February 17, 2026 • 38 mins
Mike Armstrong and Marc Fandetti examine a market that looks flat on the surface but has experienced significant sector rotation and investor anxiety underneath. The conversation explores renewed AI disruption fears, productivity gains, and whether Federal Reserve policy is heading into risky territory. Later, the hosts discuss corporate price increases, rent control proposals in Massachusetts, and new federal efforts aimed at addressing the nation’s housing shortage.
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Speaker 1 (00:00):
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(00:43):
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(01:06):
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Speaker 2 (01:10):
Good morning, Happy Tuesday, and welcome back to the Financial Exchange. Tuesday.
That feels like Monday for anybody that works on Wall Street.
Sorry for all of those that didn't have yesterday off
like like those that do work on Wall Street did.
But we are kicking off another week here with markets
you know, I'm not gonna say floundering, but you know,
bopping all over the place and opening up in negative
(01:34):
territory here. And I'm trying to, I guess put a
synopsis together on where markets stand right now or where
we take investor sentiment at the moment, because on the surface,
markets look pretty boring. If you just look at the
S and P five hundred, the S and P five
hundred right now sitting just below sixty eight hundred. Back
(01:56):
in October, Let's see when do we reach this level?
Back in October, right around October twenty fourth, we were
at the same exact level that we are today. In
spite of that, it doesn't really feel that way to
a lot of investors because there has been a fair
bit of churn in market. It's a fair bit of
rotation in and out of different sectors, different stocks, and
I think may that's healthy, that's you know, you don't
(02:20):
necessarily like to see people just blindly buying entire sectors
or companies of the stock market. But on the other hand,
it's been defined by I think brief periods of a
lot of concern about AI, the impact on certain industries,
whether or not the entire thing could erupt in some
(02:40):
sort of stock market bubble popping. And yeah, I think
it's left investors a little bit jittery. At this point
in time.
Speaker 3 (02:47):
The AI conversation is getting really interesting. You had growth,
you had the economy expanded at pretty rapid pace in
the last three quarters of last year. We don't have
fourth quarter to eight yet, we'll get that in a
couple of days. But it looks like the economy grew
in the last in the final three quarters of twenty
twenty five, in quarters two, three, and four, grew at
like a four percent or somewhere in that ballpark real rate, right,
(03:13):
unemployment employment more accurately, employment or more appropriately for what
I'm about to say, I think seems to have been
like flat. So that means productivity went up by a lot,
which is just output per hour, So we produced a
lot more with like the fewer people. Yeah, so was
(03:33):
that a result of AI. There are some very influential
growth researchers who think that we are in the early
stages of harvesting years worth of investments in AI. What
I'm getting to Mike is for capital markets, AI could
also So that is a that is an interesting, somewhat disruptive,
somewhat unsettling story. AI allowed us to do more with
(03:55):
the same or fewer people, disturbing from a labor market
point of view, encouraging from maybe a long term growth
point of view. The jury will be out on that
for some time. In equity markets, we're seeing some companies
investors souring on some companies prospects because of the same,
seemingly the same unfolding phenomenon.
Speaker 2 (04:16):
Yeah, and the concerns that I'm hearing about AI today
are pretty substantially different from this time last year, when
the narrative I think this time last year was, oh,
these companies that are developing AI. Maybe it's all just overblown,
maybe it's not as impressive, And there were early signs
that it wasn't terribly impressive. These tools were bad at math,
misidentified people, and were not all that usable and I
(04:39):
think a lot of people were scratching their heads saying,
is this really you know, making in VideA, for instance,
a four trillion dollar company, Is this really justifiable in
terms of what we're seeing for a cost build out.
And while those questions are still being raised, you know,
is it going to be sustainable for Amazon, Microsoft Beta
and Alphabet to spend six hundred and fifty million dollars
(05:00):
on AI development over the course of the next year.
Those questions exist, but the bigger questions today seem to
be the tools are actually quite impressive, and so which
companies is this going to completely put out of business?
And that story seems to be rotating every week as well.
We've gone from software companies to financial services companies. I
think there was another one just last week that logistics
(05:23):
companies now like shipping logistics companies, were all called into
question in terms of their core business models over the
course of the last three weeks. And I won't be
surprised if some new company that last week it was
a former karaoke company that ruled out of logistics software.
So you know, God knows we're going to get hit
with next time. It's probably going to be a movie
(05:43):
theater that rolls out a AI tool for uh, you know,
selling tickets and competing with Ticketmaster for all I know.
But the rotation continues. And in spite of that, people
aren't rotating and saying that's it. I'm out. It's time
to go to cash, as you will say, or you know,
buy into bond markets. It's more been well, I don't
(06:04):
know what this sector is going to do, so I'm
going to take my money and put it over here.
Still largely in US talks.
Speaker 3 (06:11):
Yeah, the trick here and I think you and Chuck
sadd have talked about this is oh that maybe the
paradox is a better way to put it. AI may
not benefit most or on average or your average publicly
traded company, So maybe it seems unthinkable that AI could
be this transformative, revolutionary through every other cliche you want
(06:33):
in that description thing and at the same time bad
for publicly, bad for the s and P five hundred
because maybe the benefits a crew to private firms.
Speaker 2 (06:42):
Right, I mean, we're smaller, very well could be, and
some of the top leaders in that space are privately held.
Open AI SpaceX which is now combined with XAI Clauds
what's what's Claudes parent company, Anthropic all privately held companies,
not to say that they will be the primary beneficiaries
(07:04):
of some AI advancement, but massive privately.
Speaker 3 (07:07):
They'll go public.
Speaker 1 (07:09):
Awards.
Speaker 2 (07:10):
The counterpoint to that would be that they all seem
to be racing to get to public markets before the
before the ship turns. So we shall see other news
this week. Walmart will be reporting earnings. We will get
more inflation data GDP, as Mark alluded to, will be
released this week. Uh So, more more information to come out.
I mentioned Walmart. We also have earnings from Deer Live Nation, Neumont,
(07:32):
Western Union, and you know, a partial blocking of the
Strait of Horn moves which is not even moving oil markets.
This morning, we're going to take a quick break here.
I don't know, I'm a little bit early. Let's take
a quick break. When we come back, I want to
talk a little bit about this uh piece from Financial
Times that you know, markets in the economy are heading
(07:52):
into our uncharted territory when it comes to FED policy
and the state of things right now. Is it truly uncharted?
And what is there to worry about? If so? Quick break?
That's next on the Financial Exchange.
Speaker 1 (08:04):
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Speaker 2 (09:15):
Mark Richard Bernstein writes that US markets and the economy
are headed into uncharted territory, which these types of stories
tend to bother me because I feel like everyone and
their mother has been writing about unprecedented times. And he
specifically calls that out as you know many publications calling
things unprecedented, and then goes on to talk about how
twenty twenty six is going to be unprecedented. So let's
(09:38):
for a moment acknowledge that every single day is unprecedented,
and we've been using that word a lot recently. What
does Richard kind of layout here as the unprecedented unprecedented
circumstances that he is concerned about in twenty twenty six?
Speaker 3 (09:55):
In a nutshell, the Fed has eased and may continue
to ease to sp I elevated inflation, strong growth, as
we just talked about.
Speaker 2 (10:06):
By easing, we mean lowering. Interesting. Yeah, So prior to September,
the FED fund's upper target rate was four and a
half percent. It's now three seven to five.
Speaker 3 (10:14):
Yeah, And to elaborate a little bit further on what
the Fed does, and we'll reset this every time because
listeners come and go throughout the course of.
Speaker 2 (10:22):
The show'll tune in at ten oh six and stay
there right till eleven fifty six, and we appreciate it.
Thank you.
Speaker 3 (10:29):
Well, then pardon me if you're hearing this for the
nth time since I since I started bringing it up whenever,
you could think of the FED as indirectly controlling overall demand. Technically,
like nominal GDP, we always report real, but nominal has
inflation in it, which the FED can control. They attempt
(10:50):
to stimulate demand when they think the economy needs it,
when they think it's running flat, by lowering interest rates,
and behind the scenes, they're actually increasing the supply of money.
They don't control interest rates per se, there's not a dial.
They increase the supply of money, which allows banks to
lend at lower interest rates. So that's what the FED does,
but indirectly they're targeting demand. His point, and it's well taken,
(11:14):
is that normally, when you're faced with a set of
economic indicators such as we're faced with today, strong growth,
very low unemployment by historical standards, and elevated inflation, the
Fed would not be He doesn't say this as I'm
putting it, but you can read between the lines here.
The Fed would be raising or at very least holding
(11:35):
steady interest rates, not cutting them. And then he goes
on to make a bunch of investment recommendations for an
environment in which perhaps not unlike the nineteen seventies. By
the way, there is some precedent for what he describes.
He doesn't make the point directly, but what did well
in the seventies commodities versus US equities, international equities versus
US equities, and some other things what you might call alternative,
(11:56):
though not in the modern way alternative is used investments.
Speaker 2 (12:01):
So I guess that's where I get to is how
unprecedented is I don't think that the FED should go
on a rampant rate cutting path, and you know, to me,
it's not ultimately clear if they are going to do so,
even though Kevin worsh who is the new selection, has
been pretty clear that he wants to. I'll acknowledge that,
(12:22):
you know, you say a lot of things to get jobs,
and we'll see what he actually does when he is
in there. But to me, twenty nineteen is not terribly dissimilar.
You know, in twenty nineteen we were looking at so
July twenty nineteen, the FED funds target rate was two
and a half percent, substantially lower than where it is now.
(12:42):
Unemployment rate was very low, in the high threes, low fours,
and we had the dollar index sliding at that point
in time too. You had the Fed then cut rates
three times, and then COVID hit, and you know, all
hell broke loose, and we said on a very different course.
But I'm just curious how unprecedented this time he is.
(13:05):
And you know, if the Fed does go on a
path of cutting rates by half a percent, does that,
you know, doom us into some sort of inflation loop
that we need to be concerned.
Speaker 3 (13:15):
About, possibly if they're misreading the structure of the economy
as they did chronically throughout the nineteen seventies. Twenty nineteen
expectations were inflation expectations were a little lower, not a lot,
a little lower than they are today, and nobody was And.
Speaker 2 (13:30):
By the way, I'm not sure that cutting rates in
twenty nineteen was a good idea.
Speaker 3 (13:32):
Yeah, that was in response to what a big market
downturn and which was in turn in response to a
growth scare. So the Fed did like a one to eighty.
Powell had been raising rates. Trump pounded his head into
the pavement metaphorically speaking, and the FED did a quick
u turn, lowered rates, stocks rocketed right back up. In
twenty nineteen was a great year. Inflation was moderate, economic
(13:56):
growth was strong, and stock market performance was good. So
in retrospect, nothing nothing broke, and the Fed didn't risk
an unleashing of inform. Although inflation was steady in twenty nineteen,
it didn't exactly fall. And who knows what would happen
if COVID didn't hit after that. This to me is
more like the seventies, and it the FED faces heavy
(14:18):
political pressure, and I think that's an understatement. I mean,
the president is said he wants lower interest rates. The
new FED share will come in pushing for lower interest rates.
That's reckless. That's like a doctor before they even meet
with you, knowing what they want to prescribe because their
boss is telling them to prescribe that. Right, Can you imagine?
Speaker 2 (14:38):
Right?
Speaker 3 (14:38):
These are so good Michael no No.
Speaker 2 (14:40):
I think that is that is the ultimate fair point,
which is this incoming FED share has predescribed what he
intends to do prior to meeting with any of the
researchers at the Federal Reserve and talking about where they
think things are right now, and so that has some
inherent risks. And the inherent risk is moving moving towards
(15:04):
a much looser policy, which ends up driving a whole
bunch of new economic activity. And what you need to
happen for that to work out properly. Is this productivity
boom really lock itself in for a number of years, right?
That would be I suppose the excuse you could use
for lowering interest rates is if we do, in fact
(15:25):
see economic activity continue to climb without more hours.
Speaker 3 (15:31):
That shouldn't that should necessarily call for lower interest rates.
Higher productivity all else equal, calls for higher neutral rates
because it stokes the demand for loanable Think of Think
of all the capital expenditure so called cap X that
sucks up investment, and that investment has to compete the
dollars that's used, whether it's issuing stocks or bonds to
(15:51):
pay for that investment, is competing with other investments out there,
and that bids up the price of bonds or whatever. General.
Speaker 2 (15:59):
In any case, I'm not certain that this point in
time is truly unprecedented. But what is the points of
time that you can compare it to when there has
been immense pressure on the federal reserve to fulfill a
specific policy, and an economy that may not be able
to absorb those lower interest rates. The period of time
(16:21):
that's comparable is not a great one in our us.
Speaker 3 (16:23):
Mike, I just don't I know. I've said this before.
If you had presented anybody with the state of the
economy as measured by inflation, unemployment, and GDP, GDP growing
it like twice, most researchers estimates of potential GDP inflation
remaining somewhat elevated somewhere in the high two's low threes,
depending on the measure you use. It ain't too I
(16:45):
can tell you that, and unemployment being remarkably low by
historical standards that any other in any other era, the
prescription would have been higher, or at the very least maintained.
Thank you, maintaining a federal.
Speaker 2 (17:00):
H That part is really undoubtable and why I think
most serious economists are pretty concerned about the path that
it could go down. Tucker, I know you picked this
piece because you wanted me to ridicule it. Wallsreet Journal
says the economy may have stuck the soft landing. Nobody
wants to jinx it, Okay, So, first of all, let's
describe what everybody was talking about with the soft landing.
(17:24):
Back in twenty twenty two. You had Fed funds target
rate at effectively zero percent. Money was free back then.
You could get a mortgage for next to nothing like
I did. The Fed then, out of concern of inflation,
which was well warranted and way behind, raised interest rates
(17:44):
all the way up to five and a half percent
for their target and everybody was asking themselves, hey, we
just raised interest rates by five and a half percent,
five and a quarter percent over the course of a
twelve month period. Usually when that happens, the economy falls apart.
Is it going to fall apart? Are we going to
get a recession now? We didn't. One. The economy never lands,
so the economy's constantly in flux. It's always going to move. Two.
(18:07):
If the economy goes into recession today, can we really
blame it on the policy from the Fed back in
early twenty twenty two, I don't think so. We might
be able to blame it on the policy the Fed now,
But is there any justification mark in your mind to
say that, oh, yeah, the interest rate hikes back of
twenty twenty two caused a recession in the second half
of twenty twenty six, because that just doesn't ring realistic
(18:30):
to me.
Speaker 3 (18:31):
With respect to the soft landing, we did achieve it.
I think aig inflation came down. Part of it was luck.
There doesn't seem to seem to have been any output
cost associated with the Fed's attempts at disinflation, which is
historically unusual. People were very worried about that because it's
what had always happened after the FED raised Indeed, that's
(18:51):
how the FED works.
Speaker 2 (18:52):
So if you bought the narrative that a soft landing
could exist, I don't know how you could describe what
we got of the last few years as anything but
a soft landing. Unemployment did not move much higher, inflation
came down, the economy did not see a notable recession,
markets relatively stable. We got the soft landing. If now
we go into a recession in twenty twenty six, that
(19:14):
is not related, in my mind, directly to the actions
of the FED three and a half years ago. Other
problems maybe, but not what happened.
Speaker 3 (19:23):
I don't think it's even useful to debate whether we
had a soft landing. Seems pretty clear.
Speaker 2 (19:26):
Quick break Wall Street Watches Next.
Speaker 1 (19:39):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch a complete look at what's moving markets so
far today right here on the Financial Exchange Radio Network.
Speaker 4 (19:58):
Alstraders are back from the holiday and breading for a
week ahead that includes a look at fourth quarter GDP,
the Fed's preferred measure of inflation, and the core PCE
index in Walmart's fourth quarter earnings. Right now, we're seeing
another tech sell off. The Dow is down by two
thirds of a percent, or two hundred and ninety eight
(20:19):
points lower. SMP five hundred is down over eight tenths
of a percent or fifty six points lower Tech heavy
NASDAC down one and a quarter percent or two hundred
and eighty points. Russell two thousand is down about three
quarters of a percent. Ten Your treasure reel down one
basis point at four point zero four to four percent,
and crude oiled down nearly nine tenths of a percent,
(20:40):
rating at sixty two dollars and thirty five cents a barrel.
We have yet another development on the deal for Warner
Brothers Discovery after Warner agreed to reopen negotiations with Paramount
for a potential bidding war with Netflix. The streaming giant
granted Warner's board a week to discuss Paramount's most recent proposal.
(21:02):
Shares and Warner Brothers are up two percent, Paramount stock
is rising five percent, and Netflix shares a down over
one percent. Meanwhile, the Wall Street Journal report of the
Genuine Parts, the parent company to NAPA Autocare Centers, plans
to separate its auto parts business from its industrial parts
unit into two separate public companies. That stock is tumbling
(21:25):
by twelve percent. Elsewhere, the Wall Street Journal also reported
that activist investor Elliott Management has built a more than
ten percent stake in Norwegian Cruise Line and plans to
push for changes to turn the struggling cruise ship operator around.
Norwegian stock is jumping by six percent and shares in
serial maker General Mills falling nearly seven percent after the
(21:48):
company cut its annual sales and profit outlook. I'm Tucker Silva,
and that is Wall Street Watch.
Speaker 2 (21:56):
Massachusetts is considering rent control via ballot measure. That is
pretty much there in terms of signatures from what I
saw so very likely that this could be on the
ballot in the Commonwealth of Massachusetts in twenty twenty six.
And details are important here, so I'm going to I
(22:16):
think everyone listening already knows my conclusion about rent control, which,
by the way, is my same general feeling about caps
on credit card interest rates or food price controls on food,
or any of these same things, because they are the
same economic effect, which is rent control. The specifics of
the policy would stop landlords from raising rents by more
(22:39):
than the state's annual rate of inflation, but no higher
than five percent in a year. So if inflation runs
ten percent, too bad, your cap to five percent. In
either case, they are going to publish the state's rate
of inflation. You cannot raise rents above that rate of inflation.
They will allow an exemption for new construction buildings for
the first ten years, as well as owner occupied buildings
(23:03):
with for or fewer units in them, so everything else
will be subject to this rule. It would be among
the strictest rent control laws in the country. Most other
rent control programs that are in there are generally city
by city rather than statewide. They also tend to allow
for a inflation plus cap of increase. In either case,
(23:24):
I would still be opposed to it even if they
had looser restrictions on all of this. But I want
to talk about We'll talk about the generalities of why
rent control seems to be a bad idea that all
economists universally agree is a bad idea. Some powerful people
in Massachusetts are dividing on this. The governor is not
(23:45):
in favor of it. The Mayor of Boston is pushing
for it. But let's just think through some practicalities. So
have friends that owned an apartment in Boston moved out
to the suburbs, continue to rent the apartment in Boston,
so they would be subject to this rent control law.
Fantastic tenants that they love, They have not raised rent
(24:05):
on them for five years. Those tenants do a lot
of upkeep on the apartment. They love having the tenants
in there, and just have not raised it to market
rent for several years in hopes of keeping the tenant
in the apartment. Under this rent control law, the tenant
leaves for some other reason, the owner of this apartment
(24:27):
cannot raise rents to market rate now right they are
locked in because they chose to not raise rent on
this person, they are now locked into a lower rent.
So if I am a landlord in this now many
landlords already do this. But if I'm a landlord in
one of these scenarios, and maybe I'm just a small
owner who again likes to find attractive tenants who attractors
(24:48):
the wrong word there, likes to find tenants who are
not a pain in the rear end and are really
pay on time and do everything. I have very little
incentive to keep their rent low because I know that
if I lose that tenant, I'm going to be capped
in terms of how much I can raise the rent. Furthermore,
maybe it's been a decade and I need to get
in there and you know, change out some of the appliances,
(25:11):
you know, do the landlord special repaint the thing, put
in some new tile in the kitchen. I have no
ability to raise the rent by improving the property. So
if I if I, you know, take out a wall
and you know, expand the kitchen and then put up
a new bedroom, I have no ability, seemingly under this rule,
to raise the rent at all. So, as we've seen
(25:34):
in rent controlled areas like New York City, what happens
to the properties. They generally deteriorate because landlords are capped
in terms of how much they can raise the rent. Therefore,
they don't do anything to the buildings, and there's this
constant battle between landlord and tenant to maintain the property,
and the landlords are unwilling to do so because they
can't recoup the cost of putting money into it. So
(25:56):
there's just some practical problems with the Massachusetts thing. Here's
the reality you put in rent control. The only thing
that happens is a shortage. There will be a shortage
of apartments available for rent because nobody's going to be
willing to develop new properties because I ultimately, whether it's
a ten year exemption or not, anyone who is thinking
(26:19):
about building knows, Okay, I can build this thing, and yeah,
I'm good for a decade, but ten years out, I
have no ability to raise rent anymore. And so why
am I going to build here when I can deploy
my capital elsewhere? Is there anything? I mean, it seems
like such a simple obvious solution to me. Boston, Cambridge,
(26:40):
Somerville all outlawed rent control based on exactly these factors.
A few decades ago. This would overturn that and put
in a statewide rent control law. And it is just
so brutally obvious to me what is likely to happen
in these scenarios. And I'm also relatively convinced that if
it gets on the ballot, we will pass it. Mass
jusets anything I've missed on the subject of rent control.
Speaker 3 (27:03):
Now that was pretty exhaustive. Just remember prices or signals,
whether it's the interest rate you pay on your credit card,
or wages or whatever. They're all prices in one form
or another. Interest rates or prices too. They price the future.
And when government steps in and caps or otherwise interferes
with that mechanism, markets don't know how to allocate resources.
Speaker 2 (27:25):
Rents are not so high in Massachusetts because all the
landlords get together in a in a backdoor meeting and
peg rents at the highest level they can by colluding. Like,
that's not the cause between this. Rents are so high
in Massachusetts because wages are high and people want to
live here, and because we don't let anyone build anything
bigger than like three stories anywhere in the state. So yeah,
(27:48):
rents are really high in the Commonwealth of Massachusetts. We
have some of the highest wages in the country. We
have some of the highest housing costs in the country.
We have very limited space and therefore rents are quite high.
It is not something the government needs to step in
and fix by fixing prices.
Speaker 3 (28:04):
It's just a bat Like interest rate caps on credit
cards are also a bad idea. The result will be
rationing of credit in that case. The result in this
case will be lower quality supply and rationing. How do
I How do I know that? Well, because anyone who's
ever looked at rent control exercises, including recently in the
Twin Cities out in the Midwest, Yeah, has found indeed
(28:25):
that you drive.
Speaker 2 (28:26):
I can think of almost no better control experiment than
if you.
Speaker 3 (28:31):
Get a natural Yeah, I mean a natural experiment is
exactly what it sounds like. It's when two otherwise identical
groups of people like you split up Korea in the
North and South. Let one adopt communism, the other some
version of capitalism, and then see who's wealthier. Well, the
verdicts in on that there are plenty of examples along
the lines, is that I just gave rent control is
(28:52):
one in which you rarely get natural experiments, But we
did last year and the results were conclusive, fairly conclusive.
In fact, rents actually went up in the rent controlled
more than they did in the non rent controlled subject
in that experiment.
Speaker 2 (29:06):
Yeah again, Yeah, Minnesota, twin cities you had Saint Paul
and Minneapolis, one enacting rent control, the other not. Permits
for new construction rose in the non rent controlled area
whereas they did not in the rent controlleds. I mean,
it's so brutally obvious what happens in these scenarios that
I really hope we're smart enough to vote this down
(29:27):
if it does indeed get on the ballot. But like
I said, I suspect it will get on the ballot,
and I suspect that Massachusetts will vote the way it
usually does on subjects like this. So time will tell,
but be prepared for that one. And again, it's worth
mentioning because it has spillover effects for other you know,
even if you don't live and own property in Massachusetts,
(29:49):
it has spillover effects for all of them.
Speaker 3 (29:50):
Yeah, I think, Look, people listening to this show, they're
probably a little bit more entrepreneurial. They have more economic
sense than to support. My guess is seventy eighty percent
of the people listening to this show will not vote
for rent control because otherwise you wouldn't be listening to
a money show. Sure, right, So maybe talk to someone
who's on the fence and explain what might Just explain
(30:12):
how it restricts supply, prevents investments in new supply, and
won't accomplish whatever it is the advocates of this referendum
item seek to accomplish. If it's just fairness, well there
are better ways to do that, like, oh God forbid,
we cut taxes. Never gonna happen. I understand that.
Speaker 2 (30:29):
Let's take a quick break. When we come back, speaking
of price increases, Wall Street Journal reporting that companies are
jacking up prices again, we'll be covering that next Financial Exchange.
Speaker 1 (30:39):
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Speaker 2 (31:19):
The break is over, companies are jacking up prices again,
while Street Journal goes on to say the companies from
Levi Strauss to McCormick the spice maker, say they're raising
prices early this year on items from blue jeans to spices,
to housewares and industrial products. The narrative here is that
a whole bunch of companies out there have been absorbing
(31:41):
price shocks from tariffs as well as some other high
employer costs. Health insurance costs just went through the roof
again in twenty twenty six. I think I think the
average increase for employer provided health insurance was more than
ten percent year over year. Some big price shocks that
are you know, companies are experiencing. And the narrative here
(32:03):
is that, hey, we've held off for long enough, we're
not getting the relief on the supply side that we needed,
and we're going to have to raise prices. I'm not
pooh pooing that narrative. I'm just not sure I have
the evidence needed to actually support it right. What I'd
be looking for here is, hey, did you see a
noticeable decline in profit margins among consumer product companies in
(32:27):
twenty twenty five, and I'm just I'm not convinced that.
I'm sure that was the case in some areas where yeah,
consumer products like Levi, Strauss and McCormick absorbed the price
shocks and didn't raise prices, But I'm not sure we're
seeing that across the board. And likewise, I'm unsure that
we're going to see a general inflation uptick across the
board based on this narrative of companies finally passing along
(32:50):
the increased costs. Some areas, yes, I'm sure, some areas not.
I'm just My point is, I'm not sure that this
actually works into a substantially higher inflation rate, for instance, which.
Speaker 3 (33:02):
Is what people well, it may not because other prices
may be moving down for different reasons. So one of
the interesting phenomena of twenty twenty five is that tariffs
went up, like you said, and inflation did not go up,
but it remained elevated. So it's possible that some prices
went up but others, like energy went down. We kind
(33:22):
of got lucky and offset some of that effect. It's
possible too that firms just didn't raise prices, they worked
out their old inventory, or they just ate it. And
resigned to reduced margins at some point, though, if firms
pushed through. I think Chuck said last week something the
effective inflation happens when companies raise prices. And that's true
(33:44):
because some companies raise prices, others keep their prices the same,
and the result is the average price goes up over
the long term. Though, like more than several quarters, only
an increase in the money supply in excess of only
too much demand as a result of the FED increasing
the money supply too much can cause persistent inflation.
Speaker 2 (34:05):
So otherwise you just can't afford it at some point.
Speaker 3 (34:09):
Because there are relative prices, and then there's the price level.
Relative prices are hamburgers per sneaker or you know something
like that, whatever two goods you want to trade off.
It's actually but so in the short term price of
one can go up, the price the other one doesn't drop.
So the overall price level CPI as we measure it,
or whatever your favorite indicator is, goes up in the
(34:29):
long run, though when all prices adjust, changes in relative
prices are just that they don't translate into inflation. Persistent
inflation again requires the FED to sort of misread the
state of the economy.
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Speaker 2 (35:55):
The House and Senate past bills addressing America's housing shortage
those need to be now reconcised before heading to the President.
When I first read this piece, I expected it to
be chock full of just very bad and dumb ideas,
because we've seen a lot of them floated to address
the housing crisis, Massachusetts rent control being one of them,
mortgage rate caps, and all sorts of other policies being others.
(36:16):
But honestly, when I look at the details of this
in terms of the headlines, I don't have much to
take issue with. So one of the items in here
would be just pushing cities to build. How they do
that would be authorizing a program whereby certain cities who
are behind in housing production could lose out on federal
funding if they don't incentivize more building. So basically, remove
(36:40):
restrictions around buildings so that more building can take place,
or otherwise some of your federal funds are going to
be potentially eliminated or threatened under this bill. Streamlining environmental
reviews so that they do not take so long. I
don't know exactly how that works and how much control
the federal government would have over this, but trying to
push for faster stuff, they're removing restrictions when it comes
(37:04):
to manufactured and modular homes, so right now this is
news to me. But apparently when you build a manufactured home,
you have to have a permanent chassis, meaning the building
can actually be moved, and builders are saying, look, this
is completely unnecessary. In twenty twenty six, we're building modular
homes that are designed to stay there for the life
of the home. We don't need this thing in here,
(37:25):
which I don't know, but seems like somebody did some
research there. And then expanding mortgage access. I'm not sure
how they're going to incentivize banks to promote more mortgages
for smaller loans in the tune of one hundred and
fifty grand that tend to be not very profitable for
big banks to issue, But that's what's in here. I'm
(37:47):
just again relieved that some of the more expensive and
I frankly think dumber ideas around housing were left out
of this. And all of this seems to me is
deregulation in housing, which I think a lot of people
have been pushing for all the time we have for
this hour, will be right back, though a lot more
(38:07):
to cover in the second hour. The financial exchange markets
remaining in negative territory with the NAZAC leading the way down.
We'll be right back in full market recap in the
second hour
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Speaker 2 (01:10):
Good morning, Happy Tuesday, and welcome back to the Financial Exchange. Tuesday.
That feels like Monday for anybody that works on Wall Street.
Sorry for all of those that didn't have yesterday off
like like those that do work on Wall Street did.
But we are kicking off another week here with markets
you know, I'm not gonna say floundering, but you know,
bopping all over the place and opening up in negative
(01:34):
territory here. And I'm trying to, I guess put a
synopsis together on where markets stand right now or where
we take investor sentiment at the moment, because on the surface,
markets look pretty boring. If you just look at the
S and P five hundred, the S and P five
hundred right now sitting just below sixty eight hundred. Back
(01:56):
in October, Let's see when do we reach this level?
Back in October, right around October twenty fourth, we were
at the same exact level that we are today. In
spite of that, it doesn't really feel that way to
a lot of investors because there has been a fair
bit of churn in market. It's a fair bit of
rotation in and out of different sectors, different stocks, and
I think may that's healthy, that's you know, you don't
(02:20):
necessarily like to see people just blindly buying entire sectors
or companies of the stock market. But on the other hand,
it's been defined by I think brief periods of a
lot of concern about AI, the impact on certain industries,
whether or not the entire thing could erupt in some
(02:40):
sort of stock market bubble popping. And yeah, I think
it's left investors a little bit jittery. At this point
in time.
Speaker 3 (02:47):
The AI conversation is getting really interesting. You had growth,
you had the economy expanded at pretty rapid pace in
the last three quarters of last year. We don't have
fourth quarter to eight yet, we'll get that in a
couple of days. But it looks like the economy grew
in the last in the final three quarters of twenty
twenty five, in quarters two, three, and four, grew at
like a four percent or somewhere in that ballpark real rate, right,
(03:13):
unemployment employment more accurately, employment or more appropriately for what
I'm about to say, I think seems to have been
like flat. So that means productivity went up by a lot,
which is just output per hour, So we produced a
lot more with like the fewer people. Yeah, so was
(03:33):
that a result of AI. There are some very influential
growth researchers who think that we are in the early
stages of harvesting years worth of investments in AI. What
I'm getting to Mike is for capital markets, AI could
also So that is a that is an interesting, somewhat disruptive,
somewhat unsettling story. AI allowed us to do more with
(03:55):
the same or fewer people, disturbing from a labor market
point of view, encouraging from maybe a long term growth
point of view. The jury will be out on that
for some time. In equity markets, we're seeing some companies
investors souring on some companies prospects because of the same,
seemingly the same unfolding phenomenon.
Speaker 2 (04:16):
Yeah, and the concerns that I'm hearing about AI today
are pretty substantially different from this time last year, when
the narrative I think this time last year was, oh,
these companies that are developing AI. Maybe it's all just overblown,
maybe it's not as impressive, And there were early signs
that it wasn't terribly impressive. These tools were bad at math,
misidentified people, and were not all that usable and I
(04:39):
think a lot of people were scratching their heads saying,
is this really you know, making in VideA, for instance,
a four trillion dollar company, Is this really justifiable in
terms of what we're seeing for a cost build out.
And while those questions are still being raised, you know,
is it going to be sustainable for Amazon, Microsoft Beta
and Alphabet to spend six hundred and fifty million dollars
(05:00):
on AI development over the course of the next year.
Those questions exist, but the bigger questions today seem to
be the tools are actually quite impressive, and so which
companies is this going to completely put out of business?
And that story seems to be rotating every week as well.
We've gone from software companies to financial services companies. I
think there was another one just last week that logistics
(05:23):
companies now like shipping logistics companies, were all called into
question in terms of their core business models over the
course of the last three weeks. And I won't be
surprised if some new company that last week it was
a former karaoke company that ruled out of logistics software.
So you know, God knows we're going to get hit
with next time. It's probably going to be a movie
(05:43):
theater that rolls out a AI tool for uh, you know,
selling tickets and competing with Ticketmaster for all I know.
But the rotation continues. And in spite of that, people
aren't rotating and saying that's it. I'm out. It's time
to go to cash, as you will say, or you know,
buy into bond markets. It's more been well, I don't
(06:04):
know what this sector is going to do, so I'm
going to take my money and put it over here.
Still largely in US talks.
Speaker 3 (06:11):
Yeah, the trick here and I think you and Chuck
sadd have talked about this is oh that maybe the
paradox is a better way to put it. AI may
not benefit most or on average or your average publicly
traded company, So maybe it seems unthinkable that AI could
be this transformative, revolutionary through every other cliche you want
(06:33):
in that description thing and at the same time bad
for publicly, bad for the s and P five hundred
because maybe the benefits a crew to private firms.
Speaker 2 (06:42):
Right, I mean, we're smaller, very well could be, and
some of the top leaders in that space are privately held.
Open AI SpaceX which is now combined with XAI Clauds
what's what's Claudes parent company, Anthropic all privately held companies,
not to say that they will be the primary beneficiaries
(07:04):
of some AI advancement, but massive privately.
Speaker 3 (07:07):
They'll go public.
Speaker 1 (07:09):
Awards.
Speaker 2 (07:10):
The counterpoint to that would be that they all seem
to be racing to get to public markets before the
before the ship turns. So we shall see other news
this week. Walmart will be reporting earnings. We will get
more inflation data GDP, as Mark alluded to, will be
released this week. Uh So, more more information to come out.
I mentioned Walmart. We also have earnings from Deer Live Nation, Neumont,
(07:32):
Western Union, and you know, a partial blocking of the
Strait of Horn moves which is not even moving oil markets.
This morning, we're going to take a quick break here.
I don't know, I'm a little bit early. Let's take
a quick break. When we come back, I want to
talk a little bit about this uh piece from Financial
Times that you know, markets in the economy are heading
(07:52):
into our uncharted territory when it comes to FED policy
and the state of things right now. Is it truly uncharted?
And what is there to worry about? If so? Quick break?
That's next on the Financial Exchange.
Speaker 1 (08:04):
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Speaker 4 (08:33):
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Speaker 2 (09:15):
Mark Richard Bernstein writes that US markets and the economy
are headed into uncharted territory, which these types of stories
tend to bother me because I feel like everyone and
their mother has been writing about unprecedented times. And he
specifically calls that out as you know many publications calling
things unprecedented, and then goes on to talk about how
twenty twenty six is going to be unprecedented. So let's
(09:38):
for a moment acknowledge that every single day is unprecedented,
and we've been using that word a lot recently. What
does Richard kind of layout here as the unprecedented unprecedented
circumstances that he is concerned about in twenty twenty six?
Speaker 3 (09:55):
In a nutshell, the Fed has eased and may continue
to ease to sp I elevated inflation, strong growth, as
we just talked about.
Speaker 2 (10:06):
By easing, we mean lowering. Interesting. Yeah, So prior to September,
the FED fund's upper target rate was four and a
half percent. It's now three seven to five.
Speaker 3 (10:14):
Yeah, And to elaborate a little bit further on what
the Fed does, and we'll reset this every time because
listeners come and go throughout the course of.
Speaker 2 (10:22):
The show'll tune in at ten oh six and stay
there right till eleven fifty six, and we appreciate it.
Thank you.
Speaker 3 (10:29):
Well, then pardon me if you're hearing this for the
nth time since I since I started bringing it up whenever,
you could think of the FED as indirectly controlling overall demand. Technically,
like nominal GDP, we always report real, but nominal has
inflation in it, which the FED can control. They attempt
(10:50):
to stimulate demand when they think the economy needs it,
when they think it's running flat, by lowering interest rates,
and behind the scenes, they're actually increasing the supply of money.
They don't control interest rates per se, there's not a dial.
They increase the supply of money, which allows banks to
lend at lower interest rates. So that's what the FED does,
but indirectly they're targeting demand. His point, and it's well taken,
(11:14):
is that normally, when you're faced with a set of
economic indicators such as we're faced with today, strong growth,
very low unemployment by historical standards, and elevated inflation, the
Fed would not be He doesn't say this as I'm
putting it, but you can read between the lines here.
The Fed would be raising or at very least holding
(11:35):
steady interest rates, not cutting them. And then he goes
on to make a bunch of investment recommendations for an
environment in which perhaps not unlike the nineteen seventies. By
the way, there is some precedent for what he describes.
He doesn't make the point directly, but what did well
in the seventies commodities versus US equities, international equities versus
US equities, and some other things what you might call alternative,
(11:56):
though not in the modern way alternative is used investments.
Speaker 2 (12:01):
So I guess that's where I get to is how
unprecedented is I don't think that the FED should go
on a rampant rate cutting path, and you know, to me,
it's not ultimately clear if they are going to do so,
even though Kevin worsh who is the new selection, has
been pretty clear that he wants to. I'll acknowledge that,
(12:22):
you know, you say a lot of things to get jobs,
and we'll see what he actually does when he is
in there. But to me, twenty nineteen is not terribly dissimilar.
You know, in twenty nineteen we were looking at so
July twenty nineteen, the FED funds target rate was two
and a half percent, substantially lower than where it is now.
(12:42):
Unemployment rate was very low, in the high threes, low fours,
and we had the dollar index sliding at that point
in time too. You had the Fed then cut rates
three times, and then COVID hit, and you know, all
hell broke loose, and we said on a very different course.
But I'm just curious how unprecedented this time he is.
(13:05):
And you know, if the Fed does go on a
path of cutting rates by half a percent, does that,
you know, doom us into some sort of inflation loop
that we need to be concerned.
Speaker 3 (13:15):
About, possibly if they're misreading the structure of the economy
as they did chronically throughout the nineteen seventies. Twenty nineteen
expectations were inflation expectations were a little lower, not a lot,
a little lower than they are today, and nobody was And.
Speaker 2 (13:30):
By the way, I'm not sure that cutting rates in
twenty nineteen was a good idea.
Speaker 3 (13:32):
Yeah, that was in response to what a big market
downturn and which was in turn in response to a
growth scare. So the Fed did like a one to eighty.
Powell had been raising rates. Trump pounded his head into
the pavement metaphorically speaking, and the FED did a quick
u turn, lowered rates, stocks rocketed right back up. In
twenty nineteen was a great year. Inflation was moderate, economic
(13:56):
growth was strong, and stock market performance was good. So
in retrospect, nothing nothing broke, and the Fed didn't risk
an unleashing of inform. Although inflation was steady in twenty nineteen,
it didn't exactly fall. And who knows what would happen
if COVID didn't hit after that. This to me is
more like the seventies, and it the FED faces heavy
(14:18):
political pressure, and I think that's an understatement. I mean,
the president is said he wants lower interest rates. The
new FED share will come in pushing for lower interest rates.
That's reckless. That's like a doctor before they even meet
with you, knowing what they want to prescribe because their
boss is telling them to prescribe that. Right, Can you imagine?
Speaker 2 (14:38):
Right?
Speaker 3 (14:38):
These are so good Michael no No.
Speaker 2 (14:40):
I think that is that is the ultimate fair point,
which is this incoming FED share has predescribed what he
intends to do prior to meeting with any of the
researchers at the Federal Reserve and talking about where they
think things are right now, and so that has some
inherent risks. And the inherent risk is moving moving towards
(15:04):
a much looser policy, which ends up driving a whole
bunch of new economic activity. And what you need to
happen for that to work out properly. Is this productivity
boom really lock itself in for a number of years, right?
That would be I suppose the excuse you could use
for lowering interest rates is if we do, in fact
(15:25):
see economic activity continue to climb without more hours.
Speaker 3 (15:31):
That shouldn't that should necessarily call for lower interest rates.
Higher productivity all else equal, calls for higher neutral rates
because it stokes the demand for loanable Think of Think
of all the capital expenditure so called cap X that
sucks up investment, and that investment has to compete the
dollars that's used, whether it's issuing stocks or bonds to
(15:51):
pay for that investment, is competing with other investments out there,
and that bids up the price of bonds or whatever. General.
Speaker 2 (15:59):
In any case, I'm not certain that this point in
time is truly unprecedented. But what is the points of
time that you can compare it to when there has
been immense pressure on the federal reserve to fulfill a
specific policy, and an economy that may not be able
to absorb those lower interest rates. The period of time
(16:21):
that's comparable is not a great one in our us.
Speaker 3 (16:23):
Mike, I just don't I know. I've said this before.
If you had presented anybody with the state of the
economy as measured by inflation, unemployment, and GDP, GDP growing
it like twice, most researchers estimates of potential GDP inflation
remaining somewhat elevated somewhere in the high two's low threes,
depending on the measure you use. It ain't too I
(16:45):
can tell you that, and unemployment being remarkably low by
historical standards that any other in any other era, the
prescription would have been higher, or at the very least maintained.
Thank you, maintaining a federal.
Speaker 2 (17:00):
H That part is really undoubtable and why I think
most serious economists are pretty concerned about the path that
it could go down. Tucker, I know you picked this
piece because you wanted me to ridicule it. Wallsreet Journal
says the economy may have stuck the soft landing. Nobody
wants to jinx it, Okay, So, first of all, let's
describe what everybody was talking about with the soft landing.
(17:24):
Back in twenty twenty two. You had Fed funds target
rate at effectively zero percent. Money was free back then.
You could get a mortgage for next to nothing like
I did. The Fed then, out of concern of inflation,
which was well warranted and way behind, raised interest rates
(17:44):
all the way up to five and a half percent
for their target and everybody was asking themselves, hey, we
just raised interest rates by five and a half percent,
five and a quarter percent over the course of a
twelve month period. Usually when that happens, the economy falls apart.
Is it going to fall apart? Are we going to
get a recession now? We didn't. One. The economy never lands,
so the economy's constantly in flux. It's always going to move. Two.
(18:07):
If the economy goes into recession today, can we really
blame it on the policy from the Fed back in
early twenty twenty two, I don't think so. We might
be able to blame it on the policy the Fed now,
But is there any justification mark in your mind to
say that, oh, yeah, the interest rate hikes back of
twenty twenty two caused a recession in the second half
of twenty twenty six, because that just doesn't ring realistic
(18:30):
to me.
Speaker 3 (18:31):
With respect to the soft landing, we did achieve it.
I think aig inflation came down. Part of it was luck.
There doesn't seem to seem to have been any output
cost associated with the Fed's attempts at disinflation, which is
historically unusual. People were very worried about that because it's
what had always happened after the FED raised Indeed, that's
(18:51):
how the FED works.
Speaker 2 (18:52):
So if you bought the narrative that a soft landing
could exist, I don't know how you could describe what
we got of the last few years as anything but
a soft landing. Unemployment did not move much higher, inflation
came down, the economy did not see a notable recession,
markets relatively stable. We got the soft landing. If now
we go into a recession in twenty twenty six, that
(19:14):
is not related, in my mind, directly to the actions
of the FED three and a half years ago. Other
problems maybe, but not what happened.
Speaker 3 (19:23):
I don't think it's even useful to debate whether we
had a soft landing. Seems pretty clear.
Speaker 2 (19:26):
Quick break Wall Street Watches Next.
Speaker 1 (19:39):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch a complete look at what's moving markets so
far today right here on the Financial Exchange Radio Network.
Speaker 4 (19:58):
Alstraders are back from the holiday and breading for a
week ahead that includes a look at fourth quarter GDP,
the Fed's preferred measure of inflation, and the core PCE
index in Walmart's fourth quarter earnings. Right now, we're seeing
another tech sell off. The Dow is down by two
thirds of a percent, or two hundred and ninety eight
(20:19):
points lower. SMP five hundred is down over eight tenths
of a percent or fifty six points lower Tech heavy
NASDAC down one and a quarter percent or two hundred
and eighty points. Russell two thousand is down about three
quarters of a percent. Ten Your treasure reel down one
basis point at four point zero four to four percent,
and crude oiled down nearly nine tenths of a percent,
(20:40):
rating at sixty two dollars and thirty five cents a barrel.
We have yet another development on the deal for Warner
Brothers Discovery after Warner agreed to reopen negotiations with Paramount
for a potential bidding war with Netflix. The streaming giant
granted Warner's board a week to discuss Paramount's most recent proposal.
(21:02):
Shares and Warner Brothers are up two percent, Paramount stock
is rising five percent, and Netflix shares a down over
one percent. Meanwhile, the Wall Street Journal report of the
Genuine Parts, the parent company to NAPA Autocare Centers, plans
to separate its auto parts business from its industrial parts
unit into two separate public companies. That stock is tumbling
(21:25):
by twelve percent. Elsewhere, the Wall Street Journal also reported
that activist investor Elliott Management has built a more than
ten percent stake in Norwegian Cruise Line and plans to
push for changes to turn the struggling cruise ship operator around.
Norwegian stock is jumping by six percent and shares in
serial maker General Mills falling nearly seven percent after the
(21:48):
company cut its annual sales and profit outlook. I'm Tucker Silva,
and that is Wall Street Watch.
Speaker 2 (21:56):
Massachusetts is considering rent control via ballot measure. That is
pretty much there in terms of signatures from what I
saw so very likely that this could be on the
ballot in the Commonwealth of Massachusetts in twenty twenty six.
And details are important here, so I'm going to I
(22:16):
think everyone listening already knows my conclusion about rent control, which,
by the way, is my same general feeling about caps
on credit card interest rates or food price controls on food,
or any of these same things, because they are the
same economic effect, which is rent control. The specifics of
the policy would stop landlords from raising rents by more
(22:39):
than the state's annual rate of inflation, but no higher
than five percent in a year. So if inflation runs
ten percent, too bad, your cap to five percent. In
either case, they are going to publish the state's rate
of inflation. You cannot raise rents above that rate of inflation.
They will allow an exemption for new construction buildings for
the first ten years, as well as owner occupied buildings
(23:03):
with for or fewer units in them, so everything else
will be subject to this rule. It would be among
the strictest rent control laws in the country. Most other
rent control programs that are in there are generally city
by city rather than statewide. They also tend to allow
for a inflation plus cap of increase. In either case,
(23:24):
I would still be opposed to it even if they
had looser restrictions on all of this. But I want
to talk about We'll talk about the generalities of why
rent control seems to be a bad idea that all
economists universally agree is a bad idea. Some powerful people
in Massachusetts are dividing on this. The governor is not
(23:45):
in favor of it. The Mayor of Boston is pushing
for it. But let's just think through some practicalities. So
have friends that owned an apartment in Boston moved out
to the suburbs, continue to rent the apartment in Boston,
so they would be subject to this rent control law.
Fantastic tenants that they love, They have not raised rent
(24:05):
on them for five years. Those tenants do a lot
of upkeep on the apartment. They love having the tenants
in there, and just have not raised it to market
rent for several years in hopes of keeping the tenant
in the apartment. Under this rent control law, the tenant
leaves for some other reason, the owner of this apartment
(24:27):
cannot raise rents to market rate now right they are
locked in because they chose to not raise rent on
this person, they are now locked into a lower rent.
So if I am a landlord in this now many
landlords already do this. But if I'm a landlord in
one of these scenarios, and maybe I'm just a small
owner who again likes to find attractive tenants who attractors
(24:48):
the wrong word there, likes to find tenants who are
not a pain in the rear end and are really
pay on time and do everything. I have very little
incentive to keep their rent low because I know that
if I lose that tenant, I'm going to be capped
in terms of how much I can raise the rent. Furthermore,
maybe it's been a decade and I need to get
in there and you know, change out some of the appliances,
(25:11):
you know, do the landlord special repaint the thing, put
in some new tile in the kitchen. I have no
ability to raise the rent by improving the property. So
if I if I, you know, take out a wall
and you know, expand the kitchen and then put up
a new bedroom, I have no ability, seemingly under this rule,
to raise the rent at all. So, as we've seen
(25:34):
in rent controlled areas like New York City, what happens
to the properties. They generally deteriorate because landlords are capped
in terms of how much they can raise the rent. Therefore,
they don't do anything to the buildings, and there's this
constant battle between landlord and tenant to maintain the property,
and the landlords are unwilling to do so because they
can't recoup the cost of putting money into it. So
(25:56):
there's just some practical problems with the Massachusetts thing. Here's
the reality you put in rent control. The only thing
that happens is a shortage. There will be a shortage
of apartments available for rent because nobody's going to be
willing to develop new properties because I ultimately, whether it's
a ten year exemption or not, anyone who is thinking
(26:19):
about building knows, Okay, I can build this thing, and yeah,
I'm good for a decade, but ten years out, I
have no ability to raise rent anymore. And so why
am I going to build here when I can deploy
my capital elsewhere? Is there anything? I mean, it seems
like such a simple obvious solution to me. Boston, Cambridge,
(26:40):
Somerville all outlawed rent control based on exactly these factors.
A few decades ago. This would overturn that and put
in a statewide rent control law. And it is just
so brutally obvious to me what is likely to happen
in these scenarios. And I'm also relatively convinced that if
it gets on the ballot, we will pass it. Mass
jusets anything I've missed on the subject of rent control.
Speaker 3 (27:03):
Now that was pretty exhaustive. Just remember prices or signals,
whether it's the interest rate you pay on your credit card,
or wages or whatever. They're all prices in one form
or another. Interest rates or prices too. They price the future.
And when government steps in and caps or otherwise interferes
with that mechanism, markets don't know how to allocate resources.
Speaker 2 (27:25):
Rents are not so high in Massachusetts because all the
landlords get together in a in a backdoor meeting and
peg rents at the highest level they can by colluding. Like,
that's not the cause between this. Rents are so high
in Massachusetts because wages are high and people want to
live here, and because we don't let anyone build anything
bigger than like three stories anywhere in the state. So yeah,
(27:48):
rents are really high in the Commonwealth of Massachusetts. We
have some of the highest wages in the country. We
have some of the highest housing costs in the country.
We have very limited space and therefore rents are quite high.
It is not something the government needs to step in
and fix by fixing prices.
Speaker 3 (28:04):
It's just a bat Like interest rate caps on credit
cards are also a bad idea. The result will be
rationing of credit in that case. The result in this
case will be lower quality supply and rationing. How do
I How do I know that? Well, because anyone who's
ever looked at rent control exercises, including recently in the
Twin Cities out in the Midwest, Yeah, has found indeed
(28:25):
that you drive.
Speaker 2 (28:26):
I can think of almost no better control experiment than
if you.
Speaker 3 (28:31):
Get a natural Yeah, I mean a natural experiment is
exactly what it sounds like. It's when two otherwise identical
groups of people like you split up Korea in the
North and South. Let one adopt communism, the other some
version of capitalism, and then see who's wealthier. Well, the
verdicts in on that there are plenty of examples along
the lines, is that I just gave rent control is
(28:52):
one in which you rarely get natural experiments, But we
did last year and the results were conclusive, fairly conclusive.
In fact, rents actually went up in the rent controlled
more than they did in the non rent controlled subject
in that experiment.
Speaker 2 (29:06):
Yeah again, Yeah, Minnesota, twin cities you had Saint Paul
and Minneapolis, one enacting rent control, the other not. Permits
for new construction rose in the non rent controlled area
whereas they did not in the rent controlleds. I mean,
it's so brutally obvious what happens in these scenarios that
I really hope we're smart enough to vote this down
(29:27):
if it does indeed get on the ballot. But like
I said, I suspect it will get on the ballot,
and I suspect that Massachusetts will vote the way it
usually does on subjects like this. So time will tell,
but be prepared for that one. And again, it's worth
mentioning because it has spillover effects for other you know,
even if you don't live and own property in Massachusetts,
(29:49):
it has spillover effects for all of them.
Speaker 3 (29:50):
Yeah, I think, Look, people listening to this show, they're
probably a little bit more entrepreneurial. They have more economic
sense than to support. My guess is seventy eighty percent
of the people listening to this show will not vote
for rent control because otherwise you wouldn't be listening to
a money show. Sure, right, So maybe talk to someone
who's on the fence and explain what might Just explain
(30:12):
how it restricts supply, prevents investments in new supply, and
won't accomplish whatever it is the advocates of this referendum
item seek to accomplish. If it's just fairness, well there
are better ways to do that, like, oh God forbid,
we cut taxes. Never gonna happen. I understand that.
Speaker 2 (30:29):
Let's take a quick break. When we come back, speaking
of price increases, Wall Street Journal reporting that companies are
jacking up prices again, we'll be covering that next Financial Exchange.
Speaker 1 (30:39):
Miss any of the show. The Financial Exchange Show podcast
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button and leave us a five star review. This is
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Find daily show segments and full shows. Go to YouTube
(31:00):
dot com and search for the Financial Exchange. This is
your home for breaking business and financial news. This is
the Financial Exchange Radio network.
Speaker 2 (31:19):
The break is over, companies are jacking up prices again,
while Street Journal goes on to say the companies from
Levi Strauss to McCormick the spice maker, say they're raising
prices early this year on items from blue jeans to spices,
to housewares and industrial products. The narrative here is that
a whole bunch of companies out there have been absorbing
(31:41):
price shocks from tariffs as well as some other high
employer costs. Health insurance costs just went through the roof
again in twenty twenty six. I think I think the
average increase for employer provided health insurance was more than
ten percent year over year. Some big price shocks that
are you know, companies are experiencing. And the narrative here
(32:03):
is that, hey, we've held off for long enough, we're
not getting the relief on the supply side that we needed,
and we're going to have to raise prices. I'm not
pooh pooing that narrative. I'm just not sure I have
the evidence needed to actually support it right. What I'd
be looking for here is, hey, did you see a
noticeable decline in profit margins among consumer product companies in
(32:27):
twenty twenty five, and I'm just I'm not convinced that.
I'm sure that was the case in some areas where yeah,
consumer products like Levi, Strauss and McCormick absorbed the price
shocks and didn't raise prices, But I'm not sure we're
seeing that across the board. And likewise, I'm unsure that
we're going to see a general inflation uptick across the
board based on this narrative of companies finally passing along
(32:50):
the increased costs. Some areas, yes, I'm sure, some areas not.
I'm just My point is, I'm not sure that this
actually works into a substantially higher inflation rate, for instance, which.
Speaker 3 (33:02):
Is what people well, it may not because other prices
may be moving down for different reasons. So one of
the interesting phenomena of twenty twenty five is that tariffs
went up, like you said, and inflation did not go up,
but it remained elevated. So it's possible that some prices
went up but others, like energy went down. We kind
(33:22):
of got lucky and offset some of that effect. It's
possible too that firms just didn't raise prices, they worked
out their old inventory, or they just ate it. And
resigned to reduced margins at some point, though, if firms
pushed through. I think Chuck said last week something the
effective inflation happens when companies raise prices. And that's true
(33:44):
because some companies raise prices, others keep their prices the same,
and the result is the average price goes up over
the long term. Though, like more than several quarters, only
an increase in the money supply in excess of only
too much demand as a result of the FED increasing
the money supply too much can cause persistent inflation.
Speaker 2 (34:05):
So otherwise you just can't afford it at some point.
Speaker 3 (34:09):
Because there are relative prices, and then there's the price level.
Relative prices are hamburgers per sneaker or you know something
like that, whatever two goods you want to trade off.
It's actually but so in the short term price of
one can go up, the price the other one doesn't drop.
So the overall price level CPI as we measure it,
or whatever your favorite indicator is, goes up in the
(34:29):
long run, though when all prices adjust, changes in relative
prices are just that they don't translate into inflation. Persistent
inflation again requires the FED to sort of misread the
state of the economy.
Speaker 4 (34:43):
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Speaker 2 (35:55):
The House and Senate past bills addressing America's housing shortage
those need to be now reconcised before heading to the President.
When I first read this piece, I expected it to
be chock full of just very bad and dumb ideas,
because we've seen a lot of them floated to address
the housing crisis, Massachusetts rent control being one of them,
mortgage rate caps, and all sorts of other policies being others.
(36:16):
But honestly, when I look at the details of this
in terms of the headlines, I don't have much to
take issue with. So one of the items in here
would be just pushing cities to build. How they do
that would be authorizing a program whereby certain cities who
are behind in housing production could lose out on federal
funding if they don't incentivize more building. So basically, remove
(36:40):
restrictions around buildings so that more building can take place,
or otherwise some of your federal funds are going to
be potentially eliminated or threatened under this bill. Streamlining environmental
reviews so that they do not take so long. I
don't know exactly how that works and how much control
the federal government would have over this, but trying to
push for faster stuff, they're removing restrictions when it comes
(37:04):
to manufactured and modular homes, so right now this is
news to me. But apparently when you build a manufactured home,
you have to have a permanent chassis, meaning the building
can actually be moved, and builders are saying, look, this
is completely unnecessary. In twenty twenty six, we're building modular
homes that are designed to stay there for the life
of the home. We don't need this thing in here,
(37:25):
which I don't know, but seems like somebody did some
research there. And then expanding mortgage access. I'm not sure
how they're going to incentivize banks to promote more mortgages
for smaller loans in the tune of one hundred and
fifty grand that tend to be not very profitable for
big banks to issue, But that's what's in here. I'm
(37:47):
just again relieved that some of the more expensive and
I frankly think dumber ideas around housing were left out
of this. And all of this seems to me is
deregulation in housing, which I think a lot of people
have been pushing for all the time we have for
this hour, will be right back, though a lot more
(38:07):
to cover in the second hour. The financial exchange markets
remaining in negative territory with the NAZAC leading the way down.
We'll be right back in full market recap in the
second hour
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