August 19, 2024 • 38 mins
Chuck Zodda and Mike Armstrong preview this week's Fed meeting in Jackson Hole. Will the Fed set the stage for rate cuts, if so, by how much? How is the US Treasury more powerful than the Fed? Goldman cuts recession risk by 5%, citing latest jobs data. Why are the biggest US companies warning of an AI risk? What is the latest dystopian nightmare coming from the tech world?
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Episode Transcript
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Speaker 1 (00:01):
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Speaker 2 (01:07):
This is the Financial Exchange with Chuck Zada and Mike Armstrong.
Speaker 3 (01:13):
Chuck, Mike and Tucker with you here on. Well, it's
it's Jay Powell goes to Jackson Hole week.
Speaker 4 (01:21):
Fat. You are confused about what day it was, Well.
Speaker 3 (01:25):
I mean, listen, I have my problems, but I know
it's Thursday, so it's it's not a big deal.
Speaker 4 (01:32):
Chuck's been chugging daquill this morning, So just be prepared, everybody.
Speaker 3 (01:36):
In any case, j Powell is heading to Jackson Hole.
He might actually already be there. And each year at
this time, the Federal Reserve goes to Jackson Hole for
what's called their Jackson Hole Policy Symposium. And the premise
of it is pretty simple. The Fed spends a lot
of their time during the rest of the year going
through and setting policy and kind of focusing on what's
(01:58):
right ahead of them, and this is a chance for
them too. While they acknowledge what's you know, immediately ahead
of them, also talk about some larger policy frameworks that
they might want to implement in the future, and generally
talk about the direction in which they want to take
the institution from a policy perspective this year, though, with
rate cuts on the horizon, it seems like the focus
(02:21):
is more likely going to be on hey, Jay, what
are you going to do this fall as opposed to,
you know, new policy proposals that they might be putting
out there.
Speaker 4 (02:30):
Which in my mind is a bit of a shame
since that's all we talk about every other time we
talk about the federal reserve, and so it would be
nice if they could take this moment to step away
and tackle bigger issues like, hey, should we still keep
talking to the public as though we are targeting that
two percent target? Is a two percent target of inflation meaningful?
Or should we be giving a range of targets depending
(02:52):
on other finals? Those are to me more interesting discussions
than are we going to get a fifty or twenty
five basis point cut in September when we when we
down And that's certainly all you're going to hear about,
mainly because that's what markets and and financial news journalism
cares about. But honestly, that's what they talk about every
other time we hear them speak.
Speaker 3 (03:12):
Yeah, it's we get so caught up in oge, like
what's the policy going to be that I think sometimes
we forget about not forget about, but what gets lost
in here is, Okay, what's this actually mean?
Speaker 4 (03:25):
And why are we doing it right? You know?
Speaker 3 (03:27):
Like those are the questions in anything that are important
to ask, Like, Hey, why is it that we're doing this?
If if you were working building a house and you
know the format of the job comes in the next
you know, in the morning and says hey today, no
more nails, just glue, you'd be like, why are we
(03:48):
making this policy change? And and and you know he'd
be like, well, you know what, I just don't like nails. Okay,
that's not really a good reason for that, Like we were.
Speaker 4 (03:57):
Going to push back on this a little bit.
Speaker 3 (04:00):
Likewise, the questions that I think are worthwhile to ask
are ones that you know you brought up there, which are, hey,
why are we targeting two percent inflation? Should we be
targeting two percent inflation? Is monetary policy the best tool
to generate two percent inflation? These are things that actually
help us determine whether we're right or wrong in what
we're doing, because ultimately, any kind of science, it boils
(04:25):
down to one thing and one thing only, which is
how do you know that what you believe to be
true is actually true. And what has always bothered me
a little bit about economics is that it gets talked
about as if it's hard science like physics, when in
reality it's closer to social science like philosophy.
Speaker 4 (04:47):
It's it's not quite.
Speaker 3 (04:49):
There, but it's Ultimately economics is kind of the study
of like human behavior as it affects buying decisions, and
that's not something that is hard coded, like how fast
an object falls int. So I think it's good to
ask questions about, like, hey, why is it that we're
doing what we're doing, because oftentimes you can find that, hey,
we thought that this was doing one thing and we're
(05:10):
doing the wrong thing actually, and maybe we need to
adjust our approach here. And the whole rest of the
year is okay, what you know, how are we reacting
to this crisis in front of us. It's important to
take a step back in anything that you're doing.
Speaker 4 (05:21):
I think, yeah, I kind of think about this in
the same way that you know, our company and other
companies do, like a full day off site of teams
that you know, the idea is to not do the
day job when you are doing that, you know, critical
thinking and looking back at the year that was the
important thing is to get away from Okay, this is
what we do every day, which is, yeah, tackle the
(05:42):
issues of current inflation and current crises and take a
step back and say, okay, well, you know, in our
projections to the general public, in our speeches, are there
things that we, you know, in hindsight said that maybe
it wasn't such a great idea to say, or things
that we didn't say that would have been useful. Those
are I think the opportunities that you have when you
have the Jackson Hole Symposium, and I do suspect that
(06:02):
those conversations will also happen, But primarily people are going
to reporters and everyone else are going to be asking, Okay,
what's the framework by which you cut by fifty bases
points versus twenty five basis points at this meeting coming
up on September eighteenth. So, now that we've gotten out
of the way, Chuck, what the FED should be talking about?
(06:23):
Should we tackle whether or not they're going to cut
by twenty five or fifty bases points at the next meeting?
Speaker 3 (06:28):
Yes, because that's why you're all listening to us, you know.
Let's you know, called spade of spade. So in terms
of the decision making framework here, it is very clear
in my opinion, that the Federal Reserve is going to
begin a cutting cycle.
Speaker 4 (06:45):
Here.
Speaker 3 (06:45):
The question is going to be how fast do they
cut and then how deeply do they need to before
that cutting cycle ends. Let's start with the first piece
in terms of how fast they need to cut MIC
it is still going to be data dependent in that hey,
if the economic data shows a meaningful slowing in US growth,
(07:07):
then fifty and seventy five basis point cuts on a
per meeting basis become in something that's an open question
of hey, are we going to do this or not?
Because you want to move quickly enough that even with
the long and variable lags that monetary policy has, you
want to move quickly enough so that those lags don't
go out too far and you're basically able to preempt
(07:31):
as much of the recession as you can by cutting rates,
which encourages businesses and households to borrow.
Speaker 4 (07:38):
What I would argue is that this Federal Reserve has
made it really clear to us over the last how
long has Powell been in charge of it? Eight years,
seven eight years somewhere in that ballpark. Yet they're not
going to surprise anybody. And so right now, the answer
to this economy at this moment in time is for
a twenty five bases point rate cut. There are circumstances,
(07:58):
very clear circumstances that would call for a fifty basis
point cut, and so one of those would be the
jobs report that we're going to see on Is it
the sixth of September, the Friday? Yes, So let's talk
about the circumstances there. If you see unemployment creep up further,
let's say it goes from four to three where it
is now up to four to five, or frankly even
four to four. Any increased creep of unemployment will be
(08:23):
a reason, in my opinion, to consider a fifty basis
point hike, and the Fed will forecast it. I think
we will know really clearly well before that meeting what
the policy decision is going to be. They do not
like surprising, and I don't suspect that they will hear either.
Do we have another Consumer Price Index report before the
eighteenth of September?
Speaker 3 (08:42):
Chuck, Yeah, So if you look at the schedule that
is going to be coming out in September, just things
that we're going to be getting that could affect this
and really growth is going to be the big thing
because unless inflation prints hot, yeah it doesn't really matter.
But he got ism manufacturing, you got jolt jobs opening,
so those two are matter as well as ism services
and the jobs report. We do have a CPI on
(09:05):
the eleventh of September. Again, I think it's gonna be
kind of a non event unless it prints hot, in
which case, even if it prints you know, point three
for the month, I'm still not sure that it changes
much just because it's one data point, yeah, and it's
surrounded by a sea of otherwise calm ones.
Speaker 4 (09:24):
Uh.
Speaker 3 (09:24):
And then you're gonna get retail sales data on September seventeenth,
right as the FED is meeting as well, So that's
another one where they are going to take it into
account because it's on the Tuesday of that week and
the FED policy decision is on Wednesday. You do have
that playing into it as well, that that data points
at eight thirty in the morning, so they've got, you know,
a full twenty four hours to kind of get it
(09:46):
together and say, Okay, what are we gonna do. So
I think that one's gonna matter as well, because we
just got a good retail sales number. And if you
string together a trend of two against a short term trend,
but you look at it and J. Powell could very
easily say, yeah, the economy looked like it was slowing
in June and July, September. I'm sorry, in May and June,
(10:07):
July and August, data has come in stronger, and as such,
we believe that only a quarter percentage point cut is needed.
Speaker 4 (10:12):
Now tough for me to envision a scenario where no
cut is needed. I mean, if unemployment shoots down, I guess,
then here's the scenario where.
Speaker 3 (10:20):
You get no cut. In my opinion, Yeah, unemployment's got
to be flat to down. Jobs number has to be
you know, two hundred k plus, and you know, retail
sales has to be strong.
Speaker 4 (10:31):
And CPI's got a surprise the up. CPI's got to
print zero point four percent for the month. Yeah, and
then you get, Okay, what's going on here? We don't
want to do anything dumb, So the answer is right now,
expectation for what we're baking in it's a quarter percent hike, uh,
depending on data. Really over the next few weeks leading
right into the meeting itself has the ability to change
(10:55):
that overall expectation. But retail sales data stronger than expected
unless you get some weak job market data. I think
that that twenty five basis point is the likely or
excuse yeah, twenty five basis point cut is the likely outcome.
And like I said, this FED does not like surprising,
so if it's going to be more we'll probably have
a good idea of that well ahead of the meeting.
Speaker 3 (11:16):
Let's take a quick break here and when we come back.
We've been talking about the Federal Reserve quite a bit forever. Yes,
let's talk a little bit about the US Treasury when
we come back, because there's so much focus on the FED.
But you've got a piece today in Bloomberg Opinion talking about, hey,
the Treasury is actually more powerful than the FED. And
(11:38):
it seems to me like we've got a good old
fashioned uh fight bruin here, you know. So we'll talk
about who's more powerful, the Treasury or the Fed.
Speaker 4 (11:47):
Mexican standoff coming up next right after this.
Speaker 2 (11:51):
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Speaker 5 (12:16):
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Speaker 3 (12:55):
Mike, there's a piece in Bloomberg Opinion today. It's tell
you how the Treasury is more powerful than the.
Speaker 4 (13:02):
Is it? They have very different responsibilities. I have a
tough time concluding that the Treasury Department is more powerful
than the Fed. But I suppose I have a tough
time really understanding what that means. I don't think they
have a larger impact on the state of the United
States economy. I struggle to think they have a bigger
(13:25):
impact on markets. So my general conclusion is probably not.
But obviously there is a tremendous amount of responsibility and
power at the Treasury, and it's more of a political
organization or political appointment than say the Federal Reserve, which
maintains much more independence from the White House. So I
guess let's start by talking about the different responsibilities. I mean,
(13:47):
the Federal Reserve is an independent, quasi governmental organization who
has a dual mandate, which is to maintain stable and
low unemployment and maintain stable prices. That's the two things
that they work on. And like I said, they are
very much independent from or generally have been pretty independent
(14:08):
from politics. They do so through their interest rate moves
as well as bond purchasing. They also share a lot
of bank regulation, so regulating local banks and setting rules
for the local members of their jurisdiction. The Treasury Department,
again much more part of the administration appointed by the president.
(14:32):
Confirmed treasure sector is confirmed by the Senate, right, I
would think so, and responsible for issuing different denominations of
debt in order to fund purchases and shooting fund government spending,
and so they too also have a lot of regulatory
responsibility as well, but generally speaking, they manage finances, manage
(14:53):
cash flow, and manage risk of the United States government,
so very different responsibilities. At the point here by Alison
is look that the Treasury Department determines what to issue
in terms of bonds to fund the spending of the
United States government, and lately that's been a lot more
on the short term side of things, which might explain
(15:16):
why rates are so high on the short term. Do
you buy it? No?
Speaker 3 (15:22):
Yeah, Look, here's here's kind of where I land on this. Ultimately,
the Treasury is trying to do one thing, and one
thing only pay the bills. Yeah, it's the only thing
that the Treasury cares about. Now, the Treasury may adjust
the mix of what it is offering in order to
pay the bills in the way it thinks is most efficient,
(15:44):
but ultimately that is what matters is, Hey, how are
we going to pay the bills that the US government
has accrued? And sometimes that results in issuing more T bills.
Short term debt that you know is anywhere from you know,
three months out to uh was a tee bow.
Speaker 4 (16:03):
I think it was like five years. Again, who cares
what the exact terminology is on it. Sometimes it is hey,
we're gonna issue you know, treasury bonds, longer term, ten,
twenty thirty year bonds. But ultimately it's hey, we need
to find.
Speaker 3 (16:17):
Buyers for all of this debt at various different maturities.
And I guess what I'm trying to figure out with
this piece is this piece is making the case that hey,
the Treasury's doing it wrong, like the Treasury is not
doing this right, and they should be doing it differently.
(16:39):
But they don't really propose a solution, and and look
maybe it should be done differently. Well, no, they do
propose that the solution that they say again doesn't even
make sense today, says that's why the Treasury should lock
in low rates and more of its debt while while
it can. It's also why pension funds and individual savers
face un necessary risk and retirement. Basically, it's saying, hey,
everyone's buying too many short term bonds and no one's
(17:02):
buying enough long term bonds.
Speaker 4 (17:03):
But the treasure can't fix that. Well, here's the thing.
Speaker 3 (17:10):
If everyone's doing something different and you're saying, no, it
should be done this way, I think it's worthwhile to ask, Look,
why is everyone doing it the way that they're they're
doing it today, And the answer is because people do
care about annual returns. The point that's made in this
(17:30):
piece is like people are too focused on annual returns
instead of long term planning. Same with you know, insurance
companies and pensions and YadA YadA, and ultimately the way
that long term returns get made is through short term returns.
Speaker 4 (17:45):
Like, yes, I.
Speaker 3 (17:45):
Guess if you wanted to buy a thirty year bond,
you could do that and say, okay, I'm walking in
you know, four percent over that time. But hey, pension
funds that they're not dumb, you know, they're like, they're
pretty good at what they do generally, especially in the
last couple of years. They said, no, interest rates are
going up, we don't want as much of this. Let's
buy more shorter term bonds and then we can buy
(18:08):
longer term when the risk is passed.
Speaker 4 (18:11):
Okay, I mean, who's to say that they did the
wrong thing. Yeah, Furthermore, on the power question, like let's
say I mean power right like the White House, the
president is arguably the most powerful individual in the world.
If the Federal Reserve had a political bias and wanted
to get somebody re elected or elected, I can think
(18:31):
through the process that you would go under. If you
were a bias Federal Reserve that wanted a specific person elected,
you would cut interest rates to get the incumbent. You
would raise interest rates if you didn't want them elected,
you would you know, do bond buying in order to
stimulate the economy ahead of an election. I have a
tougher time imagining what the Treasury would do if they
wanted to exert power on an election. For example, Well,
(18:53):
they can change the mix of what they're issuing again,
you know, so you're messing around with short versus long
term interest rates. It just doesn't have the same impact
to me as the Federalserve does it is.
Speaker 3 (19:05):
I mean, if the Treasury wanted to, they could basically
do what the Fed does, just through less direct intervention.
It would be Hey, if we want to cut interest rates,
we're going to issue less short term debts so that
there's more demand for the same matters, demand for less bonds,
fewer bonds. Okay, great, that's going to you know, push
(19:25):
those prices up and reduce rates.
Speaker 4 (19:29):
I don't know. I mean, I'm with it. It's just trickier.
Six and one is half dozen of another. You know.
Let's take a quick break here.
Speaker 3 (19:36):
When we come back, we got Wall Street Watch, and
then we're talking recession risks.
Speaker 2 (19:42):
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Speaker 5 (20:02):
Well, coming off a winning week where traders saw the
SMP five hundred advanced nearly four percent, markets today are
slightly impositive territory as investors await Erroame piles Friday speeds
at the Central Banks Jackson Hole Symposium. Right now, the
Dow is up by about a third of a percent,
or one hundred and forty three points. SMP five hundred
(20:24):
is up by about a quarter percent or twelve points,
in the Nasdaq up by twenty four points, Russell two
thousand edging about a quarter percent higher. Ten You're Treasure
reeled up by one basis point or suit Me down
by one basis points at three point eighty seven percent,
and crude oil off about one percent, trading just below
seventy six.
Speaker 1 (20:44):
Dollars a barrel.
Speaker 5 (20:45):
Shares an AMD up two and a half percent following
news this morning that the chip maker would acquire ZT
Systems in a four point nine billion dollar deal. ZT
Systems is a tech company based in New Jersey that
produces servers and other equipment used in data centers for
artificial intelligence. Meanwhile, s Day Latter CEO said it's longtime
(21:07):
excuse me es Day Latter said its longtime chief executive
would retire next year. The beauty conglomerate also cautioned that
weak Chinese demand will continue to weigh on business that
stock is flat edging higher elsewhere. Shares in Fubo TV
up by twenty seven percent after a judge on Friday
block the launch of its latest competitor, Venue Sports, created
(21:29):
by Warner Brothers, Discovery, Fox, and Disney. HP down by
four percent after Morgan Stanley downgraded the tech company to
equal weight from overweight overweight, saying it has limited upside
and Palo Alto Networks will report after the closing bell
tomorrow morning. We'll see more retailer earnings from Low's. I'm
(21:50):
Tucker Silvan, that's Wall Street Watch.
Speaker 4 (21:52):
Mike.
Speaker 3 (21:53):
Let's talk a little bit about the difference between a
twenty percent chance of recession in the next year and
a tw twenty five percent chance of recession in the
next year.
Speaker 4 (22:02):
I've going bad news. It would seem to me. No,
I think I've got it, Michael.
Speaker 3 (22:09):
It would seem to me that this means that there's
a five percent difference in the odds of a recession
in the next year.
Speaker 4 (22:16):
Which is useless information. Yes, so Goldman cutting their recession
risk following a better than expected retail sales report as
well as jobs data. Again, the frustrating part is not
only the fact that they do this on an ongoing basis,
but I also fundamentally don't believe that Goldman Sachs uses
(22:38):
this for anything in driving their own decisions in terms
of investments or anything else. Right, I'm struggling to think about, like, Okay, Goldman,
you just cut your chance of recession the next twelve
months from twenty five to twenty How does that change
anything that you do on a day to day basis,
let me actually guarantee you that it doesn't because.
Speaker 3 (23:00):
Goldman Sacks. Again, there are a lot of things, but
they're not dumb. Right, we can all agree Goldman Sacks
isn't dumb. Yeah, I'm with you. You know, we might
have differences of opinion in terms of whether they are
a vampire squid with its tentacles all through humanity, you know,
as Matt Tybee described them a decade ago.
Speaker 4 (23:19):
But listen, they are what they are. They're not dumb.
Speaker 3 (23:24):
When you're talking about Goldman Sachs and their ability to
generate alpha for their clients, and alpha I'll define as
outperformance over your your benchmark. Just to make it simple,
Alpha is one thing and one thing only.
Speaker 4 (23:42):
Alpha is private information.
Speaker 3 (23:44):
Now I'm not talking about material, non public information, which
is illegal to trade on. When I say private information,
that can mean an economic model that you've developed and
not told anyone. It could be a series of you know,
words that you say in your head before you make
a trade.
Speaker 4 (24:01):
Every time.
Speaker 3 (24:02):
It's something that no one else knows, because once everyone
else knows it, it can't generate alpha anymore because everyone's
already trading on it, and so private information is at
the core of any alpha generating strategy. And so when
Goldman Sachs is saying, yes, we you know, our odds
of recession have declined from twenty five to twenty percent,
(24:25):
I know they're not trading on it, because if they were,
they just gave away their edge. So it's it's it's
not something that they trade on there. Furthermore, the entire
like basis for being successful in like general macro trading
is not just hey, what's the chance of X happening?
(24:46):
It's what's the chance of X happening? What are the
consequences of X happening? And then what can I extrapolate
into how that's going to reflect into markets. So even
if you know for certain that a recession is going
to happen, well, how are you actually gonna trade it?
How are you actually gonna invest in it? Because just
knowing it's going to happen is not enough to be successful.
(25:09):
So this, in my opinion, if we're doing like the
dumbness ranking of publicly released data from investment banks, I
put this as dumber than year end s and P
five hundred targets.
Speaker 4 (25:24):
Hmm, yeah, at least the S and P five hundred
year end targets are like, at least they give you
a timeframe, Mike, a twenty five percent chance of recession
in the next year. There's a big difference if it
happens next week versus in July of next year. Yeah, Like,
those are two completely different things. Recession in September of
twenty four versus recession in July of twenty five. They're
(25:48):
both of the in the next year. Even if they're
the exact same recession, they mean completely different things. Furthermore, like,
if you're correct about your S and P five hundred
target for a couple of years in a row, at
least you're going to get featured somewhere, whereas a twenty
percent chance of recession, like, oh, congrats, you called not
having a recession four years in a row. There's just
(26:09):
nothing informational about this or other.
Speaker 3 (26:11):
Things that I just find interesting when we talk about percentages,
because I I'm sorry that I'm letting my my my
nerds show a little bit, but I love talking about
percentages because we're just so bad at them. A twenty
percent chance of something happening means that in an average
work week, if you were giving it that probability, it
(26:31):
would happen once a week. So people say all like
twenty percent, Like, it's a really low chance. Mike, if
I give you a twenty percent chance of having a
car accident this.
Speaker 4 (26:43):
Week, would you like, probably not drive. You'd be like,
I'm not driving, I'm not let work. Something that happens
twenty percent of the time is really frequent. Actually, So
this is why, like when when we have these recession
probabilities that get put out there, a twenty percent chance
of recession, in my opinion, is actually a really high chance.
(27:07):
But Goldman, basically, if you look at this data series
for how they've projected like recession historically, they've always kind
of had a baseline of this. And yet we don't
have a recession every five years. No, we don't.
Speaker 3 (27:21):
And so I find it kind of problematic that they
keep saying that because in general, the probability of recession
like when things as an example, hang on, I need
to find the actual chart just because I need to
find the image, just because I was looking at it
this morning.
Speaker 4 (27:38):
Here we go.
Speaker 3 (27:39):
It's from Nick tim Rose to the Wall Street Journal
who published it. So he went through this, so it's
As an example, it's April of twenty twenty three, Silicon
Valley Bank blew up a month ago, and Goldman Sachs
is saying there's a thirty five percent chance of recession
in the next year.
Speaker 4 (27:58):
It's not quite a coin flip, but it's pretty close,
Mike that we didn't even come like close to recession
in the last twelve months, No, nowhere near it.
Speaker 3 (28:09):
And so this is the stuff that I find rather bothersome.
Is it's just, hey, there have to be some conditions, Goldman.
Even even the last like since when is it, like
October of last year, they were down to a fifteen
percent chance and that's the lowest they've gone. There has
to be some point in time where you're like, no,
(28:30):
there's only a five percent chance of recession.
Speaker 4 (28:33):
No, if you're not any look like a moron when
you do that right in October of seven is the problem.
But if you're not willing to say there's almost no
chance of recession ever, then it's useless. Then it's always
it's even more useless. Yeah, like what are we even
doing here? Yeah? I would categorize this as use uselessly
stupid rather than dangerously stupid, because dangerously stupid is worse,
(28:56):
and we get plenty of that from time to time,
but usually not from Goldman Sacks.
Speaker 3 (29:00):
No, dangerously stupid are the competing pieces published in the
same day and financial media that they're like, here's why
a melt up in stocks is next, Here's why imminent
doom is coming. Yeap, Yeah, Speaking of which, Speaking of which,
Goldman Sachs says us Goldbin Sacks says, US sales forecast
for twenty twenty five or too high, expects sales to
(29:21):
slow in a moderating economy and weaker dollar.
Speaker 4 (29:24):
Your thoughts, Michael, Well, there's only a twenty percent chance
of that happening, So, oh my goodness, Like, this is
what I'm trying to teach anyone listening here, is not
that Goldman Sachs is wrong all the time, because they're not.
Speaker 3 (29:38):
Again, they're very smart people. You don't make the kind
of money that they make by being dumb. I'm not
making moral judgments. I'm not saying that they're like the best.
Speaker 4 (29:47):
I'm not saying they make a lot of money and
you don't do that just by being dumb, greedy, sometimes
breaking the law, like all of these things, maybe, but
not being by being stupid.
Speaker 3 (29:59):
I'm trying to get out to everyone listening is to
think about what you're reading critically and understand that the
reason why this stuff is published is not because they
like inherently just want to educate you about what's going
on in the economy. It's because these help to drive ultimately,
(30:22):
like what like one of the core businesses is for
any investment bank, which is the flow of deals and trades.
Then the real money that gets made in the banking
business is not by owning assets and seeing the value
go up. You know this mic because if you look
(30:43):
at any actual bank, do they want to own houses?
Do they want to own commercial real estate? No, they
want to do deal flow. The whole premise of securitization is, hey,
let me underwrite the deal and then sell it off
to someone else. The real money is made in the
flow of deals, and if you look at investment banks
(31:06):
from that perspective, you get an entirely different understanding of
why they're doing what they're doing.
Speaker 4 (31:11):
In my opinion, that's all I have on this. Anything else, no,
please move on.
Speaker 3 (31:17):
Okay with that, Why don't we take a quick break
here and when we return, should we talk about artificial
intelligence and how it's gonna come for all of us.
Speaker 4 (31:28):
Yeah, let's do that. Next sounds uplifting. Let's do it.
Speaker 2 (31:31):
This is 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
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Speaker 4 (31:54):
Peace stay from the Financial Times.
Speaker 3 (31:56):
More than half the US biggest companies thee Artificial intelligence
is a potential to their business, according to a survey
of corporate filings that how emerging technology could bring about
sweeping industrial transformation. Overall, fifty six percent of Fortune five
hundred companies say that AI is a risk factor in
the most recent annual reports. Michael, in my opinion, this
(32:16):
does not mean that most companies are imminently worried about
AI as something that's going to change their business tomorrow,
but rather their lawyers want to cover their bases so
that they don't get sued by people who own the
stock if AI turns out to harm the company.
Speaker 4 (32:31):
I was gonna say this is CYA yes, which stands
for cover your rear end, So this is not anything
that they are genuinely concerned about at this stage. I
do find Here's what's concerning to me about artificial intelligence
is that already it's a very impressive tool, and it's
(32:51):
pretty much at its infancy right now. So nothing about
AI today scares me terribly, Like, can you make a
scam a little bit easier to convince people love yak?
Can you post it video that looks like it's real
even though it's not absolutely create a picture that's false
and misleading? Definitely, But they're pretty easy to discover and
detect and YadA, YadA YadA. They're pretty easy to discover
(33:13):
and detect and refute now. And that's my concern is
we are very much like, was anyone talking about artificial
intelligence tools other than IBM two years ago? Not really.
Did the average person have any idea what artificial intelligence
tools actually looked like and did prior to two years ago?
Not really. Yeah, so we're at the very beginning stages
(33:33):
of all this, and so is there anything to be
really genuinely concerned about it, even on the part of
corporations right now? No, it's probably lawyers covering their own
rear ends, and we have no idea what those risks
are going to look like in the future, and that's
what keeps me up at night.
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Speaker 4 (34:50):
Mike.
Speaker 3 (34:51):
Do we want to talk about world coin and eyeballs
or why worldcoinbilies?
Speaker 4 (34:57):
Let's talk eyeballs. It's just a weird, weird story. Uh So,
would you like to introduce it from here, Chuck? Or
should I so?
Speaker 3 (35:08):
Sam Altman, who is the CEO of open Ai, creator.
Speaker 4 (35:14):
Of chat gpt if you're unfamiliar, Yes, And he.
Speaker 3 (35:17):
Has another initiative called world Coin, and what he is
doing as part of this is well, it's trying to
verify whether someone is human or not by scanning the
irises kind of. I mean think of if any of
you have seen like Minority Report or any movie in
the future where they scan your eyeballs to identify you.
(35:40):
That's what he's trying to do. And once you do that,
you get a world id passport that you can use
to prove that you're human, because in the future, we're
not going to.
Speaker 4 (35:53):
Know whether a robot is a robot or if it's
a human. I love futurists. I'm big like great for
somebody for planning for things one hundred years ago, but
from now, But can we focus on there? In my view,
is probably not going to be a scenario in my
lifetime where I'm worried about a human looking robot that
(36:14):
convinces me that they are human. I don't think that
that's the most likely outcome. I'm a bit more concerned
about somebody creating content that is genuinely confusing on the
Internet as to whether or not it is true, and
dissemining that information across the globe and generally creating confusion
about the state of something in our world, whether it's
(36:37):
politics or war or any of these things. Those are
the imitations of humans that I am worried about, not
the realistic human being from some Tom Cruiser Bruce Willis
movie that's going to make their way in front of
me and convince me that they are a human being.
How about you, Chuck. Well, here's the other thing.
Speaker 3 (36:59):
So they're collecting all of this personal biometric data and
they've had six million people that have signed up, by
the way, for this stuff. It's mostly in Africa and Asia,
and it sure seems to be taking advantage of like
low income populations that don't know a ton about technology and.
Speaker 4 (37:19):
Don't have strong consumer protection laws would be my guess.
Speaker 3 (37:22):
Yeah, and so you're accumulating all of this biometric data
with unclear rules as to who owns it and what
they can do with it, and that to me seems
like a bigger problem than what a robot might look
like in the future.
Speaker 4 (37:39):
Yeah, I don't know. Its like again, I'm happy that
people are thinking about the problems of tomorrow, but in
the meantime, you're potentially creating a much bigger problem today
of storing a bunch of people's very personal information on
your servers without clear protections for those individuals.
Speaker 3 (37:57):
Mike, I've seen lots of robots today. They do some
really cool stuff, but they look like robots, and I
think they will for most of our lifetime.
Speaker 4 (38:05):
Right.
Speaker 3 (38:05):
It's we're we're kind of far away from like actual
androids that can imitate humans. Do we have problems with
like AI generated video? Yeah, you bet. But if you're
just collecting a bunch of data on how real human
eyes are, aren't you enabling the creation of fake human
eyes that look real.
Speaker 4 (38:26):
Quick Break Hour Two's next
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Speaker 2 (01:07):
This is the Financial Exchange with Chuck Zada and Mike Armstrong.
Speaker 3 (01:13):
Chuck, Mike and Tucker with you here on. Well, it's
it's Jay Powell goes to Jackson Hole week.
Speaker 4 (01:21):
Fat. You are confused about what day it was, Well.
Speaker 3 (01:25):
I mean, listen, I have my problems, but I know
it's Thursday, so it's it's not a big deal.
Speaker 4 (01:32):
Chuck's been chugging daquill this morning, So just be prepared, everybody.
Speaker 3 (01:36):
In any case, j Powell is heading to Jackson Hole.
He might actually already be there. And each year at
this time, the Federal Reserve goes to Jackson Hole for
what's called their Jackson Hole Policy Symposium. And the premise
of it is pretty simple. The Fed spends a lot
of their time during the rest of the year going
through and setting policy and kind of focusing on what's
(01:58):
right ahead of them, and this is a chance for
them too. While they acknowledge what's you know, immediately ahead
of them, also talk about some larger policy frameworks that
they might want to implement in the future, and generally
talk about the direction in which they want to take
the institution from a policy perspective this year, though, with
rate cuts on the horizon, it seems like the focus
(02:21):
is more likely going to be on hey, Jay, what
are you going to do this fall as opposed to,
you know, new policy proposals that they might be putting
out there.
Speaker 4 (02:30):
Which in my mind is a bit of a shame
since that's all we talk about every other time we
talk about the federal reserve, and so it would be
nice if they could take this moment to step away
and tackle bigger issues like, hey, should we still keep
talking to the public as though we are targeting that
two percent target? Is a two percent target of inflation meaningful?
Or should we be giving a range of targets depending
(02:52):
on other finals? Those are to me more interesting discussions
than are we going to get a fifty or twenty
five basis point cut in September when we when we
down And that's certainly all you're going to hear about,
mainly because that's what markets and and financial news journalism
cares about. But honestly, that's what they talk about every
other time we hear them speak.
Speaker 3 (03:12):
Yeah, it's we get so caught up in oge, like
what's the policy going to be that I think sometimes
we forget about not forget about, but what gets lost
in here is, Okay, what's this actually mean?
Speaker 4 (03:25):
And why are we doing it right? You know?
Speaker 3 (03:27):
Like those are the questions in anything that are important
to ask, Like, Hey, why is it that we're doing this?
If if you were working building a house and you
know the format of the job comes in the next
you know, in the morning and says hey today, no
more nails, just glue, you'd be like, why are we
(03:48):
making this policy change? And and and you know he'd
be like, well, you know what, I just don't like nails. Okay,
that's not really a good reason for that, Like we were.
Speaker 4 (03:57):
Going to push back on this a little bit.
Speaker 3 (04:00):
Likewise, the questions that I think are worthwhile to ask
are ones that you know you brought up there, which are, hey,
why are we targeting two percent inflation? Should we be
targeting two percent inflation? Is monetary policy the best tool
to generate two percent inflation? These are things that actually
help us determine whether we're right or wrong in what
we're doing, because ultimately, any kind of science, it boils
(04:25):
down to one thing and one thing only, which is
how do you know that what you believe to be
true is actually true. And what has always bothered me
a little bit about economics is that it gets talked
about as if it's hard science like physics, when in
reality it's closer to social science like philosophy.
Speaker 4 (04:47):
It's it's not quite.
Speaker 3 (04:49):
There, but it's Ultimately economics is kind of the study
of like human behavior as it affects buying decisions, and
that's not something that is hard coded, like how fast
an object falls int. So I think it's good to
ask questions about, like, hey, why is it that we're
doing what we're doing, because oftentimes you can find that, hey,
we thought that this was doing one thing and we're
(05:10):
doing the wrong thing actually, and maybe we need to
adjust our approach here. And the whole rest of the
year is okay, what you know, how are we reacting
to this crisis in front of us. It's important to
take a step back in anything that you're doing.
Speaker 4 (05:21):
I think, yeah, I kind of think about this in
the same way that you know, our company and other
companies do, like a full day off site of teams
that you know, the idea is to not do the
day job when you are doing that, you know, critical
thinking and looking back at the year that was the
important thing is to get away from Okay, this is
what we do every day, which is, yeah, tackle the
(05:42):
issues of current inflation and current crises and take a
step back and say, okay, well, you know, in our
projections to the general public, in our speeches, are there
things that we, you know, in hindsight said that maybe
it wasn't such a great idea to say, or things
that we didn't say that would have been useful. Those
are I think the opportunities that you have when you
have the Jackson Hole Symposium, and I do suspect that
(06:02):
those conversations will also happen, But primarily people are going
to reporters and everyone else are going to be asking, Okay,
what's the framework by which you cut by fifty bases
points versus twenty five basis points at this meeting coming
up on September eighteenth. So, now that we've gotten out
of the way, Chuck, what the FED should be talking about?
(06:23):
Should we tackle whether or not they're going to cut
by twenty five or fifty bases points at the next meeting?
Speaker 3 (06:28):
Yes, because that's why you're all listening to us, you know.
Let's you know, called spade of spade. So in terms
of the decision making framework here, it is very clear
in my opinion, that the Federal Reserve is going to
begin a cutting cycle.
Speaker 4 (06:45):
Here.
Speaker 3 (06:45):
The question is going to be how fast do they
cut and then how deeply do they need to before
that cutting cycle ends. Let's start with the first piece
in terms of how fast they need to cut MIC
it is still going to be data dependent in that hey,
if the economic data shows a meaningful slowing in US growth,
(07:07):
then fifty and seventy five basis point cuts on a
per meeting basis become in something that's an open question
of hey, are we going to do this or not?
Because you want to move quickly enough that even with
the long and variable lags that monetary policy has, you
want to move quickly enough so that those lags don't
go out too far and you're basically able to preempt
(07:31):
as much of the recession as you can by cutting rates,
which encourages businesses and households to borrow.
Speaker 4 (07:38):
What I would argue is that this Federal Reserve has
made it really clear to us over the last how
long has Powell been in charge of it? Eight years,
seven eight years somewhere in that ballpark. Yet they're not
going to surprise anybody. And so right now, the answer
to this economy at this moment in time is for
a twenty five bases point rate cut. There are circumstances,
(07:58):
very clear circumstances that would call for a fifty basis
point cut, and so one of those would be the
jobs report that we're going to see on Is it
the sixth of September, the Friday? Yes, So let's talk
about the circumstances there. If you see unemployment creep up further,
let's say it goes from four to three where it
is now up to four to five, or frankly even
four to four. Any increased creep of unemployment will be
(08:23):
a reason, in my opinion, to consider a fifty basis
point hike, and the Fed will forecast it. I think
we will know really clearly well before that meeting what
the policy decision is going to be. They do not
like surprising, and I don't suspect that they will hear either.
Do we have another Consumer Price Index report before the
eighteenth of September?
Speaker 3 (08:42):
Chuck, Yeah, So if you look at the schedule that
is going to be coming out in September, just things
that we're going to be getting that could affect this
and really growth is going to be the big thing
because unless inflation prints hot, yeah it doesn't really matter.
But he got ism manufacturing, you got jolt jobs opening,
so those two are matter as well as ism services
and the jobs report. We do have a CPI on
(09:05):
the eleventh of September. Again, I think it's gonna be
kind of a non event unless it prints hot, in
which case, even if it prints you know, point three
for the month, I'm still not sure that it changes
much just because it's one data point, yeah, and it's
surrounded by a sea of otherwise calm ones.
Speaker 4 (09:24):
Uh.
Speaker 3 (09:24):
And then you're gonna get retail sales data on September seventeenth,
right as the FED is meeting as well, So that's
another one where they are going to take it into
account because it's on the Tuesday of that week and
the FED policy decision is on Wednesday. You do have
that playing into it as well, that that data points
at eight thirty in the morning, so they've got, you know,
a full twenty four hours to kind of get it
(09:46):
together and say, Okay, what are we gonna do. So
I think that one's gonna matter as well, because we
just got a good retail sales number. And if you
string together a trend of two against a short term trend,
but you look at it and J. Powell could very
easily say, yeah, the economy looked like it was slowing
in June and July, September. I'm sorry, in May and June,
(10:07):
July and August, data has come in stronger, and as such,
we believe that only a quarter percentage point cut is needed.
Speaker 4 (10:12):
Now tough for me to envision a scenario where no
cut is needed. I mean, if unemployment shoots down, I guess,
then here's the scenario where.
Speaker 3 (10:20):
You get no cut. In my opinion, Yeah, unemployment's got
to be flat to down. Jobs number has to be
you know, two hundred k plus, and you know, retail
sales has to be strong.
Speaker 4 (10:31):
And CPI's got a surprise the up. CPI's got to
print zero point four percent for the month. Yeah, and
then you get, Okay, what's going on here? We don't
want to do anything dumb, So the answer is right now,
expectation for what we're baking in it's a quarter percent hike, uh,
depending on data. Really over the next few weeks leading
right into the meeting itself has the ability to change
(10:55):
that overall expectation. But retail sales data stronger than expected
unless you get some weak job market data. I think
that that twenty five basis point is the likely or
excuse yeah, twenty five basis point cut is the likely outcome.
And like I said, this FED does not like surprising,
so if it's going to be more we'll probably have
a good idea of that well ahead of the meeting.
Speaker 3 (11:16):
Let's take a quick break here and when we come back.
We've been talking about the Federal Reserve quite a bit forever. Yes,
let's talk a little bit about the US Treasury when
we come back, because there's so much focus on the FED.
But you've got a piece today in Bloomberg Opinion talking about, hey,
the Treasury is actually more powerful than the FED. And
(11:38):
it seems to me like we've got a good old
fashioned uh fight bruin here, you know. So we'll talk
about who's more powerful, the Treasury or the Fed.
Speaker 4 (11:47):
Mexican standoff coming up next right after this.
Speaker 2 (11:51):
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Speaker 5 (12:16):
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Speaker 3 (12:55):
Mike, there's a piece in Bloomberg Opinion today. It's tell
you how the Treasury is more powerful than the.
Speaker 4 (13:02):
Is it? They have very different responsibilities. I have a
tough time concluding that the Treasury Department is more powerful
than the Fed. But I suppose I have a tough
time really understanding what that means. I don't think they
have a larger impact on the state of the United
States economy. I struggle to think they have a bigger
(13:25):
impact on markets. So my general conclusion is probably not.
But obviously there is a tremendous amount of responsibility and
power at the Treasury, and it's more of a political
organization or political appointment than say the Federal Reserve, which
maintains much more independence from the White House. So I
guess let's start by talking about the different responsibilities. I mean,
(13:47):
the Federal Reserve is an independent, quasi governmental organization who
has a dual mandate, which is to maintain stable and
low unemployment and maintain stable prices. That's the two things
that they work on. And like I said, they are
very much independent from or generally have been pretty independent
(14:08):
from politics. They do so through their interest rate moves
as well as bond purchasing. They also share a lot
of bank regulation, so regulating local banks and setting rules
for the local members of their jurisdiction. The Treasury Department,
again much more part of the administration appointed by the president.
(14:32):
Confirmed treasure sector is confirmed by the Senate, right, I
would think so, and responsible for issuing different denominations of
debt in order to fund purchases and shooting fund government spending,
and so they too also have a lot of regulatory
responsibility as well, but generally speaking, they manage finances, manage
(14:53):
cash flow, and manage risk of the United States government,
so very different responsibilities. At the point here by Alison
is look that the Treasury Department determines what to issue
in terms of bonds to fund the spending of the
United States government, and lately that's been a lot more
on the short term side of things, which might explain
(15:16):
why rates are so high on the short term. Do
you buy it? No?
Speaker 3 (15:22):
Yeah, Look, here's here's kind of where I land on this. Ultimately,
the Treasury is trying to do one thing, and one
thing only pay the bills. Yeah, it's the only thing
that the Treasury cares about. Now, the Treasury may adjust
the mix of what it is offering in order to
pay the bills in the way it thinks is most efficient,
(15:44):
but ultimately that is what matters is, Hey, how are
we going to pay the bills that the US government
has accrued? And sometimes that results in issuing more T bills.
Short term debt that you know is anywhere from you know,
three months out to uh was a tee bow.
Speaker 4 (16:03):
I think it was like five years. Again, who cares
what the exact terminology is on it. Sometimes it is hey,
we're gonna issue you know, treasury bonds, longer term, ten,
twenty thirty year bonds. But ultimately it's hey, we need
to find.
Speaker 3 (16:17):
Buyers for all of this debt at various different maturities.
And I guess what I'm trying to figure out with
this piece is this piece is making the case that hey,
the Treasury's doing it wrong, like the Treasury is not
doing this right, and they should be doing it differently.
(16:39):
But they don't really propose a solution, and and look
maybe it should be done differently. Well, no, they do
propose that the solution that they say again doesn't even
make sense today, says that's why the Treasury should lock
in low rates and more of its debt while while
it can. It's also why pension funds and individual savers
face un necessary risk and retirement. Basically, it's saying, hey,
everyone's buying too many short term bonds and no one's
(17:02):
buying enough long term bonds.
Speaker 4 (17:03):
But the treasure can't fix that. Well, here's the thing.
Speaker 3 (17:10):
If everyone's doing something different and you're saying, no, it
should be done this way, I think it's worthwhile to ask, Look,
why is everyone doing it the way that they're they're
doing it today, And the answer is because people do
care about annual returns. The point that's made in this
(17:30):
piece is like people are too focused on annual returns
instead of long term planning. Same with you know, insurance
companies and pensions and YadA YadA, and ultimately the way
that long term returns get made is through short term returns.
Speaker 4 (17:45):
Like, yes, I.
Speaker 3 (17:45):
Guess if you wanted to buy a thirty year bond,
you could do that and say, okay, I'm walking in
you know, four percent over that time. But hey, pension
funds that they're not dumb, you know, they're like, they're
pretty good at what they do generally, especially in the
last couple of years. They said, no, interest rates are
going up, we don't want as much of this. Let's
buy more shorter term bonds and then we can buy
(18:08):
longer term when the risk is passed.
Speaker 4 (18:11):
Okay, I mean, who's to say that they did the
wrong thing. Yeah, Furthermore, on the power question, like let's
say I mean power right like the White House, the
president is arguably the most powerful individual in the world.
If the Federal Reserve had a political bias and wanted
to get somebody re elected or elected, I can think
(18:31):
through the process that you would go under. If you
were a bias Federal Reserve that wanted a specific person elected,
you would cut interest rates to get the incumbent. You
would raise interest rates if you didn't want them elected,
you would you know, do bond buying in order to
stimulate the economy ahead of an election. I have a
tougher time imagining what the Treasury would do if they
wanted to exert power on an election. For example, Well,
(18:53):
they can change the mix of what they're issuing again,
you know, so you're messing around with short versus long
term interest rates. It just doesn't have the same impact
to me as the Federalserve does it is.
Speaker 3 (19:05):
I mean, if the Treasury wanted to, they could basically
do what the Fed does, just through less direct intervention.
It would be Hey, if we want to cut interest rates,
we're going to issue less short term debts so that
there's more demand for the same matters, demand for less bonds,
fewer bonds. Okay, great, that's going to you know, push
(19:25):
those prices up and reduce rates.
Speaker 4 (19:29):
I don't know. I mean, I'm with it. It's just trickier.
Six and one is half dozen of another. You know.
Let's take a quick break here.
Speaker 3 (19:36):
When we come back, we got Wall Street Watch, and
then we're talking recession risks.
Speaker 2 (19:42):
Like us on Facebook and follow us on Twitter at
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 on the Finchel Exchange Radio Network.
Speaker 5 (20:02):
Well, coming off a winning week where traders saw the
SMP five hundred advanced nearly four percent, markets today are
slightly impositive territory as investors await Erroame piles Friday speeds
at the Central Banks Jackson Hole Symposium. Right now, the
Dow is up by about a third of a percent,
or one hundred and forty three points. SMP five hundred
(20:24):
is up by about a quarter percent or twelve points,
in the Nasdaq up by twenty four points, Russell two
thousand edging about a quarter percent higher. Ten You're Treasure
reeled up by one basis point or suit Me down
by one basis points at three point eighty seven percent,
and crude oil off about one percent, trading just below
seventy six.
Speaker 1 (20:44):
Dollars a barrel.
Speaker 5 (20:45):
Shares an AMD up two and a half percent following
news this morning that the chip maker would acquire ZT
Systems in a four point nine billion dollar deal. ZT
Systems is a tech company based in New Jersey that
produces servers and other equipment used in data centers for
artificial intelligence. Meanwhile, s Day Latter CEO said it's longtime
(21:07):
excuse me es Day Latter said its longtime chief executive
would retire next year. The beauty conglomerate also cautioned that
weak Chinese demand will continue to weigh on business that
stock is flat edging higher elsewhere. Shares in Fubo TV
up by twenty seven percent after a judge on Friday
block the launch of its latest competitor, Venue Sports, created
(21:29):
by Warner Brothers, Discovery, Fox, and Disney. HP down by
four percent after Morgan Stanley downgraded the tech company to
equal weight from overweight overweight, saying it has limited upside
and Palo Alto Networks will report after the closing bell
tomorrow morning. We'll see more retailer earnings from Low's. I'm
(21:50):
Tucker Silvan, that's Wall Street Watch.
Speaker 4 (21:52):
Mike.
Speaker 3 (21:53):
Let's talk a little bit about the difference between a
twenty percent chance of recession in the next year and
a tw twenty five percent chance of recession in the
next year.
Speaker 4 (22:02):
I've going bad news. It would seem to me. No,
I think I've got it, Michael.
Speaker 3 (22:09):
It would seem to me that this means that there's
a five percent difference in the odds of a recession
in the next year.
Speaker 4 (22:16):
Which is useless information. Yes, so Goldman cutting their recession
risk following a better than expected retail sales report as
well as jobs data. Again, the frustrating part is not
only the fact that they do this on an ongoing basis,
but I also fundamentally don't believe that Goldman Sachs uses
(22:38):
this for anything in driving their own decisions in terms
of investments or anything else. Right, I'm struggling to think about, like, Okay, Goldman,
you just cut your chance of recession the next twelve
months from twenty five to twenty How does that change
anything that you do on a day to day basis,
let me actually guarantee you that it doesn't because.
Speaker 3 (23:00):
Goldman Sacks. Again, there are a lot of things, but
they're not dumb. Right, we can all agree Goldman Sacks
isn't dumb. Yeah, I'm with you. You know, we might
have differences of opinion in terms of whether they are
a vampire squid with its tentacles all through humanity, you know,
as Matt Tybee described them a decade ago.
Speaker 4 (23:19):
But listen, they are what they are. They're not dumb.
Speaker 3 (23:24):
When you're talking about Goldman Sachs and their ability to
generate alpha for their clients, and alpha I'll define as
outperformance over your your benchmark. Just to make it simple,
Alpha is one thing and one thing only.
Speaker 4 (23:42):
Alpha is private information.
Speaker 3 (23:44):
Now I'm not talking about material, non public information, which
is illegal to trade on. When I say private information,
that can mean an economic model that you've developed and
not told anyone. It could be a series of you know,
words that you say in your head before you make
a trade.
Speaker 4 (24:01):
Every time.
Speaker 3 (24:02):
It's something that no one else knows, because once everyone
else knows it, it can't generate alpha anymore because everyone's
already trading on it, and so private information is at
the core of any alpha generating strategy. And so when
Goldman Sachs is saying, yes, we you know, our odds
of recession have declined from twenty five to twenty percent,
(24:25):
I know they're not trading on it, because if they were,
they just gave away their edge. So it's it's it's
not something that they trade on there. Furthermore, the entire
like basis for being successful in like general macro trading
is not just hey, what's the chance of X happening?
(24:46):
It's what's the chance of X happening? What are the
consequences of X happening? And then what can I extrapolate
into how that's going to reflect into markets. So even
if you know for certain that a recession is going
to happen, well, how are you actually gonna trade it?
How are you actually gonna invest in it? Because just
knowing it's going to happen is not enough to be successful.
(25:09):
So this, in my opinion, if we're doing like the
dumbness ranking of publicly released data from investment banks, I
put this as dumber than year end s and P
five hundred targets.
Speaker 4 (25:24):
Hmm, yeah, at least the S and P five hundred
year end targets are like, at least they give you
a timeframe, Mike, a twenty five percent chance of recession
in the next year. There's a big difference if it
happens next week versus in July of next year. Yeah, Like,
those are two completely different things. Recession in September of
twenty four versus recession in July of twenty five. They're
(25:48):
both of the in the next year. Even if they're
the exact same recession, they mean completely different things. Furthermore, like,
if you're correct about your S and P five hundred
target for a couple of years in a row, at
least you're going to get featured somewhere, whereas a twenty
percent chance of recession, like, oh, congrats, you called not
having a recession four years in a row. There's just
(26:09):
nothing informational about this or other.
Speaker 3 (26:11):
Things that I just find interesting when we talk about percentages,
because I I'm sorry that I'm letting my my my
nerds show a little bit, but I love talking about
percentages because we're just so bad at them. A twenty
percent chance of something happening means that in an average
work week, if you were giving it that probability, it
(26:31):
would happen once a week. So people say all like
twenty percent, Like, it's a really low chance. Mike, if
I give you a twenty percent chance of having a
car accident this.
Speaker 4 (26:43):
Week, would you like, probably not drive. You'd be like,
I'm not driving, I'm not let work. Something that happens
twenty percent of the time is really frequent. Actually, So
this is why, like when when we have these recession
probabilities that get put out there, a twenty percent chance
of recession, in my opinion, is actually a really high chance.
(27:07):
But Goldman, basically, if you look at this data series
for how they've projected like recession historically, they've always kind
of had a baseline of this. And yet we don't
have a recession every five years. No, we don't.
Speaker 3 (27:21):
And so I find it kind of problematic that they
keep saying that because in general, the probability of recession
like when things as an example, hang on, I need
to find the actual chart just because I need to
find the image, just because I was looking at it
this morning.
Speaker 4 (27:38):
Here we go.
Speaker 3 (27:39):
It's from Nick tim Rose to the Wall Street Journal
who published it. So he went through this, so it's
As an example, it's April of twenty twenty three, Silicon
Valley Bank blew up a month ago, and Goldman Sachs
is saying there's a thirty five percent chance of recession
in the next year.
Speaker 4 (27:58):
It's not quite a coin flip, but it's pretty close,
Mike that we didn't even come like close to recession
in the last twelve months, No, nowhere near it.
Speaker 3 (28:09):
And so this is the stuff that I find rather bothersome.
Is it's just, hey, there have to be some conditions, Goldman.
Even even the last like since when is it, like
October of last year, they were down to a fifteen
percent chance and that's the lowest they've gone. There has
to be some point in time where you're like, no,
(28:30):
there's only a five percent chance of recession.
Speaker 4 (28:33):
No, if you're not any look like a moron when
you do that right in October of seven is the problem.
But if you're not willing to say there's almost no
chance of recession ever, then it's useless. Then it's always
it's even more useless. Yeah, like what are we even
doing here? Yeah? I would categorize this as use uselessly
stupid rather than dangerously stupid, because dangerously stupid is worse,
(28:56):
and we get plenty of that from time to time,
but usually not from Goldman Sacks.
Speaker 3 (29:00):
No, dangerously stupid are the competing pieces published in the
same day and financial media that they're like, here's why
a melt up in stocks is next, Here's why imminent
doom is coming. Yeap, Yeah, Speaking of which, Speaking of which,
Goldman Sachs says us Goldbin Sacks says, US sales forecast
for twenty twenty five or too high, expects sales to
(29:21):
slow in a moderating economy and weaker dollar.
Speaker 4 (29:24):
Your thoughts, Michael, Well, there's only a twenty percent chance
of that happening, So, oh my goodness, Like, this is
what I'm trying to teach anyone listening here, is not
that Goldman Sachs is wrong all the time, because they're not.
Speaker 3 (29:38):
Again, they're very smart people. You don't make the kind
of money that they make by being dumb. I'm not
making moral judgments. I'm not saying that they're like the best.
Speaker 4 (29:47):
I'm not saying they make a lot of money and
you don't do that just by being dumb, greedy, sometimes
breaking the law, like all of these things, maybe, but
not being by being stupid.
Speaker 3 (29:59):
I'm trying to get out to everyone listening is to
think about what you're reading critically and understand that the
reason why this stuff is published is not because they
like inherently just want to educate you about what's going
on in the economy. It's because these help to drive ultimately,
(30:22):
like what like one of the core businesses is for
any investment bank, which is the flow of deals and trades.
Then the real money that gets made in the banking
business is not by owning assets and seeing the value
go up. You know this mic because if you look
(30:43):
at any actual bank, do they want to own houses?
Do they want to own commercial real estate? No, they
want to do deal flow. The whole premise of securitization is, hey,
let me underwrite the deal and then sell it off
to someone else. The real money is made in the
flow of deals, and if you look at investment banks
(31:06):
from that perspective, you get an entirely different understanding of
why they're doing what they're doing.
Speaker 4 (31:11):
In my opinion, that's all I have on this. Anything else, no,
please move on.
Speaker 3 (31:17):
Okay with that, Why don't we take a quick break
here and when we return, should we talk about artificial
intelligence and how it's gonna come for all of us.
Speaker 4 (31:28):
Yeah, let's do that. Next sounds uplifting. Let's do it.
Speaker 2 (31:31):
This is 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 Face is the
Financial Exchange Radio Network.
Speaker 4 (31:54):
Peace stay from the Financial Times.
Speaker 3 (31:56):
More than half the US biggest companies thee Artificial intelligence
is a potential to their business, according to a survey
of corporate filings that how emerging technology could bring about
sweeping industrial transformation. Overall, fifty six percent of Fortune five
hundred companies say that AI is a risk factor in
the most recent annual reports. Michael, in my opinion, this
(32:16):
does not mean that most companies are imminently worried about
AI as something that's going to change their business tomorrow,
but rather their lawyers want to cover their bases so
that they don't get sued by people who own the
stock if AI turns out to harm the company.
Speaker 4 (32:31):
I was gonna say this is CYA yes, which stands
for cover your rear end, So this is not anything
that they are genuinely concerned about at this stage. I
do find Here's what's concerning to me about artificial intelligence
is that already it's a very impressive tool, and it's
(32:51):
pretty much at its infancy right now. So nothing about
AI today scares me terribly, Like, can you make a
scam a little bit easier to convince people love yak?
Can you post it video that looks like it's real
even though it's not absolutely create a picture that's false
and misleading? Definitely, But they're pretty easy to discover and
detect and YadA, YadA YadA. They're pretty easy to discover
(33:13):
and detect and refute now. And that's my concern is
we are very much like, was anyone talking about artificial
intelligence tools other than IBM two years ago? Not really.
Did the average person have any idea what artificial intelligence
tools actually looked like and did prior to two years ago?
Not really. Yeah, so we're at the very beginning stages
(33:33):
of all this, and so is there anything to be
really genuinely concerned about it, even on the part of
corporations right now? No, it's probably lawyers covering their own
rear ends, and we have no idea what those risks
are going to look like in the future, and that's
what keeps me up at night.
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Speaker 4 (34:50):
Mike.
Speaker 3 (34:51):
Do we want to talk about world coin and eyeballs
or why worldcoinbilies?
Speaker 4 (34:57):
Let's talk eyeballs. It's just a weird, weird story. Uh So,
would you like to introduce it from here, Chuck? Or
should I so?
Speaker 3 (35:08):
Sam Altman, who is the CEO of open Ai, creator.
Speaker 4 (35:14):
Of chat gpt if you're unfamiliar, Yes, And he.
Speaker 3 (35:17):
Has another initiative called world Coin, and what he is
doing as part of this is well, it's trying to
verify whether someone is human or not by scanning the
irises kind of. I mean think of if any of
you have seen like Minority Report or any movie in
the future where they scan your eyeballs to identify you.
(35:40):
That's what he's trying to do. And once you do that,
you get a world id passport that you can use
to prove that you're human, because in the future, we're
not going to.
Speaker 4 (35:53):
Know whether a robot is a robot or if it's
a human. I love futurists. I'm big like great for
somebody for planning for things one hundred years ago, but
from now, But can we focus on there? In my view,
is probably not going to be a scenario in my
lifetime where I'm worried about a human looking robot that
(36:14):
convinces me that they are human. I don't think that
that's the most likely outcome. I'm a bit more concerned
about somebody creating content that is genuinely confusing on the
Internet as to whether or not it is true, and
dissemining that information across the globe and generally creating confusion
about the state of something in our world, whether it's
(36:37):
politics or war or any of these things. Those are
the imitations of humans that I am worried about, not
the realistic human being from some Tom Cruiser Bruce Willis
movie that's going to make their way in front of
me and convince me that they are a human being.
How about you, Chuck. Well, here's the other thing.
Speaker 3 (36:59):
So they're collecting all of this personal biometric data and
they've had six million people that have signed up, by
the way, for this stuff. It's mostly in Africa and Asia,
and it sure seems to be taking advantage of like
low income populations that don't know a ton about technology and.
Speaker 4 (37:19):
Don't have strong consumer protection laws would be my guess.
Speaker 3 (37:22):
Yeah, and so you're accumulating all of this biometric data
with unclear rules as to who owns it and what
they can do with it, and that to me seems
like a bigger problem than what a robot might look
like in the future.
Speaker 4 (37:39):
Yeah, I don't know. Its like again, I'm happy that
people are thinking about the problems of tomorrow, but in
the meantime, you're potentially creating a much bigger problem today
of storing a bunch of people's very personal information on
your servers without clear protections for those individuals.
Speaker 3 (37:57):
Mike, I've seen lots of robots today. They do some
really cool stuff, but they look like robots, and I
think they will for most of our lifetime.
Speaker 4 (38:05):
Right.
Speaker 3 (38:05):
It's we're we're kind of far away from like actual
androids that can imitate humans. Do we have problems with
like AI generated video? Yeah, you bet. But if you're
just collecting a bunch of data on how real human
eyes are, aren't you enabling the creation of fake human
eyes that look real.
Speaker 4 (38:26):
Quick Break Hour Two's next
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