November 4, 2025 • 38 mins
Mike Armstrong and Marc Fandetti discuss Michael Burry's short positions on Palantir and Nvidia. Wall Street CEOs flag high market valuations and pullback risks. Wall Street intensifies scrutiny of fraud after spate of loan losses. Have fraud cases highlighted systemic risks? Dan Griggs, OceanFirst Bank President, joins the show to share what he views is the biggest threat to the economy.
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Speaker 1 (00:00):
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(01:01):
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Speaker 3 (01:10):
Good morning, Happy Tuesday, Welcome back to the Financial Exchange.
It's Mike, Mark and Tucker with you here, and we've
got another week of earnings.
Speaker 4 (01:18):
No behemoths reporting this week.
Speaker 3 (01:20):
We got Pallunteer yesterday which is making some moves and
some short calls.
Speaker 4 (01:26):
We have AMD going.
Speaker 3 (01:29):
Today after the bell, Shopify Uber reported before the bell today.
Tomorrow we've got some more between Toyota and Nova, Nordisk
and McDonald's all going tomorrow. Thursday, we've got Astrazenka, Kanako,
Parkerhannafin Again, no massive names here Airbnb.
Speaker 4 (01:48):
But I think what might.
Speaker 3 (01:49):
Be interesting is some tells here on the state of
the US consumer. We've seen and we will cover many
stories today about that K shaped economy, where the spending
is coming from, where it's not. We've got some warnings
about private credit and where it seeped its tentacles into
from ubs and others. But I want to start off
with a few pieces about this market generally today, because
(02:14):
you have more than one Wall Street CEO flagging high
market valuations and pullback risk, and I find the information
both useless but worth talking about. I guess, so first
things first, why is it useless. Wall Street CEOs have
said that investors should brace for an equity market drop
of more than ten percent in the next twelve to
(02:35):
twenty four months.
Speaker 4 (02:38):
Okay, so could.
Speaker 3 (02:41):
You tell me Mark, I don't know off the top
of my head, but I would be very interested to hear,
and it'd probably be pretty easy for us to pull.
If you did a rolling twenty four month period, what
percentage of them have a stock market correction of ten
percent or more. I'd be willing to bet it's something
like one in three. So not exactly a bold call
to say that sometime in the next twenty four months
(03:03):
you should expect a pullback of ten percent or more
when we have valuations where they are. I'm sure you're
gonna go do that. Wait until after the break, because
I don't want to hear you doing that for the
next five minutes. But again, not exactly a not exactly
a bold claim here. When CEOs are saying, hey, prep
for a ten percent market pullback, these things happen.
Speaker 4 (03:26):
Five percent market pullbacks happen, I would guess every other year.
Speaker 3 (03:30):
A bear market happens every five years, so a ten
percent pullback is nothing. So I don't think that's terribly useful.
But here's what I do think is worth mentioning, is
that there seems to be a bit of more focus
on the high flying valuations of AI companies specifically. The
(03:54):
other big news that you have on this front today
is Michael Burry of the big short fame, coming out
and putting short bets on Palanteer as well as Nvidia.
And I'm not going to say that this is terribly
useful information either, because I don't know how many times
Michael Berry has tried to short a specific theme and
(04:16):
has been wrong about it over the course the last
fifteen years, but he's been famously wrong about several of
them over the course the last fifteen years. So I
don't think that that in and of itself is of interest.
But I do think you're starting to see the beginnings
of some form of sentiment shift when it comes to
at least some folks on the massive AI trade and
(04:36):
the appreciation of stocks that we have seen so far
this year and over the course of the last few
Am I full of it? Am I full of boloney?
Do you detect the same thing? Or are we starting
to actually see some of the sentiment shifting it's.
Speaker 5 (04:49):
Being reported more widely, I'd say prominent investors who make
money by betting against the consensus, and the consensus is
whatever's embodied in the current price of something.
Speaker 3 (05:02):
Headlines are, you know, catchy, But can we actually talk
about that for a minute when we talk about the
big short. You know, for anybody that hasn't seen the movie,
who hasn't studied the crisis, what exactly does it mean
when Michael Burry is going out and betting against Nvidia
and Palenteer. There's technically a few ways to do it,
But what do we mean when we talk about somebody
(05:23):
shorting a stock.
Speaker 5 (05:25):
Yeah, the simplest way to think about it is, if
you thought the price was something off, something was going
to fall, you'd want to sell it today with a
promise to buy it back in the future at a
lower price.
Speaker 3 (05:41):
So some people if they were worrying, though, if some
people were worried about a stock price going down, they
might just sell it and remove.
Speaker 4 (05:47):
All of it.
Speaker 5 (05:47):
You actually want to you want to capitalize, You want that,
you want to turn that reduction in price into capital appreciation.
And the way you do one way to do that,
as you say, is by engaging in so called shorting,
which a lot of so called hedge funds do. You
may not have access to them in your four one kit.
You probably wouldn't want it. They're a little too speculative,
(06:08):
a little too high risk. But you're if you have
a pension, for example, some of the managers, not many
backing those payments you get every month, do employee strategies
like use like like shorting, as well as using leverage
and derivatives. And we call those unconstrained investors hedge funds.
This is how they make money, very unlike the large
(06:31):
cap US stock fund you own in your four to
one day plan, which is probably an S and P
five hundred index or benchmarked to that leading US company
Bellweather a metric.
Speaker 3 (06:44):
So here is I guess how I would summarize what
I think we're reading and seeing right now. Still a
tremendous amount of excitement over Ai and the spending that's coming.
Tremendous amount of excitement still about every move that open
Ai makes. Just yesterday, Amazon announce that deal with them
their stock for again, a nearly three trillion dollar company
(07:05):
on a deal with open Ai shot the stock up
at one point nearly five percent.
Speaker 4 (07:10):
I don't think it closed quite that high.
Speaker 3 (07:12):
So it is not to debate that there is still
excitement about artificial intelligence, the chips that are going to
be needed, the computing power that's going to be needed,
in the electricity that's going to be needed to power
all of it is still a driving market force. What
I am hearing and reading a little bit more into
is more scrutiny coming about when the payoff is. Palenteer,
(07:35):
for example, reported earnings yesterday, their stocks down more than
seven and a half percent. We'll talk about that a
little bit more. You have Michael Berry shorting a couple stocks.
You have Wall Street CEOs talking about the frothiness of markets.
While I don't find any of those predictions to be
terribly indicative of where things go, I do take it
all to me that investors going forward are getting to
(07:58):
be a little bit They're going to start potentially scrutinizing
the spend and the payoff more than they have over
the last couple of years. I guess is where I
am leading to. Only time will tell, but I think
that's where I'm getting to. It's not to say that
that spending will disappoint, it's just to say that, I
(08:19):
think investors are getting a little bit more, their antennas
are perking up a little bit more. When it comes
to hey, if these dollars are going to be spent,
when is the payoff going to come?
Speaker 4 (08:29):
And what's going to look like?
Speaker 5 (08:31):
Well, Vidia is what doubled in the past few months
stock price?
Speaker 4 (08:35):
Isn't that right?
Speaker 5 (08:35):
Since like May or April or am I thinking of
the wrong time?
Speaker 6 (08:38):
I can tell you past six months up seventy eight percent?
Speaker 4 (08:42):
Okay, so my it has doubled since April it doubled? Okay?
Speaker 5 (08:47):
Have has the growth potential of this technology doubled in
the past several months? I think the answer to that is, well.
Speaker 4 (08:55):
We don't.
Speaker 3 (08:56):
As Jensen Wong, yes, yeah, Well ask everybody else if yeah.
Speaker 5 (09:01):
One of the problems with this phenomenon is that it's
biggest cheer and this is always the case, but it's
biggest cheerleaders are also paid to be cheerleader. Yes, so
you can't trust them, no disrespect. I'm sure he believes
what he says. The same is true of Michael Burry
and others who have taken who are now making bets
that a stock price will fall.
Speaker 4 (09:21):
He will directly profit and is very public about it.
Speaker 5 (09:23):
As everything that these folks say on CNBC or whatever
it consists of talking up their book, as the expression goes,
where the book. Your book is just what you own
in finance, and if you're talking it up, all that
self explanatory. So you can't really trust him. Agreed, Not
because they're inherently untrustworthy, but because they're biased. They can't
(09:45):
help it.
Speaker 4 (09:45):
Agreed. Let's take quick break when we come back.
Speaker 3 (09:49):
The only other thing, the other thing that we've been
talking about predominantly on the show other than artificial intelligence,
has been private credit. And I felt like a bit
of a broken record over the last couple of months
when our points weren't being repeated. They finally are, They're
finally getting a little bit more attention from Wall.
Speaker 4 (10:08):
Street and others.
Speaker 3 (10:10):
So we're gonna be talking private credits and just where
those risks might be standing these days in the overall economy.
Speaker 4 (10:18):
That's next here on the Financial Exchange.
Speaker 2 (10:21):
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Speaker 4 (11:21):
Just fair warning here. I might have to sneeze during
this segment. I can feel it coming on. I just
want to give everybody a once to get the sun.
Can't control it.
Speaker 3 (11:29):
I want to talk about private credit, and I don't
think we need to define it at length again, but
everyone here listening is probably heard in some way of
private equity.
Speaker 4 (11:37):
Private credit is.
Speaker 3 (11:38):
A similar phenomenon on the loan side of things rather
than the investment side of things. Therefore, several months now
have started to be cracks in the foundation. We started
talking about this well ahead of this, but mainly because
in my personal experience, every time I've gone to any
sort of investment or financial conference, the profession in the
(12:00):
room have either been pushing private credit and private equity
as an investment option for professional money managers, or those
professional money managers have been asking questions about the segment,
its opacity, its growth, and you know, potential problems with it,
and so for years in that universe, to me, it's
(12:21):
been front and center, but not really reported on much.
This year, finally we started to see some cracks in
the foundation.
Speaker 4 (12:29):
I think you can call them.
Speaker 3 (12:31):
To summarize, we had the bankruptcy of Tricolor, which you
know has been some allegations of fraud there when it
comes to how they packaged their loans together. They were
a subprime auto lender. First Brands filed for bankruptcy. Have
there been allegations of fraud. I think there have been
allegation of the fraud First Brands as well in terms
(12:53):
of off balance sheet financing and things along those lines.
You then had a the owner of two very unknown
telecom companies being alleged fraud from Blackrock, And now we
have Zion's Bankcorp. Taking losses on loans to a California
real estate investors who they've accused of fraud. And what
(13:16):
you have here again for well known cases here that
we've reported on now of alleged fraud of companies or
individuals who have taken money from private credit companies. That's
all we know so far. Several of them have had
to declare bankruptcy as part of all of this. But
(13:37):
I think what I'm comfortable saying is every time that
money becomes loose, there's usually fraud attached to it. I
don't think this is unique to private credit. If you
want some examples of this, go look at the number
of people that went to jail after the Paycheck Protection
Program rolled out. People that saw very easy money to
(13:59):
find and filed false claims for employees that they didn't
have and then were eventually put in prison or had
to pay the money back. When money is easy to
come by and there's not a whole lot of diligence,
fraud exists. The question mark that I can't answer, is
how much more is there out there and beyond the
(14:20):
fraud If the money was this easy to get and
there were just very few checks and balances on these
companies in terms of what they were borrowing and what
they were using as collateral for those loans.
Speaker 4 (14:32):
How much fraud is there?
Speaker 3 (14:33):
And then how much just unsustainable debt is there that's
been taken out for businesses that couldn't ever really afford
the repayment of it.
Speaker 4 (14:41):
So that's question number one.
Speaker 3 (14:44):
The question number two is if there is a systemic
problem there, where does it filter through the US economy?
Speaker 4 (14:52):
Where are the real problems?
Speaker 3 (14:54):
Where is this systemic too big to fail risk when
it comes to all this stuff? And I don't have
a firm answer there, but UBS is pointing out one
segment of the market, which is the insurance market, and
their specific exposure to this type of.
Speaker 5 (15:09):
Thing could be they don't own a lot of private
is a percentage of their okay insurance companies a general
accounts or like seventy percent fixed income, So it's like
the it's it's like the opposite of your maybe four
or one K, or opposite of a pension fund. We
would think of an insurance company as being very conservatively,
but what I did.
Speaker 3 (15:28):
What I consider in that seventy percent with Yeah, private
credits considered fixed income, right yea.
Speaker 5 (15:33):
Yeah, absolutely, Yeah, these are these are loans. A bond
is just a loan, So yeah, private credits part of that.
It's it's a much bigger part of it than it
was twenty years ago. Most of them diligence, and diligence
is a fancy way of saying, investigate, do your homework on.
Most of them diligence their own deals. Insurance companies have
a lot of people doing private credit deals, just out
(15:54):
there in the field, looking for people who need looking
for credit worthy borrowers who might offer a higher rate
of return than what you can get in public markets. Again,
insurance companies, if you just think of them as a
big bond portfolio that they will use the income on
which they will use to pay your claim if you
have to file it. That's a basic sketch of their
business model what private credit offers them. See, professional investors
(16:17):
think about portfolio construction totally differently than individuals do. Most
of you listening to this are like, can I make
money off this or not? Should I buy this willok
gollup more than Tesla because I was also looking at Tesla.
Not the way professionals construct portfolios. They look for imperfectly
correlated things that zig one other things zag asset classes.
Private credit is one of them, so imperfectly correlated. Fancy
(16:39):
way of saying. Again, this zigs when the market zags. Great,
it diversifies me. And it's got higher yields than interest
rates than publicly traded bonds. Because they're not liquid, there's
no market for them, and because they're risk ear they
may not even be rated in many cases. That's why
you have to go out and du due diligence yourself.
So institutions are a vast majority of this market. It
(17:02):
is probably not an appropriate market for retail investors unless
you buy something that is professionally managed. And if you
are buying something professionally managed, it has to be liquid,
which means you give up some of what makes private
credit special. So I'm getting off on a little bit
of a tangent here, I guess.
Speaker 3 (17:16):
But it's helpful to understand the context of it, because, yeah,
buy and large, it's not owned by individual investors.
Speaker 5 (17:22):
I mean very indirectly. Mike again, your insurance company has it,
your pension fund has it. They own it for diversifications.
It's far from It's not a small part, but it's
not a big part either of their overall portfolio. But
that's not to say if there are if there is
a little bit of turmoil and private credit, it might
not have knock on effects that say, take out a
(17:43):
bank because that bank was exposed indirectly. For say a
bank made a loan to Goldman Sachs. A couple of
Goldman Sacks private credit funds go down and they can't
pay that loan back. That that's not a really good example,
but you get the sense of knock on effects. You
were a big hedge fund, you had some private credit.
That's taking your portfolio down. You gotta sell other stuff,
(18:05):
more liquid stuff. That's when it hits the broader stock market,
for example.
Speaker 3 (18:09):
So here is the claim from UBS's chairman, whose name
is Colem Kelleher quote in two thousand and seven, subprime
was all about rating agency arbitrage. What you see now
is a massive growth in small rating agencies ticking the
box of compliance of investment, meaning the insurance companies are
hiring small rating agent.
Speaker 4 (18:29):
You do have to.
Speaker 5 (18:29):
Yeah, you do have to do that at some point.
It's just it's too hard to diligence these because it's
so labor intentsive. It's too hard to do this using
in house staff.
Speaker 1 (18:37):
Yeah.
Speaker 3 (18:38):
And so the follow on to all that is the
claim from Bloomberg here that insurance companies generally have ramped
up their private debt investments over the past few years,
allocating close to one third of their five point six
trillion in assets to the sector last year. Okay, okay,
you know that's that's an interesting number. It might be
(19:01):
enough to cause a problem, but that is what this
one individual is calling you out as a key risk
of Hey, the insurance companies are not properly or may
not be properly rating this stuff, and if it blows up,
then that some of them are going to blow up.
Speaker 5 (19:14):
But you don't have to sell them all under distressed conditions.
You can hold those until the term is up. We
can talk about this more on the other side if
you want me to elaborate, but let's.
Speaker 4 (19:22):
Say a quick break.
Speaker 3 (19:22):
Wall Street Watch is coming up next, and then we'll
wrap up our thoughts on the auto sector and private
credit when we do return.
Speaker 2 (19:40):
Like us on Facebook and follow us on Twitter at
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Speaker 1 (19:48):
Exchange Radio Network. Time now for Wall Street.
Speaker 2 (19:53):
Watch a complete look at what's moving market so far
today right here on the Financial Exchange Radio Network.
Speaker 6 (20:00):
Selling off this morning, driven by losses in the tech
sector as worries increase about high valuations of AI stocks.
Right now, the Dow is down by two tenths of
one percent, or at eight eighty nine points, SMP five
hundreds down about six tenths of one percent or thirty
nine points. NASDAC down about one percent lower two hundred
(20:20):
and thirty two points, Russell two thousands down three quarters
of a percent. Tenure Treasure reeled down two basis points
at four point zero eighty three percent. In crude oil
down about eight tens of one percent, trading at sixty
dollars in fifty four cents a barrel. Palenteer among the
biggest AI losers on the day due to concerns over
the stocks high valuation. Despite the data analytics company posting
(20:44):
another quarter of record revenue, Palenteer also raised its current
quarter in full year revenue guidance. Furthermore, renowned big short
investor Michael Burry revealed a short position of both Palenteer
and Nvidia. Palenteer is now down just over five percent. Meanwhile,
Uber logged a higher quarterly profit and revenue, saying users
(21:05):
took twenty two percent more trips than a year ago. However,
the stock is retreating six percent after the ride sharing
and delivery company offered an ebit a range that's slightly disappointed. Elsewhere,
Young Brand's posted stronger than expected third quarter earnings and
revenue growth, driven by strong demand for Taco Bell and
improved US sales for KFC. However, the bigger news might
(21:29):
be the restaurant's company A company's announcement that it plans
to review strategic options for struggling Pizza Hut, including a
possible sale of all or parts of the brand. Yum
is up by six percent. Spotify shares down modestly after
the music streaming platform b third quarter of revenue expectations.
The companies reported active users during the quarter. All also
(21:52):
beat forecasts. Surrepti Therapeutics tanking twenty eight percent after the
biotech companies said results from a year long trial of
two therapies for rare muscle wasting illness fell short of
statistical significance, and after today's closing, bell A MD will
post their third quarter earnings. I'm Tucker Silva and that
(22:12):
is Wall Street watch Mark.
Speaker 3 (22:14):
We were talking before about the private credit space, and
before we get into this specific issue that we're talking about,
I want to make clear what people.
Speaker 4 (22:23):
May or may not be worried about.
Speaker 3 (22:25):
But when we talk about packaging of loans and whether
diligence was done properly, I want to bring people back
to the lead up of the Great Financial Crisis.
Speaker 5 (22:36):
You don't even bring up packaging of stuff here.
Speaker 3 (22:38):
Yeah, I mean, just plain and simple when you talk
about the Great Financial Crisis, what you heard and what
you saw on famous movies that I think most people,
a lot of people have seen is that there was
no real underwriting for who could get a loan back
in the lead up to the Great Financial Crisis.
Speaker 5 (22:53):
Yeah, we're talking here about mortgages.
Speaker 4 (22:55):
On mortgages, not business loans. But we're talking mortgages here.
Speaker 3 (22:58):
Where you know there's that famous what's the Steve Krell
is that the big short does it Corell movie?
Speaker 6 (23:06):
Are you talking about, Michael Berry?
Speaker 4 (23:08):
I'm talking about Yeah, Steve right.
Speaker 3 (23:11):
Yeah, there's that famous scene that I just always lists
in my head where he's talking to the mortgage brokers
and they're like, oh, yeah, my banks don't verify any
of this stuff. We just tell them to put down
whatever they want on the application.
Speaker 5 (23:22):
This isn't that egregious, Mike, It's not.
Speaker 4 (23:24):
It is not that egregious. It is different.
Speaker 3 (23:27):
I think what has people spooked is that in these
four instances of alleged fraud, the even giant companies like
black Rock, who people associate with good diligence and and
uh some degree of caution, apparently missed some allegations of fraud.
Speaker 4 (23:47):
Here a lot of these.
Speaker 5 (23:48):
Giving example from the last job I had before I
came to work for sure, I wasn't underwriting these loans.
I was on the assid I was. I'm a generalist, right,
That's how I get out of answering any question. Yeah,
I'm a generalist. It's not really my area. But we'd
sit through presentations on the latest deals and I'd pretend
to be following along. But these are loans. So a
big insurance company will go out and make a loan
to someone, say who owns real estate, and they say
(24:11):
what's occupancy, Oh, it's ninety eight percent. And is everybody
paying their rent on time?
Speaker 4 (24:15):
Yes?
Speaker 1 (24:15):
They are?
Speaker 5 (24:16):
How exactly now, they have a good track record. They
borrowed from us before they paid, They repaid their loan
on time. It worked out for everybody.
Speaker 2 (24:22):
Yep.
Speaker 1 (24:23):
How do I verify?
Speaker 5 (24:24):
Do I go out and do I knock on every
door in the apartment building that's going to be collateral
for the loan? Then I'm making think about how Now
I'm not excusing sloppy underwriting. I'm simply saying that it
is very labor intensive. And as markets get frothier, and
I think you made this point last segment, and it
is the key point. Markets get frothy. That pushes yields down.
Everybody's piling into something. It pushes, whether it's a stock
(24:47):
or a bond.
Speaker 4 (24:47):
Why is market's getting frothy? Push yields pushes prices up.
Speaker 5 (24:50):
Yield is just income divided by price. So frothy markets
push up the denominator price. That drives your yield down. Yep,
so you reach four yield, That's where that express comes from.
Everybody's got to do it. I have a return target
as an insurance company. I have to keep paying claims
at the estimated rate. I have a rate of return
target as a pension fund. It's based on actuarial projections
(25:12):
and other considerations. When markets get expensive, I have to
reach for yield to meet my goals.
Speaker 4 (25:18):
So it's that.
Speaker 5 (25:19):
General environment that results in what in retrospect seem like
egregious abuses and instances of fraud. There will be more fraud,
There will be books written about this period.
Speaker 4 (25:32):
People.
Speaker 5 (25:33):
Maybe we'll go to jail. It's almost an inevitable byproduct
of the messy process of getting capital to its highest
and best use that for most of us is just
embodied in the stock market that we look at every day.
You don't see the ugliness under the hood of the
stock market. There's a lot of tumult to arrive at
the price that we see. For example, that average that
(25:57):
we see embodied in stock prices, that was a little
bit of a digression.
Speaker 3 (26:01):
So the similarities between now and then, I don't think
are all that great. I think that the we think
that the underwriting was better than it was back in
the mid two thousands when it came to mortgages.
Speaker 5 (26:12):
We yeah, nobody thinks there's a problem there right, you
haven't heard.
Speaker 3 (26:15):
I don't think so, because banks aren't that stupid. I
think Okay, I'm not sure we should go that far.
They were that stupid back in the early two thousands,
So maybe.
Speaker 5 (26:26):
We're not going to make the same mistakes fifteen, I
mean the exact same mistakes fifteen.
Speaker 3 (26:31):
Okay, the repackaging of those loans into something that's credit worthy.
Speaker 4 (26:38):
I don't feel like you know that until after the fact.
Speaker 5 (26:40):
But that's not even That's not even what's happening here.
It's that you got to farm out some of your
dude so called do deal. And I'm sorry for continue
to use that phrase, but it's the easiest way to
summarize all the homeworks.
Speaker 3 (26:49):
Knocking on the doors, not full in the customers, and
seeing if there's that place.
Speaker 5 (26:53):
Really rented out like you told us before we give
you a five million dollar loan, Is that place really
rented at ninety eight percent? Uh so, yeah, that's hard
to do. Sometimes you hire a third party to do it,
and what if they're sloppy, They've got ten other jobs lined.
Speaker 4 (27:05):
Up that day.
Speaker 3 (27:06):
Risk does not disappear from the system after eight What
happened is regulations came in and said, hey, banks, you
sucked at doing this. You misled regulators, you didn't do
a good job, you didn't have good standards, and we
had to come bail you out because if we let
you fail, who's going to sink the entire financial system.
(27:27):
So banks, you aren't allowed to do this type of
stuff anymore. That does not mean that nobody does risky
loans anymore. It just means that it goes elsewhere. And
that's what we saw post Grade financial crisis is the
banks are no longer doing this. It is now on
somebody else's shoulders. And so risk doesn't get removed from
a system, It simply migrates elsewhere. And where it's migrated
(27:49):
is to these private credit Some of it has migrated
to this private credit space. And whether or not is
big enough or risky enough to blow up in their faces,
or maybe they genuinely are better at managing risk and
issuing loans to credit worthy companies and individuals and it's
not going to blow up in time.
Speaker 5 (28:09):
Now, there will be a lot of blow ups. The
hope is that they'll be because the risk has been
diffused spread over a larger number of investors. The idea
is that it will be contained. I don't know if
that ends up being the case. We'll know in a
couple of years.
Speaker 4 (28:23):
Yep. Let's take a quick break. When we come back.
Speaker 3 (28:26):
Dan Griggs from Motion First Bank joining us next to
talk about the Boston region economy, state of things from
the banker's eyes.
Speaker 4 (28:34):
That's next. Here on the Financial Exchange.
Speaker 2 (28:36):
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(28:57):
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Speaker 3 (29:06):
Joining us now is Dan Griggs is the president of
Ocean First Banks Boston Region and join us now to
talk about the national and regional economy.
Speaker 4 (29:13):
Dan, thanks for coming on, appreciate it.
Speaker 7 (29:16):
Hi, Mike, good to be back. Thank you.
Speaker 3 (29:17):
So, if you don't mind, I want to start off
with the state of employment nationally and then you know,
get your feel for the Boston area as well. And
I'm focused here because a it's supposed to be a
jobs week, we won't be getting that due to the
government shutdown would be my well, I think there's no
way we get it because they couldn't have measured the data.
With this Friday coming and going, we will now be
(29:39):
two weeks, two months behind on collection of unemployment data.
And so I'm sure you and then every you know,
every economist out there, especially at the Federal Reserve, is
trying to cobble together data. In Massachusetts, we had an
unemployment rate of four point one percent, which matched the
national situation back in December. Since then, nationally hit four
(30:02):
to three. In August, Massachusetts hit four eight. Does the
Massachusetts unemployment scenario feel weak to you right now when
you talk to the businesses that you serve.
Speaker 7 (30:14):
It doesn't. It doesn't. I think hiring We were just
out of the manufacturer last week and they're finding it
easier to hire. But they're hiring because business is good,
So it doesn't. It feels okay, not like there's a crisis.
And I'd say too, the you know, the job market
(30:37):
is still solid but cooling. In the FED when they
made their decision, if you go to the minutes, they
cided the weakening job market alongside potential housing market deterioration
for the reason. So what they're balancing are those two
things against inflation, and really felt, in my opinion, the
risk to employment are real and likely outweigh short term
(31:00):
concern regarding inflation.
Speaker 3 (31:02):
If there's been a theme at least from you know,
the politics this year, I feel like obviously tariffs has
been a focus, but generally government funding across the board
has been under pressure. And I know, you know, the
Boston area, especially with you know, high tech and biotech
reliant on some of that government funding. Are you hearing
(31:23):
from any of that place, you know, the lab space
I think of just the tremendous amount of growth over
the last decade. Are we seeing some pressure on either
the owners of those buildings or the lab space generally
in Massachusetts?
Speaker 7 (31:35):
Well, I think three things on on kind of the
office building market is is you know flight to quality,
So the A and B buildings are getting the tenants. Overall,
it's about twenty percent vacancy. There is some office to
REZI conversion with the current you know, city administration. And
(31:55):
the life science is we just overbuilt lab space, so
there is a huge vacancy there. But the life sciences
companies are they're doing okay. It's just they're not expanding
and there was a lot of building on spec So yeah,
that's hurt right.
Speaker 3 (32:10):
Now, Mike, we're now in today. You got to be
thirty five or thirty four of the government shut down.
As that continues, where do you see the risks cropping
up for businesses in the region.
Speaker 7 (32:23):
I really think the holiday outlook, staffing and consumer spending habits,
and then travel the fifth carries over into Thanksgiving. You know,
I really think the government shutdown, on how long it goes,
is a bigger driver of the next sped Open Market
Committee in December, more so than anything else. If it's settled,
(32:43):
you know, sooner than than you know, it's okay. I'll
give you an example. I was traveled. I traveled yesterday
to an airport. This the the terminal I went to
generally had five lines. They were down to three. So
it's just taking a little more time. But everything works fine.
But if as it continues and they're not being paid,
(33:04):
it's you know, it might be tough for travel during
particularly the thanksgetting Giving holiday season, and that will affect
the economy.
Speaker 3 (33:12):
Lawyers for the Trump administration are going to the Supreme
Court tomorrow for opening arguments in the case on the
use of tariffs in twenty twenty five. What's been your
experience in dealing with your clients that are subject to them,
how have they fared through this, and what's on your
mind as we head into the last quarter of the
(33:32):
e as we're readily in the last quarter of the
year when it comes to the subject of tariffs.
Speaker 7 (33:37):
Yeah, I just feel like it's a little bit of
old news. You know. I'll go back to some comments
that made earlier with you, is that it's really the
price of an item. If you're buying an item for
fifteen twenty bucks, you're probably still going to buy that item.
If you're buying a big ticket item, that might have
a bigger effect. So that's kind of the place where
(33:59):
it will hit it. And then of course with the
US and China, the Green Dicks and the tariff truce,
they're working their way through it. Our businesses since the
last time the administration did tariffs, you know, they they
it was harder for them to adjust prices. They've been
had an easier time to adjust prices this time around again.
Speaker 3 (34:19):
Dan Griggs, the president of Ocean First Banks Boston Region. Dan,
before I let you go just any any last thoughts
when you look at on the horizon of the biggest
opportunities and biggest threats to this economy right now.
Speaker 7 (34:31):
I you know, he kinomy feels okay, Mike, it really does.
The threats are you know, where the job unemployment goes.
That's the biggest threat. It is, plain and simple, the
biggest threat.
Speaker 3 (34:44):
Dan Griggs, ocean First Bank, President of Ocean First Banks
Boston Region, join us today to talk about the state
of the national and regional economy. Dan, thanks so much
for joining us. Appreciate it and we'll talk again soon.
Speaker 7 (34:55):
Sounds good, Mike, Thank you very much.
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Speaker 3 (36:13):
As I mentioned, the Trump administration's lawyers are heading to
the US Supreme Court to argue their case on tariffs.
Through August, the government had collected around ninety billion dollars
from tariffs. The administration had told the court that it
expects to have collected between seven hundred and fifty billion
and one trillion dollars in tariffs by next June. As
(36:33):
these things truly ramp up, I have no idea how
realistic that projection is, but as we head there, I
guess two important questions, does anyone have a real sense
of which direction this goes? And what if these tariffs?
What happens if these tariffs actually do get overruled by
the Supreme Court? That would be I think an immense
web of complexity if that were to happen.
Speaker 5 (36:56):
So if you're interested in this subject, I'll direct you
to the brief filed by eminent economists and researchers. A
brief is something that an interested party can file so
that the justices, the Supreme Court justices can can better
acquaint themselves with the economic in this case issues. If
you want to understand whether or not tariffs are response
(37:17):
to an emergency, what tariffs are supposed to do, what
they can't do, I would just read that I'm sorry
to like no no you to helps point people in another direction. Here,
Walls Street Journal Excuse Me has an excellent editorial on
the subject today. They go through the history of tariffs,
starting with Congress increasingly delegating tariff powers to the president.
(37:39):
Those have always been limited, though, which is of course
the main question here. Wall Street Journal is pro free trade.
They're free market generally publication. They do a good job
of laying out the issues.
Speaker 3 (37:49):
The answer to me, I have no idea which way
the Supreme Courts in a rule, I would think they
continue to defer to the administration. But the complexity involved
if the courts, if the courts forced them to repay
those tariffs, it would be pretty unprecedented in terms of
the complexity of doing so.
Speaker 5 (38:08):
When you didn't ask. Look, there's this easy scootion your
miket's get Congress to vote on this stuff.
Speaker 4 (38:12):
Make it law right quick break.
Speaker 3 (38:14):
A lot more to cover than the second hour. The
financial exchange will be right back
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Speaker 3 (01:10):
Good morning, Happy Tuesday, Welcome back to the Financial Exchange.
It's Mike, Mark and Tucker with you here, and we've
got another week of earnings.
Speaker 4 (01:18):
No behemoths reporting this week.
Speaker 3 (01:20):
We got Pallunteer yesterday which is making some moves and
some short calls.
Speaker 4 (01:26):
We have AMD going.
Speaker 3 (01:29):
Today after the bell, Shopify Uber reported before the bell today.
Tomorrow we've got some more between Toyota and Nova, Nordisk
and McDonald's all going tomorrow. Thursday, we've got Astrazenka, Kanako,
Parkerhannafin Again, no massive names here Airbnb.
Speaker 4 (01:48):
But I think what might.
Speaker 3 (01:49):
Be interesting is some tells here on the state of
the US consumer. We've seen and we will cover many
stories today about that K shaped economy, where the spending
is coming from, where it's not. We've got some warnings
about private credit and where it seeped its tentacles into
from ubs and others. But I want to start off
with a few pieces about this market generally today, because
(02:14):
you have more than one Wall Street CEO flagging high
market valuations and pullback risk, and I find the information
both useless but worth talking about. I guess, so first
things first, why is it useless. Wall Street CEOs have
said that investors should brace for an equity market drop
of more than ten percent in the next twelve to
(02:35):
twenty four months.
Speaker 4 (02:38):
Okay, so could.
Speaker 3 (02:41):
You tell me Mark, I don't know off the top
of my head, but I would be very interested to hear,
and it'd probably be pretty easy for us to pull.
If you did a rolling twenty four month period, what
percentage of them have a stock market correction of ten
percent or more. I'd be willing to bet it's something
like one in three. So not exactly a bold call
to say that sometime in the next twenty four months
(03:03):
you should expect a pullback of ten percent or more
when we have valuations where they are. I'm sure you're
gonna go do that. Wait until after the break, because
I don't want to hear you doing that for the
next five minutes. But again, not exactly a not exactly
a bold claim here. When CEOs are saying, hey, prep
for a ten percent market pullback, these things happen.
Speaker 4 (03:26):
Five percent market pullbacks happen, I would guess every other year.
Speaker 3 (03:30):
A bear market happens every five years, so a ten
percent pullback is nothing. So I don't think that's terribly useful.
But here's what I do think is worth mentioning, is
that there seems to be a bit of more focus
on the high flying valuations of AI companies specifically. The
(03:54):
other big news that you have on this front today
is Michael Burry of the big short fame, coming out
and putting short bets on Palanteer as well as Nvidia.
And I'm not going to say that this is terribly
useful information either, because I don't know how many times
Michael Berry has tried to short a specific theme and
(04:16):
has been wrong about it over the course the last
fifteen years, but he's been famously wrong about several of
them over the course the last fifteen years. So I
don't think that that in and of itself is of interest.
But I do think you're starting to see the beginnings
of some form of sentiment shift when it comes to
at least some folks on the massive AI trade and
(04:36):
the appreciation of stocks that we have seen so far
this year and over the course of the last few
Am I full of it? Am I full of boloney?
Do you detect the same thing? Or are we starting
to actually see some of the sentiment shifting it's.
Speaker 5 (04:49):
Being reported more widely, I'd say prominent investors who make
money by betting against the consensus, and the consensus is
whatever's embodied in the current price of something.
Speaker 3 (05:02):
Headlines are, you know, catchy, But can we actually talk
about that for a minute when we talk about the
big short. You know, for anybody that hasn't seen the movie,
who hasn't studied the crisis, what exactly does it mean
when Michael Burry is going out and betting against Nvidia
and Palenteer. There's technically a few ways to do it,
But what do we mean when we talk about somebody
(05:23):
shorting a stock.
Speaker 5 (05:25):
Yeah, the simplest way to think about it is, if
you thought the price was something off, something was going
to fall, you'd want to sell it today with a
promise to buy it back in the future at a
lower price.
Speaker 3 (05:41):
So some people if they were worrying, though, if some
people were worried about a stock price going down, they
might just sell it and remove.
Speaker 4 (05:47):
All of it.
Speaker 5 (05:47):
You actually want to you want to capitalize, You want that,
you want to turn that reduction in price into capital appreciation.
And the way you do one way to do that,
as you say, is by engaging in so called shorting,
which a lot of so called hedge funds do. You
may not have access to them in your four one kit.
You probably wouldn't want it. They're a little too speculative,
(06:08):
a little too high risk. But you're if you have
a pension, for example, some of the managers, not many
backing those payments you get every month, do employee strategies
like use like like shorting, as well as using leverage
and derivatives. And we call those unconstrained investors hedge funds.
This is how they make money, very unlike the large
(06:31):
cap US stock fund you own in your four to
one day plan, which is probably an S and P
five hundred index or benchmarked to that leading US company
Bellweather a metric.
Speaker 3 (06:44):
So here is I guess how I would summarize what
I think we're reading and seeing right now. Still a
tremendous amount of excitement over Ai and the spending that's coming.
Tremendous amount of excitement still about every move that open
Ai makes. Just yesterday, Amazon announce that deal with them
their stock for again, a nearly three trillion dollar company
(07:05):
on a deal with open Ai shot the stock up
at one point nearly five percent.
Speaker 4 (07:10):
I don't think it closed quite that high.
Speaker 3 (07:12):
So it is not to debate that there is still
excitement about artificial intelligence, the chips that are going to
be needed, the computing power that's going to be needed,
in the electricity that's going to be needed to power
all of it is still a driving market force. What
I am hearing and reading a little bit more into
is more scrutiny coming about when the payoff is. Palenteer,
(07:35):
for example, reported earnings yesterday, their stocks down more than
seven and a half percent. We'll talk about that a
little bit more. You have Michael Berry shorting a couple stocks.
You have Wall Street CEOs talking about the frothiness of markets.
While I don't find any of those predictions to be
terribly indicative of where things go, I do take it
all to me that investors going forward are getting to
(07:58):
be a little bit They're going to start potentially scrutinizing
the spend and the payoff more than they have over
the last couple of years. I guess is where I
am leading to. Only time will tell, but I think
that's where I'm getting to. It's not to say that
that spending will disappoint, it's just to say that, I
(08:19):
think investors are getting a little bit more, their antennas
are perking up a little bit more. When it comes
to hey, if these dollars are going to be spent,
when is the payoff going to come?
Speaker 4 (08:29):
And what's going to look like?
Speaker 5 (08:31):
Well, Vidia is what doubled in the past few months
stock price?
Speaker 4 (08:35):
Isn't that right?
Speaker 5 (08:35):
Since like May or April or am I thinking of
the wrong time?
Speaker 6 (08:38):
I can tell you past six months up seventy eight percent?
Speaker 4 (08:42):
Okay, so my it has doubled since April it doubled? Okay?
Speaker 5 (08:47):
Have has the growth potential of this technology doubled in
the past several months? I think the answer to that is, well.
Speaker 4 (08:55):
We don't.
Speaker 3 (08:56):
As Jensen Wong, yes, yeah, Well ask everybody else if yeah.
Speaker 5 (09:01):
One of the problems with this phenomenon is that it's
biggest cheer and this is always the case, but it's
biggest cheerleaders are also paid to be cheerleader. Yes, so
you can't trust them, no disrespect. I'm sure he believes
what he says. The same is true of Michael Burry
and others who have taken who are now making bets
that a stock price will fall.
Speaker 4 (09:21):
He will directly profit and is very public about it.
Speaker 5 (09:23):
As everything that these folks say on CNBC or whatever
it consists of talking up their book, as the expression goes,
where the book. Your book is just what you own
in finance, and if you're talking it up, all that
self explanatory. So you can't really trust him. Agreed, Not
because they're inherently untrustworthy, but because they're biased. They can't
(09:45):
help it.
Speaker 4 (09:45):
Agreed. Let's take quick break when we come back.
Speaker 3 (09:49):
The only other thing, the other thing that we've been
talking about predominantly on the show other than artificial intelligence,
has been private credit. And I felt like a bit
of a broken record over the last couple of months
when our points weren't being repeated. They finally are, They're
finally getting a little bit more attention from Wall.
Speaker 4 (10:08):
Street and others.
Speaker 3 (10:10):
So we're gonna be talking private credits and just where
those risks might be standing these days in the overall economy.
Speaker 4 (10:18):
That's next here on the Financial Exchange.
Speaker 2 (10:21):
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the economy and the trends on Wall Street.
Speaker 1 (10:26):
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Speaker 2 (10:30):
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Speaker 4 (11:21):
Just fair warning here. I might have to sneeze during
this segment. I can feel it coming on. I just
want to give everybody a once to get the sun.
Can't control it.
Speaker 3 (11:29):
I want to talk about private credit, and I don't
think we need to define it at length again, but
everyone here listening is probably heard in some way of
private equity.
Speaker 4 (11:37):
Private credit is.
Speaker 3 (11:38):
A similar phenomenon on the loan side of things rather
than the investment side of things. Therefore, several months now
have started to be cracks in the foundation. We started
talking about this well ahead of this, but mainly because
in my personal experience, every time I've gone to any
sort of investment or financial conference, the profession in the
(12:00):
room have either been pushing private credit and private equity
as an investment option for professional money managers, or those
professional money managers have been asking questions about the segment,
its opacity, its growth, and you know, potential problems with it,
and so for years in that universe, to me, it's
(12:21):
been front and center, but not really reported on much.
This year, finally we started to see some cracks in
the foundation.
Speaker 4 (12:29):
I think you can call them.
Speaker 3 (12:31):
To summarize, we had the bankruptcy of Tricolor, which you
know has been some allegations of fraud there when it
comes to how they packaged their loans together. They were
a subprime auto lender. First Brands filed for bankruptcy. Have
there been allegations of fraud. I think there have been
allegation of the fraud First Brands as well in terms
(12:53):
of off balance sheet financing and things along those lines.
You then had a the owner of two very unknown
telecom companies being alleged fraud from Blackrock, And now we
have Zion's Bankcorp. Taking losses on loans to a California
real estate investors who they've accused of fraud. And what
(13:16):
you have here again for well known cases here that
we've reported on now of alleged fraud of companies or
individuals who have taken money from private credit companies. That's
all we know so far. Several of them have had
to declare bankruptcy as part of all of this. But
(13:37):
I think what I'm comfortable saying is every time that
money becomes loose, there's usually fraud attached to it. I
don't think this is unique to private credit. If you
want some examples of this, go look at the number
of people that went to jail after the Paycheck Protection
Program rolled out. People that saw very easy money to
(13:59):
find and filed false claims for employees that they didn't
have and then were eventually put in prison or had
to pay the money back. When money is easy to
come by and there's not a whole lot of diligence,
fraud exists. The question mark that I can't answer, is
how much more is there out there and beyond the
(14:20):
fraud If the money was this easy to get and
there were just very few checks and balances on these
companies in terms of what they were borrowing and what
they were using as collateral for those loans.
Speaker 4 (14:32):
How much fraud is there?
Speaker 3 (14:33):
And then how much just unsustainable debt is there that's
been taken out for businesses that couldn't ever really afford
the repayment of it.
Speaker 4 (14:41):
So that's question number one.
Speaker 3 (14:44):
The question number two is if there is a systemic
problem there, where does it filter through the US economy?
Speaker 4 (14:52):
Where are the real problems?
Speaker 3 (14:54):
Where is this systemic too big to fail risk when
it comes to all this stuff? And I don't have
a firm answer there, but UBS is pointing out one
segment of the market, which is the insurance market, and
their specific exposure to this type of.
Speaker 5 (15:09):
Thing could be they don't own a lot of private
is a percentage of their okay insurance companies a general
accounts or like seventy percent fixed income, So it's like
the it's it's like the opposite of your maybe four
or one K, or opposite of a pension fund. We
would think of an insurance company as being very conservatively,
but what I did.
Speaker 3 (15:28):
What I consider in that seventy percent with Yeah, private
credits considered fixed income, right yea.
Speaker 5 (15:33):
Yeah, absolutely, Yeah, these are these are loans. A bond
is just a loan, So yeah, private credits part of that.
It's it's a much bigger part of it than it
was twenty years ago. Most of them diligence, and diligence
is a fancy way of saying, investigate, do your homework on.
Most of them diligence their own deals. Insurance companies have
a lot of people doing private credit deals, just out
(15:54):
there in the field, looking for people who need looking
for credit worthy borrowers who might offer a higher rate
of return than what you can get in public markets. Again,
insurance companies, if you just think of them as a
big bond portfolio that they will use the income on
which they will use to pay your claim if you
have to file it. That's a basic sketch of their
business model what private credit offers them. See, professional investors
(16:17):
think about portfolio construction totally differently than individuals do. Most
of you listening to this are like, can I make
money off this or not? Should I buy this willok
gollup more than Tesla because I was also looking at Tesla.
Not the way professionals construct portfolios. They look for imperfectly
correlated things that zig one other things zag asset classes.
Private credit is one of them, so imperfectly correlated. Fancy
(16:39):
way of saying. Again, this zigs when the market zags. Great,
it diversifies me. And it's got higher yields than interest
rates than publicly traded bonds. Because they're not liquid, there's
no market for them, and because they're risk ear they
may not even be rated in many cases. That's why
you have to go out and du due diligence yourself.
So institutions are a vast majority of this market. It
(17:02):
is probably not an appropriate market for retail investors unless
you buy something that is professionally managed. And if you
are buying something professionally managed, it has to be liquid,
which means you give up some of what makes private
credit special. So I'm getting off on a little bit
of a tangent here, I guess.
Speaker 3 (17:16):
But it's helpful to understand the context of it, because, yeah,
buy and large, it's not owned by individual investors.
Speaker 5 (17:22):
I mean very indirectly. Mike again, your insurance company has it,
your pension fund has it. They own it for diversifications.
It's far from It's not a small part, but it's
not a big part either of their overall portfolio. But
that's not to say if there are if there is
a little bit of turmoil and private credit, it might
not have knock on effects that say, take out a
(17:43):
bank because that bank was exposed indirectly. For say a
bank made a loan to Goldman Sachs. A couple of
Goldman Sacks private credit funds go down and they can't
pay that loan back. That that's not a really good example,
but you get the sense of knock on effects. You
were a big hedge fund, you had some private credit.
That's taking your portfolio down. You gotta sell other stuff,
(18:05):
more liquid stuff. That's when it hits the broader stock market,
for example.
Speaker 3 (18:09):
So here is the claim from UBS's chairman, whose name
is Colem Kelleher quote in two thousand and seven, subprime
was all about rating agency arbitrage. What you see now
is a massive growth in small rating agencies ticking the
box of compliance of investment, meaning the insurance companies are
hiring small rating agent.
Speaker 4 (18:29):
You do have to.
Speaker 5 (18:29):
Yeah, you do have to do that at some point.
It's just it's too hard to diligence these because it's
so labor intentsive. It's too hard to do this using
in house staff.
Speaker 1 (18:37):
Yeah.
Speaker 3 (18:38):
And so the follow on to all that is the
claim from Bloomberg here that insurance companies generally have ramped
up their private debt investments over the past few years,
allocating close to one third of their five point six
trillion in assets to the sector last year. Okay, okay,
you know that's that's an interesting number. It might be
(19:01):
enough to cause a problem, but that is what this
one individual is calling you out as a key risk
of Hey, the insurance companies are not properly or may
not be properly rating this stuff, and if it blows up,
then that some of them are going to blow up.
Speaker 5 (19:14):
But you don't have to sell them all under distressed conditions.
You can hold those until the term is up. We
can talk about this more on the other side if
you want me to elaborate, but let's.
Speaker 4 (19:22):
Say a quick break.
Speaker 3 (19:22):
Wall Street Watch is coming up next, and then we'll
wrap up our thoughts on the auto sector and private
credit when we do return.
Speaker 2 (19:40):
Like us on Facebook and follow us on Twitter at
TFFE show. Breaking business news is always first right here
on the Financial.
Speaker 1 (19:48):
Exchange Radio Network. Time now for Wall Street.
Speaker 2 (19:53):
Watch a complete look at what's moving market so far
today right here on the Financial Exchange Radio Network.
Speaker 6 (20:00):
Selling off this morning, driven by losses in the tech
sector as worries increase about high valuations of AI stocks.
Right now, the Dow is down by two tenths of
one percent, or at eight eighty nine points, SMP five
hundreds down about six tenths of one percent or thirty
nine points. NASDAC down about one percent lower two hundred
(20:20):
and thirty two points, Russell two thousands down three quarters
of a percent. Tenure Treasure reeled down two basis points
at four point zero eighty three percent. In crude oil
down about eight tens of one percent, trading at sixty
dollars in fifty four cents a barrel. Palenteer among the
biggest AI losers on the day due to concerns over
the stocks high valuation. Despite the data analytics company posting
(20:44):
another quarter of record revenue, Palenteer also raised its current
quarter in full year revenue guidance. Furthermore, renowned big short
investor Michael Burry revealed a short position of both Palenteer
and Nvidia. Palenteer is now down just over five percent. Meanwhile,
Uber logged a higher quarterly profit and revenue, saying users
(21:05):
took twenty two percent more trips than a year ago. However,
the stock is retreating six percent after the ride sharing
and delivery company offered an ebit a range that's slightly disappointed. Elsewhere,
Young Brand's posted stronger than expected third quarter earnings and
revenue growth, driven by strong demand for Taco Bell and
improved US sales for KFC. However, the bigger news might
(21:29):
be the restaurant's company A company's announcement that it plans
to review strategic options for struggling Pizza Hut, including a
possible sale of all or parts of the brand. Yum
is up by six percent. Spotify shares down modestly after
the music streaming platform b third quarter of revenue expectations.
The companies reported active users during the quarter. All also
(21:52):
beat forecasts. Surrepti Therapeutics tanking twenty eight percent after the
biotech companies said results from a year long trial of
two therapies for rare muscle wasting illness fell short of
statistical significance, and after today's closing, bell A MD will
post their third quarter earnings. I'm Tucker Silva and that
(22:12):
is Wall Street watch Mark.
Speaker 3 (22:14):
We were talking before about the private credit space, and
before we get into this specific issue that we're talking about,
I want to make clear what people.
Speaker 4 (22:23):
May or may not be worried about.
Speaker 3 (22:25):
But when we talk about packaging of loans and whether
diligence was done properly, I want to bring people back
to the lead up of the Great Financial Crisis.
Speaker 5 (22:36):
You don't even bring up packaging of stuff here.
Speaker 3 (22:38):
Yeah, I mean, just plain and simple when you talk
about the Great Financial Crisis, what you heard and what
you saw on famous movies that I think most people,
a lot of people have seen is that there was
no real underwriting for who could get a loan back
in the lead up to the Great Financial Crisis.
Speaker 5 (22:53):
Yeah, we're talking here about mortgages.
Speaker 4 (22:55):
On mortgages, not business loans. But we're talking mortgages here.
Speaker 3 (22:58):
Where you know there's that famous what's the Steve Krell
is that the big short does it Corell movie?
Speaker 6 (23:06):
Are you talking about, Michael Berry?
Speaker 4 (23:08):
I'm talking about Yeah, Steve right.
Speaker 3 (23:11):
Yeah, there's that famous scene that I just always lists
in my head where he's talking to the mortgage brokers
and they're like, oh, yeah, my banks don't verify any
of this stuff. We just tell them to put down
whatever they want on the application.
Speaker 5 (23:22):
This isn't that egregious, Mike, It's not.
Speaker 4 (23:24):
It is not that egregious. It is different.
Speaker 3 (23:27):
I think what has people spooked is that in these
four instances of alleged fraud, the even giant companies like
black Rock, who people associate with good diligence and and
uh some degree of caution, apparently missed some allegations of fraud.
Speaker 4 (23:47):
Here a lot of these.
Speaker 5 (23:48):
Giving example from the last job I had before I
came to work for sure, I wasn't underwriting these loans.
I was on the assid I was. I'm a generalist, right,
That's how I get out of answering any question. Yeah,
I'm a generalist. It's not really my area. But we'd
sit through presentations on the latest deals and I'd pretend
to be following along. But these are loans. So a
big insurance company will go out and make a loan
to someone, say who owns real estate, and they say
(24:11):
what's occupancy, Oh, it's ninety eight percent. And is everybody
paying their rent on time?
Speaker 4 (24:15):
Yes?
Speaker 1 (24:15):
They are?
Speaker 5 (24:16):
How exactly now, they have a good track record. They
borrowed from us before they paid, They repaid their loan
on time. It worked out for everybody.
Speaker 2 (24:22):
Yep.
Speaker 1 (24:23):
How do I verify?
Speaker 5 (24:24):
Do I go out and do I knock on every
door in the apartment building that's going to be collateral
for the loan? Then I'm making think about how Now
I'm not excusing sloppy underwriting. I'm simply saying that it
is very labor intensive. And as markets get frothier, and
I think you made this point last segment, and it
is the key point. Markets get frothy. That pushes yields down.
Everybody's piling into something. It pushes, whether it's a stock
(24:47):
or a bond.
Speaker 4 (24:47):
Why is market's getting frothy? Push yields pushes prices up.
Speaker 5 (24:50):
Yield is just income divided by price. So frothy markets
push up the denominator price. That drives your yield down. Yep,
so you reach four yield, That's where that express comes from.
Everybody's got to do it. I have a return target
as an insurance company. I have to keep paying claims
at the estimated rate. I have a rate of return
target as a pension fund. It's based on actuarial projections
(25:12):
and other considerations. When markets get expensive, I have to
reach for yield to meet my goals.
Speaker 4 (25:18):
So it's that.
Speaker 5 (25:19):
General environment that results in what in retrospect seem like
egregious abuses and instances of fraud. There will be more fraud,
There will be books written about this period.
Speaker 4 (25:32):
People.
Speaker 5 (25:33):
Maybe we'll go to jail. It's almost an inevitable byproduct
of the messy process of getting capital to its highest
and best use that for most of us is just
embodied in the stock market that we look at every day.
You don't see the ugliness under the hood of the
stock market. There's a lot of tumult to arrive at
the price that we see. For example, that average that
(25:57):
we see embodied in stock prices, that was a little
bit of a digression.
Speaker 3 (26:01):
So the similarities between now and then, I don't think
are all that great. I think that the we think
that the underwriting was better than it was back in
the mid two thousands when it came to mortgages.
Speaker 5 (26:12):
We yeah, nobody thinks there's a problem there right, you
haven't heard.
Speaker 3 (26:15):
I don't think so, because banks aren't that stupid. I
think Okay, I'm not sure we should go that far.
They were that stupid back in the early two thousands,
So maybe.
Speaker 5 (26:26):
We're not going to make the same mistakes fifteen, I
mean the exact same mistakes fifteen.
Speaker 3 (26:31):
Okay, the repackaging of those loans into something that's credit worthy.
Speaker 4 (26:38):
I don't feel like you know that until after the fact.
Speaker 5 (26:40):
But that's not even That's not even what's happening here.
It's that you got to farm out some of your
dude so called do deal. And I'm sorry for continue
to use that phrase, but it's the easiest way to
summarize all the homeworks.
Speaker 3 (26:49):
Knocking on the doors, not full in the customers, and
seeing if there's that place.
Speaker 5 (26:53):
Really rented out like you told us before we give
you a five million dollar loan, Is that place really
rented at ninety eight percent? Uh so, yeah, that's hard
to do. Sometimes you hire a third party to do it,
and what if they're sloppy, They've got ten other jobs lined.
Speaker 4 (27:05):
Up that day.
Speaker 3 (27:06):
Risk does not disappear from the system after eight What
happened is regulations came in and said, hey, banks, you
sucked at doing this. You misled regulators, you didn't do
a good job, you didn't have good standards, and we
had to come bail you out because if we let
you fail, who's going to sink the entire financial system.
(27:27):
So banks, you aren't allowed to do this type of
stuff anymore. That does not mean that nobody does risky
loans anymore. It just means that it goes elsewhere. And
that's what we saw post Grade financial crisis is the
banks are no longer doing this. It is now on
somebody else's shoulders. And so risk doesn't get removed from
a system, It simply migrates elsewhere. And where it's migrated
(27:49):
is to these private credit Some of it has migrated
to this private credit space. And whether or not is
big enough or risky enough to blow up in their faces,
or maybe they genuinely are better at managing risk and
issuing loans to credit worthy companies and individuals and it's
not going to blow up in time.
Speaker 5 (28:09):
Now, there will be a lot of blow ups. The
hope is that they'll be because the risk has been
diffused spread over a larger number of investors. The idea
is that it will be contained. I don't know if
that ends up being the case. We'll know in a
couple of years.
Speaker 4 (28:23):
Yep. Let's take a quick break. When we come back.
Speaker 3 (28:26):
Dan Griggs from Motion First Bank joining us next to
talk about the Boston region economy, state of things from
the banker's eyes.
Speaker 4 (28:34):
That's next. Here on the Financial Exchange.
Speaker 2 (28:36):
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(28:57):
the Financial Exchange Radio Network.
Speaker 3 (29:06):
Joining us now is Dan Griggs is the president of
Ocean First Banks Boston Region and join us now to
talk about the national and regional economy.
Speaker 4 (29:13):
Dan, thanks for coming on, appreciate it.
Speaker 7 (29:16):
Hi, Mike, good to be back. Thank you.
Speaker 3 (29:17):
So, if you don't mind, I want to start off
with the state of employment nationally and then you know,
get your feel for the Boston area as well. And
I'm focused here because a it's supposed to be a
jobs week, we won't be getting that due to the
government shutdown would be my well, I think there's no
way we get it because they couldn't have measured the data.
With this Friday coming and going, we will now be
(29:39):
two weeks, two months behind on collection of unemployment data.
And so I'm sure you and then every you know,
every economist out there, especially at the Federal Reserve, is
trying to cobble together data. In Massachusetts, we had an
unemployment rate of four point one percent, which matched the
national situation back in December. Since then, nationally hit four
(30:02):
to three. In August, Massachusetts hit four eight. Does the
Massachusetts unemployment scenario feel weak to you right now when
you talk to the businesses that you serve.
Speaker 7 (30:14):
It doesn't. It doesn't. I think hiring We were just
out of the manufacturer last week and they're finding it
easier to hire. But they're hiring because business is good,
So it doesn't. It feels okay, not like there's a crisis.
And I'd say too, the you know, the job market
(30:37):
is still solid but cooling. In the FED when they
made their decision, if you go to the minutes, they
cided the weakening job market alongside potential housing market deterioration
for the reason. So what they're balancing are those two
things against inflation, and really felt, in my opinion, the
risk to employment are real and likely outweigh short term
(31:00):
concern regarding inflation.
Speaker 3 (31:02):
If there's been a theme at least from you know,
the politics this year, I feel like obviously tariffs has
been a focus, but generally government funding across the board
has been under pressure. And I know, you know, the
Boston area, especially with you know, high tech and biotech
reliant on some of that government funding. Are you hearing
(31:23):
from any of that place, you know, the lab space
I think of just the tremendous amount of growth over
the last decade. Are we seeing some pressure on either
the owners of those buildings or the lab space generally
in Massachusetts?
Speaker 7 (31:35):
Well, I think three things on on kind of the
office building market is is you know flight to quality,
So the A and B buildings are getting the tenants. Overall,
it's about twenty percent vacancy. There is some office to
REZI conversion with the current you know, city administration. And
(31:55):
the life science is we just overbuilt lab space, so
there is a huge vacancy there. But the life sciences
companies are they're doing okay. It's just they're not expanding
and there was a lot of building on spec So yeah,
that's hurt right.
Speaker 3 (32:10):
Now, Mike, we're now in today. You got to be
thirty five or thirty four of the government shut down.
As that continues, where do you see the risks cropping
up for businesses in the region.
Speaker 7 (32:23):
I really think the holiday outlook, staffing and consumer spending habits,
and then travel the fifth carries over into Thanksgiving. You know,
I really think the government shutdown, on how long it goes,
is a bigger driver of the next sped Open Market
Committee in December, more so than anything else. If it's settled,
(32:43):
you know, sooner than than you know, it's okay. I'll
give you an example. I was traveled. I traveled yesterday
to an airport. This the the terminal I went to
generally had five lines. They were down to three. So
it's just taking a little more time. But everything works fine.
But if as it continues and they're not being paid,
(33:04):
it's you know, it might be tough for travel during
particularly the thanksgetting Giving holiday season, and that will affect
the economy.
Speaker 3 (33:12):
Lawyers for the Trump administration are going to the Supreme
Court tomorrow for opening arguments in the case on the
use of tariffs in twenty twenty five. What's been your
experience in dealing with your clients that are subject to them,
how have they fared through this, and what's on your
mind as we head into the last quarter of the
(33:32):
e as we're readily in the last quarter of the
year when it comes to the subject of tariffs.
Speaker 7 (33:37):
Yeah, I just feel like it's a little bit of
old news. You know. I'll go back to some comments
that made earlier with you, is that it's really the
price of an item. If you're buying an item for
fifteen twenty bucks, you're probably still going to buy that item.
If you're buying a big ticket item, that might have
a bigger effect. So that's kind of the place where
(33:59):
it will hit it. And then of course with the
US and China, the Green Dicks and the tariff truce,
they're working their way through it. Our businesses since the
last time the administration did tariffs, you know, they they
it was harder for them to adjust prices. They've been
had an easier time to adjust prices this time around again.
Speaker 3 (34:19):
Dan Griggs, the president of Ocean First Banks Boston Region. Dan,
before I let you go just any any last thoughts
when you look at on the horizon of the biggest
opportunities and biggest threats to this economy right now.
Speaker 7 (34:31):
I you know, he kinomy feels okay, Mike, it really does.
The threats are you know, where the job unemployment goes.
That's the biggest threat. It is, plain and simple, the
biggest threat.
Speaker 3 (34:44):
Dan Griggs, ocean First Bank, President of Ocean First Banks
Boston Region, join us today to talk about the state
of the national and regional economy. Dan, thanks so much
for joining us. Appreciate it and we'll talk again soon.
Speaker 7 (34:55):
Sounds good, Mike, Thank you very much.
Speaker 6 (34:56):
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Speaker 3 (36:13):
As I mentioned, the Trump administration's lawyers are heading to
the US Supreme Court to argue their case on tariffs.
Through August, the government had collected around ninety billion dollars
from tariffs. The administration had told the court that it
expects to have collected between seven hundred and fifty billion
and one trillion dollars in tariffs by next June. As
(36:33):
these things truly ramp up, I have no idea how
realistic that projection is, but as we head there, I
guess two important questions, does anyone have a real sense
of which direction this goes? And what if these tariffs?
What happens if these tariffs actually do get overruled by
the Supreme Court? That would be I think an immense
web of complexity if that were to happen.
Speaker 5 (36:56):
So if you're interested in this subject, I'll direct you
to the brief filed by eminent economists and researchers. A
brief is something that an interested party can file so
that the justices, the Supreme Court justices can can better
acquaint themselves with the economic in this case issues. If
you want to understand whether or not tariffs are response
(37:17):
to an emergency, what tariffs are supposed to do, what
they can't do, I would just read that I'm sorry
to like no no you to helps point people in another direction. Here,
Walls Street Journal Excuse Me has an excellent editorial on
the subject today. They go through the history of tariffs,
starting with Congress increasingly delegating tariff powers to the president.
(37:39):
Those have always been limited, though, which is of course
the main question here. Wall Street Journal is pro free trade.
They're free market generally publication. They do a good job
of laying out the issues.
Speaker 3 (37:49):
The answer to me, I have no idea which way
the Supreme Courts in a rule, I would think they
continue to defer to the administration. But the complexity involved
if the courts, if the courts forced them to repay
those tariffs, it would be pretty unprecedented in terms of
the complexity of doing so.
Speaker 5 (38:08):
When you didn't ask. Look, there's this easy scootion your
miket's get Congress to vote on this stuff.
Speaker 4 (38:12):
Make it law right quick break.
Speaker 3 (38:14):
A lot more to cover than the second hour. The
financial exchange will be right back
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