October 7, 2025 • 38 mins
Mike Armstrong and Marc Fandetti discuss the costs associated with AI projects are soaring. Fed's Mary Daly says AI bubble wouldn't hurt financial stability. Where are we now compared to previous market crashes? A devastating fire at a major Ford supplier is just another dent in the auto industry. US banks missed that warning signs on Tricolor. Massachusetts employer confidence dips again.
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Transcript
Episode Transcript
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Speaker 1 (00:00):
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(01:07):
and Mark Vandetti.
Speaker 2 (01:10):
Good morning, Welcome back to the Financial Exchange. It's Mike,
Mark and Tucker with you on a Tuesday, as we
enter into what's this week two, Week three of the
government shutdown. Week two of the government shutdown. I clearly
have been not exactly counting the days here. Doesn't look
like a ton of progress being made there, but you know,
some a couple I think relevant announcements or statements by
(01:34):
key lawmakers that could indicate where things go in the future.
Dates that we're keeping in mind. I mean, the first
payroll date for military I think is October sixteenth. Federal
employee pay payroll I think is October tenth, that will
be missed. November first would be the first date where
people who are on Obamacare would see the increase in
(01:55):
premiums get affected by the lack of a renewal of
these subsidies. So those are a few of the key
dates that kind of I have in my mind. Obviously,
for financial markets, we've got a October is it a October.
Speaker 3 (02:08):
Thirtieth FED meeting.
Speaker 2 (02:10):
It's towards the end of this month here, So that's
not going to reopen the government, but it will be
relevant and so far as they may or may not
have data related to inflation and the labor market ahead
of that meeting, So we will see, you know, if
things reopen here. But to me at least, I just
don't see that pressure that would be necessary to get
(02:30):
things restarted at this point in time, and I think
that will continue to mount as time goes on. We'll
we visit the government shutdown throughout the show. I wanted
to start off today though, with a revisit of our
conversation yesterday when it comes to the deals of an
announced regarding open AI and artificial intelligence in general. But
(02:51):
open AI seems to be very much at the center
of all these discussions. If you missed it, yesterday they
announced with AMD a big investment in that company. This
follows a big announced deal within Nvidia, and I realized
at about nine am this morning that I was having
a tough time keeping it all straight, even in my
(03:12):
own head. So I just wrote down some of my
notes on what seems to be going on here and
why people seem to be concerned about all the circular
deals that are getting done here. So starting off with
open ai, the maker of chat GPT, I would say
there is nobody else in my mind that has a
consumer facing product that is quite as known in the
(03:33):
AI space as open AI.
Speaker 3 (03:34):
I think that's safe to say between the two of you.
Speaker 2 (03:37):
Yeah, like, yeah, Google's Gemini I suppose is up there.
But Chat GPT, Yeah, I think GPT is probably the
most well known. So as of the most recent funding,
that company that owns Chat GPT and may or may
not be trying to transition into a for profit company,
was valued around half a trillion dollars. They generated four
(03:59):
point three billion dollars in sales in the first half
of twenty twenty five, and they burned through two and
a half billion dollars worth of cash. The deals that
they have now inked, which I hesitate to even say
the word inked because they've announced these deals, but the
actual timing of when they all come to pass, who
(04:20):
you know exchanges cash with the other is not terribly
clear at this point. But the deals with AMD and
Video Oracle, Core Weave, they've all promised about twenty gigawatts
of computing power over the next decade. If that means
nothing to you, don't worry. It meant nothing to me either.
I have no idea what a gigawatt really represents. But
(04:41):
according to people who know more about this than I do,
powering twenty gigawatts of computing power takes about.
Speaker 3 (04:47):
Twenty nuclear reactors today.
Speaker 2 (04:50):
So the power of about twenty nuclear reactors, and the
cost to deploy something like that on an annual basis
would be about a trillion dollars. So again, these are
the promises that are being made. Is hey, a company
that's generating about four billion dollars in sales in the
first half is going to need to spend a trillion
dollars a year in order to you know, finance the
(05:12):
computing power that they want for the future, meaning you know.
Speaker 3 (05:16):
Those sales had better grow at a pretty rapid pace. Uh.
The deal that in Nvidia ink.
Speaker 4 (05:21):
I'm sorry, could you say that again, Mike.
Speaker 2 (05:23):
Yes, So the cost to deploy this computing power, the
twenty gigawatts of.
Speaker 3 (05:30):
Not their competitors, not their competitors.
Speaker 2 (05:32):
This is the promise of the deals that they have
in so far, which is over the next decade they
want to be able to build out and power twenty
gigawatts of computing power.
Speaker 4 (05:42):
Which will cost them a trillion dollars a year.
Speaker 2 (05:44):
To power that assuming today's electricity costs, which we can't
hold certain like I would think they would go up
in the short term, maybe down in the long term.
But you know, under today's cost, Financial Times estimates that
cost about a trillion dollars to power.
Speaker 4 (05:59):
Okay, So their electricity bill, I'm sorry for putting you
on the stand here. That's their Their electricity bill will
be a trillion dollars a year according to the Financial Time.
I believe it's not read that as well. But is
that your interpretation?
Speaker 2 (06:10):
My interpretation was not just electricity, but other costs associated
with running a data center.
Speaker 4 (06:15):
Okay, and this is just open AI one company.
Speaker 3 (06:17):
One company.
Speaker 4 (06:18):
Do we have any sense for what fraction of overall
demand for AI they will provide? Now we're piling assumption
on top of.
Speaker 3 (06:24):
Assumption here, no clue?
Speaker 4 (06:25):
Maybe half is that?
Speaker 3 (06:27):
Maybe? Is that fair? No clue?
Speaker 4 (06:28):
Okay, maybe it's well, this is a big I don't
know what I'm trying to get at. Here is the
US economy's GDP today. Let's just talk in today's dollars,
because we don't know what inflation is going to be
GDP of all the goods and all the spending in
the economy consumers, firms, government is about thirty trillion.
Speaker 2 (06:47):
So we're saying that the cost annually for one company
for them to power these things is for.
Speaker 4 (06:54):
One company, and we're assuming they'll be half they'll have half.
Speaker 3 (06:57):
The market maybe, so yeah, sure.
Speaker 4 (07:00):
Those two the AI's power needs alone will will constitute
one to fifteenth of the of the spending, or we'll
be equivalent to not constitute Oh, I guess yeah, because
they're spending it, so that should show up in the GDP.
It'll be one fifteenth of the economy just to power AI.
Government today spends about six trillion dollars. Again, we're holding
(07:23):
everything constant, yep, So they'll spend as much. They'll spend
a third twice what we spend on national defense today.
Speaker 3 (07:30):
That's that's the third of.
Speaker 4 (07:31):
What we spend on government, federal government anyway, on all
expenses just to power AI says nothing of the maintenance replacement.
I'm just trying to put this. These some of these
it's tough to optimistic. I'll call them optimistic instead of
outlandish and reckless and self serving and cynical and scammy,
I'll call them optimistic.
Speaker 2 (07:52):
Let's go with that instead. Yeah, uh, the deal with
Nvidian particular. We talked about this yesterday and we kind
of framed did as, Wow, that's pretty interesting because the
announced deal is that in Vidia is investing one hundred
billion dollars into open ai, and weeks later open ai
turned around and said, yeah, we're investing in AMD. And
I wanted to clarify how that deal works, because technically
(08:14):
in Vidia didn't just.
Speaker 3 (08:14):
Hand over one hundred billion dollars in cash.
Speaker 2 (08:16):
What they did was they promised to provide open ai
with one hundred billion dollars worth of cash or resources,
and that could come in the phase. That could come
in the form of future investment based on the build
out of these data centers. They might provide vendor financing
for the purchase of their own Nvidia chips.
Speaker 3 (08:37):
They're not literally.
Speaker 2 (08:38):
Handing over one hundred billion dollars in cash, though, and
that part I don't think was made clear enough by
the media, so I'm trying to correct that piece. Open
Ai did not receive one hundred billion dollars in cash
from Nvidia. They received some promises of that value of
investment over the course of the next decade as they
bring these data centers using in video chips online. The
AMD deal that open Ai just put through here or
(09:01):
inked it was open Ai. It was AMD offering open
Ai a warrant that would eventually allow them to maybe
buy up to ten percent of AMD's stock in exchange
for buying chips from AMD. Hypothetically some have put out
(09:21):
there that you know, and then if the value of
that warrant appreciates, they could maybe sell it to get
cash to then buy more AMD chips, And so how
great for that business model. If I've lost you don't
blame yourself. This is immensely complicated. It evokes a lot
(09:45):
of types of deals like vendor financing that we've run
into in the past, and is immensely complicated.
Speaker 4 (09:52):
There as a lot of potential for financial so called
financial shenanigans. Here. I'm using the title of a two
thousand and three book written after the collapse of the
dot com era, which outlines many of the dodgy accounting
methods used by Sunbeam and others throughout the eighties and
nineties to inflate their earnings and to move debt off
(10:12):
their balance sheets and to just get investors excited about
something that was just fanciful. If you keep the one
trillion figure for power usage alone in mind, compare that
to the economy or spending on other enormous economy wide enterprises.
I think that alone should tell you that there's some
seriously optimistic estimation going on here. Not to say it
(10:35):
won't come to pass, but it would have to come
to pass quicker than any technology has crystallized and permeated
the whole economy at any time in history since the
beginning of the industrial era. I'm not saying a I
won't be life changing for many people and industries. It
probably will. But if you think it will permeate the
economy faster than electricity or the Internet, you've got some
(10:57):
splaining to do, because history suggests that it takes time.
The way these stocks related to these and Opening Eyes
obviously not public, but they're getting in vidiot of sharp
and A and they're all getting each other to pop
by announcing these these these these discumbrious web of cross
deals that nobody can really get to the bottom of
(11:18):
the price returns that are being realized by these stocks
assume quick gains, and that is unlikely to happen if
history is any guy.
Speaker 2 (11:26):
By the way AMD stock moving up an additional five
percent this morning in VideA moving back up one point
six percent. At this stage, AMD much much smaller company
than in video. It's about a three hundred and fifty
billion dollar market cap as opposed to in videos four
and a half trillion dollar market cap, but at this
stage AMD is valued pretty considerably richer than a than
(11:50):
in Vidia is on a forward pe basis. Again, smaller company,
different makeup, but clearly a lot of optimism after this
announced deal with open Ai.
Speaker 3 (12:00):
Do you need to take a quick break.
Speaker 2 (12:01):
When we come back, we'll switch over to a few
of the people making commentary about this whole trade and
what it might mean for markets. Mary Daily, the San
Francisco FED talking about financial stability. Let's say quick break
and cover those stories next on the Financial Exchange.
Speaker 1 (12:20):
Thanks to us six one, seven, three six two thirteen
eighty five with your comments and questions about today's show,
and let us know what you think about the stories
we are covering. This is the Financial Exchange Radio Network,
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Speaker 5 (12:49):
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Speaker 3 (13:25):
San Francisco Federal Reserves.
Speaker 2 (13:27):
Mary Daily was giving an interview and was asked questions
about concerns over an AI related bubble, and I suspect
that that's not what her interview was supposed to be about.
But I think that every FED president is likely to
get questions about the stock market and how it's affecting
their models on inflation and growth and financial stability, which
(13:50):
is it's not one of their two mandates, but they
obviously do care about financial stability. That much is that
much is obvious. I did not listen to the interviews,
so I hesitate too much to you know fully digest
all of her views, but in the interview with Axio,
she laid out three reasons she's watching the stock market
(14:12):
quote bubble, the AI cap X boom and what it
could mean, but not worrying about it in a lot
of context. One her point would be that if it
is a bubble, she doesn't see it as a financial bubble.
And I think what she means by that is it's
not being financed in large part by massive debt obligations
(14:34):
that are permeating their way through the banks and through
individual retail investors who are loaning money for the build
out of all this. It's largely being financed by either
IOUs between companies or by very well capitalized tech companies
like Microsoft, Oracle.
Speaker 3 (14:52):
Nvidia and others.
Speaker 2 (14:53):
Was that you're read on her commentary as well as
you know, compared to eight when they're was all this
stuff being done that nobody knew how to value? This
is just seemingly a big infatuation with them. It's different
than technology.
Speaker 4 (15:07):
You may have read it more carefully than I did.
It's certainly different than evaluations were not extreme and eight.
First of all, stock market valuation if there was no
clear stock market bubble valuations if you want to use
a smooth ten year inflation adjusted price to earnings ratio,
so called cyclically adjusted price ratio. They're in the mid
to high twenties, sitting the closer to forty. So it's
far more likely that stocks are overvalued to their detriment
(15:29):
ie to the point where lower where future returns will
be low. Far more likely today than it was in eight.
What killed stocks and eight was obviously a couple things.
I think the price of oil, which was slowing down
economic growth because it got so extreme, as well as
of course the collapse and the insecurity is collateralized by mortgagees,
(15:53):
so very different situation. This is probably more akin to
nineteen ninety nine two thousand, for which the Fed does
deserve some blame, and Mary Daily and other policy she
a voting member right now, I forget or whatever the
Fed is important. This absolutely falls in the lap of
the Fed. They have aided and abedded a bubble through
(16:13):
by keeping financial conditions loose. This runs contrary to the
conventional wisdom that rates are restrictive. If you look at
every measure of financial conditions, including and maybe above all,
stock prices, financial conditions are quite loose. That's resulting in
in behavior like we're seeing now in AI an AI
adjacent related that is industries and valuations generally. Mike, if
(16:37):
if this is a bubble, and I'll go out on
a little limb here and say, this is absolutely a bubble,
it's absolutely going to end badly, and it's also absolutely
the Fed's fault, and they're lowering rates into an exuberant
orgy of circular investing, is the Financial Times likes to
call it. This is going to be a head scratcher
for the ages. I suspect I don't have one hundred
percent confidence of this, and your guess is as good
(16:59):
as mine, but I suspect this will result in a
lot of finger pointing, and many of those fingers will
point right at the FED for keeping financial conditions too loose,
just like they did after the bubble burst in two
thousand and two thousand and one.
Speaker 3 (17:11):
A few points that I would agree with her on.
Speaker 2 (17:14):
I don't see signs that this has permeated so far
into our financial systems that it could bring down a
bunch of banks like it did back in no way,
so I think it is different from that perspective. And
if we did see a big tech sell off due
to a bubble burst. I take her point that the
infrastructure that had been built out similar to the infrastructure
that was built out during the dot Com bubble, could
be useful to all sorts of growth for the future,
(17:35):
and so I think those are salient points. What I
am worried that some might be missing, and we don't
really have very strong evidence of this, but there's been
more and more studies that have called into question what
used to be the normal behavior where spending primarily getting
or a lot of spending being driven by wage gains
does not really seem to be playing out in the
(17:57):
same way. We seem to be getting a lot more
spending from very upper wealth demographics, and a lot of
that seems to be in part related to how much
their investment portfolio is growing or how much of their
real estate portfolio is growing. And so if that ends
up being true, that hey, uh, you know, this ends
up being a stock market bubble that does end up
(18:18):
crashing in some you know, spectacular fashion down the road, which, again,
as certain as Mark sounds, I'm sure that if you
ask them.
Speaker 4 (18:25):
No, no, I'm sorry, I don't you know what I
feel strongly about it, But I'm not sure, and and
I don't mean to sound overly certain.
Speaker 2 (18:34):
And even if you were sure, I am certain that
I wouldn't be able to pin you down on what
that all means for timing, and that's part of the
most important But my question would be, could a stock
market collapse or extreme bout to volatility be destabilizing for
the US economy today merely because of what I just
(18:54):
talked about. That, Hey, spending these days and people's feelings
of wealth are so intricately to the stock market. Our
retirement plans are also intricately tied to the stock market,
and the concentration of the stock market is among the
highest it's ever been. That yeah, even something that is
not sucking in all this debt investment from banks could
(19:16):
still be destabilized.
Speaker 4 (19:17):
We talked about why this is different than nineteen eighty
seven and two thousand.
Speaker 2 (19:20):
When we come back, we absolutely can, but we do
need to take a break. First, Wall Street Watches next,
and then how It's different is next.
Speaker 1 (19:40):
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Speaker 5 (20:00):
LESMP five hundred is looking to notch its eighth straight
day of gains as Wall Street continues to monitor development
surrounding the government shutdown, now in its second week. Gold
also continues to climb, topping four thousand dollars for the
first time. Right now, the Dow is down by two
tenths of one percent or eighty eight points lower. SMP
(20:21):
five hundred is flat, NASDAC is about a tenth of
a percent higher, or seventeen points. RUSS two thousand is
down a tenth of one percent. Tenyure Treasury reel down
two basis points at four point one four to two percent,
and crude oil we're treating about half a percent rating
at sixty one dollars in thirty six cents a barrel
(20:42):
chairs into Canadian minerals. Explore Trilogy Medals roaring two hundred
and sixteen percent after the White House announced it was
investing thirty six point five million dollars in the company,
giving the US government a ten percent stake. Meanwhile, after
its twenty four percent rally yesterday, driven by the massive
computing deal with OpenAI, AMD up another five percent today.
(21:05):
Jeffries also upgraded AMD stock to buy from hold, Sticking
with tech, where Dell said have roughly doubled its targets
for long term growth in sales and earnings, pointing to
a huge opportunity from rising adoption of AI. Delstock is
up nearly three percent. Elsewhere, the Wall Street Journal reported
New York Stock exchange owner Intercontinental Exchanges in talks to
(21:29):
invest two billion dollars in the crypto based prediction market
poly market. That stock is up one percent. Constellation Brands
up over two percent after the maker of Modello and
Corona Beach Street forecast for revenue and earnings in the
previous quarter. The company did, however, reiterate its lower full
year guidance due to macro economic headwinds, and spice maker
(21:52):
McCormick posted a higher quarterly profit in sales, but noted
higher costs have eaten into its bottom line. Shares a
currently off by three percent. I'm Tucker Silva and that
is Wall Street Watch.
Speaker 3 (22:04):
So Mark.
Speaker 2 (22:05):
Prior to the break, we were discussing the comparisons that
are continuing to be made between this moment in time
and other moments of exuberance, let's say, in stock market history,
in relatively recent history, and by relatively I mean since
say the nineteen eighties, Can you compare and contrast some
(22:25):
of them for us? Because a lot's been written about this,
a lot's been said about it. I'm less interested in
comparisons between today and twenty twenty because that was a
very unique recession. But when you look back at the
previous stock market crashes and what we learned from studying
those in history, how do you how do you compare
(22:46):
where we are now to some of those.
Speaker 4 (22:47):
Well, the point I was going to make was if
there is a crash, the Fed's got way less room
to maneuver than it had in previous eergencies because inflation
is elevated and its balance sheet is to understate it
as much as it is possible to understand anything a
little bit stretched. In nineteen eighty seven, when the market crash,
FED stepped in. Didn't do it publicly, but Greenspan made
(23:08):
phone calls. There's some great books documenting the behind the scenes,
the drama that took place, because what he was doing
was unprecedented, unprecedented at the time. That staved off failures
of trading firms that would have reverberated into banking and
into the economy generally. Greenspan arguably saved the market and
saved the economy in nineteen eighty seven. In two thousand,
(23:30):
the FED similarly had room to ease inflation. Inflation was
not low, by the way, in nineteen eighty seven, but
the fed's balance sheet was teeny tiny and inflation was
inflation expectations were stable. In two thousand, FED had no
balance sheet to speak of, none, None of the innovative
policies that had been adopted since were practiced. Then inflation
(23:53):
was quite low. FED could keep interest rates at one
percent for years. They kept interest rates too low for
too long, in fact, and that are you will be
helped inflate the housing bubble. So my point is, in
those two instances, the FED could stimulate aggressively. In this instance,
I don't. They will try, probably, but to offset the
effect of demand, which you pointed to in the last segment,
(24:15):
to offset the contractionary effect on demand, contractionary so called
wealth effect, which is what will happen if stocks fall
for the same reason that rising stocks are boosting spending
among the top ten percent today, top ten percent, making
up fifty percent of spending. Well documented, Fed's got less
room to stimulate so called aggregate demand, overall demand in
(24:36):
the economy from consumers and firms two to an extent
than it did in past episodes when stocks crashed. So
and I'm not saying daily is dismissing the possibility of
adverse effects of a bubble pop on the real economy.
But you could argue that the FED doesn't have nearly
as much room to cushion the blow as it did
(25:00):
past episodes. And I just cited a couple Maybe there
are some counter examples that just aren't coming to mind.
Speaker 2 (25:05):
Yeah, I think that's a fair point that anything they
were to do now would bear the risk of shooting
inflation a fair bit higher.
Speaker 4 (25:15):
And it just came off an episode of very which.
Speaker 3 (25:17):
Which I think they would be willing to do if
we theyre going to and I think.
Speaker 4 (25:21):
They're going to get surprised because prices are there's this
debate among economists at any given point in time, how
responsive are prices to changes in the money supply? How
responsive are how responsive is a different way of putting
this is how responsive is inflation to changes in the
unemployment rate. Sometimes you'll see an economist quoted as saying,
is the Phillip's curve really steep or flat?
Speaker 3 (25:40):
Right now?
Speaker 4 (25:40):
What they mean by that is how quickly is what
the FED does going to pass into prices versus stimulating
real economic activity. We're all on a hair trigger when
it comes to inflation because we're all traumatized by the
recent inflation episode. I think again, this has implications for
what the FED can actually do in terms of stimulating demand.
Speaker 2 (26:00):
Moving to another area of the economy, which is the
auto market. I want to go there because there have
been a number of blow up stories in that space
over the last several weeks, and blow up was not
the right word, because a devastating fire just swept through
a major Ford supplier just over the last few days.
Novellas plant supplies about forty percent of aluminum sheet used
(26:22):
in the auto industry in Oswego, New York. It's been
taken offline and will be offline until early next year,
and in the meantime, again another hit to the auto
industry who relies heavily on this domestically sourced aluminum. Aluminum
that is imported into the United States, which Novellas does
plenty of They have plants in Brazil and Japan all
(26:43):
over the world. They would face about a fifty percent
tariff on that imported aluminum should they need to bring
it into the country, and so brilliant. What does this
mean for the auto sector? Will they get some sort
of temporary waiver because this is a pretty unpredictable outcome here.
But nonetheless, one other shot across the bow of the
auto industry, the other piece that I found really fascinating.
(27:07):
We've talked a lot about the Tricolor situation. This was
the lender and auto dealer across the country that went
through is going through Chapter seven bankruptcy, meaning liquidating everything
they have, and there's we're now a few weeks out
and are starting to see what was actually going on
over at Tricolor.
Speaker 3 (27:28):
And the risk management and where that's permeated.
Speaker 2 (27:32):
I found this story interesting one because whenever something goes
belly up this quickly, there's all sorts of allegations of
fraudulent activity and not quite properly doing things, and so
you've got some of that intrigue here. But it also
tells you that once again, banks, credit rating agencies, any
(27:55):
of these groups who are responsible for assessing risk. When
it came to this, Tricolor company did a fairly bad
job of doing so.
Speaker 5 (28:04):
So.
Speaker 3 (28:04):
For instance, SMP Global Ratings.
Speaker 2 (28:06):
Gave the biggest slice of these securities that were put
out there, which are just a whole bunch of auto loans.
They gave it a double A rating, the second highest
rating you can have, and again these are auto loans too,
largely below credit worthy customers. The US government, the US
government awarded Tricolor, especially US Treasury certification in twenty nineteen,
(28:29):
that was, you know, for their role as a community
development financial institution. Didn't know that that existed, but it's
a government seal of approval for social based lenders. Why
the Treasury is in the business of giving out social
based lending accreditations, I do not know. At the same
time that they were given that and we're boasting of it,
(28:52):
they were accused of, you know, having delayed title transfers,
in proper use of temporary license plates, selling cars that
the company didn't even hold title to.
Speaker 3 (28:59):
So I don't know.
Speaker 2 (29:01):
The more you look at this, and this is always
the case after there's a blow up, right every single
time there's a blow up you always look back on
and say, Wow, why didn't this bank have a better
sense of what was actually going on underneath the hood here?
But I just find it so unambiguously repetitive compared to
every blow up of a major lending institution that we've
(29:21):
ever seen.
Speaker 4 (29:22):
Yeah, the best predictor of a blow up is the
track record of the guy in charge. This guy has
been tainted before, similar to first brands shady characters. Yeah,
the first Trump administration gave this guy a metal while
they were practicing tawdry while they were engaging in tawdry
financial machinations. So I mean, I'm not blaming them, nests.
(29:45):
They obviously did no due diligence whatsoever on the guy.
So the best predictor of whether or not something is
going to end in tears is a person's past track record,
which is why when you're hired somewhere, your employer does
a background check like we do here, right, Mike, You
don't hire somebody with a criminal record.
Speaker 2 (29:59):
Probably, So, like the statement from Fifth Third Bank, who
recently disclosed they'd faced up to two hundred million dollars
in losses tied to you know what they're calling alleged
fraud might be just poor risk management. But you know,
they said, quote, we're not in the business of doing
business with people who commit fraud. Ironically, one of Tricolor's
co founders, Texas businessman Ken Weaver, had served prison time
(30:22):
for selling stolen cars and failed to disclose that history
when seeking to run a Texas utility that racked up
customer complaints under his watch. So again, you say one thing,
but clearly you're doing something pretty dramatically different. Where this
all rubber hits the road on this stuff. There are
a lot of lenders doing business with Tricolor. There were
(30:43):
a lot of lenders doing business with auto parts supplier
out of the Midwest that just went first brands, thank you.
And the question on my mind is is this a
wake up call for a lot of private credit lenders
out there who are suddenly taking a look at their
books and saying, ooh, didn't realize that we were all
doing I.
Speaker 4 (31:01):
Got news for you here. This stuff is happening all
over the place right now because financial conditions are too easy,
and regulators have been told to back off, right.
Speaker 3 (31:10):
And the question that I have is will any of
these events be the moment that those lenders say, oh tay, yes, yes.
Speaker 4 (31:18):
One of them will. It will be once a crisis
is underway, and then nobody trusts anybody, and that's when
you get financial market forgive me collapse.
Speaker 2 (31:26):
Let's take a quick break. When we come back, mass
just's employer confidence dipping in the month of September. We'll
talk about that next year on the Financial Exchange.
Speaker 1 (31:35):
Miss any of the show. Catch up at your convenience
by visiting Financial Exchange Show dot com and clicking the
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(31:59):
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Speaker 2 (32:09):
Mark we covered a story yesterday that we kind of
poked a bunch of holes in, but it made the
point that there's you know, twenty two states according to
do you remember who did the study?
Speaker 5 (32:20):
I know it's on market, I don't know the actual survey.
Speaker 2 (32:23):
They made the argument that the hey, twenty two states,
that are you know, basically in recession right now when
you look at employment trends, growth, et cetera, et cetera.
And the counterpoint was, yeah, well, look but none of
them are Florida, Texas, California, or New York, so none
of that matters. But it is true that, especially around
New England right now, the employment has been weak on.
(32:43):
Employment rates have been generally trending upwards, and confidence among
employers seems to be dipping. So business confidence in Massachusetts
remained negative for the seventh straight month in September. That's
the longest stretch of bloomy outlooks since twenty twenty. During
the pandemic. Business Consumer Business Confidence Index, which is compiled
(33:03):
by the Associated Industries of Massachusetts, fell another one and
a half points again to its lowest point since April
of this year. And here in Massachusetts, I think you
can kind of paint a pretty easy picture of why
that might be the case. You have a large subset
of employers in the biotech pharmaceutical research place, where funding
(33:28):
has been getting questioned. You have a pretty hefty employment
in the education sector, which has also been under pressure.
And with that concentration, I'm not immensely surprised that the
hiring market and the state of things has been weaker
here in massa Chusetts in other parts of the country.
I pointed this out also, the unemployment rate in Massachusetts
(33:49):
now sitting at I believe four point eight percent, was
right at the national average, which I think was four
point two percent back in December of this year. Average
is barely budged here mass Chusets. We've climbed nearly We've
climbed six tenths of a percent, and so I guess
my point would be, if the stories you're reading about
(34:11):
the stock market or about the labor market don't feel
all that true to folks here in New England, it's
because the economy here in New England is not holding
up nearly as strong as the rest of the country.
Speaker 4 (34:21):
Yeah, if you look at our biggest employers, hospitals, universities,
you ticked off some of these investment firms like Fidelity,
and a lot of smaller management investment managers that you've
never heard of. But there's a huge concentration of investment
managers in Boston, public market and private market. General electric
is A quick Google search just reminded me and many
(34:44):
others and you can think of idiosyncratic, know very specific
to a sector or even a entity, reasons why some
of these might be careful about hiring right now. But
keep in mind the hiring pace was absolutely frantic for
a few years. Four Yeah, so what do we have
four point eight percent on a planet right now? Maybe
(35:05):
that's just the nor. Maybe the so called natural rate
here in Massachusetts is closer to five than what we
experienced in the earlier part of this decade was a
little bit of anomally.
Speaker 5 (35:14):
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Speaker 2 (36:23):
Mark We traveled now from Massachusetts down to Providence, Rhode Island,
where the Superman Building. If you're not familiar, just google it.
Speaker 3 (36:30):
It's it's this.
Speaker 2 (36:32):
Do you know how old that building is? It's it's
quite an old building. It used to be occupied by
bank from America.
Speaker 4 (36:39):
The people natives whould know what is the Industrial Bank building?
Speaker 2 (36:42):
Yeah, the Industrial Bank Building. It kind of looks like
a building from the Superman movies. I don't know if
it was actually like part of some of those films
in the past, but nonetheless things been sitting the sin.
Speaker 3 (36:53):
Ghostbusters nineteen twenty eight. By the way, in nineteen.
Speaker 4 (36:55):
Twenty eight, it was same era as the Empire State Building.
You could tell this by looking at it.
Speaker 3 (36:59):
It's a cool looking building. I mean, I just you know.
Speaker 2 (37:01):
Setting aside here, it's part of the Providence Sky Alliance
twenty six story tower empty now for the last twelve years.
The owner of the building, or one of the building's owners,
David Sweetzer, had cobbled together a three hundred and eight
million dollar financing package for a conversion project to maybe
convert at least some of this into high end condos.
(37:25):
Bad news, he died, so that deal is now in question,
and we might go a fair bit longer with this
building being unoccupied. I was actually down in Providence over
the weekend. Lovely little trip, but clearly not the only
city in the country having trouble attracting big, big tenants
to large, older buildings.
Speaker 3 (37:47):
And this is just a story that has stabilized but.
Speaker 2 (37:51):
Might continue to have big issues like this one where
they cannot attract their right town.
Speaker 4 (37:56):
It's too big to preserve. Maybe it's got some If
you call that art deco that a period, I think
you would. It's gorgeous, but it's too expensive to preserve
and maybe to convert. You'd hate to think they'd have
to demolish it.
Speaker 3 (38:10):
But markets are slightly down for the day.
Speaker 2 (38:13):
We'll have a full market and recap and more for
it in the next hour the Financial Exchange.
Speaker 3 (38:17):
Stay tuned, folks,
The Financial Exchange is produced by Money Matters Radio and
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donation Today. Face is the Financial Exchange with Mike Armstrong
(01:07):
and Mark Vandetti.
Speaker 2 (01:10):
Good morning, Welcome back to the Financial Exchange. It's Mike,
Mark and Tucker with you on a Tuesday, as we
enter into what's this week two, Week three of the
government shutdown. Week two of the government shutdown. I clearly
have been not exactly counting the days here. Doesn't look
like a ton of progress being made there, but you know,
some a couple I think relevant announcements or statements by
(01:34):
key lawmakers that could indicate where things go in the future.
Dates that we're keeping in mind. I mean, the first
payroll date for military I think is October sixteenth. Federal
employee pay payroll I think is October tenth, that will
be missed. November first would be the first date where
people who are on Obamacare would see the increase in
(01:55):
premiums get affected by the lack of a renewal of
these subsidies. So those are a few of the key
dates that kind of I have in my mind. Obviously,
for financial markets, we've got a October is it a October.
Speaker 3 (02:08):
Thirtieth FED meeting.
Speaker 2 (02:10):
It's towards the end of this month here, So that's
not going to reopen the government, but it will be
relevant and so far as they may or may not
have data related to inflation and the labor market ahead
of that meeting, So we will see, you know, if
things reopen here. But to me at least, I just
don't see that pressure that would be necessary to get
(02:30):
things restarted at this point in time, and I think
that will continue to mount as time goes on. We'll
we visit the government shutdown throughout the show. I wanted
to start off today though, with a revisit of our
conversation yesterday when it comes to the deals of an
announced regarding open AI and artificial intelligence in general. But
(02:51):
open AI seems to be very much at the center
of all these discussions. If you missed it, yesterday they
announced with AMD a big investment in that company. This
follows a big announced deal within Nvidia, and I realized
at about nine am this morning that I was having
a tough time keeping it all straight, even in my
(03:12):
own head. So I just wrote down some of my
notes on what seems to be going on here and
why people seem to be concerned about all the circular
deals that are getting done here. So starting off with
open ai, the maker of chat GPT, I would say
there is nobody else in my mind that has a
consumer facing product that is quite as known in the
(03:33):
AI space as open AI.
Speaker 3 (03:34):
I think that's safe to say between the two of you.
Speaker 2 (03:37):
Yeah, like, yeah, Google's Gemini I suppose is up there.
But Chat GPT, Yeah, I think GPT is probably the
most well known. So as of the most recent funding,
that company that owns Chat GPT and may or may
not be trying to transition into a for profit company,
was valued around half a trillion dollars. They generated four
(03:59):
point three billion dollars in sales in the first half
of twenty twenty five, and they burned through two and
a half billion dollars worth of cash. The deals that
they have now inked, which I hesitate to even say
the word inked because they've announced these deals, but the
actual timing of when they all come to pass, who
(04:20):
you know exchanges cash with the other is not terribly
clear at this point. But the deals with AMD and
Video Oracle, Core Weave, they've all promised about twenty gigawatts
of computing power over the next decade. If that means
nothing to you, don't worry. It meant nothing to me either.
I have no idea what a gigawatt really represents. But
(04:41):
according to people who know more about this than I do,
powering twenty gigawatts of computing power takes about.
Speaker 3 (04:47):
Twenty nuclear reactors today.
Speaker 2 (04:50):
So the power of about twenty nuclear reactors, and the
cost to deploy something like that on an annual basis
would be about a trillion dollars. So again, these are
the promises that are being made. Is hey, a company
that's generating about four billion dollars in sales in the
first half is going to need to spend a trillion
dollars a year in order to you know, finance the
(05:12):
computing power that they want for the future, meaning you know.
Speaker 3 (05:16):
Those sales had better grow at a pretty rapid pace. Uh.
The deal that in Nvidia ink.
Speaker 4 (05:21):
I'm sorry, could you say that again, Mike.
Speaker 2 (05:23):
Yes, So the cost to deploy this computing power, the
twenty gigawatts of.
Speaker 3 (05:30):
Not their competitors, not their competitors.
Speaker 2 (05:32):
This is the promise of the deals that they have
in so far, which is over the next decade they
want to be able to build out and power twenty
gigawatts of computing power.
Speaker 4 (05:42):
Which will cost them a trillion dollars a year.
Speaker 2 (05:44):
To power that assuming today's electricity costs, which we can't
hold certain like I would think they would go up
in the short term, maybe down in the long term.
But you know, under today's cost, Financial Times estimates that
cost about a trillion dollars to power.
Speaker 4 (05:59):
Okay, So their electricity bill, I'm sorry for putting you
on the stand here. That's their Their electricity bill will
be a trillion dollars a year according to the Financial Time.
I believe it's not read that as well. But is
that your interpretation?
Speaker 2 (06:10):
My interpretation was not just electricity, but other costs associated
with running a data center.
Speaker 4 (06:15):
Okay, and this is just open AI one company.
Speaker 3 (06:17):
One company.
Speaker 4 (06:18):
Do we have any sense for what fraction of overall
demand for AI they will provide? Now we're piling assumption
on top of.
Speaker 3 (06:24):
Assumption here, no clue?
Speaker 4 (06:25):
Maybe half is that?
Speaker 3 (06:27):
Maybe? Is that fair? No clue?
Speaker 4 (06:28):
Okay, maybe it's well, this is a big I don't
know what I'm trying to get at. Here is the
US economy's GDP today. Let's just talk in today's dollars,
because we don't know what inflation is going to be
GDP of all the goods and all the spending in
the economy consumers, firms, government is about thirty trillion.
Speaker 2 (06:47):
So we're saying that the cost annually for one company
for them to power these things is for.
Speaker 4 (06:54):
One company, and we're assuming they'll be half they'll have half.
Speaker 3 (06:57):
The market maybe, so yeah, sure.
Speaker 4 (07:00):
Those two the AI's power needs alone will will constitute
one to fifteenth of the of the spending, or we'll
be equivalent to not constitute Oh, I guess yeah, because
they're spending it, so that should show up in the GDP.
It'll be one fifteenth of the economy just to power AI.
Government today spends about six trillion dollars. Again, we're holding
(07:23):
everything constant, yep, So they'll spend as much. They'll spend
a third twice what we spend on national defense today.
Speaker 3 (07:30):
That's that's the third of.
Speaker 4 (07:31):
What we spend on government, federal government anyway, on all
expenses just to power AI says nothing of the maintenance replacement.
I'm just trying to put this. These some of these
it's tough to optimistic. I'll call them optimistic instead of
outlandish and reckless and self serving and cynical and scammy,
I'll call them optimistic.
Speaker 2 (07:52):
Let's go with that instead. Yeah, uh, the deal with
Nvidian particular. We talked about this yesterday and we kind
of framed did as, Wow, that's pretty interesting because the
announced deal is that in Vidia is investing one hundred
billion dollars into open ai, and weeks later open ai
turned around and said, yeah, we're investing in AMD. And
I wanted to clarify how that deal works, because technically
(08:14):
in Vidia didn't just.
Speaker 3 (08:14):
Hand over one hundred billion dollars in cash.
Speaker 2 (08:16):
What they did was they promised to provide open ai
with one hundred billion dollars worth of cash or resources,
and that could come in the phase. That could come
in the form of future investment based on the build
out of these data centers. They might provide vendor financing
for the purchase of their own Nvidia chips.
Speaker 3 (08:37):
They're not literally.
Speaker 2 (08:38):
Handing over one hundred billion dollars in cash, though, and
that part I don't think was made clear enough by
the media, so I'm trying to correct that piece. Open
Ai did not receive one hundred billion dollars in cash
from Nvidia. They received some promises of that value of
investment over the course of the next decade as they
bring these data centers using in video chips online. The
AMD deal that open Ai just put through here or
(09:01):
inked it was open Ai. It was AMD offering open
Ai a warrant that would eventually allow them to maybe
buy up to ten percent of AMD's stock in exchange
for buying chips from AMD. Hypothetically some have put out
(09:21):
there that you know, and then if the value of
that warrant appreciates, they could maybe sell it to get
cash to then buy more AMD chips, And so how
great for that business model. If I've lost you don't
blame yourself. This is immensely complicated. It evokes a lot
(09:45):
of types of deals like vendor financing that we've run
into in the past, and is immensely complicated.
Speaker 4 (09:52):
There as a lot of potential for financial so called
financial shenanigans. Here. I'm using the title of a two
thousand and three book written after the collapse of the
dot com era, which outlines many of the dodgy accounting
methods used by Sunbeam and others throughout the eighties and
nineties to inflate their earnings and to move debt off
(10:12):
their balance sheets and to just get investors excited about
something that was just fanciful. If you keep the one
trillion figure for power usage alone in mind, compare that
to the economy or spending on other enormous economy wide enterprises.
I think that alone should tell you that there's some
seriously optimistic estimation going on here. Not to say it
(10:35):
won't come to pass, but it would have to come
to pass quicker than any technology has crystallized and permeated
the whole economy at any time in history since the
beginning of the industrial era. I'm not saying a I
won't be life changing for many people and industries. It
probably will. But if you think it will permeate the
economy faster than electricity or the Internet, you've got some
(10:57):
splaining to do, because history suggests that it takes time.
The way these stocks related to these and Opening Eyes
obviously not public, but they're getting in vidiot of sharp
and A and they're all getting each other to pop
by announcing these these these these discumbrious web of cross
deals that nobody can really get to the bottom of
(11:18):
the price returns that are being realized by these stocks
assume quick gains, and that is unlikely to happen if
history is any guy.
Speaker 2 (11:26):
By the way AMD stock moving up an additional five
percent this morning in VideA moving back up one point
six percent. At this stage, AMD much much smaller company
than in video. It's about a three hundred and fifty
billion dollar market cap as opposed to in videos four
and a half trillion dollar market cap, but at this
stage AMD is valued pretty considerably richer than a than
(11:50):
in Vidia is on a forward pe basis. Again, smaller company,
different makeup, but clearly a lot of optimism after this
announced deal with open Ai.
Speaker 3 (12:00):
Do you need to take a quick break.
Speaker 2 (12:01):
When we come back, we'll switch over to a few
of the people making commentary about this whole trade and
what it might mean for markets. Mary Daily, the San
Francisco FED talking about financial stability. Let's say quick break
and cover those stories next on the Financial Exchange.
Speaker 1 (12:20):
Thanks to us six one, seven, three six two thirteen
eighty five with your comments and questions about today's show,
and let us know what you think about the stories
we are covering. This is the Financial Exchange Radio Network,
breaking business and financial news first throughout the day, only
here on the Financial Exchange Radio Network.
Speaker 5 (12:49):
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Speaker 3 (13:25):
San Francisco Federal Reserves.
Speaker 2 (13:27):
Mary Daily was giving an interview and was asked questions
about concerns over an AI related bubble, and I suspect
that that's not what her interview was supposed to be about.
But I think that every FED president is likely to
get questions about the stock market and how it's affecting
their models on inflation and growth and financial stability, which
(13:50):
is it's not one of their two mandates, but they
obviously do care about financial stability. That much is that
much is obvious. I did not listen to the interviews,
so I hesitate too much to you know fully digest
all of her views, but in the interview with Axio,
she laid out three reasons she's watching the stock market
(14:12):
quote bubble, the AI cap X boom and what it
could mean, but not worrying about it in a lot
of context. One her point would be that if it
is a bubble, she doesn't see it as a financial bubble.
And I think what she means by that is it's
not being financed in large part by massive debt obligations
(14:34):
that are permeating their way through the banks and through
individual retail investors who are loaning money for the build
out of all this. It's largely being financed by either
IOUs between companies or by very well capitalized tech companies
like Microsoft, Oracle.
Speaker 3 (14:52):
Nvidia and others.
Speaker 2 (14:53):
Was that you're read on her commentary as well as
you know, compared to eight when they're was all this
stuff being done that nobody knew how to value? This
is just seemingly a big infatuation with them. It's different
than technology.
Speaker 4 (15:07):
You may have read it more carefully than I did.
It's certainly different than evaluations were not extreme and eight.
First of all, stock market valuation if there was no
clear stock market bubble valuations if you want to use
a smooth ten year inflation adjusted price to earnings ratio,
so called cyclically adjusted price ratio. They're in the mid
to high twenties, sitting the closer to forty. So it's
far more likely that stocks are overvalued to their detriment
(15:29):
ie to the point where lower where future returns will
be low. Far more likely today than it was in eight.
What killed stocks and eight was obviously a couple things.
I think the price of oil, which was slowing down
economic growth because it got so extreme, as well as
of course the collapse and the insecurity is collateralized by mortgagees,
(15:53):
so very different situation. This is probably more akin to
nineteen ninety nine two thousand, for which the Fed does
deserve some blame, and Mary Daily and other policy she
a voting member right now, I forget or whatever the
Fed is important. This absolutely falls in the lap of
the Fed. They have aided and abedded a bubble through
(16:13):
by keeping financial conditions loose. This runs contrary to the
conventional wisdom that rates are restrictive. If you look at
every measure of financial conditions, including and maybe above all,
stock prices, financial conditions are quite loose. That's resulting in
in behavior like we're seeing now in AI an AI
adjacent related that is industries and valuations generally. Mike, if
(16:37):
if this is a bubble, and I'll go out on
a little limb here and say, this is absolutely a bubble,
it's absolutely going to end badly, and it's also absolutely
the Fed's fault, and they're lowering rates into an exuberant
orgy of circular investing, is the Financial Times likes to
call it. This is going to be a head scratcher
for the ages. I suspect I don't have one hundred
percent confidence of this, and your guess is as good
(16:59):
as mine, but I suspect this will result in a
lot of finger pointing, and many of those fingers will
point right at the FED for keeping financial conditions too loose,
just like they did after the bubble burst in two
thousand and two thousand and one.
Speaker 3 (17:11):
A few points that I would agree with her on.
Speaker 2 (17:14):
I don't see signs that this has permeated so far
into our financial systems that it could bring down a
bunch of banks like it did back in no way,
so I think it is different from that perspective. And
if we did see a big tech sell off due
to a bubble burst. I take her point that the
infrastructure that had been built out similar to the infrastructure
that was built out during the dot Com bubble, could
be useful to all sorts of growth for the future,
(17:35):
and so I think those are salient points. What I
am worried that some might be missing, and we don't
really have very strong evidence of this, but there's been
more and more studies that have called into question what
used to be the normal behavior where spending primarily getting
or a lot of spending being driven by wage gains
does not really seem to be playing out in the
(17:57):
same way. We seem to be getting a lot more
spending from very upper wealth demographics, and a lot of
that seems to be in part related to how much
their investment portfolio is growing or how much of their
real estate portfolio is growing. And so if that ends
up being true, that hey, uh, you know, this ends
up being a stock market bubble that does end up
(18:18):
crashing in some you know, spectacular fashion down the road, which, again,
as certain as Mark sounds, I'm sure that if you
ask them.
Speaker 4 (18:25):
No, no, I'm sorry, I don't you know what I
feel strongly about it, But I'm not sure, and and
I don't mean to sound overly certain.
Speaker 2 (18:34):
And even if you were sure, I am certain that
I wouldn't be able to pin you down on what
that all means for timing, and that's part of the
most important But my question would be, could a stock
market collapse or extreme bout to volatility be destabilizing for
the US economy today merely because of what I just
(18:54):
talked about. That, Hey, spending these days and people's feelings
of wealth are so intricately to the stock market. Our
retirement plans are also intricately tied to the stock market,
and the concentration of the stock market is among the
highest it's ever been. That yeah, even something that is
not sucking in all this debt investment from banks could
(19:16):
still be destabilized.
Speaker 4 (19:17):
We talked about why this is different than nineteen eighty
seven and two thousand.
Speaker 2 (19:20):
When we come back, we absolutely can, but we do
need to take a break. First, Wall Street Watches next,
and then how It's different is next.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time Now for Wall
Street Watch a complete look at what's moving market so
far today? Right here on the Financial Exchange Radio Network.
Speaker 5 (20:00):
LESMP five hundred is looking to notch its eighth straight
day of gains as Wall Street continues to monitor development
surrounding the government shutdown, now in its second week. Gold
also continues to climb, topping four thousand dollars for the
first time. Right now, the Dow is down by two
tenths of one percent or eighty eight points lower. SMP
(20:21):
five hundred is flat, NASDAC is about a tenth of
a percent higher, or seventeen points. RUSS two thousand is
down a tenth of one percent. Tenyure Treasury reel down
two basis points at four point one four to two percent,
and crude oil we're treating about half a percent rating
at sixty one dollars in thirty six cents a barrel
(20:42):
chairs into Canadian minerals. Explore Trilogy Medals roaring two hundred
and sixteen percent after the White House announced it was
investing thirty six point five million dollars in the company,
giving the US government a ten percent stake. Meanwhile, after
its twenty four percent rally yesterday, driven by the massive
computing deal with OpenAI, AMD up another five percent today.
(21:05):
Jeffries also upgraded AMD stock to buy from hold, Sticking
with tech, where Dell said have roughly doubled its targets
for long term growth in sales and earnings, pointing to
a huge opportunity from rising adoption of AI. Delstock is
up nearly three percent. Elsewhere, the Wall Street Journal reported
New York Stock exchange owner Intercontinental Exchanges in talks to
(21:29):
invest two billion dollars in the crypto based prediction market
poly market. That stock is up one percent. Constellation Brands
up over two percent after the maker of Modello and
Corona Beach Street forecast for revenue and earnings in the
previous quarter. The company did, however, reiterate its lower full
year guidance due to macro economic headwinds, and spice maker
(21:52):
McCormick posted a higher quarterly profit in sales, but noted
higher costs have eaten into its bottom line. Shares a
currently off by three percent. I'm Tucker Silva and that
is Wall Street Watch.
Speaker 3 (22:04):
So Mark.
Speaker 2 (22:05):
Prior to the break, we were discussing the comparisons that
are continuing to be made between this moment in time
and other moments of exuberance, let's say, in stock market history,
in relatively recent history, and by relatively I mean since
say the nineteen eighties, Can you compare and contrast some
(22:25):
of them for us? Because a lot's been written about this,
a lot's been said about it. I'm less interested in
comparisons between today and twenty twenty because that was a
very unique recession. But when you look back at the
previous stock market crashes and what we learned from studying
those in history, how do you how do you compare
(22:46):
where we are now to some of those.
Speaker 4 (22:47):
Well, the point I was going to make was if
there is a crash, the Fed's got way less room
to maneuver than it had in previous eergencies because inflation
is elevated and its balance sheet is to understate it
as much as it is possible to understand anything a
little bit stretched. In nineteen eighty seven, when the market crash,
FED stepped in. Didn't do it publicly, but Greenspan made
(23:08):
phone calls. There's some great books documenting the behind the scenes,
the drama that took place, because what he was doing
was unprecedented, unprecedented at the time. That staved off failures
of trading firms that would have reverberated into banking and
into the economy generally. Greenspan arguably saved the market and
saved the economy in nineteen eighty seven. In two thousand,
(23:30):
the FED similarly had room to ease inflation. Inflation was
not low, by the way, in nineteen eighty seven, but
the fed's balance sheet was teeny tiny and inflation was
inflation expectations were stable. In two thousand, FED had no
balance sheet to speak of, none, None of the innovative
policies that had been adopted since were practiced. Then inflation
(23:53):
was quite low. FED could keep interest rates at one
percent for years. They kept interest rates too low for
too long, in fact, and that are you will be
helped inflate the housing bubble. So my point is, in
those two instances, the FED could stimulate aggressively. In this instance,
I don't. They will try, probably, but to offset the
effect of demand, which you pointed to in the last segment,
(24:15):
to offset the contractionary effect on demand, contractionary so called
wealth effect, which is what will happen if stocks fall
for the same reason that rising stocks are boosting spending
among the top ten percent today, top ten percent, making
up fifty percent of spending. Well documented, Fed's got less
room to stimulate so called aggregate demand, overall demand in
(24:36):
the economy from consumers and firms two to an extent
than it did in past episodes when stocks crashed. So
and I'm not saying daily is dismissing the possibility of
adverse effects of a bubble pop on the real economy.
But you could argue that the FED doesn't have nearly
as much room to cushion the blow as it did
(25:00):
past episodes. And I just cited a couple Maybe there
are some counter examples that just aren't coming to mind.
Speaker 2 (25:05):
Yeah, I think that's a fair point that anything they
were to do now would bear the risk of shooting
inflation a fair bit higher.
Speaker 4 (25:15):
And it just came off an episode of very which.
Speaker 3 (25:17):
Which I think they would be willing to do if
we theyre going to and I think.
Speaker 4 (25:21):
They're going to get surprised because prices are there's this
debate among economists at any given point in time, how
responsive are prices to changes in the money supply? How
responsive are how responsive is a different way of putting
this is how responsive is inflation to changes in the
unemployment rate. Sometimes you'll see an economist quoted as saying,
is the Phillip's curve really steep or flat?
Speaker 3 (25:40):
Right now?
Speaker 4 (25:40):
What they mean by that is how quickly is what
the FED does going to pass into prices versus stimulating
real economic activity. We're all on a hair trigger when
it comes to inflation because we're all traumatized by the
recent inflation episode. I think again, this has implications for
what the FED can actually do in terms of stimulating demand.
Speaker 2 (26:00):
Moving to another area of the economy, which is the
auto market. I want to go there because there have
been a number of blow up stories in that space
over the last several weeks, and blow up was not
the right word, because a devastating fire just swept through
a major Ford supplier just over the last few days.
Novellas plant supplies about forty percent of aluminum sheet used
(26:22):
in the auto industry in Oswego, New York. It's been
taken offline and will be offline until early next year,
and in the meantime, again another hit to the auto
industry who relies heavily on this domestically sourced aluminum. Aluminum
that is imported into the United States, which Novellas does
plenty of They have plants in Brazil and Japan all
(26:43):
over the world. They would face about a fifty percent
tariff on that imported aluminum should they need to bring
it into the country, and so brilliant. What does this
mean for the auto sector? Will they get some sort
of temporary waiver because this is a pretty unpredictable outcome here.
But nonetheless, one other shot across the bow of the
auto industry, the other piece that I found really fascinating.
(27:07):
We've talked a lot about the Tricolor situation. This was
the lender and auto dealer across the country that went
through is going through Chapter seven bankruptcy, meaning liquidating everything
they have, and there's we're now a few weeks out
and are starting to see what was actually going on
over at Tricolor.
Speaker 3 (27:28):
And the risk management and where that's permeated.
Speaker 2 (27:32):
I found this story interesting one because whenever something goes
belly up this quickly, there's all sorts of allegations of
fraudulent activity and not quite properly doing things, and so
you've got some of that intrigue here. But it also
tells you that once again, banks, credit rating agencies, any
(27:55):
of these groups who are responsible for assessing risk. When
it came to this, Tricolor company did a fairly bad
job of doing so.
Speaker 5 (28:04):
So.
Speaker 3 (28:04):
For instance, SMP Global Ratings.
Speaker 2 (28:06):
Gave the biggest slice of these securities that were put
out there, which are just a whole bunch of auto loans.
They gave it a double A rating, the second highest
rating you can have, and again these are auto loans too,
largely below credit worthy customers. The US government, the US
government awarded Tricolor, especially US Treasury certification in twenty nineteen,
(28:29):
that was, you know, for their role as a community
development financial institution. Didn't know that that existed, but it's
a government seal of approval for social based lenders. Why
the Treasury is in the business of giving out social
based lending accreditations, I do not know. At the same
time that they were given that and we're boasting of it,
(28:52):
they were accused of, you know, having delayed title transfers,
in proper use of temporary license plates, selling cars that
the company didn't even hold title to.
Speaker 3 (28:59):
So I don't know.
Speaker 2 (29:01):
The more you look at this, and this is always
the case after there's a blow up, right every single
time there's a blow up you always look back on
and say, Wow, why didn't this bank have a better
sense of what was actually going on underneath the hood here?
But I just find it so unambiguously repetitive compared to
every blow up of a major lending institution that we've
(29:21):
ever seen.
Speaker 4 (29:22):
Yeah, the best predictor of a blow up is the
track record of the guy in charge. This guy has
been tainted before, similar to first brands shady characters. Yeah,
the first Trump administration gave this guy a metal while
they were practicing tawdry while they were engaging in tawdry
financial machinations. So I mean, I'm not blaming them, nests.
(29:45):
They obviously did no due diligence whatsoever on the guy.
So the best predictor of whether or not something is
going to end in tears is a person's past track record,
which is why when you're hired somewhere, your employer does
a background check like we do here, right, Mike, You
don't hire somebody with a criminal record.
Speaker 2 (29:59):
Probably, So, like the statement from Fifth Third Bank, who
recently disclosed they'd faced up to two hundred million dollars
in losses tied to you know what they're calling alleged
fraud might be just poor risk management. But you know,
they said, quote, we're not in the business of doing
business with people who commit fraud. Ironically, one of Tricolor's
co founders, Texas businessman Ken Weaver, had served prison time
(30:22):
for selling stolen cars and failed to disclose that history
when seeking to run a Texas utility that racked up
customer complaints under his watch. So again, you say one thing,
but clearly you're doing something pretty dramatically different. Where this
all rubber hits the road on this stuff. There are
a lot of lenders doing business with Tricolor. There were
(30:43):
a lot of lenders doing business with auto parts supplier
out of the Midwest that just went first brands, thank you.
And the question on my mind is is this a
wake up call for a lot of private credit lenders
out there who are suddenly taking a look at their
books and saying, ooh, didn't realize that we were all
doing I.
Speaker 4 (31:01):
Got news for you here. This stuff is happening all
over the place right now because financial conditions are too easy,
and regulators have been told to back off, right.
Speaker 3 (31:10):
And the question that I have is will any of
these events be the moment that those lenders say, oh tay, yes, yes.
Speaker 4 (31:18):
One of them will. It will be once a crisis
is underway, and then nobody trusts anybody, and that's when
you get financial market forgive me collapse.
Speaker 2 (31:26):
Let's take a quick break. When we come back, mass
just's employer confidence dipping in the month of September. We'll
talk about that next year on the Financial Exchange.
Speaker 1 (31:35):
Miss any of the show. Catch up at your convenience
by visiting Financial Exchange Show dot com and clicking the
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in full showers. This is your home for the latest
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This is the Financial Exchange Radio Network. The Financial Exchange
streams live on YouTube. Like our page and stay up
(31:59):
to date on breaking business news all morning long. Base
is the Financial Exchange Radio Network.
Speaker 2 (32:09):
Mark we covered a story yesterday that we kind of
poked a bunch of holes in, but it made the
point that there's you know, twenty two states according to
do you remember who did the study?
Speaker 5 (32:20):
I know it's on market, I don't know the actual survey.
Speaker 2 (32:23):
They made the argument that the hey, twenty two states,
that are you know, basically in recession right now when
you look at employment trends, growth, et cetera, et cetera.
And the counterpoint was, yeah, well, look but none of
them are Florida, Texas, California, or New York, so none
of that matters. But it is true that, especially around
New England right now, the employment has been weak on.
(32:43):
Employment rates have been generally trending upwards, and confidence among
employers seems to be dipping. So business confidence in Massachusetts
remained negative for the seventh straight month in September. That's
the longest stretch of bloomy outlooks since twenty twenty. During
the pandemic. Business Consumer Business Confidence Index, which is compiled
(33:03):
by the Associated Industries of Massachusetts, fell another one and
a half points again to its lowest point since April
of this year. And here in Massachusetts, I think you
can kind of paint a pretty easy picture of why
that might be the case. You have a large subset
of employers in the biotech pharmaceutical research place, where funding
(33:28):
has been getting questioned. You have a pretty hefty employment
in the education sector, which has also been under pressure.
And with that concentration, I'm not immensely surprised that the
hiring market and the state of things has been weaker
here in massa Chusetts in other parts of the country.
I pointed this out also, the unemployment rate in Massachusetts
(33:49):
now sitting at I believe four point eight percent, was
right at the national average, which I think was four
point two percent back in December of this year. Average
is barely budged here mass Chusets. We've climbed nearly We've
climbed six tenths of a percent, and so I guess
my point would be, if the stories you're reading about
(34:11):
the stock market or about the labor market don't feel
all that true to folks here in New England, it's
because the economy here in New England is not holding
up nearly as strong as the rest of the country.
Speaker 4 (34:21):
Yeah, if you look at our biggest employers, hospitals, universities,
you ticked off some of these investment firms like Fidelity,
and a lot of smaller management investment managers that you've
never heard of. But there's a huge concentration of investment
managers in Boston, public market and private market. General electric
is A quick Google search just reminded me and many
(34:44):
others and you can think of idiosyncratic, know very specific
to a sector or even a entity, reasons why some
of these might be careful about hiring right now. But
keep in mind the hiring pace was absolutely frantic for
a few years. Four Yeah, so what do we have
four point eight percent on a planet right now? Maybe
(35:05):
that's just the nor. Maybe the so called natural rate
here in Massachusetts is closer to five than what we
experienced in the earlier part of this decade was a
little bit of anomally.
Speaker 5 (35:14):
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Speaker 2 (36:23):
Mark We traveled now from Massachusetts down to Providence, Rhode Island,
where the Superman Building. If you're not familiar, just google it.
Speaker 3 (36:30):
It's it's this.
Speaker 2 (36:32):
Do you know how old that building is? It's it's
quite an old building. It used to be occupied by
bank from America.
Speaker 4 (36:39):
The people natives whould know what is the Industrial Bank building?
Speaker 2 (36:42):
Yeah, the Industrial Bank Building. It kind of looks like
a building from the Superman movies. I don't know if
it was actually like part of some of those films
in the past, but nonetheless things been sitting the sin.
Speaker 3 (36:53):
Ghostbusters nineteen twenty eight. By the way, in nineteen.
Speaker 4 (36:55):
Twenty eight, it was same era as the Empire State Building.
You could tell this by looking at it.
Speaker 3 (36:59):
It's a cool looking building. I mean, I just you know.
Speaker 2 (37:01):
Setting aside here, it's part of the Providence Sky Alliance
twenty six story tower empty now for the last twelve years.
The owner of the building, or one of the building's owners,
David Sweetzer, had cobbled together a three hundred and eight
million dollar financing package for a conversion project to maybe
convert at least some of this into high end condos.
(37:25):
Bad news, he died, so that deal is now in question,
and we might go a fair bit longer with this
building being unoccupied. I was actually down in Providence over
the weekend. Lovely little trip, but clearly not the only
city in the country having trouble attracting big, big tenants
to large, older buildings.
Speaker 3 (37:47):
And this is just a story that has stabilized but.
Speaker 2 (37:51):
Might continue to have big issues like this one where
they cannot attract their right town.
Speaker 4 (37:56):
It's too big to preserve. Maybe it's got some If
you call that art deco that a period, I think
you would. It's gorgeous, but it's too expensive to preserve
and maybe to convert. You'd hate to think they'd have
to demolish it.
Speaker 3 (38:10):
But markets are slightly down for the day.
Speaker 2 (38:13):
We'll have a full market and recap and more for
it in the next hour the Financial Exchange.
Speaker 3 (38:17):
Stay tuned, folks,
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