October 30, 2025 • 38 mins
Chuck Zodda and Mike Armstrong discuss Trump's meeting with Xi and the declaration of immediate cuts to tariffs. Fed divisions reveal new caution over continued cuts. Google revenue soars to record as AI boom lifts cloud business. Big tech test investors' patience with $80B AI investment spree. Is a $100,000 salary enough to raise a family in Massachusetts?
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Episode Transcript
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Speaker 1 (00:00):
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(00:43):
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(01:06):
and Mike Armstrong.
Speaker 2 (01:11):
Chuck, Mike and talker with you here, and we got
a full show to get to, so no time for
further introductions. We're gonna kick things off with a little
bit of chatter about the big meeting between President Trump
and President g and this happened kicked off a little
after ten pm last night. And basically, Mike, when you
(01:35):
look at the takeaways on this and you know kind
of what we've what we've gotten from this meeting, I
think it matches my expectations, which was that, hey, not
anything game changing as far as you know, shifting the
overall relationship between the two countries. But let's talk about
(01:57):
I think there are five key areas that are identified
in my book that were addressed here, as you know,
small side issues that still don't deal with again those
bigger ones. So number one, the US agreed to reduce
tariffs on Chinese imports by ten percent, dropping the total
(02:17):
rate from fifty seven percent down to forty seven percent. Agreed.
Speaker 3 (02:21):
And by the way, if I'm going to call any
of the outcomes surprising to me, this was the only one.
Speaker 4 (02:27):
And it wasn't a huge surprise, but a slight decrease
in tariff.
Speaker 2 (02:30):
It was signaled in advance.
Speaker 4 (02:32):
Yeah, I guess you know.
Speaker 2 (02:34):
This was being talked about by the President over the weekend,
so I'm not too surprised by this. The other side
of this is the second item, which is China reportedly
agreeing to help crack down on the export of fentanyl
and fentanyl precursors to the United States.
Speaker 4 (02:52):
Pretty tough to measure, but Okay, whether they.
Speaker 2 (02:54):
Actually do or don't, I don't know that we're going
to know. But again, like I think it's something we'd
want to does it actually happen? Who knows? Number two,
China agreed to suspend or ease their export controls of
rare earth elements for a year. I don't believe this
is worth the paper it's not printed on, because we've
(03:17):
talked about, like, we have multiple instances this year of
China saying, hey, we're gonna, you know, do this rare
earth thing, and then they come and have a meeting
with the US and they're like, Okay, we're not going
to I have no conviction that we're not going to
be right back here in January or February.
Speaker 3 (03:31):
Let's be clear, we will be if anything sets them
off it. This will be the first lever that is
pulled if there's some other disagreement, and they might pull
the lever either way just to get what they want
out of it, which you know, in this case was
a meeting with the president where some progress was made
on some other issues.
Speaker 4 (03:50):
So yeah, I'm with you.
Speaker 3 (03:51):
I think that any promise on this front, you know,
we're back to where we were I guess two months
ago when it comes to rare earths, which is I'm
still concerned about the export controls and they're not going
to completely shut them off for the time being.
Speaker 2 (04:06):
Other things, China reportedly agreeing to resume larger purchases of
US soybeans. Again, this is kind of one where I'll
believe it when I see it. And part of the
reason on this is we've been talking soybeans for like
a decade. I went back, actually and pulled the references
from President Trump's first term, and I can't tell you
how many times China pledged to buy more US soybeans
(04:28):
and then didn't do it. Now the difference is right
now they've been buying basically none for the last several months. Yeah,
So yes, I guess technically anything can be an increase
over that, and earlier this week we did see a
one hundred and eighty thousand ton order, which is again,
I know, one hundred and eighty thousand tons seems like
a lot, but when you're trying to buy soybeans for
(04:49):
one point three billion people, it's really not much. So
it's a drop in the bucket. Was that a goodwill
gesture before this meeting or is that something that's going
to have further follow through. We're going to see, we
will get data on this over the coming months, and
so we're going to see what ends up happening here.
Speaker 3 (05:06):
Do we need the government to be open to get
that data?
Speaker 2 (05:10):
Maybe? I don't know. I don't know who produces it,
quite honestly. Yeah, fair, it's a hard maybe. Other things
just takeaways. I like this quote today reporters asked President
Trump about the meeting. He says, overall, on the scale
from zero to ten, with ten being the best, I would.
Speaker 4 (05:26):
Say it was a twelve. He did say that, yep.
Speaker 2 (05:28):
So I thought that was just, you know, a fun
little quote there. But again, I think take this for
what it is, which is, by and large, most of
the things that were agreed to here were things that
had like that both sides had put in place as
potential negotiating items over the last month or two. None
of the longer term stuff was addressed here. We didn't
(05:50):
do anything on technology transfers, anything on intellectual property, anything
on Taiwan, or anything on semiconductors. The President specifically said
that they did not discuss the Blackwell chips from Nvidia.
So I think that when we look at this ultimately,
(06:11):
like for me at least, it feels like we're kind
of just back to where we were. Maybe June July.
Is that fair?
Speaker 3 (06:17):
I was going to say two months ago, so I
was even less far back, But yeah, right around then.
I mean, the only thing that this has done for
me is erased the escalations that we saw in totally
early October.
Speaker 2 (06:31):
Yes, it takes that short term downside risk of things
going sideways off the table.
Speaker 3 (06:39):
I guess the one piece that is actually measurable and
real out of all of this is tariff rates coming
down by ten percent.
Speaker 2 (06:47):
Yep.
Speaker 3 (06:47):
That should be immediate and it probably will be in
place for a while, you know, absent and explosion on
another issue. Everything else you kind of have to wait
and see. And again, none of the things that we're
now really signify any any meaningful progress. We didn't even
get a TikTok deal, which I thought might be part
of this.
Speaker 2 (07:06):
So it is.
Speaker 4 (07:09):
I mean, I'm glad the meeting happened.
Speaker 3 (07:11):
I'm glad we are in this place rather than where
we thought we could be a couple of weeks ago.
But when we said this earlier, we said, look, this
all just looks like posturing ahead of the meeting. And
it's precisely what we got out of all this, which
was posturing ahead of a meeting, both sides, you know,
playing up the banter to be able to go to
that meeting and walk something away. And they succeeded on
(07:35):
that front, I guess.
Speaker 2 (07:37):
And that's fine. Likes, that's fine if you accept it
for what it is. If you were hoping for, you know,
some grand bargain to change all these different things, it's
not there. It's it's not. And that's because this stuff
takes a while, especially when you're dealing with China. And
this is the thing I come back to over and over.
China loves to just run out the clock. Oh we're talking,
(07:57):
we're talking, we're talking. We're still doing the stuff that
you don't like. Talking. We're talking. We're talking, still doing
the stuff you don't like, talking, talking, talking, still doing
the stuff that you don't like. Oh, you're you know,
presidential term ended. Great, we're still talking doing the stuff
that you don't like.
Speaker 3 (08:12):
It is pretty stark the comparisons that you can draw
now between the other piece of this trip that was
inked was the deal with South Korea and a you know,
negotiated tariff rate on that stuff. It has become clear
that China is really one of the only countries really
posing a challenge to the president's tariff policy. You could
(08:35):
argue Canada to some extent, but not really. I mean,
I mean really, the only country that's able to stand
up and fight back a little bit has been China,
and quite frankly, they've been pretty successful in doing so.
Speaker 4 (08:49):
Yeah, well, what do.
Speaker 3 (08:51):
You say, pretty successful in doing so when the threat
of what the President has wanted from China has been
a more open market and you know, investments in the
United States, They have not made those like other countries have.
And any time that the teriff rates have climbed to
(09:13):
a place that would completely be ruinous to China, they
have been able.
Speaker 4 (09:17):
To combat that with rare earth restrictions.
Speaker 3 (09:21):
So there has not been any Yes, they're you know,
much higher tarifrates on China than where we were a
year ago. Sure, but it's not as though we have
convinced Europe to join in on that, Mexico or any
other country to join in on it. And any time
that we've come close to any sort of real concentrate
pushed there, they have been successful in pushing back on
(09:43):
the rare earths.
Speaker 2 (09:44):
No, I mean, look that part of it. Look, there's
a chance that like Europe might be beyond hope on
this issue, just because I think that the the the
the effect of you know capture of you know, the
European Commission by Chinese you know, political pressure, I think
is pretty significant. And I just wonder if Europe actually
(10:07):
has the wherewithal to want to push back against that, right,
I just don't know that it's there. I mean again,
your Europe's economic engine is German manufacturing, and they've basically said, hey, China,
come on in, like do whatever you want for you know,
cars and heavy machinery and this and that. I mean
that they're basically like kind of killing their own you know,
economic engine and doing so, and they don't seem to care.
(10:30):
So Europe doesn't really seem to care too much about it. Canada,
I'm not sure they care too much either. Canada just
in the last week has talked about trying to deepen
ties with China as part of this. Quite honestly, there's
part of me that, in retrospect, looking at the last
week thinks that that is more why the Trump administration
wanted to, you know, raise additional tariffs on Canada as
(10:53):
a post I know that, you know, the ad that
was going around was talked about, but I do kind
of wonder, Hey, is it actually because Canada is talking
about building closer ties with China? And so, you know,
these are things that I think do matter in the
context of all these broader negotiations. Here anything else to
add before we wrap up with this, I don't think
(11:15):
there's too much more that I have to say on it.
Speaker 3 (11:18):
Now, let's move along from the Asia visit and uh,
let's talk FED.
Speaker 2 (11:22):
We we got Yeah, this is this is a fun one.
This is a meaty one. Let's talk FED when we return.
Speaker 1 (11:29):
This is your home for the most comprehensive coverage of
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Speaker 2 (11:57):
All right, let's talk a little bit about yesterday's FED
meeting because quite honestly, like I thought, this was going
to be a pretty boring one. You know, we haven't
really been hyping this up, we haven't really been getting
all excited about it. But gollye g. Willikers, we got
a little bit of excitement from mister purple tie himself. Yeah,
that's surprise a little bit so even before Jay started talking.
(12:20):
So two pm we get the release of what the
Fed's doing, and no surprise in what they actually did.
They cut interest rates, the FED funds rate by a
quarter percent, as expected. They also halted their runoff of
the FED balance sheet, basically saying we've you know, done
enough trimming on the balance sheet and it's down now
down to the level that we think is appropriate. This
(12:41):
is also widely expected based on you know, overall levels
of reserves that are out there when you look at
the you know a lot of people who follow this.
They basically said Yeah, the Fed's got into an appropriate place,
and you know, going too much further could potentially start
to create some stress in the banking system. So that
was expected. The other part that I personally expected Stephen Moron,
(13:05):
who was nominated to the FED Board of Governors and
is on the FED Board of Governors for the last
two meetings now. He dissented to the downside, saying he
wanted the FED to cut by half a percent in
this meeting, just as he did in the prior meeting.
So I think that was expected for me as well.
I didn't find that to be surprising, agreed. The piece
(13:26):
that was surprising Jeffrey Schmid, who we.
Speaker 3 (13:30):
Talk about all the time on this program, right we are.
We definitely could pick him out of a lineup.
Speaker 2 (13:36):
Gotta be honest, first time I've ever said or heard
the name Jeffrey Schmid in my life. Like, if I'm
being one hundred percent honest, Mike and I follow this
stuff pretty closely, I don't think I've ever heard a
single thing from Schmid previously, Like he did.
Speaker 4 (13:52):
Not know how to spell his name until it was printed.
Speaker 2 (13:54):
He is as nondescript as you can get while being
on this board. I mean, like the other names we
talk about, John Williams, Michelle Bowman, Michael Barr, Lisa Cook,
Austin Goolsby, Philip Jefferson, ALBERTA. Musalem, Christopher Waller, Like, these
are names that were familiar with I see the name
Jeffrey spin and I'm like who, which, again, like relative
(14:16):
anonymity on the FED board is is kind of unique.
He dissented to the opposite side and said, no, I
prefer no change to the federal funds rates. So we
get the sense in each direction, which it's not the
first time this has ever happened. You guys, time to
look at six years, it is, but there's if you
will get the last fifty years or so, there's about
ten or eleven instances. So this is something that does
(14:37):
happen generally every like five to six years. It's it's
not it's I saw someone yesterally being like, oh, this
means like Powell's lost control of you know, his his committee. No,
like this has happened, you know, FED meetings on a
regular basis. Again, not every year, but usually every five
or six you get something like this that that pops up.
(14:58):
So I thought that was interesting, and then It was
topped off with Powell coming out in a no uncertain
word saying, hey, don't think that the December cut is
a foregone conclusion. And he really tried to push on this.
And so what you've had since yesterday is the bond
market has gotten the message loud and clear. The ten
(15:20):
year treasury up about ten bases points during that time.
Mortgage rates have gotten the message. The average thirty year
fixed rate mortgage, according to Mortgage News Daily yesterday went
from six point one to three percent to six point
two seven, so pretty substantial move on that side. And
so I think that when you look at this, the
bond market is hearing loud and clear. Okay, you're doing
(15:44):
these couple of cuts because you think it's important to
do so, but you're not convinced that there's further weakness
that warrants additional cuts. And this was made clear in
the FED statement as well. One of the thing that
was interesting here is again you always look at little
(16:04):
changes that get made in the FED press release. Yep,
the last sentence of the second paragraph. And I know
people listening are like, Chuck, like why do you care
about this? And I care because it helps to inform
the thinking about what they're doing. Like we parse each
of these words when they make changes, because they make
changes for a reason. The Committee is attentive to the
(16:25):
risks on both sides of its dual mandate and judges
that the downside risks to employment rose in recent months.
Rose is the piece that stands out. The previous statement
says have risen, have risen is kind of you know, present.
It's a combination of present tense and past. Yeah, these
risks have risen. Rose is that happened in the past.
(16:48):
We don't know if it's still happening, correct, And that's
a notable change because it helps to inform how they
may adjust policy in the future. So just that change
from have risen to rose, that to me is indicative
of their thinking as well, even beyond you know what
we saw with that dissent and what Powell said.
Speaker 3 (17:08):
All right, so a few things just contextualize this all
for the adverage person. We already did the context of
the mortgage rates. Mortgage rates moved higher on this news.
The chance of a rate cut in December moved lower
on this press conference. Stocks moved slightly lower during the
press conference from what I saw Chuck, I was trying
to measure it maybe four tens percent downside on the
S and P five hundred during the press conference in
(17:29):
Q and a other things. I'll be surprised if the
President does not have a statement to be made about J.
Powell and his failure at the FED and the fact
that he needs to see interest rates coming lower and
that they're missing the point here. I'll be very surprised
if we don't have commentary from the President on that subject.
(17:49):
And you know, he was asked a bunch of other things,
but I think the only other real interesting piece to me.
You know, they are clearly well, they're clearly lacking data
on jobs and so have a lot of questions there.
They're also asked some stuff about artificial intelligence, and so
I think one that speaks to the fact that reporters
(18:10):
and probably the FED are interested in the you know,
the the level of the stock market, the increase in
the stock market, the spending coming from AI.
Speaker 4 (18:19):
But the quote on AI that he had was I.
Speaker 3 (18:21):
Don't think interest rates are an important part of the
AI of the data center story. It's not really about
about twenty five basis points here or there. I think
he's right about that companies are going to spend money
on artificial intelligence regardless of whether interest rates are where
they are now or twenty five basis points higher or lower.
And I think they're cognizant of the fact that there
(18:43):
is some pretty rapid spending and some pretty wild lending
going on out there, and they could be just missing,
you know, missing the point here on the labor market
that you know, the weakness might not be that important
to the overall state of the economy.
Speaker 2 (18:58):
Yeah, I think that is Those are all I think
takeaways from you know what Powell said. I was interested
that he actually engaged on the topic of AI. Yeah,
I didn't think he wanted to get that granular, And
quite honestly, on a few topics he got more granular
than he has in the past, which I thought was interesting.
Like a lot of times he's like, well, you know,
we're not gonna get into you know, the nuance and
(19:19):
this and that and this, this Q and A. He
was kind of like digging into a lot of different topics,
which I thought was kind of interesting. It was kind
of a different approach from him. Senior writis quick break
here when we return, we got Wall Street watch and
then we're gonna get into those tech earnings.
Speaker 1 (19:40):
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 market so far
today right here on the Financial Exchange Radio Network.
Speaker 5 (20:00):
Well on one of Wall Street's busiest days of the year,
markets are mixed. Territory is investors react to the year
long trade truce between the US and China, comments from
FED Chairman Jerome Powell about future rate cuts, and of course,
big tech earnings from Alphabet, Microsoft and Meta. Right now,
the Dow is up by just over half a percent,
(20:20):
or two hundred and sixty points higher. SMP five hundred
is down three tenths of one percent or twenty five
points lower. Nasdaq is selling off nearly one percent or
two hundred and twenty two points. RUSSED two thousand is
edging higher, up about a tenth of a percent. Tenyure
Treasure realed up three basis points at four point zero
eight nine percent, and crude oil down about six tenths
(20:44):
of one percent, trading right around sixty dollars a barrel.
Alphabet shares up over five percent after the search giant
posted strong third quarter results, driven by revenue from Google
Cloud and YouTube advertising. Microsoft b quarterly expectations, where revenue
from it's a Zeri cloud business jumped forty percent. The
company's finance chief did note that capital spending will accelerate
(21:07):
this fiscal year. Microsoft is down by two percent. Meta
shares plunging eleven percent after the Facebook parent reported stronger
than expected third quarter earnings in revenue. However, Meta raised
its capital expenditures outlook to invest more in a I.
Apple and Amazon are on deck to report their results
(21:27):
after the close today. Outside of big tech, Eli Lilly
shares are up modestly after the drug maker b quarterly
earnings in revenue forecasts and hiked its full year revenue
outlook due to strong demand for its weight loss drugs. Meanwhile,
Starbucks posted weaker than expected earnings, but posted same store
sales growth for the first time in nearly two years.
(21:47):
That stock is up over one percent. Chipotle sinking seventeen
percent after the brito chain posted a drop in net
income while it's quarterly revenue missed estimates. The restaurant group
cited economic strains We're turning customers away from its stores,
and Carvanastock is falling nine percent after the online used
car retailer beat quarterly revenue expectations. However, its net income
(22:12):
fell well short of Street forecast. I'm Tucker Silvan. That
is Wall Street. Watch in the Financial Exchange streams every
day live on YouTube. Subscribe to our page, hit that bell,
and follow market activity all morning long, only here on
the Financial Exchange Radio Network.
Speaker 2 (22:29):
All right, so yesterday we did get the quarterly earnings
for as Tucker mentioned, we had Meta, we had Microsoft,
we had Alphabets. Only one of these companies uses its
original name anymore. And I don't know what that means,
but it means something. Where do you want to start, Mike?
Which one?
Speaker 3 (22:49):
I'm trying to think if there's anything with that, What
if there's anything we could generalize about all three of them,
all three of them dramatically Alphabet both revenue and.
Speaker 4 (22:59):
Alphabet profits other than taxes. Let's start with Alphabet.
Speaker 2 (23:02):
We would you like to start on, Tucker? What about Alphabet?
Speaker 5 (23:05):
It starts with the letter A.
Speaker 2 (23:07):
Okay, wonderful. So here's the big thing. So Alphabet, if
you look at their core search business, the concern this
year was, hey, more people are using large language models
like chat GPT in order to you know, get information.
One of the biggest use cases that these these large
language models have is looking for information supposed to go
(23:29):
into Google and saying, hey, how do I make a burrito?
You type it into chat GPT and it gives you,
you know, the step by step instructions. That way, what
we saw was actually an acceleration on Google's core search business.
And so the idea that Googles this dinosaur whose business
is dying not in evidence right now.
Speaker 3 (23:50):
Michael, Yeah, they are spending dramatically, but you know, compared
to Meta and Microsoft, Alphabet, Google, whatever you want to
call them, they more than covered their capact expanse with
their free cash flow. And so yes, they're spending a
boatload of money. They are, you know, trying to capitalize
on AI. They but but the pace of their revenue
(24:12):
growth is so strong that it's at least covering all
this increasing expanse and by no means turning into a dinosaur.
Speaker 4 (24:19):
I think no.
Speaker 2 (24:21):
And so like, if if you look at the the
the numbers here and again just like pulling them up
and saying, okay, like what did we actually see. I
want to talk about that free cash flow piece just
for a moment, yep, okay, because this is something that
does matter, and I think it's gonna be you know,
(24:43):
important to watch how it develops because for the last
the previous two quarters, what we did see was declining
free cash flow. Okay Q four of twenty twenty four. Again,
like I don't like to dig into earnings reports a ton,
but we're getting to the point now where some of
these numbers are big enough that it warrants some discussion.
From Q four of last year through Q two of
(25:04):
this year, free cash flow on a quarterly basis went
from twenty four billion down to five billion. So you
look at that and you're like, okay, like that's not
really a friendly trend that you want to see, Like
that's that's not really ideal on that front. So you
(25:24):
kind of dig in and you say, okay, like what's
the reason why that was happening? And you know, is
there anything there that changed during this quarter? You know
that that might have been you know, fundamentally different from
the trend that we were seeing previously, Like, is there
any reason why they saw this big jump in you know,
(25:47):
overall like operating income before you even get to the
free cash flow piece, and you know, you kind of
go through and you're like, okay, Like, as you're looking
through the numbers, there's nothing huge that you know, necessarily
out until you start looking at hey like where you
look at their cash flow statement and you're like, okay,
(26:09):
where is the difference there? And there's some shift one
of the things. And again I don't want to get
too technical on it, but you did see a fairly
notable shift in terms of accrude expenses and liabilities. So
basically it was like, Okay, they paid off a bunch
of stuff that they hadn't. But ultimately, I think that
when you look at this, it does seem to be
(26:30):
something that at least for now, is sustainable because their
core business is growing at the rate that it's growing at.
Speaker 3 (26:37):
Yeah, I mean the revenue is up sixteen percent year
over year and that was the weakest of the three.
Speaker 2 (26:43):
If that changes, then you get into the situation that
Meta is in, which is and look, Meta kind of
ended up with they kind of had a double whammy.
Even before this quarter, they were seeing a decline in
their cash on hand. So if you look at where
Meta was at the end of last next year. They
had seventy eight billion dollars in cash on hand. Before
(27:04):
this quarter, that was down to forty seven billion. After
this quarter, they're down to about eleven billion in cash
on hand. So they've been spending like from their cash
pile in order to fund this. Now, part of this
this quarter was they had a big, like eighteen billion
dollar tax expense that they ended up getting hit with
right that they said, well, help their tax situation going forward, Okay,
(27:25):
like that's not going to repeat itself. But then they
came out today and said, hey, we're going to do
a twenty five billion dollar debt raise in order to
help finance some of this construction. And I think that's
part of the reason why the market's a little spooked here,
is they're like, well, if you guys can cover this
out of free cash flow, that's all well and good.
But if you start having to raise debt in order
to pay for data centers that were unclear if they're
(27:47):
going to be profitable or not, I don't really know
about that. And so that's why Google, when you look
at them, or Alphabet rather, their stock's still up five
percent today, met is down twelve. I think that is
the key difference, and Microsoft's kind of fluttering in the middle.
They're down about two just because their quarter was good
but not great, you know it was, it was just fine.
Speaker 4 (28:07):
I wonder what it costs metat to borrow.
Speaker 2 (28:10):
I'm guessing it's probably I mean, I could probably pull
up some bonds if we wanted to look at it,
but my guess would be, I mean, just looking at
spreads and where Meta's credit rating is. Let's see, I'm
just pulling up where where these spreads are right now,
I'm guessing. And part of this, like MEDDA, is they're
doing it's a six tranch issuance. Yeah, anywhere from five
(28:32):
to forty years, I believe it is. I'm guessing metas
if you look into that forty year bond, it's probably
five percent dish and the short term ones are probably
somewhere in the range of four I reckon probably like
an average interest payment of like four and a half
on that.
Speaker 3 (28:50):
Well, I fully recognize that none of us had any
idea how much money we would be spending on our
companies would be spending on artificial intelligence.
Speaker 4 (28:56):
Development four years ago.
Speaker 3 (28:58):
You really sit back and wonder, man, how much money
could they have saved if they just went on a
borrowing spree kind of like didn't Apple do that in
twenty twenty and twenty twenty one, just borrow a ton
of money even though they didn't really have any need
for it.
Speaker 2 (29:11):
Yeah, the piece that is going to matter on this,
and you're starting to see it like I was looking
at Meta's financial statements, which again, like I don't do
this often, but when a big stock like this moves
in this way, I'm kind of like, Okay, like, what's
what's going on here? The piece that you're going to
have to watch on this is the depreciation line item
(29:31):
of these assets because effectively, like that is going to
end up impacting cash flows, like it goes right onto
the cash flow statement. And so the problem that you're
going to potentially run into is you're doing seventy billion
dollars in CAPEX this year. If you say, okay, there's
(29:52):
you know, a ten year useful life of that asset
that we just built, you start depreciating it at a
you know, seven billion dollar a year clip, and then
you're doing that next year again, Remember you're adding another
like seventy eighty billion dollars on top of that, all
of a sudden you start getting into that free cash
flow at a pretty good rate. And this is the
(30:13):
concern because remember, just because you build the data center
doesn't mean the cost is gone. That's why you have depreciation.
It's the realization of, hey, we're going to have to
buy new chips in a few years for that data center.
We're going to have to buy new cooling systems in
five years for that data center, and so that is
a cost that is going to end up coming through. Again,
(30:37):
it's not just a one time expense. It's why depreciation
exists here. And ultimately the question then is Okay, if
you're going to have these expenses that come up on
a regular basis and have this depreciation, are you going
to be able to generate the revenue to cover it?
That is the question that's going to start to matter
in the next year or two. One was the scale
of it.
Speaker 3 (30:57):
One more point on this before we're going to break
what was Meta's predicted capex now on this on all
of this over the next year.
Speaker 2 (31:03):
Uh seventy billion. It was seventy billion this year and
their guidance next year. I can't find offhand right now.
Speaker 3 (31:13):
I just I would want to give this some scale
comparison for a moment here. The last few years, all
we've been talking about with meta was the metaverse, right
YEA pouring money into the metaverse that saw no real
return on it and a fair bit of criticism. The
total amount invested into the metaverse between twenty nineteen and
early twenty twenty four was around forty five billion dollars.
Speaker 4 (31:35):
The scale of this stuff is ridiculous.
Speaker 3 (31:38):
It is massive, and clearly they're doing it because they
see the promise of something in the future. But it's
important to just understand they're talking about annual spending that
has well eclipsed anything that they've poured into anything.
Speaker 2 (31:51):
Before well, and the incentives on this make sense. Like
if you think about it this way, if you are
meta and you say, look, we can spend over a
three to five year period, you know, two hundred and
two hundred and fifty billion dollars, and the upside is
that we achieve everything we wanted there and we unlock
(32:12):
you know, a trillion dollars an annual revenue as a
result of it. I get it, Like the like you're
totally incentivized to do so. Ye, the downside from it is, hey,
if it goes badly, Mike, is Medic gonna go out
of business because of this?
Speaker 3 (32:27):
Probably not no, likely not probably not, but a very
long hit to profitability to pay those loans back.
Speaker 2 (32:35):
But like if you are the manager of that company,
if you are the CEO of that company, the financial
incentives are, yeah, we're gonna do this because the upside
is so great. And like this is how CEOs make
decisions all the time. Like, no, no one in the
CEO chair ever knows for certain that something is going
(32:56):
to pan out. It's what's the upside and what's my downside,
whether it's an acquisition and new product development, whatever it
might be. So if Medic says, yeah, we're gonna spend
you know, a quarter trillion dollars in the next five years,
and the upside for us is it might unlock a
trillion dollar annual revenue stream that can cover that in more. Okay, sure,
(33:20):
what's the downside? Well, your stock price could be cut
by like fifty to seventy five percent if it doesn't work. Okay,
like Zuck's gonna take Mark Zuckerberg is not a a
stranger to long shot bets. Facebook's a long shot bet, right, Yeah,
like the this is this is what he's built to
(33:41):
do is try to make these bets. They're larger than
when he was, you know, in his dorm room starting
the thing up. But ultimately it was yeah, I think
I can make something here, and I don't know if
he's going to be able to or not, but I
understand the financial incentives and why they're doing this. It
just the nature of risks. Sometimes it doesn't work and
(34:02):
we don't know yet if it's going to work or not.
Let's take a quick break here. When we come back,
I want to talk a little bit more on the
tech earning side, and then we'll get into what's going
on in Massachusetts with families trying to raise children. How
much income do you actually need to do so in
the most expensive state in the nation to raise kids.
Speaker 1 (34:24):
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(34:45):
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Speaker 2 (34:54):
Just putting a bow on the tech stuff based on
the continued to increase and capex and when this is
going to start really showing up on the company's financial statements.
Twenty six and twenty seven I think are key years
for these companies to prove not just that artificial intelligence works,
but that they can actually monetize it and generate revenue. Otherwise,
(35:17):
that additional capex, when it starts coming back in the
form of depreciation, it's going to become a problem for
cash flows and earnings. It's just not going to be
something that's sustainable if they don't have the revenues there.
And the next two years, in my opinion, are the
years where it's going to be make or break for
yes we can make this work or no we can't.
Speaker 3 (35:38):
Yeah, And my concern there is not that they will
all be failures on that front, but then they probably
all won't be winners.
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Speaker 2 (36:44):
Piece of the Boston Globe headline is one hundred thousand
dollars salary enough to raise a family in Massachusetts. For
some local parents, it isn't and Massachusets. According to this
study that was done by smart Asset has the highest
annual cost of raising a child in the nation, at
thirty five eight hundred and forty one. This compares to
(37:06):
Mississippi the lowest, at about sixteen thousand. Nationally, most states
fall somewhere around twenty thousand dollars a year. That's looking
at you know, cost of childcare, clothing, food, you know,
all the stuff that you typically need. And obviously this
is exacerbated by the fact that prices have continued to
move up on a number of key items related to
raising a child this year.
Speaker 3 (37:27):
Childcare though, I mean childcare masters the biggest one at yeah,
twenty two grand a year last year, and that's the
median annual cost. Right, if you live anywhere around one
twenty eight the greater Boston region, you're looking at quite
a bit more than that. And that's probably again median
annual that's not full time daycare. And so yeah, I
have had conversations with families where it's like, yeah, unless
(37:50):
you are making over one hundred thousand dollars, it doesn't
even make sense to put your kid in childcare, given
how daycare, given how much it costs these days.
Speaker 2 (37:58):
Yeah, and so part of the story it covers, you know,
lots of people that left good paying jobs because they said, hey, ultimately,
if i'm paying for childcare, I'm still gonna be at
a net loss there. It's cheaper for me to stay
home and raise the kids that way. Let's take a
quick break here. When we come back, we had our
two coming up on the financial exchange.
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(01:06):
and Mike Armstrong.
Speaker 2 (01:11):
Chuck, Mike and talker with you here, and we got
a full show to get to, so no time for
further introductions. We're gonna kick things off with a little
bit of chatter about the big meeting between President Trump
and President g and this happened kicked off a little
after ten pm last night. And basically, Mike, when you
(01:35):
look at the takeaways on this and you know kind
of what we've what we've gotten from this meeting, I
think it matches my expectations, which was that, hey, not
anything game changing as far as you know, shifting the
overall relationship between the two countries. But let's talk about
(01:57):
I think there are five key areas that are identified
in my book that were addressed here, as you know,
small side issues that still don't deal with again those
bigger ones. So number one, the US agreed to reduce
tariffs on Chinese imports by ten percent, dropping the total
(02:17):
rate from fifty seven percent down to forty seven percent. Agreed.
Speaker 3 (02:21):
And by the way, if I'm going to call any
of the outcomes surprising to me, this was the only one.
Speaker 4 (02:27):
And it wasn't a huge surprise, but a slight decrease
in tariff.
Speaker 2 (02:30):
It was signaled in advance.
Speaker 4 (02:32):
Yeah, I guess you know.
Speaker 2 (02:34):
This was being talked about by the President over the weekend,
so I'm not too surprised by this. The other side
of this is the second item, which is China reportedly
agreeing to help crack down on the export of fentanyl
and fentanyl precursors to the United States.
Speaker 4 (02:52):
Pretty tough to measure, but Okay, whether they.
Speaker 2 (02:54):
Actually do or don't, I don't know that we're going
to know. But again, like I think it's something we'd
want to does it actually happen? Who knows? Number two,
China agreed to suspend or ease their export controls of
rare earth elements for a year. I don't believe this
is worth the paper it's not printed on, because we've
(03:17):
talked about, like, we have multiple instances this year of
China saying, hey, we're gonna, you know, do this rare
earth thing, and then they come and have a meeting
with the US and they're like, Okay, we're not going
to I have no conviction that we're not going to
be right back here in January or February.
Speaker 3 (03:31):
Let's be clear, we will be if anything sets them
off it. This will be the first lever that is
pulled if there's some other disagreement, and they might pull
the lever either way just to get what they want
out of it, which you know, in this case was
a meeting with the president where some progress was made
on some other issues.
Speaker 4 (03:50):
So yeah, I'm with you.
Speaker 3 (03:51):
I think that any promise on this front, you know,
we're back to where we were I guess two months
ago when it comes to rare earths, which is I'm
still concerned about the export controls and they're not going
to completely shut them off for the time being.
Speaker 2 (04:06):
Other things, China reportedly agreeing to resume larger purchases of
US soybeans. Again, this is kind of one where I'll
believe it when I see it. And part of the
reason on this is we've been talking soybeans for like
a decade. I went back, actually and pulled the references
from President Trump's first term, and I can't tell you
how many times China pledged to buy more US soybeans
(04:28):
and then didn't do it. Now the difference is right
now they've been buying basically none for the last several months. Yeah,
So yes, I guess technically anything can be an increase
over that, and earlier this week we did see a
one hundred and eighty thousand ton order, which is again,
I know, one hundred and eighty thousand tons seems like
a lot, but when you're trying to buy soybeans for
(04:49):
one point three billion people, it's really not much. So
it's a drop in the bucket. Was that a goodwill
gesture before this meeting or is that something that's going
to have further follow through. We're going to see, we
will get data on this over the coming months, and
so we're going to see what ends up happening here.
Speaker 3 (05:06):
Do we need the government to be open to get
that data?
Speaker 2 (05:10):
Maybe? I don't know. I don't know who produces it,
quite honestly. Yeah, fair, it's a hard maybe. Other things
just takeaways. I like this quote today reporters asked President
Trump about the meeting. He says, overall, on the scale
from zero to ten, with ten being the best, I would.
Speaker 4 (05:26):
Say it was a twelve. He did say that, yep.
Speaker 2 (05:28):
So I thought that was just, you know, a fun
little quote there. But again, I think take this for
what it is, which is, by and large, most of
the things that were agreed to here were things that
had like that both sides had put in place as
potential negotiating items over the last month or two. None
of the longer term stuff was addressed here. We didn't
(05:50):
do anything on technology transfers, anything on intellectual property, anything
on Taiwan, or anything on semiconductors. The President specifically said
that they did not discuss the Blackwell chips from Nvidia.
So I think that when we look at this ultimately,
(06:11):
like for me at least, it feels like we're kind
of just back to where we were. Maybe June July.
Is that fair?
Speaker 3 (06:17):
I was going to say two months ago, so I
was even less far back, But yeah, right around then.
I mean, the only thing that this has done for
me is erased the escalations that we saw in totally
early October.
Speaker 2 (06:31):
Yes, it takes that short term downside risk of things
going sideways off the table.
Speaker 3 (06:39):
I guess the one piece that is actually measurable and
real out of all of this is tariff rates coming
down by ten percent.
Speaker 2 (06:47):
Yep.
Speaker 3 (06:47):
That should be immediate and it probably will be in
place for a while, you know, absent and explosion on
another issue. Everything else you kind of have to wait
and see. And again, none of the things that we're
now really signify any any meaningful progress. We didn't even
get a TikTok deal, which I thought might be part
of this.
Speaker 2 (07:06):
So it is.
Speaker 4 (07:09):
I mean, I'm glad the meeting happened.
Speaker 3 (07:11):
I'm glad we are in this place rather than where
we thought we could be a couple of weeks ago.
But when we said this earlier, we said, look, this
all just looks like posturing ahead of the meeting. And
it's precisely what we got out of all this, which
was posturing ahead of a meeting, both sides, you know,
playing up the banter to be able to go to
that meeting and walk something away. And they succeeded on
(07:35):
that front, I guess.
Speaker 2 (07:37):
And that's fine. Likes, that's fine if you accept it
for what it is. If you were hoping for, you know,
some grand bargain to change all these different things, it's
not there. It's it's not. And that's because this stuff
takes a while, especially when you're dealing with China. And
this is the thing I come back to over and over.
China loves to just run out the clock. Oh we're talking,
(07:57):
we're talking, we're talking. We're still doing the stuff that
you don't like. Talking. We're talking. We're talking, still doing
the stuff you don't like, talking, talking, talking, still doing
the stuff that you don't like. Oh, you're you know,
presidential term ended. Great, we're still talking doing the stuff
that you don't like.
Speaker 3 (08:12):
It is pretty stark the comparisons that you can draw
now between the other piece of this trip that was
inked was the deal with South Korea and a you know,
negotiated tariff rate on that stuff. It has become clear
that China is really one of the only countries really
posing a challenge to the president's tariff policy. You could
(08:35):
argue Canada to some extent, but not really. I mean,
I mean really, the only country that's able to stand
up and fight back a little bit has been China,
and quite frankly, they've been pretty successful in doing so.
Speaker 4 (08:49):
Yeah, well, what do.
Speaker 3 (08:51):
You say, pretty successful in doing so when the threat
of what the President has wanted from China has been
a more open market and you know, investments in the
United States, They have not made those like other countries have.
And any time that the teriff rates have climbed to
(09:13):
a place that would completely be ruinous to China, they
have been able.
Speaker 4 (09:17):
To combat that with rare earth restrictions.
Speaker 3 (09:21):
So there has not been any Yes, they're you know,
much higher tarifrates on China than where we were a
year ago. Sure, but it's not as though we have
convinced Europe to join in on that, Mexico or any
other country to join in on it. And any time
that we've come close to any sort of real concentrate
pushed there, they have been successful in pushing back on
(09:43):
the rare earths.
Speaker 2 (09:44):
No, I mean, look that part of it. Look, there's
a chance that like Europe might be beyond hope on
this issue, just because I think that the the the
the effect of you know capture of you know, the
European Commission by Chinese you know, political pressure, I think
is pretty significant. And I just wonder if Europe actually
(10:07):
has the wherewithal to want to push back against that, right,
I just don't know that it's there. I mean again,
your Europe's economic engine is German manufacturing, and they've basically said, hey, China,
come on in, like do whatever you want for you know,
cars and heavy machinery and this and that. I mean
that they're basically like kind of killing their own you know,
economic engine and doing so, and they don't seem to care.
(10:30):
So Europe doesn't really seem to care too much about it. Canada,
I'm not sure they care too much either. Canada just
in the last week has talked about trying to deepen
ties with China as part of this. Quite honestly, there's
part of me that, in retrospect, looking at the last
week thinks that that is more why the Trump administration
wanted to, you know, raise additional tariffs on Canada as
(10:53):
a post I know that, you know, the ad that
was going around was talked about, but I do kind
of wonder, Hey, is it actually because Canada is talking
about building closer ties with China? And so, you know,
these are things that I think do matter in the
context of all these broader negotiations. Here anything else to
add before we wrap up with this, I don't think
(11:15):
there's too much more that I have to say on it.
Speaker 3 (11:18):
Now, let's move along from the Asia visit and uh,
let's talk FED.
Speaker 2 (11:22):
We we got Yeah, this is this is a fun one.
This is a meaty one. Let's talk FED when we return.
Speaker 1 (11:29):
This is your home for the most comprehensive coverage of
the economy and the trends on Wall Street. This is
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Speaker 2 (11:57):
All right, let's talk a little bit about yesterday's FED
meeting because quite honestly, like I thought, this was going
to be a pretty boring one. You know, we haven't
really been hyping this up, we haven't really been getting
all excited about it. But gollye g. Willikers, we got
a little bit of excitement from mister purple tie himself. Yeah,
that's surprise a little bit so even before Jay started talking.
(12:20):
So two pm we get the release of what the
Fed's doing, and no surprise in what they actually did.
They cut interest rates, the FED funds rate by a
quarter percent, as expected. They also halted their runoff of
the FED balance sheet, basically saying we've you know, done
enough trimming on the balance sheet and it's down now
down to the level that we think is appropriate. This
(12:41):
is also widely expected based on you know, overall levels
of reserves that are out there when you look at
the you know a lot of people who follow this.
They basically said Yeah, the Fed's got into an appropriate place,
and you know, going too much further could potentially start
to create some stress in the banking system. So that
was expected. The other part that I personally expected Stephen Moron,
(13:05):
who was nominated to the FED Board of Governors and
is on the FED Board of Governors for the last
two meetings now. He dissented to the downside, saying he
wanted the FED to cut by half a percent in
this meeting, just as he did in the prior meeting.
So I think that was expected for me as well.
I didn't find that to be surprising, agreed. The piece
(13:26):
that was surprising Jeffrey Schmid, who we.
Speaker 3 (13:30):
Talk about all the time on this program, right we are.
We definitely could pick him out of a lineup.
Speaker 2 (13:36):
Gotta be honest, first time I've ever said or heard
the name Jeffrey Schmid in my life. Like, if I'm
being one hundred percent honest, Mike and I follow this
stuff pretty closely, I don't think I've ever heard a
single thing from Schmid previously, Like he did.
Speaker 4 (13:52):
Not know how to spell his name until it was printed.
Speaker 2 (13:54):
He is as nondescript as you can get while being
on this board. I mean, like the other names we
talk about, John Williams, Michelle Bowman, Michael Barr, Lisa Cook,
Austin Goolsby, Philip Jefferson, ALBERTA. Musalem, Christopher Waller, Like, these
are names that were familiar with I see the name
Jeffrey spin and I'm like who, which, again, like relative
(14:16):
anonymity on the FED board is is kind of unique.
He dissented to the opposite side and said, no, I
prefer no change to the federal funds rates. So we
get the sense in each direction, which it's not the
first time this has ever happened. You guys, time to
look at six years, it is, but there's if you
will get the last fifty years or so, there's about
ten or eleven instances. So this is something that does
(14:37):
happen generally every like five to six years. It's it's
not it's I saw someone yesterally being like, oh, this
means like Powell's lost control of you know, his his committee. No,
like this has happened, you know, FED meetings on a
regular basis. Again, not every year, but usually every five
or six you get something like this that that pops up.
(14:58):
So I thought that was interesting, and then It was
topped off with Powell coming out in a no uncertain
word saying, hey, don't think that the December cut is
a foregone conclusion. And he really tried to push on this.
And so what you've had since yesterday is the bond
market has gotten the message loud and clear. The ten
(15:20):
year treasury up about ten bases points during that time.
Mortgage rates have gotten the message. The average thirty year
fixed rate mortgage, according to Mortgage News Daily yesterday went
from six point one to three percent to six point
two seven, so pretty substantial move on that side. And
so I think that when you look at this, the
bond market is hearing loud and clear. Okay, you're doing
(15:44):
these couple of cuts because you think it's important to
do so, but you're not convinced that there's further weakness
that warrants additional cuts. And this was made clear in
the FED statement as well. One of the thing that
was interesting here is again you always look at little
(16:04):
changes that get made in the FED press release. Yep,
the last sentence of the second paragraph. And I know
people listening are like, Chuck, like why do you care
about this? And I care because it helps to inform
the thinking about what they're doing. Like we parse each
of these words when they make changes, because they make
changes for a reason. The Committee is attentive to the
(16:25):
risks on both sides of its dual mandate and judges
that the downside risks to employment rose in recent months.
Rose is the piece that stands out. The previous statement
says have risen, have risen is kind of you know, present.
It's a combination of present tense and past. Yeah, these
risks have risen. Rose is that happened in the past.
(16:48):
We don't know if it's still happening, correct, And that's
a notable change because it helps to inform how they
may adjust policy in the future. So just that change
from have risen to rose, that to me is indicative
of their thinking as well, even beyond you know what
we saw with that dissent and what Powell said.
Speaker 3 (17:08):
All right, so a few things just contextualize this all
for the adverage person. We already did the context of
the mortgage rates. Mortgage rates moved higher on this news.
The chance of a rate cut in December moved lower
on this press conference. Stocks moved slightly lower during the
press conference from what I saw Chuck, I was trying
to measure it maybe four tens percent downside on the
S and P five hundred during the press conference in
(17:29):
Q and a other things. I'll be surprised if the
President does not have a statement to be made about J.
Powell and his failure at the FED and the fact
that he needs to see interest rates coming lower and
that they're missing the point here. I'll be very surprised
if we don't have commentary from the President on that subject.
(17:49):
And you know, he was asked a bunch of other things,
but I think the only other real interesting piece to me.
You know, they are clearly well, they're clearly lacking data
on jobs and so have a lot of questions there.
They're also asked some stuff about artificial intelligence, and so
I think one that speaks to the fact that reporters
(18:10):
and probably the FED are interested in the you know,
the the level of the stock market, the increase in
the stock market, the spending coming from AI.
Speaker 4 (18:19):
But the quote on AI that he had was I.
Speaker 3 (18:21):
Don't think interest rates are an important part of the
AI of the data center story. It's not really about
about twenty five basis points here or there. I think
he's right about that companies are going to spend money
on artificial intelligence regardless of whether interest rates are where
they are now or twenty five basis points higher or lower.
And I think they're cognizant of the fact that there
(18:43):
is some pretty rapid spending and some pretty wild lending
going on out there, and they could be just missing,
you know, missing the point here on the labor market
that you know, the weakness might not be that important
to the overall state of the economy.
Speaker 2 (18:58):
Yeah, I think that is Those are all I think
takeaways from you know what Powell said. I was interested
that he actually engaged on the topic of AI. Yeah,
I didn't think he wanted to get that granular, And
quite honestly, on a few topics he got more granular
than he has in the past, which I thought was interesting.
Like a lot of times he's like, well, you know,
we're not gonna get into you know, the nuance and
(19:19):
this and that and this, this Q and A. He
was kind of like digging into a lot of different topics,
which I thought was kind of interesting. It was kind
of a different approach from him. Senior writis quick break
here when we return, we got Wall Street watch and
then we're gonna get into those tech earnings.
Speaker 1 (19:40):
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 market so far
today right here on the Financial Exchange Radio Network.
Speaker 5 (20:00):
Well on one of Wall Street's busiest days of the year,
markets are mixed. Territory is investors react to the year
long trade truce between the US and China, comments from
FED Chairman Jerome Powell about future rate cuts, and of course,
big tech earnings from Alphabet, Microsoft and Meta. Right now,
the Dow is up by just over half a percent,
(20:20):
or two hundred and sixty points higher. SMP five hundred
is down three tenths of one percent or twenty five
points lower. Nasdaq is selling off nearly one percent or
two hundred and twenty two points. RUSSED two thousand is
edging higher, up about a tenth of a percent. Tenyure
Treasure realed up three basis points at four point zero
eight nine percent, and crude oil down about six tenths
(20:44):
of one percent, trading right around sixty dollars a barrel.
Alphabet shares up over five percent after the search giant
posted strong third quarter results, driven by revenue from Google
Cloud and YouTube advertising. Microsoft b quarterly expectations, where revenue
from it's a Zeri cloud business jumped forty percent. The
company's finance chief did note that capital spending will accelerate
(21:07):
this fiscal year. Microsoft is down by two percent. Meta
shares plunging eleven percent after the Facebook parent reported stronger
than expected third quarter earnings in revenue. However, Meta raised
its capital expenditures outlook to invest more in a I.
Apple and Amazon are on deck to report their results
(21:27):
after the close today. Outside of big tech, Eli Lilly
shares are up modestly after the drug maker b quarterly
earnings in revenue forecasts and hiked its full year revenue
outlook due to strong demand for its weight loss drugs. Meanwhile,
Starbucks posted weaker than expected earnings, but posted same store
sales growth for the first time in nearly two years.
(21:47):
That stock is up over one percent. Chipotle sinking seventeen
percent after the brito chain posted a drop in net
income while it's quarterly revenue missed estimates. The restaurant group
cited economic strains We're turning customers away from its stores,
and Carvanastock is falling nine percent after the online used
car retailer beat quarterly revenue expectations. However, its net income
(22:12):
fell well short of Street forecast. I'm Tucker Silvan. That
is Wall Street. Watch in the Financial Exchange streams every
day live on YouTube. Subscribe to our page, hit that bell,
and follow market activity all morning long, only here on
the Financial Exchange Radio Network.
Speaker 2 (22:29):
All right, so yesterday we did get the quarterly earnings
for as Tucker mentioned, we had Meta, we had Microsoft,
we had Alphabets. Only one of these companies uses its
original name anymore. And I don't know what that means,
but it means something. Where do you want to start, Mike?
Which one?
Speaker 3 (22:49):
I'm trying to think if there's anything with that, What
if there's anything we could generalize about all three of them,
all three of them dramatically Alphabet both revenue and.
Speaker 4 (22:59):
Alphabet profits other than taxes. Let's start with Alphabet.
Speaker 2 (23:02):
We would you like to start on, Tucker? What about Alphabet?
Speaker 5 (23:05):
It starts with the letter A.
Speaker 2 (23:07):
Okay, wonderful. So here's the big thing. So Alphabet, if
you look at their core search business, the concern this
year was, hey, more people are using large language models
like chat GPT in order to you know, get information.
One of the biggest use cases that these these large
language models have is looking for information supposed to go
(23:29):
into Google and saying, hey, how do I make a burrito?
You type it into chat GPT and it gives you,
you know, the step by step instructions. That way, what
we saw was actually an acceleration on Google's core search business.
And so the idea that Googles this dinosaur whose business
is dying not in evidence right now.
Speaker 3 (23:50):
Michael, Yeah, they are spending dramatically, but you know, compared
to Meta and Microsoft, Alphabet, Google, whatever you want to
call them, they more than covered their capact expanse with
their free cash flow. And so yes, they're spending a
boatload of money. They are, you know, trying to capitalize
on AI. They but but the pace of their revenue
(24:12):
growth is so strong that it's at least covering all
this increasing expanse and by no means turning into a dinosaur.
Speaker 4 (24:19):
I think no.
Speaker 2 (24:21):
And so like, if if you look at the the
the numbers here and again just like pulling them up
and saying, okay, like what did we actually see. I
want to talk about that free cash flow piece just
for a moment, yep, okay, because this is something that
does matter, and I think it's gonna be you know,
(24:43):
important to watch how it develops because for the last
the previous two quarters, what we did see was declining
free cash flow. Okay Q four of twenty twenty four. Again,
like I don't like to dig into earnings reports a ton,
but we're getting to the point now where some of
these numbers are big enough that it warrants some discussion.
From Q four of last year through Q two of
(25:04):
this year, free cash flow on a quarterly basis went
from twenty four billion down to five billion. So you
look at that and you're like, okay, like that's not
really a friendly trend that you want to see, Like
that's that's not really ideal on that front. So you
(25:24):
kind of dig in and you say, okay, like what's
the reason why that was happening? And you know, is
there anything there that changed during this quarter? You know
that that might have been you know, fundamentally different from
the trend that we were seeing previously, Like, is there
any reason why they saw this big jump in you know,
(25:47):
overall like operating income before you even get to the
free cash flow piece, and you know, you kind of
go through and you're like, okay, Like, as you're looking
through the numbers, there's nothing huge that you know, necessarily
out until you start looking at hey like where you
look at their cash flow statement and you're like, okay,
(26:09):
where is the difference there? And there's some shift one
of the things. And again I don't want to get
too technical on it, but you did see a fairly
notable shift in terms of accrude expenses and liabilities. So
basically it was like, Okay, they paid off a bunch
of stuff that they hadn't. But ultimately, I think that
when you look at this, it does seem to be
(26:30):
something that at least for now, is sustainable because their
core business is growing at the rate that it's growing at.
Speaker 3 (26:37):
Yeah, I mean the revenue is up sixteen percent year
over year and that was the weakest of the three.
Speaker 2 (26:43):
If that changes, then you get into the situation that
Meta is in, which is and look, Meta kind of
ended up with they kind of had a double whammy.
Even before this quarter, they were seeing a decline in
their cash on hand. So if you look at where
Meta was at the end of last next year. They
had seventy eight billion dollars in cash on hand. Before
(27:04):
this quarter, that was down to forty seven billion. After
this quarter, they're down to about eleven billion in cash
on hand. So they've been spending like from their cash
pile in order to fund this. Now, part of this
this quarter was they had a big, like eighteen billion
dollar tax expense that they ended up getting hit with
right that they said, well, help their tax situation going forward, Okay,
(27:25):
like that's not going to repeat itself. But then they
came out today and said, hey, we're going to do
a twenty five billion dollar debt raise in order to
help finance some of this construction. And I think that's
part of the reason why the market's a little spooked here,
is they're like, well, if you guys can cover this
out of free cash flow, that's all well and good.
But if you start having to raise debt in order
to pay for data centers that were unclear if they're
(27:47):
going to be profitable or not, I don't really know
about that. And so that's why Google, when you look
at them, or Alphabet rather, their stock's still up five
percent today, met is down twelve. I think that is
the key difference, and Microsoft's kind of fluttering in the middle.
They're down about two just because their quarter was good
but not great, you know it was, it was just fine.
Speaker 4 (28:07):
I wonder what it costs metat to borrow.
Speaker 2 (28:10):
I'm guessing it's probably I mean, I could probably pull
up some bonds if we wanted to look at it,
but my guess would be, I mean, just looking at
spreads and where Meta's credit rating is. Let's see, I'm
just pulling up where where these spreads are right now,
I'm guessing. And part of this, like MEDDA, is they're
doing it's a six tranch issuance. Yeah, anywhere from five
(28:32):
to forty years, I believe it is. I'm guessing metas
if you look into that forty year bond, it's probably
five percent dish and the short term ones are probably
somewhere in the range of four I reckon probably like
an average interest payment of like four and a half
on that.
Speaker 3 (28:50):
Well, I fully recognize that none of us had any
idea how much money we would be spending on our
companies would be spending on artificial intelligence.
Speaker 4 (28:56):
Development four years ago.
Speaker 3 (28:58):
You really sit back and wonder, man, how much money
could they have saved if they just went on a
borrowing spree kind of like didn't Apple do that in
twenty twenty and twenty twenty one, just borrow a ton
of money even though they didn't really have any need
for it.
Speaker 2 (29:11):
Yeah, the piece that is going to matter on this,
and you're starting to see it like I was looking
at Meta's financial statements, which again, like I don't do
this often, but when a big stock like this moves
in this way, I'm kind of like, Okay, like, what's
what's going on here? The piece that you're going to
have to watch on this is the depreciation line item
(29:31):
of these assets because effectively, like that is going to
end up impacting cash flows, like it goes right onto
the cash flow statement. And so the problem that you're
going to potentially run into is you're doing seventy billion
dollars in CAPEX this year. If you say, okay, there's
(29:52):
you know, a ten year useful life of that asset
that we just built, you start depreciating it at a
you know, seven billion dollar a year clip, and then
you're doing that next year again, Remember you're adding another
like seventy eighty billion dollars on top of that, all
of a sudden you start getting into that free cash
flow at a pretty good rate. And this is the
(30:13):
concern because remember, just because you build the data center
doesn't mean the cost is gone. That's why you have depreciation.
It's the realization of, hey, we're going to have to
buy new chips in a few years for that data center.
We're going to have to buy new cooling systems in
five years for that data center, and so that is
a cost that is going to end up coming through. Again,
(30:37):
it's not just a one time expense. It's why depreciation
exists here. And ultimately the question then is Okay, if
you're going to have these expenses that come up on
a regular basis and have this depreciation, are you going
to be able to generate the revenue to cover it?
That is the question that's going to start to matter
in the next year or two. One was the scale
of it.
Speaker 3 (30:57):
One more point on this before we're going to break
what was Meta's predicted capex now on this on all
of this over the next year.
Speaker 2 (31:03):
Uh seventy billion. It was seventy billion this year and
their guidance next year. I can't find offhand right now.
Speaker 3 (31:13):
I just I would want to give this some scale
comparison for a moment here. The last few years, all
we've been talking about with meta was the metaverse, right
YEA pouring money into the metaverse that saw no real
return on it and a fair bit of criticism. The
total amount invested into the metaverse between twenty nineteen and
early twenty twenty four was around forty five billion dollars.
Speaker 4 (31:35):
The scale of this stuff is ridiculous.
Speaker 3 (31:38):
It is massive, and clearly they're doing it because they
see the promise of something in the future. But it's
important to just understand they're talking about annual spending that
has well eclipsed anything that they've poured into anything.
Speaker 2 (31:51):
Before well, and the incentives on this make sense. Like
if you think about it this way, if you are
meta and you say, look, we can spend over a
three to five year period, you know, two hundred and
two hundred and fifty billion dollars, and the upside is
that we achieve everything we wanted there and we unlock
(32:12):
you know, a trillion dollars an annual revenue as a
result of it. I get it, Like the like you're
totally incentivized to do so. Ye, the downside from it is, hey,
if it goes badly, Mike, is Medic gonna go out
of business because of this?
Speaker 3 (32:27):
Probably not no, likely not probably not, but a very
long hit to profitability to pay those loans back.
Speaker 2 (32:35):
But like if you are the manager of that company,
if you are the CEO of that company, the financial
incentives are, yeah, we're gonna do this because the upside
is so great. And like this is how CEOs make
decisions all the time. Like, no, no one in the
CEO chair ever knows for certain that something is going
(32:56):
to pan out. It's what's the upside and what's my downside,
whether it's an acquisition and new product development, whatever it
might be. So if Medic says, yeah, we're gonna spend
you know, a quarter trillion dollars in the next five years,
and the upside for us is it might unlock a
trillion dollar annual revenue stream that can cover that in more. Okay, sure,
(33:20):
what's the downside? Well, your stock price could be cut
by like fifty to seventy five percent if it doesn't work. Okay,
like Zuck's gonna take Mark Zuckerberg is not a a
stranger to long shot bets. Facebook's a long shot bet, right, Yeah,
like the this is this is what he's built to
(33:41):
do is try to make these bets. They're larger than
when he was, you know, in his dorm room starting
the thing up. But ultimately it was yeah, I think
I can make something here, and I don't know if
he's going to be able to or not, but I
understand the financial incentives and why they're doing this. It
just the nature of risks. Sometimes it doesn't work and
(34:02):
we don't know yet if it's going to work or not.
Let's take a quick break here. When we come back,
I want to talk a little bit more on the
tech earning side, and then we'll get into what's going
on in Massachusetts with families trying to raise children. How
much income do you actually need to do so in
the most expensive state in the nation to raise kids.
Speaker 1 (34:24):
Find daily interviews and full shows of The Financial Exchange
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(34:45):
the Financial Exchange Radio network.
Speaker 2 (34:54):
Just putting a bow on the tech stuff based on
the continued to increase and capex and when this is
going to start really showing up on the company's financial statements.
Twenty six and twenty seven I think are key years
for these companies to prove not just that artificial intelligence works,
but that they can actually monetize it and generate revenue. Otherwise,
(35:17):
that additional capex, when it starts coming back in the
form of depreciation, it's going to become a problem for
cash flows and earnings. It's just not going to be
something that's sustainable if they don't have the revenues there.
And the next two years, in my opinion, are the
years where it's going to be make or break for
yes we can make this work or no we can't.
Speaker 3 (35:38):
Yeah, And my concern there is not that they will
all be failures on that front, but then they probably
all won't be winners.
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Speaker 2 (36:44):
Piece of the Boston Globe headline is one hundred thousand
dollars salary enough to raise a family in Massachusetts. For
some local parents, it isn't and Massachusets. According to this
study that was done by smart Asset has the highest
annual cost of raising a child in the nation, at
thirty five eight hundred and forty one. This compares to
(37:06):
Mississippi the lowest, at about sixteen thousand. Nationally, most states
fall somewhere around twenty thousand dollars a year. That's looking
at you know, cost of childcare, clothing, food, you know,
all the stuff that you typically need. And obviously this
is exacerbated by the fact that prices have continued to
move up on a number of key items related to
raising a child this year.
Speaker 3 (37:27):
Childcare though, I mean childcare masters the biggest one at yeah,
twenty two grand a year last year, and that's the
median annual cost. Right, if you live anywhere around one
twenty eight the greater Boston region, you're looking at quite
a bit more than that. And that's probably again median
annual that's not full time daycare. And so yeah, I
have had conversations with families where it's like, yeah, unless
(37:50):
you are making over one hundred thousand dollars, it doesn't
even make sense to put your kid in childcare, given
how daycare, given how much it costs these days.
Speaker 2 (37:58):
Yeah, and so part of the story it covers, you know,
lots of people that left good paying jobs because they said, hey, ultimately,
if i'm paying for childcare, I'm still gonna be at
a net loss there. It's cheaper for me to stay
home and raise the kids that way. Let's take a
quick break here. When we come back, we had our
two coming up on the financial exchange.
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