I don't care what
they're going to say about how they're hiring. I care
what they're going to say about, Hey, how are you
actually seeing sales moving? Is it like spring of twenty
twenty two when you're saying, hey, there's a real problem
here or is it yeah, like things have slowed a
little bit, but we're fine.
Speaker 3 (04:02):
I would describe Wednesday's Wednesday is CPI correct?
Speaker 2 (04:05):
Ah?
Speaker 3 (04:06):
Yes, I would describe Wednesday's CPI report as the least
important inflation report that we've received so far this year.
Depends obviously, if it, you know, burns down the barn,
then it's a really important one. But looking at things
right now, inflation has been a really important data point.
(04:26):
It was higher than anticipated in Q one. We were
waiting for it to cool. It did cool. I am
gonna consider it going into it. This is the one
that I'm probably least concerned about and least interested in
so far this year.
Speaker 2 (04:41):
I don't think it's the most important release of the week,
and so I think you can say that in that Hey,
as long as it goes to expectations, yeah, it's not
gonna change things at all. If it comes in hot,
then all of a sudden you've got this problem where
you're like, oh, what the heck do we do now?
Speaker 3 (04:57):
Yeah, but then you have the stagflation folks coming back exactly.
Speaker 2 (05:00):
Then Jay Powell would be able to see both the
stag and the flation, and that would be problematic for
him since a couple months ago he remarked that he
could not see the stag nor the flation. That was
actually a quote from him. Again, this is where we
are today. The most important release of the week, in
my opinion, is that retail sales data on Thursday. And
(05:22):
the reason why is that the concern that we are
seeing right now is largely centered around consumer spending. And
granted we've been hearing it a lot from airlines and
hotels and Disney, and those aren't going to show up
in retail sales because they're not retailers. They sell services
and experiences and stuff like that, and retail sales is
(05:45):
again exactly what it sounds. Just look at the categories
that they split it into. Its gas stations, furniture stores,
electronics stores, building material, food and beverage, health and personal care, clothing,
boarding goods, general merchandise, miscellaneous store retailers, nonstore like Amazon,
(06:05):
food services, and drinking places. It's stuff that you can
walk into a place with with money and walk out
with stuff like Those are the stores we're talking about.
So I do think this is an important one because
right now the estimates are for a point two to
two point three percent monthly growth in retail sales spending.
(06:26):
If we are able to show that, hey we're starting
to rebound and build a multi month trend. Last month
was better than expected after upward revisions to the prior month. Okay,
now we've got something that's going on here where Yeah,
the rumors of the consumer's demise would be greatly exaggerated.
Maybe maybe it's just the reverse of the shift that
(06:49):
we saw in twenty twenty two when people went from
buying grills to going on trips. Maybe now what we're
seeing is, hey, we've done enough travel for the last
little bit. We're pulling back on that spending, But we're
buying more grills again because it's been a while, and
you know, there are people that now have houses that
didn't back in twenty twenty two. There are people that
(07:09):
have moved into new places because remember, even with housing
activity being low, you're still seeing four million existing homes
a year that are being bought and sold. Yeah, and
that means that people have changes in situation where they
might need new stuff, and so you get new people
coming into the pipeline who might want to buy things
that didn't back in twenty twenty two.
Speaker 3 (07:28):
The other economic data point that I don't mean to
make too much of because we do get it every
single week. But now that we have crossed that sum
rule threshold that we spent all last week talking about
every single week, the Thursday weekly jobless claims matter a lot.
They again, we get them every single week, so it's
not as though it's you know, once a month or
once a quarter report that we're waiting on. But now
(07:50):
that we have crossed that threshold, they do matter a
lot more and a lot of focus is going to
be on them, even if you just get a one
week blip, which we tend to tell you to ignore
is to get a lot of attention from investors, and
so that's another item to keep an eye on.
Speaker 2 (08:03):
So that's what we've got going on in markets this week.
Just do a quick little recap of last week. There's
a piece from the Wall Street Journal here. It's titled
investors borrowed like crazy during the rally. Now they're paying
the price, and it's talking about tales old as time,
how a little bit too much leverage led to a
(08:24):
big problem for a number of investors. Listen, this is
what it always is, that there are only two things.
This is not my quote. It's from a guy by
the name of Ben Hunt that I follow, and he says, look,
there's two things that always end up blowing up markets.
Leverage and securitization. There's the only tools that financial institutions
actually have. It's how can we borrow against this and
(08:46):
how can we package it up to sell it.
Speaker 3 (08:49):
That's it.
Speaker 2 (08:49):
There's nothing else that's new. It's whether you're talking about
you know, mortgages back in two thousand and eight, whether
you're talking about the carry trade this week, whether you're
talking about you know, FTX back in you know two
that was a twenty one when it blew up or
twenty two, I don't even remember. Now the story is
the same each time. It's too much leverage and trying
(09:11):
to securitize all of the stuff that you've leveraged that
ends up blowing you up.
Speaker 3 (09:16):
That's what does we consistently see the securitization piece, right,
I mean, was it just this year last year that
the bitcoiny tfs were approved Early this year was like February,
I think, So we've got that securitization. Recently we've covered
things like the boomer Candy articles, these new securitized options
trades that are available to So this is a constant,
(09:39):
constant move on the part of the financial industry. And
last week we saw a relatively minor blow up at
least domestically, but it was this overseas it was bigger.
Speaker 2 (09:49):
Yes, you know, if you were in Japan and you're like, hey,
the market's down twenty percent in three days, what gives Well,
remember then rallied ten percent the day after, which doesn't
get you back to where you were, but sure it
makes you feel a little better or at least. But
the premise here is, look, a lot of these strategies
that are employed by hedge funds. They don't just go
out and say, yeah, we're gonna do this, you know,
(10:09):
just with with the money that we have. They might
employ ten and twenty and thirty x leverage in order
to generate the returns they want to. And when something
moves against them and they have to unwind that, you
get this violent snap in markets where you have these
kinds of weeks of volatility like this, and it takes
a little bit of time just to still see you
(10:31):
know what, everyone, it's the Warren Buffin quote. You know, hey,
when the tide goes out, you see who's swimming naked.
We're still looking for bathing suits right now.
Speaker 3 (10:41):
Is there a not to my knowledge, I don't believe
there is. I mean, is there a good way to
be able to monitor leverage being taken in certain markets?
I'm sure in like I know, for instance, the Saint
Louis FED publishes domestic us margin balances, but that wouldn't
have told you really anything about bets being placed on
Japanese yen, for example, which is what causes most recent
(11:04):
blow up. Like, I don't know how you search for
a debt bubble.
Speaker 2 (11:09):
The average retail investor can't there are some tools and
things that are available to you know, hedge funds where
they can you know, get a sense of what other
investor positioning looks like and where a leverage might be.
But even those are not exactly the most accurate all
the time.
Speaker 3 (11:26):
It's insinuations.
Speaker 2 (11:28):
Yeah, it's something where I don't think a retail investor
is going to have any meaningful success trying to play
that game. Let's take a quick break here. When we
come back, we'll talk a little bit about what's going
on in fixed income markets with bonds, and then a
little bit more chatter on inflation.
Speaker 1 (11:48):
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Speaker 2 (12:43):
There is a piece in Bloomberg today. It's titled bonds
are Back as a hedge after failing investors for years.
So a couple things that we need to talk about here.
The first is that in terms of bonds failing investors,
it really was twenty twenty two when bonds.
Speaker 3 (13:01):
Failed and failed investors.
Speaker 2 (13:02):
Yeah, the Bloomberg US aggregate bond indecks at its bottom
that year, which was in October of twenty two, was
down about eighteen and a half percent, which was again
admittedly not fun. When the thing that you buy in
order to you know, have some ballast in your portfolio
and you say, hey, I want this to be stable
loses almost a fifth, it's.
Speaker 3 (13:23):
Kind of an important thing for us to define, actually, Like,
there are a lot of reasons why investors buy bonds.
But when it comes to the average individual investor.
Speaker 2 (13:31):
It's, hey, this is my money that I want to
be able to rely on if my stocks go down.
Speaker 3 (13:35):
Yeah, that's really the only reason that I can think
of for the average you know, individual person to go
buy bonds. It's yeah, I need a hedge.
Speaker 2 (13:43):
And so the draw down there was significant again in
eighteen percent draw down, You're like, what gives what happened? Well,
here's the thing, and this is why I kind of
look at you know, after years of you know, after
failing investors for years, Well that was the bottom of
the bond The Bloomberg US Aggregate Bond Index never touched
that level again and is now up about eleven percent
(14:06):
off of that low.
Speaker 3 (14:08):
Meaning it hasn't made its way back to those highs. Right,
it has not yet gotten back to all time highs. Right,
I'm not This is just the index. I don't know
how they calculate. I think it's total return, or maybe
it's the level. Whatever it is, the index is saying
it's not there. But the other thing is, if you
look back to this index's creation, which was back in
(14:29):
the mid nineties, at least in the format that I
have data going back to this is the only time
that there was anything more than a ten percent draw down,
and the next largest one was about five percent, and
that was back in two thousand and eight for a
very brief period when the financial world was ending. Other
than that, you basically don't have any meaningful drawdowns. So
(14:50):
I do take issue with the fact that bonds have
failed investors for years. They had a bad year in
twenty twenty two, and other than that there were turns
haven't been great because interest rates were low, But it's
hard to say that they failed investors for years in
any meaningful way. They acted predictably for most years other
than twenty twenty two.
Speaker 2 (15:10):
Correct, Now our bonds actually back well. First of all,
what does it mean for bonds to be back, Mike?
Is this is this piece making the case that hey,
now it's safe to buy them and you don't need
to worry. Is this making the case that they're doing
what they should do in times of stress? What are
they making is the case?
Speaker 3 (15:29):
The only case that they're making is that they are
no longer correlating to equities, and we saw that over
the last week, especially when people got spooked about the
state of markets in the economy and where did they
pour into? Largely bonds, long term government bonds.
Speaker 2 (15:44):
So this is important in that it means something today
in that we have what's called a negative correlation between
stocks and bonds. When your stocks go up, your bonds
are going down. And when your bonds go I'm sorry,
when your stocks go down, your bonds have moved up.
The thing about correlations is they're stable until they're not,
(16:04):
and they don't always move the same way. And in
the case of this stock bond correlation, it's been one
that's been very volatile over the last couple of years.
There has been no consistent correlation between them. So the
thing that I would caution about this piece, and you know,
just about reading this in the situation in general, is hey,
just because you had one instance of a few weeks
(16:27):
where stocks went down and bond values went up, it's
not inherently predictive of what we're going to see over
the next few weeks, months, or years. And you can't
take anything from what just happened.
Speaker 3 (16:39):
No, but but it's tough for me to envision without
another bout of inflation, a circumstance where we get back
to twenty twenty two. Yes, I'd say that's fair, Like, yeah,
it's possible, difficult for me to vision, but yeah, we
should definitely not read into what's happened over the last
(16:59):
week as oh, well, now we're back to normal where
bonds do the opposite of stocks forever.
Speaker 2 (17:05):
Yeah, I think that's fair. Another piece from the Wall
Street Journal, inflation hurts most for the things that we
can't skimp on. Look, you can file that under you know,
really obvious headlines, because yes, if the things that you
can't skimp on go up in price, of course it's
gonna hurt the most there. And what it's talking about
is the fact that the places where we've seen improvement
(17:25):
in prices are not typically thought of as necessities. You're
not seeing, you know, meaningful improvement in food prices and
stuff like that. Yes, the rate of inflation hasn't gone up,
but as we talk about quite often, it's not like
the prices for those who have gone down. The places
where you are seeing prices going down are the same
(17:46):
places that we usually see prices going down. TVs great
Now you can get a sixty five inch TV for
four hundred dollars instead of a fifty five inch Okay,
that's that's fine. Plane tickets, all right, Well, I don't
need to go on a flight, So that's great if
I'm available to and if I can afford to, but
that's not necessarily helping me. Car prices have come down. Again,
(18:10):
it's not really a necessity for families in terms of
like buying a new car. You might need transportation, but
you might be able to fix your old when or
buy a used one.
Speaker 3 (18:18):
Here's where I'll disagree not with you, Chuck, but with
the writers of this article, because they seem to have
cherry picked some stuff here. They do accurately point out. Look,
rent electricity bills both up ten percent or more over
the past two years. Car insurance. Again, the car price.
You might not need a new car, but the car
insurance you pretty much have to have nationwide, other than
in New Hampshire. I think New Hampshire might be the
(18:38):
only state that doesn't require car insurance. Those car insurance
rates are up forty percent. So they're cherry picking these
data points. But to your point, they completely ignored the
fact that food inflation basically been zero for the last
twelve months. Yeah, and again, that does not mean that
food prices are back to twenty nineteen levels. That doesn't
(18:59):
mean that it's comfortable to go to the grocery store.
I'm not making any of those claims, but the authors
here seem to be pointing out, Oh, you know, every
price for everything that you need to buy is continuing
up at a stubborn rate. And that's not really what
I'm seeing. It's very much a mixed bag.
Speaker 2 (19:16):
No, And I think that's fair because when you go
and plug through the CPI data, you do see that, hey,
it is more of a mixed bag over the last
twelve months. Like, yes, if you're looking at the last
two years, of course everything everything, Yes, you'd be hard
pressed to find stuff that isn't up meaningfully. The last
year has been a different picture. To take a quick
(19:37):
break here. When we come back, it's Wall Street Watch
and we're talking oil.
Speaker 1 (19:42):
Like us on Facebook and follow us on Twitter. Act
TFE show breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch. A complete look at what's moving markets so
far today right here Financial Exchange Radio Network.
Speaker 4 (20:03):
Alright, markets are in currently are currently in mixed territory.
To start the week, the Dow Jones is down fifty
six points, or zero point one four percent. The S
and P five hundred is up fifteen points, or three
tenths of a percent. The Nasdag's up one hundred and
four points, or up six tenths of a percent. Shares
of Starbucks are up three point seven four percent after
(20:26):
The Wall Street Journal reported activist investors Starboard Value took
a stake in the chain in an effort to boost
its stock price. Pharma stock Eli Lilly is flat following
an upgrade at Deutsche Bank to buy from hold. The
bank cited Eli Lilly's recent earnings beat and called the
stock a low beta, high growth Unicorn. Jet Blue Airways
(20:47):
shares are down thirteen percent after the airline announced plans
to offer four hundred million dollars of convertible senior notes
due in twenty twenty nine. Robinhood shares are up three
percent on the back of an upgrade to overweight from
neutral by Piper Sandler. The firm said Robinhood will benefit
in the long haul from quote continued growth in global
retail and derivatives trading, as well as the generational wealth
(21:11):
transfer from baby boomers to their children, and finally, Dane
to look at Qualcom. The shares are down two point
six percent after Wolf Research downgraded the chip maker to
peer performed from outperform. The firm said Apple using its
own internal modem will finally have an impact on Qualcom,
adding that premium Android has been by now been normalized
(21:34):
and IoT growth will likely be a tougher sell to investors.
I am Ben Kitchen and that was Wall Street Watch, Mike.
Speaker 2 (21:41):
We've got a piece here from the Wall Street Journal
talking about opekan their projections for oil demand, and I
don't know what to make of this exactly, but here's
what it says that the Vienna based cartel now forecast
demand to grow by two point one one million barrels
a day this year, reaching a total of one hundred
(22:02):
and four point three million barrels a day. They had
previously expected gross to be two point two five million
barrels a day, so they're saying it's going to be
about one hundred and forty thousand barrels lower than they anticipated,
largely because of softness in the Chinese market.
Speaker 3 (22:19):
So I guess I have two takeaways on this one.
We always generally discuss how data from China is pretty
notoriously unreliable in terms of telling you what's going on
in the economy. Yeah, this is one of those indicators
that you can take a look at and say, as
little as I trust Opek, I'm willing to bet that
they have a pretty good forecast of how much China
(22:39):
is going to consume in oil. The second piece that
I am pretty shocked by U and I would want
to dive into the details a little bit more here,
But the historical average pre COVID for demand was only
sitting at one point four million barrels per day. So
you're telling me that since COVID we've seen a fifty
(23:01):
percent surge in demand for oil. I know the economy
is still kicking.
Speaker 2 (23:07):
Is that one point four million mean? I was trying
to understand that because we use like one hundred million
barrels a day worldwide. So when it says demand demand
is still at healthy levels, well above the historical average
of one point four million barrels a day seen before
the pandemic, what is that? I don't know what it
feels like there's a word missing in the article.
Speaker 3 (23:28):
Again. Where I'm landing is they're saying the forecast now
is two point eleven, whereas previously, like five years ago,
is the insinuation, we were at one point four, which
would be a fifty percent surgeon daily demand. I don't
know if Wall Street.
Speaker 2 (23:42):
Journals is incorrectly we don't use We use one hundred
million barrels a day.
Speaker 3 (23:45):
Mike, right, Okay, So so I don't know what that
one point for is referencing.
Speaker 2 (23:50):
Yeah like that that's I don't know what any of
this means in this piece.
Speaker 3 (23:56):
Maybe it's alst average growth was one point four min
prior to the pandemic, and now we're growing our demand faster.
Speaker 2 (24:05):
But that's dumb too, because the world has more people
than that.
Speaker 3 (24:07):
Yeah, not a helpful metric.
Speaker 2 (24:09):
And the other thing that would be useful is, hey,
how accurately does OPEC typically forecast actual oil demand? Like?
Is this something where they're usually really good at it?
Are they off whenever we get into energy markets? I
just look at it and I go, I don't know
what you're actually trying to tell me? And what is
just noise when I read these pieces?
Speaker 3 (24:30):
So what conclusion, if any, do we have here? Chinese
oil demand is slightly weakening compared to previous forecasts.
Speaker 2 (24:37):
And the world uses oil.
Speaker 3 (24:39):
Okay, we've concluded those two items.
Speaker 2 (24:41):
Other than that, like, I kind of look at this
and I'm like, I don't know what this means. And
here's the other thing on China, just like you don't
know that this is necessarily an indicator of the Chinese
economy because fifty percent of all new vehicles being sold
in China now are electric are electric. Yeah, So it
(25:01):
sort of loses the proxy. It loses the value of
being a proxy of Chinese growth if most of the
growth in vehicle demand is now on the ev side,
which is being fueled by coal and that gas not
by oil. So I struggle to figure out what this
is other than like an opek.
Speaker 3 (25:21):
Hopefully some bad news for opek.
Speaker 2 (25:23):
Well here's here are other places that my mind goes, Okay,
so they think it's going to be slower growth. Does
that give them cover to cut production if they want
to do they actually need to cut production? Or is
growth going to be stronger than that. It's too gamey
and not like you know when you're eating elk. It's
just it's too much of a game being played.
Speaker 3 (25:45):
It feels like, yeah, maybe maybe this is again you know,
you and I have talked at length about how the
most difficult thing that we can imagine, or one of
the more difficult things to imagine, is playing the game
of predicting oil prices and betting on that. And so
perhaps this is just us leaking into this story a
little bit too much, but it seems like a completely
(26:07):
opaque forecast in terms of what they're actually predicting here
and what it means for markets.
Speaker 2 (26:12):
You know, it's like you look at Opek and you say, okay,
the president of the Republic of the Congo probably a
bad example because their production is on the lighter side
of the cartel. But you go on, you say, okay,
the UAE produces, you know, three million barrels a day
(26:32):
of oil. If the leader of the UAE wakes up
and says, you know what, having a bad day, let's
just stick it to Europe today, how do you know, Like,
how do you make sense of that? It's not a market,
it's one guy deciding what's gonna happen. And that's why
I struggle so much with it.
Speaker 3 (26:53):
It's more of a market today than it was thirty
years ago. Fortunately it is right like with domestic with
the US free production being a much bigger chunk of this.
It's it's much less possible for what the scenario that
you just described to occur today compared to say, the
nineteen seventies. And that's the good news sort of.
Speaker 2 (27:15):
But also, I mean, the three biggest countries in OPEC
are Saudi Arabia, Iraq, and Iran. Saudi awake, Saudi Arabia.
Speaker 3 (27:22):
Wait, sorry, production wise or.
Speaker 2 (27:24):
Production wise, Saudi Arabia wakes up and says, gee, all
this stuff with Iran is really grinding our gears. You
know what we're gonna do. We're just gonna turn on
the spigots and screw the Iranians.
Speaker 3 (27:36):
Yeah, like it could happen.
Speaker 2 (27:37):
It could happen, and you just you don't know what
pushes them over the edge, as opposed to, Hey, you know,
McDonald's is discounting this and taking about okay, like we
understand how human behavior is gonna workause there's millions of
people who go and buy those things and work there
and YadA, YadA. This is just kind of well, we
don't like you today, so screw it. We're gonna hit
(27:59):
this button. And that's literally what happened in twenty fifteen
and twenty sixteen, when Russia said, hey, we're tired of
losing market share to US shale. We're tired of losing
market share to US shale. You know what we're gonna do.
Speaker 3 (28:15):
Try and put them out of it.
Speaker 2 (28:16):
We're gonna pump everything that we can. And so gas
prices fell by about thirty percent over the subsequent six months.
A bunch of people lost their A bunch of people, right,
A bunch of people in Texas, North Dakota, and Pennsylvania
lost their jobs, all because the Russian government woke up
and said, you know what, we don't want you taking
market share from US.
Speaker 3 (28:37):
Pretty tough to predict that type of thing, Yeah.
Speaker 2 (28:39):
It really is. Do you know who the newest member
of OPEK is, the Congo No? Yeah, they got admitted
in twenty eighteen. How does one apply to join OPEK?
I would imagine it's pretty shady, you know. Is there
a form that I can fill out on the website?
Speaker 3 (28:56):
No, no, there's not. You have to do some really
dangerou stuff would be my guess.
Speaker 2 (29:00):
Other questions that I have how are some of these
countries in OPEK?
Speaker 3 (29:06):
Well, it's always entertaining to go through them because they
all run they have very little in common, and too
many of them hate each other.
Speaker 2 (29:14):
Yes, they don't really like each other. But here's the
one that gets me right now. Equatorial Guinea. It's in
Central Africa. It's been in Opek since twenty seventeen, so
it's a new admission. They produce eighty thousand barrels a
(29:35):
day of oil.
Speaker 3 (29:37):
So what gets you there?
Speaker 2 (29:39):
That's like one really big well on an offshore rig?
Speaker 1 (29:45):
What like?
Speaker 2 (29:46):
Why why did Opek want them? What did they want
from Opek? What are we really doing? How come they're
included in Opek but Russia's in Opek? Pus you know?
Speaker 3 (29:58):
Like yeah, like I said, I think that the answer
is that it's just really shady. And so scratch my back,
I'll scratch yours. I want an investment in a newport
from Saudi Arabia. Great, you have to join OPEK and
listen to what we say.
Speaker 2 (30:19):
So just it's very confusing. Yeah, let's take a quick
break here. When we come back, Mike, should we talk
uh tip taxing again?
Speaker 3 (30:28):
Yeah, let's talk a little bit about taxes on tips.
Speaker 2 (30:30):
Let's talk about taxes on tips. Yeah, that sounds like
a great plan.
Speaker 3 (30:33):
When we return, this is.
Speaker 1 (30:35):
Your home for the most comprehensive coverage of the economy
and the trends on Wall Street. This is the Financial
Exchange Radio Network. The Financial Exchange streams live on YouTube.
Like our page and stay up to date on breaking
business news all morning long. This is the Financial Exchange
Radio Network.
Speaker 2 (31:04):
All right, Mike, it's time to talk a little bit
about tips again, which normally we only do around I
don't know, a few times a year when we just
complain about the spreading of tipping into places where it
previously didn't exist.
Speaker 3 (31:17):
I think it's usually around the holidays, no holiday tipping.
Speaker 2 (31:20):
I don't have a problem with No. That's when we
talk about it, though, oh maybe, Yeah, we complain about
it several other regularly scheduled intervals throughout the year, though indeed,
but it was brought up a couple of weeks ago
simply because Donald Trump said, hey, I want to as
part of my platform, make any revenue, any income collected
by individuals as tips tax free. And we said, hey,
(31:45):
this is not a great idea, because you're just going
to get a bunch of people trying to classify more
stuff as tips. Why would you want to exclude an
entire classification of income from being taxed.
Speaker 3 (31:55):
You'll make the Social Security and Medicare problems worse.
Speaker 2 (31:58):
Whole big thing.
Speaker 3 (31:59):
Yeah.
Speaker 2 (32:00):
Over the weekend, Kamala Harris comes out and says, hey,
I'm for getting rid of taxes on tips as.
Speaker 3 (32:07):
Well, because which I want to win Nevada two, Which.
Speaker 2 (32:09):
Now means that we are just mindlessly pandering to those
who work in the hospitality industry in Nevada. Granted it
would apply, you know.
Speaker 3 (32:20):
That's where the big service industry is. But look, think
about what we're doing to the tax code. If you
do this now, it's all of a sudden, Hey, and
we're doing this, you know, carve out for tips, which
we then have to define and then we have to
have the lawsuits about what classifies as a tip and
what isn't. Just I want to go through real specifics here. Okay,
So let's say that I operate a restaurant and every
(32:42):
check has a mandatory gratuity, which are fairly common. Is
that not every check usually six people or something like that. Hypothetically,
you could say, look, I've seen now tipping. It's now
eighteen percent cretuity on every single bill. Is that tax free?
It's not really a tip. I didn't choose to do it.
It's gratuity, it's mandatory. Is that a tip? If so,
(33:06):
and I am a CPA who does individual tax returns
at H and R Block, yep. Can I say that
my tax return cost just went from three hundred dollars
down to two hundred, but every single bill comes with
a fifty percent gratuity baked into it?
Speaker 2 (33:19):
I don't know, can I?
Speaker 3 (33:20):
I'm not sure? What if we determine that this is
only specific to certain industries that ought to fix the problem,
only the restaurant industry, and uh, this specific industry fixes
this problem? Well, okay, then if I own a restaurant,
let me just think this through for a minute. Here,
can I share in gratuities? Because if so, if I
(33:42):
own that restaurant, or I'm the manager of the restaurant,
and I can share in gratuities, what I would like
to do is make every menu on my item, item
on my menu five dollars with a five hundred percent
mandatory gratuity. Is that all right? This is so needlessly complicated.
Speaker 2 (33:59):
Well, let's go let's go even just you know another. Basically,
let's say let's say I'm a restaurant owner. Hey, my
employees are now not being not being taxed on those tips.
I want to try to lower the minimum wage further
for restaurant workers reduce my costs.
Speaker 3 (34:12):
Sure, so I've just brought up some of the really
complex issues with trying to draft the legislation around this.
I mean, the other stuff that I think people are
gonna find distasteful. You can bet that if they don't
draft this properly, then the first people to implement tipping
are going to be like hedge fund managers. That's what
(34:33):
I would do. I don't know how I would do it,
but I would go and change it. I pay for
the attorneys. I would change it. I would change the
structure to make sure that a good portion of my
hedge fund profits are coming from gratuities instead of major charges.
The other really important things here again not that gratuities
today are a massive portion of total incomes across our nation,
(34:57):
although I suspect that they would grow if we suddenly
made them complete the tax free. They are a portion
of what pays for so security and medicare. So you're
just you know, you're ruining that even income stream and
making those problems a little bit worse. And then finally,
if you thought that tipping was annoying, now wait until
(35:17):
you see what it looks like when the income received
from tips is completely tax free. It's going to be everywhere.
It's going to be every single time you do anything
that requires exchanging money. Right, there's going to be that
annoying tip screen with that person staring in front of you,
and they should because you're not gonna pay any taxes
(35:41):
on that tip. That's a huge deal. You're gonna see
it everywhere you go if you go this route.
Speaker 2 (35:46):
Be honest, let's just talk about something more fundamental. Even
if you are working and earning a living through your work,
why should someone working at a restaurant who receives their
income through tips receive different tax treatment from you because
(36:11):
you work at I don't know Target. You're you're you're
both waking up and doing a full day's work and
you get told no just because you're at Target and
not at I don't know Abe and Lewis that. I mean,
those an't quite comparable in terms of the price point,
(36:33):
but you know Target versus Applebee's. Hey, why are you
being treated differently from a tax perspective? It's just not
something that clicks. You're you're both showing up and doing
an honest day's work, and just because one person receives
more of their income and tips as opposed to not,
(36:53):
it's silly. You're gonna have it be completely different.
Speaker 3 (36:57):
It's absolutely silly, and it's just pandering to a very
important state for the election, let's be clear about that.
But yeah, the consequences I would classify this on the
same scale of stupidity as the California fast food minimum
wage law. I think it gets to that level for
me because clearly no one has thought through the consequences. Nobody,
(37:21):
and it's going to distort markets so horrifically, except this
time it'll be nationally. And the concerning piece to me
is you have both major presidential candidates now pushing it
as a campaign promise right like that makes it far
more likely to go through. Think about tariffs, think about trade.
(37:42):
These are areas where both parties fundamentally seem to agree,
and whether you agree or not, that has meant much
higher tariffs in place.
Speaker 2 (37:51):
If you want to improve the conditions of working people
from a tax perspective, why not just lower tax rates
for people making lower incomes. Hey, I'm gonna cut taxes
for people making under seventy five thousand by ten percent,
by twenty percent. I'm gonna get rid of it altogether.
(38:12):
If that's what you really want to do. I'm not
saying this is good or bad, but let's let's get
rid of the the this. Let's take a quick break.
We got more financial exchange coming up an hour two
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