June 20, 2024 • 38 mins
Chuck Zodda and Marc Fandetti discuss how Nvidia rose to be the most valuable publically traded company, and if their rise means we are in a bubble. The Bank of England declines to cut rates despite easing inflation. Boeing's CEO apologizes to MAX crash families and claims companies culture is far from perfect. Has the recent rally in treasuries erased losses from earlier this year? The US debt is on pace to surpass $56T in the next ten years.
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DAV five K Boston is presented byVeterans Development Corporation PACE is the Financial Exchange
with Chuck Zada and Mark Fandetti.Chuck and Mark here with you and some
big news from Tuesday with markets closedyesterday, in Vidia taking the mantle of
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the most valuable listed company in theworld. And does this mean anything,
Mark, that's my question to you. It almost certainly does. Does it?
Is it significant for the long term? I don't know. It's it's
it's intertwined with the AI story.When we talk about that and and what
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that story is, I think wehave to kind of unpack that a little
bit, because you know, oneof the one of the things that bothers
me about markets is when people youknow consistently say, well, the price
doesn't match the fundamentals, and itkind of misunderstands a couple things. The
first is, fundamentals are a storyjust like anything else. It's a story
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told of specific numbers. But it'shey, this is the story that I
have that supports the stock. It'sthat quote. The fundamentals are good.
Other stories can support stocks as wellor tear them down. Ultimately, why
we make buying and selling decisions isnot just because you know there's a number
three or four there. It's becauseof the story that we tell ourselves.
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It's fear and greed, you know, personified into you know, some kind
of story. The story about AIif you are buying it as a long
term investment, not just something that'shyped today, is Hey, this is
going to fundamentally reshape how we live, and companies will be willing to spend
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billions of dollars building this because itwill still be cheaper than paying for employees
to do so more work in thefuture. Is that a fair take on
it. I think that's one aspectof any framework you apply to evaluate whether
or not this and videos ascent iscrazy or grounded in something. Well,
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it's almost certainly grounded in something real. Their sales growth has been spectacular.
The profit growth is like, it'snot just unprofitable tech either, Like they're
highly profitable selling this stuff. Willat some point their customers, the cloud
computing companies that are in turn sellingthis capacity to companies who they hope will
adopt AI based software, will theyfind that there's a market for whatever it
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is there so they have to turnthis into something right, Yeah, that
that companies that us and you listeningwant to actually buy. So the Rubber's
got to meet the road and videosales absolutely for real. Their growth spectacular,
But what if this all just seizesup because their customers can't in turn
sell this nebulous thing we're calling thepromise of AI to in turn their customers.
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That's that's how I don't know ifI explain that well, but that's
how I see it. I've notyet seen i'mlike with the Internet, Chuck,
where the results were tangible and almostimmediate. We lived it. It
did change the way we worked andplayed and shopped, and it was a
blip in the productivity and growth statistics. Can AI really do that much more
than the Internet, or, forthat matter, than like the light bulb,
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which was also I hate to Idon't mean to diminish it, but
it was kind of a blip inthe broad sweep of the trend of GDP
growth. The light bulb, yeah, you can't like you can pick it
out, or even all the biginnovations, they just kind of blend into
the trend. Now they become partof the trend. I'm oversimplifying totally,
but is this going to be morerevolutionary and impactful then all the big revolutions
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in tech logical revolutions and say recenthistory Jerry's I'm not saying it won't be.
I'm just saying it's hard to take. Got to be. When you're
managing other people's money like we dohere, you have to be skeptical.
And the other piece just on thiswhen we talk about think about why a
company says, hey, I'm goingto do this. Let's say that they
are paying an employee all in youknow, including health insurance and this,
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and that they're paying them eighty thousanddollars to do whatever job it is.
I'll use the job of technical writerjust because it seems like something that AI
probably could do right. Right example, take you know, a complicated technological
system and write how it works sothat average users can can can use it.
That would be seem to be somethingthat generative AI should be able to
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handle. There now, So thequestion is, let's say that I am
Company X and I'm trying to replacethat technical writer. There are a few
different costs then that I have tofigure out. First, am I going
to build the AI system myself?If I am, then I need to
figure out how much it's going tocost to buy all of the process.
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I need to figure out how muchit's going to cost me to build the
data center that operates the processors thatholds them. I got to figure out,
Hey, what's my electrical cost goingto be to do all this?
Because these things are just huge powersucks. And if everyone starts doing this,
what happens if electricity costs start goingup. We'll give you an example.
Texas, which is attracting data centersleft and right, just upped its
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projections for end of decade power usagein the last year by about twenty five
percent because they said, these datacenters are just chewing up massive amounts of
power and they need to figure outhow to produce enough in order to fulfill
it. So that's something. Soyou figure out all these different things and
then you say, Okay, ifwe amortize this across all the projects that
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we have in you know, tenfifteen years, will it be cheaper on
average than hiring employees? Maybe?I, like, I don't know.
I'm not running these numbers myself becauseI'm not trying to replace a bunch of
employees with this stuff right now.If guys, so, when we talk
about the large scale use of AI, those are the numbers that are going
to be crunched by accounting departments atmajor corporations. I can tell you from
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my personal use of AI, whichis probably like three to four times a
week, it's for assisting me withwriting stuff. But I'm happy to pay
Microsoft, you know, twenty dollarsa month or whatever it is in order
to do that. But it's it'snot something where I would look at it
and be, hey, am Iwilling to pay Microsoft, you know,
forty thousand dollars a year to replacean employee that I'd have to pay sixty
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or seventy. No, I'm notlike that. That doesn't make sense given
how I use it, And soI think you have to to really figure
out, Hey, what is theoverall demand going to be for this,
and is it going to be ableto do more than just write technical manuals
and things like that, because that'swhat the promise of this has has to
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get to. It can't just begenerate me you know a list of ten
things that are important about X orz. It's got to be more than
that. Otherwise we're just talking aboutsomething where hey, yeah, it's it's
nice to pay twenty bucks a monthfor but I'm not gonna, you know,
justify replacing a sixty thousand dollars yearemployee with a forty thousand dollars a
year one. If that's all itdoes, McDonald's can't even get it to
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the point where it can replace aneighteen dollars an hour now dry through attendant.
And the other piece on this isand this is something that's gone through
my head quite a bit on youknow, and trying to make sense of
this. Hey, what if thisis just a Capex cycle for businesses And
we've seen that, you know,in videos being priced as if, Hey,
this is gonna be something that businessesdo every year because they have to
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invest in AI every year and theyhave to continue doing that. What if
it's just a Capex cycle that isgoing to end at some point, you
know, just as all Capex cyclesdo, and that's all it is.
See worse, what if it's nota cycle. What if Amazon and these
other cloud computing providers get their datacenters up to the point where they could
support a software on the part ofall their customers, and then nobody comes
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or people do what McDonald's did.McDonald's was presumably paying a data center for
the space to do what the littleexperiment they rolled down. They're no longer
paying the data center for that space. They shut that a I'll call it
an AI bot, it's a programor something. They shut that down.
So what happens if as companies tryand fail, Maybe some succeed. But
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I keep using McDonald's as an examplebecause it's very accessible and it's it's an
obvious use. They were just tryingto take away. They just want to
take orders from human beings who speakEnglish. It couldn't even do that.
So there'll be successes in failures.But the industries expanding data centers are as
I understand it, under the presumptionthat everybody's going to be using this every
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day for every conceivable task. Arewe going to have a big overcapacity?
Said more succinctly, is there gonnabe a big over capacity of these chips
at some point? And video sittingaround they wiling its thumb. That's a
good point. It is the natureof that. There always is in the
semiconductive business. And this is theother piece that I come back to on
I keep saying the other piece becausethere's there's a lot of pieces, man,
that are questionable, not about Nvidiaas a company, but about the
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long term thesis that it can keepgrowing at three percent a day forever,
because that's basically what it's what it'sdoing right now is like the stock price
is kind of consistently going up likethree percent a day for the last few
months. Like that's not gonna can'tgo on forever. In the two thousands,
and this piece from the Wall StreetJournal mentions this, Cisco at one
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point became the most valuable company inthe world. And Cisco, if you
if you know anything about them,like they sell really boring technology now they
sell routers and telecom equipment and stufflike that was very hyped back then.
And the idea that that was soldthat makes you sound really smart as an
investor, is the idea of,hey, if there's a if there's a
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gold rush going on, you know, don't buy stocking the gold companies by
the people who sell the miners thepicks and shovels. Like that makes you
sound smart when you say, likeyou buy the picks and shovels company.
Well, the problem with picks andshovels companies in the tech space is that
the margins go to low single digitswhen it's all said and done, because
everyone gets into making this stuff.It's why you know, in the nineteen
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nineties, everyone in their freaking grandmawas starting a PC startup. It was
Gateway, it was Dell, itwas I can't even remember all the different
ones that were out there. Therewere like fifteen or twenty PC manufacturers.
There's three now, because selling thehardware in a commoditized space doesn't usually work
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out very well. And look,there's probably people way smarter than me that
can tell me, hey, here'swhy video is not going to be able
to be caught by this company andthat one. But in the tech space,
you always end up getting caught,especially on the hardware side. Someone
always catches you. It's not likein video has always been this giant in
the last year and a half.It's not to diminish what they've done,
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but it's more to say, hey, understand how this could go wrong because
this has all happened before. It'skind of what I'm getting at. Yeah,
we just don't know enough about thepotential for Even if AI's potential is
mostly realized, it's hard to believethis is the point you were just making
that and video will be the onlycompany. They're the only one that the
company to capital we're going to cometo the United States of Invidia, is
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what are we going to do here? Apple and Microsoft and others working on
knockoff products? Of course simplifying,No, of course they are. You
know why, because in Vidia's marginsare fifty percent and Microsoft doesn't like seeming
fifty percent of its dollars just goingto profit. They say, no,
let's see if we can build thisin house. And by the way,
they don't even have to build itin house because in Nvidia doesn't build it
in house. This is one ofthe most commonly misunderstood things about in video.
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They don't make their own chips.Taiwan Semiconductor does, and Vidia has
no manufacturing facilities none. So here'sthe other piece. What happens if time
on Semi says, hey, youknow what, we're getting lots of orders
for jacking the cost up on youby fifty percent. We want some of
that margin. Where are you goingto go? Who else is going to
build these for you? With theonly game in town. Let's take a
(13:13):
quick break here. When we comeback, we'll talk about the Bank of
England and why they decided not tocut interest rates. Today, the Financial
Exchange is now available on your Alexissmart speaker has to play the Financial Exchange
and catch up on anything you mighthave missed. This is the Financial Exchange
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Development Corporation. Bank of England decidingnot to cut interest rates at its June
meeting here, bucking the trend ofwhat we've seen from other European central banks
and I think one paragraph from thisWall Street journal piece really sums it up.
Quote. Much of the decline inUK inflation in recent months has been
due to fallowing energy and food prices. The BOE warriors that since those falls
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are unlikely to continue, rapidly,rising prices for services will push the rate
of inflation back above its target inthe second half of this year, and
that revival may be long lasting ifwages continue to increase rapidly. Your thoughts
Mark, They're struggling with this,the same factors trying to pierce the veil
of the noise and the fog thatthese special factors create, food, energy
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shocks from other sectors. Sometimes researchersjust call these things supply shocks. They
group them all together, but themost common example would be oil price shock
or food Probably it's hard to differentiatewhether it's that that's driving inflation or disinflation
versus too much demand in the economy. And I'll throw elevated inflation expectations into
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the mix too, and researchers havefound it productive to think about the process
of inflation as some combination of thosefactors, Like we talk about a lot
and the Bank of England and theECB, the European Central Bank, the
equivalent of our federal Reserve. They'reall struggling with the question of has the
disinflation they've experienced a miraculous disinflation aswe have over the last eighteen twenty four
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months. Is that just due tospecial factors lucky shocks, energy prices coming
down, other prices moderate services isa little bit elevated, Shelters a little
bit elevated here in the US,but other things have moderated. Are those
kind of one offs? Or isthe economy actually running at a sustainable pace?
I like to liken it. Idon't know if this is productive to
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somebody trying to figure out what's theright number of calories for me per day.
I'm older now, so I likeor a middle aged anyway, so
I calorie count. I think abouttwo thousand is right for me given my
activity level. But sometimes I can'ttell if I'm keeping weight off because it's
summer and I'm doing more in theyard, or if I've actually hit the
right caloric bogie, so to speak. So I'm looking for the natural rate
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of calorie intake for myself. TheFEDS looking for the natural rate of interest
for the economy. And the onlyway to know that is kind of after
the fact. Is the economy puttingon weight? I EU is inflation too?
Am I going up with belt size? Or am I going down?
One? You know? Is there? Yeah? When I click the seat
belt in the car, is theresomething bulging over into my lap or my
feeling fit and trim? The onlyway to really know is after the fact
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whether or not you've calibrated that correctly. And that's what the FED, the
BOE, the Bank of England andEuropean Central Bank and central banks around the
world really you're struggling with right now, finding that magical natural rate which you
never actually hit, but you striveto a tank. And on the political
side, in England, remember theyalso have a rather humorous July fourth elections
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that's coming up. I don't knowhow. I quite honestly, I don't
know how you can call an electionfor July fourth in England. Isn't that
just kind of compounding the problem?Are they still sore? I don't think
so. They're not. But it'salso an election that the Prime Minister's party
versus Schuna Act. They're expected tolose in fairly convincing fashion. So isn't
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it just kind of like it?I mean again, the jokes that I've
seen on Twitter are basically like,hey, like, at least this will
only be the second worst defeat theBritish sufferer on July fourth, Like,
it's neither of you really think thisis funny, huh to the British.
Really you don't think it's funny thatthe prime minister who's about to get smoked
in the election calls a snap electionfor the day that the United States declared
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independence from Britain. No, oh, well I do. I just think
it was convenient. I mean,he doesn't have to do it that day.
You would pick any of the otherthree hundred and sixty four days on
the calendar. Yeah, you wantedthat one. It was convenient. I
mean I don't know, like itjust seems like kind of a bad,
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bad day to do it. Butthat's just me. I'm trying to think
of like the comparison in the USand what it would be here. Well,
there's nothing that's really similar because anythingelse has been, anything else that
the US has really struggled with hasbeen too recent. So you have people
who would be like materially impacted byit, so you wouldn't do anything like
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anyone Anyone who died fighting in therevolution is dead now, obviously anyone who
lived during the revolution is dead.Is what I'm trying to say, is
I Dad, there are no survivorsof the American Revolution today, so you
can't offend anyone by it. Oh, Joe Biden close, but no cigar
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like it's I guess what I'm gettingat is you would just think that maybe
you'd call it for like I don'tknow the sixth, the seventh, any
day, but the fourth. Maybethose days have significance for the Brits that
we're not aware of it. Butit must be a reason, Chuck,
it must be good. But presumablythey look at people's calendars on English outlooks.
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They didn't look at George Washington's Let'stake a quick break. Wall Street
watches next. Like us on Facebookand follow us on Twitter at TFE show.
Breaking business news is always first righthere on the Financial Exchange Radio Network.
(19:53):
Time now for Wall Street. Watcha complete look and what's moving markets
so far today right here on theFinancial Exchange Radio Network. Well, markets
have rezuomed trading after the juneteenth holidayyesterday, and our impositive a territory is.
Wall Street reacts to a flurry ofeconomic data points this morning, including
housing starts and building permits in additionto jobless claims. Right now, the
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Dow is up by one hundred andsix points, about a quarter percent,
SMP five hundred is up nearly halfa percent, or twenty four points,
and the Nasdaq is edging thirteen pointshigher. Also two thousand also up by
only three points. Ten year treasurereeled up by six basis points, now
at four point two eight percent,and crude oil up over three quarters of
(20:38):
a percent, trading at eighty twodollars and twenty four cents a barrel.
Darden Restaurants reported mixed quarterly results aheadof the open this morning, beating on
errings yet narrowly missing on revenue forecasts. The parent company to Olive Garden many
other popular restaurants also saw its samestore sales declined for a second straight quarter.
Darden is also into diicipating that itssame store sales will grow only one
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to two percent for fiscal twenty twentyfive. However, shares are up by
one percent today. Meanwhile, aftersurpassing Microsoft, to become the most valuable
company in the world, and thenVideo stock is up another two percent today.
So far in twenty twenty four,and Video stock has surged one hundred
and seventy four percent. Elsewhere,Accentri stock is jumping by six percent.
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Despite the information technology company missing earningsand revenue expectations for its latest quarter.
However, the firm did post morethan nine hundred million dollars in new generative
AI bookings. In a post onx Elon, Musk said Dell Technologies and
super micro Computer will be building asupercomputer for XAI, the AI company Musk
(21:48):
launched back in twenty twenty three.Dell up by over one and a half
percent, while SMC shares are upby seven percent and kb home beat on
top and bottom lines for its quarter, the results sending badstock up by four
percent. I'm Tucker Silvan, that'sWall Street watch. Boeing CEO David Calhoun
was in front of Congress facing morethan two hours of questioning from a Senate
(22:14):
subcommittee that is looking into problems atBoeing. And this is actually the first
time that Calhoun has been questioned inpublic since the Alaska Airlines door plug blew
out in January, and I justwant to read a couple of quotes.
There were a bunch of relatives ofthe people who were killed in the twenty
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eighteen and nineteen crashes that killed overthree hundred and forty six people, and
Calhoun turned and facemo said, Iapologize for the grief that we have caused.
One of the people whose daughters diedin one of those crashes said,
look, where's the accountability when theCEO's of Boeing, management of Boeing and
walking away free with millions. Wewant to answer transparency and accountability and wanted
them to be in jail. Wehaven't really gotten those things. And also
(23:02):
Calhoun kind of needed to be defensivein a couple of areas where hey,
Boeing provided a bunch of stuff tothis Senate subcommittee before the hearing, and
you know, one senator was saying, look, this is basically gobbledygook,
and Calhoun said, yeah, Idescribe it just as you did, and
I can't justify it. This alsocomes on the back of another Boeing whistleblower
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coming forward on Monday, saying thatthe company mishandled faulty airplane parts and that
some of those bad parts were laterinstalled in airplanes, and saying that he
was told by his supervisors to concealevidence of the mishandled parts from federal regulators.
So, look, something continues tostink here at Boeing. And this
is bothersome to me, because Mark, we talk an awful lot that.
(23:47):
Look, whenever you're doing anything,just especially anything complicated, something at some
point is going to go wrong.Like that's the very nature of building large
complicated machinery. What Boeing has prideditself on historically is not that nothing ever
went wrong, but that they builtin, you know, redundant systems and
backups such that when the things didgo wrong, you didn't really have any
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debts. One of the greatest thingsthat you can say about aviation in the
United States is that basically in thelast twenty five years, there's been one
accident that has a resulted actually sorry, two accidents that have resulted in fatalities
in commercial airliners. There literally isno safer place that you can be on
Earth than in a commercial airliner inthe United States. On the ground,
(24:33):
looking at it, not true.Now you are literally safer in the air
than you are on the ground.In the ground, that is an absurd
statement. Let's talk about it.Talk about it. You are. I
can get hit by a car onthe ground. I can get hit by
falling hail, And this is allkinds of stuff can happen to me on
the ground. What can happen toyou in the air in a commercial aircraft?
(24:57):
What is your Yeah? I hearthat statistic, and people often use
similar logic abuse statistics. I thinkto suggest that swimming in the ocean is
you're as likely to get bit bya shark. I don't know. Standing
around in a waiting pool is swimmingin the ocean? Well, no,
(25:21):
you're more likely in the ocean.Yeah. I couldn't think of the right
analogy off the top of my head. But it's if I am not in
a high risk situation, if thehazard is totally absent, then the risk
is zero. It can't be riskierfor me to be sitting here than it
would be for me to be onan airplane. There's no risk but mortality.
(25:41):
How do you know that? Whatif there's an earthquake, what if
there's you know, what if someoneplowed again? You can be at a
shopping mall, and someone plows intoan apple store like they did a legacy
place and you thought you were completelysafe. Derby Street was that where it
was Yes, sorry, I getall those big yeah, short, Yeah.
(26:03):
That stuff can't happen in the air, like, yes, you can
have a bird strike on a planethat you know takes out an engine.
But the point that I'm making islike the redundant systems exist in aviation that
don't exist on the ground quite honestly, Like you don't have a lot of
those anyway. It's extraneous to thepoint, which is Boeing has kind of
gotten to the point where we can'tjust reasonably say, oh, something went
(26:27):
wrong, and these things happen.It's now looking like very much as if
there is a cultural problem that isignoring problems before they happen rather than trying
to proactively solve them so that whenthey do happen, they're not devastating.
That's where it seems to have gone. Seems pretty rotten, you know,
(26:48):
it feels ugly there, and it'snot unique to Boeing, by the way,
you see this in other businesses andall kinds of industries. Wells Fargo
for the last decade in a dumpsterfire in terms of corporate governance, you
know, basically went from one scandalto the next in terms of they had
the you know, obviously all theproblems with the financial crisis. Then they
(27:08):
had the account the account opening scandal, where they were opening accounts for people
in order to hit their bonuses withoutthe people's consent. I mean, the
thing is there, Okay, theworst thing that happens, you still can
be bad, which is your credit'sroomed and you can't buy a home,
but you don't die from that.When you're building airplanes and you don't take
(27:29):
care to build your airplanes correctly,people die. And that's what happened.
And the issue that we've talked aboutwith Boeing that we keep coming back to
is, Look, they're so bigand there's so little competition in the space
that it's tough for the United Statesto really come down on them in any
meaningful fashion because they play such acritical role in building you know, national
defense projects and things like that.So it's kind of like, what do
(27:51):
you do? And I don't haveany good answers, but it's probably not
this, Yeah, are things thatmuch better at Airbus? Are looking harder
here, Well, Airbus didn't havetwo planes crash that killed you know.
Again, ultimately, you're judged onyour results as an airplane maker, and
it's not that you it's not thatnothing goes wrong. It's that nothing goes
(28:12):
wrong and kills people because things alwaysgo wrong when you're flying planes. Talk
to any of your friends who werepilots. Hey, I flew this leg.
There's a warning light on this.We got to check this out for
maintenance. But it's like, that'swhat you want to happen when things go
wrong. Hey, guess what.We had a bird strike, we blew
out an engine. We returned tothe air you know, the airfield safely.
(28:33):
That stuff happens that like that.That's that's how you know the system
is working right, is when thingsgo wrong and you return safely, not
when Hey, the only thing thatsaved anyone from dying in this case was
that the seat right next to thedoor plug was empty. That's that's lucky,
not you know planned. Let's takea quick break here. When we
(28:53):
come back, we'll talk about therecent rally in US treasuries and what it
means for that much market going forward. Miss any of the show The Financial
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(29:14):
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You're listening to the Financial Exchange RadioNetwork. Peace today in Bloomberg stating
(29:42):
that treasuries are a whisker away fromerasing this year's losses. Your thoughts mark
on what we've seen in US treasurymarkets, tremendous rally of late on the
long end and elsewhere on the socalled treasury. You'll curve that relationship between
termed and maturity and interest We sayinterest rates on the show a lot or
(30:02):
just the interest rate, but thereare lots of them, as you know
from experience, so longer term interestrates and all to shoes the ten year
as a proxy for that. Itstarted the year at well like three point
nine to five percent. I'm notlooking right at it, but roughly that
if you just looked at the beginningof the year and now it looks like
rates have gone up by a lot, but relative to only a few weeks
ago, they've come down pretty rapidly. A part of that is due to
(30:26):
declining inflation expectations, but not much. The bulk of that is due to
declining so called real interest rates.Real interest rates are just after inflation.
Interest rates and real interest rates arewhat you care about because they reflect demand
for investment, sure, and they'reassociated with economic activity. So it's nice
(30:48):
when interest rates come down. Itmakes bearing dead easier, but it may
not be a good sign. Youknow, low interest rates are typically a
sign of feeble demand for investment.Low growth rates were very low in the
twenty tens. They were a notoriouslylow growth decade, So it's one of
those somewhat double edged But you'd ratherhave higher interest rates and robust growth i
(31:12):
e. A job and good wagegrowth and good wage growth prospects, then
say low interest rates and uncertain wagegrowth prospects. And I think this also
just speaks to the fact that,you know, the first three four months
of the year, a lot ofinvestors kind of bemoaning, oh geez,
these these these treasuries are just youknow, they're not doing anything. I'm
(31:33):
losing money on these. Why doI own these? And the answer is
Look, you don't own treasuries becausethey make you a ton of money in
a rapidly growing economy. Is theQ one data. You know, as
we saw you know this acceleration inQ four and then into the first part
of Q one. You own treasuriesbecause, hey, when it hits the
fan, and inevitably it sometimes does, they provide you ballast, typically to
(31:56):
other things in your portfolio. Soit's kind of this the idea of diversification,
I think sometimes gets sold the wrongway. Where it gets sold is
hey, this is how you makemore money, whereas really it's no,
this is how you build a morestable path so that, regardless of what's
happening in the economy, you're youknow, moving in a more stable trend
line towards your overall end goal.As opposed to, no, this is
(32:19):
how you make the most money inany one year. Like, that's not
what diversification does. Yeah, treasuriesare, like you said, ballast or
insurance. Insurance stinks because it's justa drag. We'd all love to drop
it, sure, but you doso at your peril. Yes, obviously
for the same reason, particularly ifyou're older, if you're a very young
investor, you could argue for onehundred percent equity son episode stock portfolio,
(32:42):
maybe even through your thirties and forties, depending on your risk time. I
get absolutely you're in your time frame, but if you're older, you need
some of that. As you calledit, ballast, which is a perfect
way I think to think about theinsurance that bonds represent. It's not fun,
but you'll be glad you own itduring the inevitable market downturn. Revocable
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Cushing and Armstrong did not endorse eachother and are not affiliated. Mark this
(34:12):
piece of the New York Times.Here us dead on pace top fifty six
trillion dollars over the next ten years. Do you want to take the over
under on that? Oh? Howcould anybody take anything but the over?
You gotta pound the over on that? Right? Is the under ever paid
off? No? Because here's thething. The Congressional Budget Office, they
put this out on Tuesday. Theydo these, is it a few times
(34:35):
a year? I don't know howoften they put least rejections at least a
couple So they published these again atleast a couple times a year. And
here's the thing about the CBO,projections. Number one, they never predict
any recession happening. That's not whatthe CBO does. They do not predict
recession. And in recession, youalways run higher deficits than you previously projected.
So that's the first reason why youalways take the over second piece.
(34:59):
Mark when is the last time thatyou think politicians actually cared about the US
deficit? In the nineties, wetook it seriously. We had two presidents
in a row who enacted tax increasesto close the gap between revenues and expenditures.
George H. W. Bush didprobably cost him in part the election
(35:20):
because it eroded his support with thebase because he famously said, read my
lips, no new taxes you caneven make Look even Reagan when he was
there, that was the last timewe reformed social Security and those were tax
increases as well. Yeah during thattime. People forget that Reagan raised taxes
actually through raising Social Security taxes.Yeah, we did that in eighty three.
And then we had tax reform activeeighty six, which I forget.
(35:42):
It did not raise marginal rates,but it closed loopholes, which is the
same thing. So yeah, theseguys were these these guys were not dogmatic.
Reagan is obviously the iconic conservative,but he was pragmatic, right,
he said, look, I gotto deal with this, and I think
part of it was his first priority. But no, I think all of
it came from the fact that theyall lived like in adulthood through the seventies
(36:02):
and we're kind of like, hey, like, no, we're not gonna
make those same mistakes again. Butthinking on debt, deficits and debt has
changed a little bit in the pastfew decades because of experience. The sky
didn't fall. We've run up,but the debt at the end of Clinton's
term was couldn't have been much morethan two trillion, just off the top
of my head. I'm sorry ifI'm getting that somewhat wrong. I'm not
(36:24):
wrong by an order of magnitude.Tho, it's pretty close. We're now
at what thirty So the run uphas been astronomical, beyond what anybody could
have conceived. We were running surplusesin the deficit. The deficit was positive,
that is, or we're running asurplus at the end of Clinton's term,
and now we're running two trillion dollarsdeficits. It's the norm. Interest
(36:45):
rates are lower. How is thatpossible, Well, there are a few
different explanations. Predominant among them increasein world savings. So the sky has
not fallen despite the explosion in debtand deficits. That's one reason why we
why neither of the presume nominees ofeither major political party are talking about the
deficit. No, And look,you can find pieces going back the last
(37:07):
one hundred years pretty much on whythe US deficit is going to cause financial
ruin for the US, and it'sjust it's never come to fruition. That
doesn't mean it never will, butit hasn't in a time when anyone on
the planet has been alive. Andso I think that ultimately, when you
look at this, the part thatis problematic to me is, look,
(37:28):
when you look at the deficits thatwe're running now, it's projected to be
I think like six point four percentof GDP this year now, up from
five point seven originally predicted. Hey, if you're running those deficits with unemployment
at four percent, what's it looklike when unemployment inevitably hits six seven eight
percent in a recession, It's notgoing to be lower. And that's when
it becomes you know, potentially problematichere. But look the counter that that
(37:52):
I will say on all this is, Hey, people have been predicting deficit
doom for a long time in theUS. They'll be right at some point.
At some point, it'll put thepressure on interest. There'll be nothing
we can do about it. We'llhave to cut spending dramatically and make big
sacrifices. Until then we won't.But investing as if the US deficit is
going to cause iminent problems has beena horrible way to go about it for
the last several generations. It isnot a good timing tool. Let's take
(38:15):
a quick break here when we comeback hour two, including Hey, it's
hot out there. I'm just gonnacost to stay cool.
The Financial Exchanges produced by Money MattersRadio and is hosted by employees of the
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DAV five K Boston is presented byVeterans Development Corporation PACE is the Financial Exchange
with Chuck Zada and Mark Fandetti.Chuck and Mark here with you and some
big news from Tuesday with markets closedyesterday, in Vidia taking the mantle of
(01:23):
the most valuable listed company in theworld. And does this mean anything,
Mark, that's my question to you. It almost certainly does. Does it?
Is it significant for the long term? I don't know. It's it's
it's intertwined with the AI story.When we talk about that and and what
(01:47):
that story is, I think wehave to kind of unpack that a little
bit, because you know, oneof the one of the things that bothers
me about markets is when people youknow consistently say, well, the price
doesn't match the fundamentals, and itkind of misunderstands a couple things. The
first is, fundamentals are a storyjust like anything else. It's a story
(02:08):
told of specific numbers. But it'shey, this is the story that I
have that supports the stock. It'sthat quote. The fundamentals are good.
Other stories can support stocks as wellor tear them down. Ultimately, why
we make buying and selling decisions isnot just because you know there's a number
three or four there. It's becauseof the story that we tell ourselves.
(02:30):
It's fear and greed, you know, personified into you know, some kind
of story. The story about AIif you are buying it as a long
term investment, not just something that'shyped today, is Hey, this is
going to fundamentally reshape how we live, and companies will be willing to spend
(02:53):
billions of dollars building this because itwill still be cheaper than paying for employees
to do so more work in thefuture. Is that a fair take on
it. I think that's one aspectof any framework you apply to evaluate whether
or not this and videos ascent iscrazy or grounded in something. Well,
(03:15):
it's almost certainly grounded in something real. Their sales growth has been spectacular.
The profit growth is like, it'snot just unprofitable tech either, Like they're
highly profitable selling this stuff. Willat some point their customers, the cloud
computing companies that are in turn sellingthis capacity to companies who they hope will
adopt AI based software, will theyfind that there's a market for whatever it
(03:42):
is there so they have to turnthis into something right, Yeah, that
that companies that us and you listeningwant to actually buy. So the Rubber's
got to meet the road and videosales absolutely for real. Their growth spectacular,
But what if this all just seizesup because their customers can't in turn
sell this nebulous thing we're calling thepromise of AI to in turn their customers.
(04:10):
That's that's how I don't know ifI explain that well, but that's
how I see it. I've notyet seen i'mlike with the Internet, Chuck,
where the results were tangible and almostimmediate. We lived it. It
did change the way we worked andplayed and shopped, and it was a
blip in the productivity and growth statistics. Can AI really do that much more
than the Internet, or, forthat matter, than like the light bulb,
(04:32):
which was also I hate to Idon't mean to diminish it, but
it was kind of a blip inthe broad sweep of the trend of GDP
growth. The light bulb, yeah, you can't like you can pick it
out, or even all the biginnovations, they just kind of blend into
the trend. Now they become partof the trend. I'm oversimplifying totally,
but is this going to be morerevolutionary and impactful then all the big revolutions
(04:59):
in tech logical revolutions and say recenthistory Jerry's I'm not saying it won't be.
I'm just saying it's hard to take. Got to be. When you're
managing other people's money like we dohere, you have to be skeptical.
And the other piece just on thiswhen we talk about think about why a
company says, hey, I'm goingto do this. Let's say that they
are paying an employee all in youknow, including health insurance and this,
(05:19):
and that they're paying them eighty thousanddollars to do whatever job it is.
I'll use the job of technical writerjust because it seems like something that AI
probably could do right. Right example, take you know, a complicated technological
system and write how it works sothat average users can can can use it.
That would be seem to be somethingthat generative AI should be able to
(05:40):
handle. There now, So thequestion is, let's say that I am
Company X and I'm trying to replacethat technical writer. There are a few
different costs then that I have tofigure out. First, am I going
to build the AI system myself?If I am, then I need to
figure out how much it's going tocost to buy all of the process.
(06:00):
I need to figure out how muchit's going to cost me to build the
data center that operates the processors thatholds them. I got to figure out,
Hey, what's my electrical cost goingto be to do all this?
Because these things are just huge powersucks. And if everyone starts doing this,
what happens if electricity costs start goingup. We'll give you an example.
Texas, which is attracting data centersleft and right, just upped its
(06:23):
projections for end of decade power usagein the last year by about twenty five
percent because they said, these datacenters are just chewing up massive amounts of
power and they need to figure outhow to produce enough in order to fulfill
it. So that's something. Soyou figure out all these different things and
then you say, Okay, ifwe amortize this across all the projects that
(06:45):
we have in you know, tenfifteen years, will it be cheaper on
average than hiring employees? Maybe?I, like, I don't know.
I'm not running these numbers myself becauseI'm not trying to replace a bunch of
employees with this stuff right now.If guys, so, when we talk
about the large scale use of AI, those are the numbers that are going
to be crunched by accounting departments atmajor corporations. I can tell you from
(07:09):
my personal use of AI, whichis probably like three to four times a
week, it's for assisting me withwriting stuff. But I'm happy to pay
Microsoft, you know, twenty dollarsa month or whatever it is in order
to do that. But it's it'snot something where I would look at it
and be, hey, am Iwilling to pay Microsoft, you know,
forty thousand dollars a year to replacean employee that I'd have to pay sixty
(07:32):
or seventy. No, I'm notlike that. That doesn't make sense given
how I use it, And soI think you have to to really figure
out, Hey, what is theoverall demand going to be for this,
and is it going to be ableto do more than just write technical manuals
and things like that, because that'swhat the promise of this has has to
(07:54):
get to. It can't just begenerate me you know a list of ten
things that are important about X orz. It's got to be more than
that. Otherwise we're just talking aboutsomething where hey, yeah, it's it's
nice to pay twenty bucks a monthfor but I'm not gonna, you know,
justify replacing a sixty thousand dollars yearemployee with a forty thousand dollars a
year one. If that's all itdoes, McDonald's can't even get it to
(08:18):
the point where it can replace aneighteen dollars an hour now dry through attendant.
And the other piece on this isand this is something that's gone through
my head quite a bit on youknow, and trying to make sense of
this. Hey, what if thisis just a Capex cycle for businesses And
we've seen that, you know,in videos being priced as if, Hey,
this is gonna be something that businessesdo every year because they have to
(08:39):
invest in AI every year and theyhave to continue doing that. What if
it's just a Capex cycle that isgoing to end at some point, you
know, just as all Capex cyclesdo, and that's all it is.
See worse, what if it's nota cycle. What if Amazon and these
other cloud computing providers get their datacenters up to the point where they could
support a software on the part ofall their customers, and then nobody comes
(09:03):
or people do what McDonald's did.McDonald's was presumably paying a data center for
the space to do what the littleexperiment they rolled down. They're no longer
paying the data center for that space. They shut that a I'll call it
an AI bot, it's a programor something. They shut that down.
So what happens if as companies tryand fail, Maybe some succeed. But
(09:24):
I keep using McDonald's as an examplebecause it's very accessible and it's it's an
obvious use. They were just tryingto take away. They just want to
take orders from human beings who speakEnglish. It couldn't even do that.
So there'll be successes in failures.But the industries expanding data centers are as
I understand it, under the presumptionthat everybody's going to be using this every
(09:46):
day for every conceivable task. Arewe going to have a big overcapacity?
Said more succinctly, is there gonnabe a big over capacity of these chips
at some point? And video sittingaround they wiling its thumb. That's a
good point. It is the natureof that. There always is in the
semiconductive business. And this is theother piece that I come back to on
I keep saying the other piece becausethere's there's a lot of pieces, man,
that are questionable, not about Nvidiaas a company, but about the
(10:07):
long term thesis that it can keepgrowing at three percent a day forever,
because that's basically what it's what it'sdoing right now is like the stock price
is kind of consistently going up likethree percent a day for the last few
months. Like that's not gonna can'tgo on forever. In the two thousands,
and this piece from the Wall StreetJournal mentions this, Cisco at one
(10:30):
point became the most valuable company inthe world. And Cisco, if you
if you know anything about them,like they sell really boring technology now they
sell routers and telecom equipment and stufflike that was very hyped back then.
And the idea that that was soldthat makes you sound really smart as an
investor, is the idea of,hey, if there's a if there's a
(10:54):
gold rush going on, you know, don't buy stocking the gold companies by
the people who sell the miners thepicks and shovels. Like that makes you
sound smart when you say, likeyou buy the picks and shovels company.
Well, the problem with picks andshovels companies in the tech space is that
the margins go to low single digitswhen it's all said and done, because
everyone gets into making this stuff.It's why you know, in the nineteen
(11:18):
nineties, everyone in their freaking grandmawas starting a PC startup. It was
Gateway, it was Dell, itwas I can't even remember all the different
ones that were out there. Therewere like fifteen or twenty PC manufacturers.
There's three now, because selling thehardware in a commoditized space doesn't usually work
(11:41):
out very well. And look,there's probably people way smarter than me that
can tell me, hey, here'swhy video is not going to be able
to be caught by this company andthat one. But in the tech space,
you always end up getting caught,especially on the hardware side. Someone
always catches you. It's not likein video has always been this giant in
the last year and a half.It's not to diminish what they've done,
(12:03):
but it's more to say, hey, understand how this could go wrong because
this has all happened before. It'skind of what I'm getting at. Yeah,
we just don't know enough about thepotential for Even if AI's potential is
mostly realized, it's hard to believethis is the point you were just making
that and video will be the onlycompany. They're the only one that the
company to capital we're going to cometo the United States of Invidia, is
(12:26):
what are we going to do here? Apple and Microsoft and others working on
knockoff products? Of course simplifying,No, of course they are. You
know why, because in Vidia's marginsare fifty percent and Microsoft doesn't like seeming
fifty percent of its dollars just goingto profit. They say, no,
let's see if we can build thisin house. And by the way,
they don't even have to build itin house because in Nvidia doesn't build it
in house. This is one ofthe most commonly misunderstood things about in video.
(12:50):
They don't make their own chips.Taiwan Semiconductor does, and Vidia has
no manufacturing facilities none. So here'sthe other piece. What happens if time
on Semi says, hey, youknow what, we're getting lots of orders
for jacking the cost up on youby fifty percent. We want some of
that margin. Where are you goingto go? Who else is going to
build these for you? With theonly game in town. Let's take a
(13:13):
quick break here. When we comeback, we'll talk about the Bank of
England and why they decided not tocut interest rates. Today, the Financial
Exchange is now available on your Alexissmart speaker has to play the Financial Exchange
and catch up on anything you mighthave missed. This is the Financial Exchange
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(13:39):
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(14:01):
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(14:26):
Development Corporation. Bank of England decidingnot to cut interest rates at its June
meeting here, bucking the trend ofwhat we've seen from other European central banks
and I think one paragraph from thisWall Street journal piece really sums it up.
Quote. Much of the decline inUK inflation in recent months has been
due to fallowing energy and food prices. The BOE warriors that since those falls
(14:46):
are unlikely to continue, rapidly,rising prices for services will push the rate
of inflation back above its target inthe second half of this year, and
that revival may be long lasting ifwages continue to increase rapidly. Your thoughts
Mark, They're struggling with this,the same factors trying to pierce the veil
of the noise and the fog thatthese special factors create, food, energy
(15:07):
shocks from other sectors. Sometimes researchersjust call these things supply shocks. They
group them all together, but themost common example would be oil price shock
or food Probably it's hard to differentiatewhether it's that that's driving inflation or disinflation
versus too much demand in the economy. And I'll throw elevated inflation expectations into
(15:30):
the mix too, and researchers havefound it productive to think about the process
of inflation as some combination of thosefactors, Like we talk about a lot
and the Bank of England and theECB, the European Central Bank, the
equivalent of our federal Reserve. They'reall struggling with the question of has the
disinflation they've experienced a miraculous disinflation aswe have over the last eighteen twenty four
(15:52):
months. Is that just due tospecial factors lucky shocks, energy prices coming
down, other prices moderate services isa little bit elevated, Shelters a little
bit elevated here in the US,but other things have moderated. Are those
kind of one offs? Or isthe economy actually running at a sustainable pace?
I like to liken it. Idon't know if this is productive to
(16:15):
somebody trying to figure out what's theright number of calories for me per day.
I'm older now, so I likeor a middle aged anyway, so
I calorie count. I think abouttwo thousand is right for me given my
activity level. But sometimes I can'ttell if I'm keeping weight off because it's
summer and I'm doing more in theyard, or if I've actually hit the
right caloric bogie, so to speak. So I'm looking for the natural rate
(16:37):
of calorie intake for myself. TheFEDS looking for the natural rate of interest
for the economy. And the onlyway to know that is kind of after
the fact. Is the economy puttingon weight? I EU is inflation too?
Am I going up with belt size? Or am I going down?
One? You know? Is there? Yeah? When I click the seat
belt in the car, is theresomething bulging over into my lap or my
feeling fit and trim? The onlyway to really know is after the fact
(16:57):
whether or not you've calibrated that correctly. And that's what the FED, the
BOE, the Bank of England andEuropean Central Bank and central banks around the
world really you're struggling with right now, finding that magical natural rate which you
never actually hit, but you striveto a tank. And on the political
side, in England, remember theyalso have a rather humorous July fourth elections
(17:21):
that's coming up. I don't knowhow. I quite honestly, I don't
know how you can call an electionfor July fourth in England. Isn't that
just kind of compounding the problem?Are they still sore? I don't think
so. They're not. But it'salso an election that the Prime Minister's party
versus Schuna Act. They're expected tolose in fairly convincing fashion. So isn't
(17:45):
it just kind of like it?I mean again, the jokes that I've
seen on Twitter are basically like,hey, like, at least this will
only be the second worst defeat theBritish sufferer on July fourth, Like,
it's neither of you really think thisis funny, huh to the British.
Really you don't think it's funny thatthe prime minister who's about to get smoked
in the election calls a snap electionfor the day that the United States declared
(18:07):
independence from Britain. No, oh, well I do. I just think
it was convenient. I mean,he doesn't have to do it that day.
You would pick any of the otherthree hundred and sixty four days on
the calendar. Yeah, you wantedthat one. It was convenient. I
mean I don't know, like itjust seems like kind of a bad,
(18:27):
bad day to do it. Butthat's just me. I'm trying to think
of like the comparison in the USand what it would be here. Well,
there's nothing that's really similar because anythingelse has been, anything else that
the US has really struggled with hasbeen too recent. So you have people
who would be like materially impacted byit, so you wouldn't do anything like
(18:49):
anyone Anyone who died fighting in therevolution is dead now, obviously anyone who
lived during the revolution is dead.Is what I'm trying to say, is
I Dad, there are no survivorsof the American Revolution today, so you
can't offend anyone by it. Oh, Joe Biden close, but no cigar
(19:10):
like it's I guess what I'm gettingat is you would just think that maybe
you'd call it for like I don'tknow the sixth, the seventh, any
day, but the fourth. Maybethose days have significance for the Brits that
we're not aware of it. Butit must be a reason, Chuck,
it must be good. But presumablythey look at people's calendars on English outlooks.
(19:30):
They didn't look at George Washington's Let'stake a quick break. Wall Street
watches next. Like us on Facebookand follow us on Twitter at TFE show.
Breaking business news is always first righthere on the Financial Exchange Radio Network.
(19:53):
Time now for Wall Street. Watcha complete look and what's moving markets
so far today right here on theFinancial Exchange Radio Network. Well, markets
have rezuomed trading after the juneteenth holidayyesterday, and our impositive a territory is.
Wall Street reacts to a flurry ofeconomic data points this morning, including
housing starts and building permits in additionto jobless claims. Right now, the
(20:17):
Dow is up by one hundred andsix points, about a quarter percent,
SMP five hundred is up nearly halfa percent, or twenty four points,
and the Nasdaq is edging thirteen pointshigher. Also two thousand also up by
only three points. Ten year treasurereeled up by six basis points, now
at four point two eight percent,and crude oil up over three quarters of
(20:38):
a percent, trading at eighty twodollars and twenty four cents a barrel.
Darden Restaurants reported mixed quarterly results aheadof the open this morning, beating on
errings yet narrowly missing on revenue forecasts. The parent company to Olive Garden many
other popular restaurants also saw its samestore sales declined for a second straight quarter.
Darden is also into diicipating that itssame store sales will grow only one
(21:03):
to two percent for fiscal twenty twentyfive. However, shares are up by
one percent today. Meanwhile, aftersurpassing Microsoft, to become the most valuable
company in the world, and thenVideo stock is up another two percent today.
So far in twenty twenty four,and Video stock has surged one hundred
and seventy four percent. Elsewhere,Accentri stock is jumping by six percent.
(21:26):
Despite the information technology company missing earningsand revenue expectations for its latest quarter.
However, the firm did post morethan nine hundred million dollars in new generative
AI bookings. In a post onx Elon, Musk said Dell Technologies and
super micro Computer will be building asupercomputer for XAI, the AI company Musk
(21:48):
launched back in twenty twenty three.Dell up by over one and a half
percent, while SMC shares are upby seven percent and kb home beat on
top and bottom lines for its quarter, the results sending badstock up by four
percent. I'm Tucker Silvan, that'sWall Street watch. Boeing CEO David Calhoun
was in front of Congress facing morethan two hours of questioning from a Senate
(22:14):
subcommittee that is looking into problems atBoeing. And this is actually the first
time that Calhoun has been questioned inpublic since the Alaska Airlines door plug blew
out in January, and I justwant to read a couple of quotes.
There were a bunch of relatives ofthe people who were killed in the twenty
(22:37):
eighteen and nineteen crashes that killed overthree hundred and forty six people, and
Calhoun turned and facemo said, Iapologize for the grief that we have caused.
One of the people whose daughters diedin one of those crashes said,
look, where's the accountability when theCEO's of Boeing, management of Boeing and
walking away free with millions. Wewant to answer transparency and accountability and wanted
them to be in jail. Wehaven't really gotten those things. And also
(23:02):
Calhoun kind of needed to be defensivein a couple of areas where hey,
Boeing provided a bunch of stuff tothis Senate subcommittee before the hearing, and
you know, one senator was saying, look, this is basically gobbledygook,
and Calhoun said, yeah, Idescribe it just as you did, and
I can't justify it. This alsocomes on the back of another Boeing whistleblower
(23:22):
coming forward on Monday, saying thatthe company mishandled faulty airplane parts and that
some of those bad parts were laterinstalled in airplanes, and saying that he
was told by his supervisors to concealevidence of the mishandled parts from federal regulators.
So, look, something continues tostink here at Boeing. And this
is bothersome to me, because Mark, we talk an awful lot that.
(23:47):
Look, whenever you're doing anything,just especially anything complicated, something at some
point is going to go wrong.Like that's the very nature of building large
complicated machinery. What Boeing has prideditself on historically is not that nothing ever
went wrong, but that they builtin, you know, redundant systems and
backups such that when the things didgo wrong, you didn't really have any
(24:10):
debts. One of the greatest thingsthat you can say about aviation in the
United States is that basically in thelast twenty five years, there's been one
accident that has a resulted actually sorry, two accidents that have resulted in fatalities
in commercial airliners. There literally isno safer place that you can be on
Earth than in a commercial airliner inthe United States. On the ground,
(24:33):
looking at it, not true.Now you are literally safer in the air
than you are on the ground.In the ground, that is an absurd
statement. Let's talk about it.Talk about it. You are. I
can get hit by a car onthe ground. I can get hit by
falling hail, And this is allkinds of stuff can happen to me on
the ground. What can happen toyou in the air in a commercial aircraft?
(24:57):
What is your Yeah? I hearthat statistic, and people often use
similar logic abuse statistics. I thinkto suggest that swimming in the ocean is
you're as likely to get bit bya shark. I don't know. Standing
around in a waiting pool is swimmingin the ocean? Well, no,
(25:21):
you're more likely in the ocean.Yeah. I couldn't think of the right
analogy off the top of my head. But it's if I am not in
a high risk situation, if thehazard is totally absent, then the risk
is zero. It can't be riskierfor me to be sitting here than it
would be for me to be onan airplane. There's no risk but mortality.
(25:41):
How do you know that? Whatif there's an earthquake, what if
there's you know, what if someoneplowed again? You can be at a
shopping mall, and someone plows intoan apple store like they did a legacy
place and you thought you were completelysafe. Derby Street was that where it
was Yes, sorry, I getall those big yeah, short, Yeah.
(26:03):
That stuff can't happen in the air, like, yes, you can
have a bird strike on a planethat you know takes out an engine.
But the point that I'm making islike the redundant systems exist in aviation that
don't exist on the ground quite honestly, Like you don't have a lot of
those anyway. It's extraneous to thepoint, which is Boeing has kind of
gotten to the point where we can'tjust reasonably say, oh, something went
(26:27):
wrong, and these things happen.It's now looking like very much as if
there is a cultural problem that isignoring problems before they happen rather than trying
to proactively solve them so that whenthey do happen, they're not devastating.
That's where it seems to have gone. Seems pretty rotten, you know,
(26:48):
it feels ugly there, and it'snot unique to Boeing, by the way,
you see this in other businesses andall kinds of industries. Wells Fargo
for the last decade in a dumpsterfire in terms of corporate governance, you
know, basically went from one scandalto the next in terms of they had
the you know, obviously all theproblems with the financial crisis. Then they
(27:08):
had the account the account opening scandal, where they were opening accounts for people
in order to hit their bonuses withoutthe people's consent. I mean, the
thing is there, Okay, theworst thing that happens, you still can
be bad, which is your credit'sroomed and you can't buy a home,
but you don't die from that.When you're building airplanes and you don't take
(27:29):
care to build your airplanes correctly,people die. And that's what happened.
And the issue that we've talked aboutwith Boeing that we keep coming back to
is, Look, they're so bigand there's so little competition in the space
that it's tough for the United Statesto really come down on them in any
meaningful fashion because they play such acritical role in building you know, national
defense projects and things like that.So it's kind of like, what do
(27:51):
you do? And I don't haveany good answers, but it's probably not
this, Yeah, are things thatmuch better at Airbus? Are looking harder
here, Well, Airbus didn't havetwo planes crash that killed you know.
Again, ultimately, you're judged onyour results as an airplane maker, and
it's not that you it's not thatnothing goes wrong. It's that nothing goes
(28:12):
wrong and kills people because things alwaysgo wrong when you're flying planes. Talk
to any of your friends who werepilots. Hey, I flew this leg.
There's a warning light on this.We got to check this out for
maintenance. But it's like, that'swhat you want to happen when things go
wrong. Hey, guess what.We had a bird strike, we blew
out an engine. We returned tothe air you know, the airfield safely.
(28:33):
That stuff happens that like that.That's that's how you know the system
is working right, is when thingsgo wrong and you return safely, not
when Hey, the only thing thatsaved anyone from dying in this case was
that the seat right next to thedoor plug was empty. That's that's lucky,
not you know planned. Let's takea quick break here. When we
(28:53):
come back, we'll talk about therecent rally in US treasuries and what it
means for that much market going forward. Miss any of the show The Financial
Exchange Show podcast is available on Apple, Spotify, and iHeartRadio. Hit the
subscribe button and leave us a fivestar review. This is the Financial Exchange
(29:14):
Radio Network. The Financial Exchange Showpodcast drops every day on Apple, Spotify,
and iHeartRadio. Hit that subscribe buttonand leave us a five star review.
You're listening to the Financial Exchange RadioNetwork. Peace today in Bloomberg stating
(29:42):
that treasuries are a whisker away fromerasing this year's losses. Your thoughts mark
on what we've seen in US treasurymarkets, tremendous rally of late on the
long end and elsewhere on the socalled treasury. You'll curve that relationship between
termed and maturity and interest We sayinterest rates on the show a lot or
(30:02):
just the interest rate, but thereare lots of them, as you know
from experience, so longer term interestrates and all to shoes the ten year
as a proxy for that. Itstarted the year at well like three point
nine to five percent. I'm notlooking right at it, but roughly that
if you just looked at the beginningof the year and now it looks like
rates have gone up by a lot, but relative to only a few weeks
ago, they've come down pretty rapidly. A part of that is due to
(30:26):
declining inflation expectations, but not much. The bulk of that is due to
declining so called real interest rates.Real interest rates are just after inflation.
Interest rates and real interest rates arewhat you care about because they reflect demand
for investment, sure, and they'reassociated with economic activity. So it's nice
(30:48):
when interest rates come down. Itmakes bearing dead easier, but it may
not be a good sign. Youknow, low interest rates are typically a
sign of feeble demand for investment.Low growth rates were very low in the
twenty tens. They were a notoriouslylow growth decade, So it's one of
those somewhat double edged But you'd ratherhave higher interest rates and robust growth i
(31:12):
e. A job and good wagegrowth and good wage growth prospects, then
say low interest rates and uncertain wagegrowth prospects. And I think this also
just speaks to the fact that,you know, the first three four months
of the year, a lot ofinvestors kind of bemoaning, oh geez,
these these these treasuries are just youknow, they're not doing anything. I'm
(31:33):
losing money on these. Why doI own these? And the answer is
Look, you don't own treasuries becausethey make you a ton of money in
a rapidly growing economy. Is theQ one data. You know, as
we saw you know this acceleration inQ four and then into the first part
of Q one. You own treasuriesbecause, hey, when it hits the
fan, and inevitably it sometimes does, they provide you ballast, typically to
(31:56):
other things in your portfolio. Soit's kind of this the idea of diversification,
I think sometimes gets sold the wrongway. Where it gets sold is
hey, this is how you makemore money, whereas really it's no,
this is how you build a morestable path so that, regardless of what's
happening in the economy, you're youknow, moving in a more stable trend
line towards your overall end goal.As opposed to, no, this is
(32:19):
how you make the most money inany one year. Like, that's not
what diversification does. Yeah, treasuriesare, like you said, ballast or
insurance. Insurance stinks because it's justa drag. We'd all love to drop
it, sure, but you doso at your peril. Yes, obviously
for the same reason, particularly ifyou're older, if you're a very young
investor, you could argue for onehundred percent equity son episode stock portfolio,
(32:42):
maybe even through your thirties and forties, depending on your risk time. I
get absolutely you're in your time frame, but if you're older, you need
some of that. As you calledit, ballast, which is a perfect
way I think to think about theinsurance that bonds represent. It's not fun,
but you'll be glad you own itduring the inevitable market downturn. Revocable
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and Dolan and or Armstrong Advisory maycontact you offering legal or investment services.
Cushing and Armstrong did not endorse eachother and are not affiliated. Mark this
(34:12):
piece of the New York Times.Here us dead on pace top fifty six
trillion dollars over the next ten years. Do you want to take the over
under on that? Oh? Howcould anybody take anything but the over?
You gotta pound the over on that? Right? Is the under ever paid
off? No? Because here's thething. The Congressional Budget Office, they
put this out on Tuesday. Theydo these, is it a few times
(34:35):
a year? I don't know howoften they put least rejections at least a
couple So they published these again atleast a couple times a year. And
here's the thing about the CBO,projections. Number one, they never predict
any recession happening. That's not whatthe CBO does. They do not predict
recession. And in recession, youalways run higher deficits than you previously projected.
So that's the first reason why youalways take the over second piece.
(34:59):
Mark when is the last time thatyou think politicians actually cared about the US
deficit? In the nineties, wetook it seriously. We had two presidents
in a row who enacted tax increasesto close the gap between revenues and expenditures.
George H. W. Bush didprobably cost him in part the election
(35:20):
because it eroded his support with thebase because he famously said, read my
lips, no new taxes you caneven make Look even Reagan when he was
there, that was the last timewe reformed social Security and those were tax
increases as well. Yeah during thattime. People forget that Reagan raised taxes
actually through raising Social Security taxes.Yeah, we did that in eighty three.
And then we had tax reform activeeighty six, which I forget.
(35:42):
It did not raise marginal rates,but it closed loopholes, which is the
same thing. So yeah, theseguys were these these guys were not dogmatic.
Reagan is obviously the iconic conservative,but he was pragmatic, right,
he said, look, I gotto deal with this, and I think
part of it was his first priority. But no, I think all of
it came from the fact that theyall lived like in adulthood through the seventies
(36:02):
and we're kind of like, hey, like, no, we're not gonna
make those same mistakes again. Butthinking on debt, deficits and debt has
changed a little bit in the pastfew decades because of experience. The sky
didn't fall. We've run up,but the debt at the end of Clinton's
term was couldn't have been much morethan two trillion, just off the top
of my head. I'm sorry ifI'm getting that somewhat wrong. I'm not
(36:24):
wrong by an order of magnitude.Tho, it's pretty close. We're now
at what thirty So the run uphas been astronomical, beyond what anybody could
have conceived. We were running surplusesin the deficit. The deficit was positive,
that is, or we're running asurplus at the end of Clinton's term,
and now we're running two trillion dollarsdeficits. It's the norm. Interest
(36:45):
rates are lower. How is thatpossible, Well, there are a few
different explanations. Predominant among them increasein world savings. So the sky has
not fallen despite the explosion in debtand deficits. That's one reason why we
why neither of the presume nominees ofeither major political party are talking about the
deficit. No, And look,you can find pieces going back the last
(37:07):
one hundred years pretty much on whythe US deficit is going to cause financial
ruin for the US, and it'sjust it's never come to fruition. That
doesn't mean it never will, butit hasn't in a time when anyone on
the planet has been alive. Andso I think that ultimately, when you
look at this, the part thatis problematic to me is, look,
(37:28):
when you look at the deficits thatwe're running now, it's projected to be
I think like six point four percentof GDP this year now, up from
five point seven originally predicted. Hey, if you're running those deficits with unemployment
at four percent, what's it looklike when unemployment inevitably hits six seven eight
percent in a recession, It's notgoing to be lower. And that's when
it becomes you know, potentially problematichere. But look the counter that that
(37:52):
I will say on all this is, Hey, people have been predicting deficit
doom for a long time in theUS. They'll be right at some point.
At some point, it'll put thepressure on interest. There'll be nothing
we can do about it. We'llhave to cut spending dramatically and make big
sacrifices. Until then we won't.But investing as if the US deficit is
going to cause iminent problems has beena horrible way to go about it for
the last several generations. It isnot a good timing tool. Let's take
(38:15):
a quick break here when we comeback hour two, including Hey, it's
hot out there. I'm just gonnacost to stay cool.
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