July 11, 2025 • 38 mins
Chuck Zodda and Marc Fandetti discuss Trump threatening some Canadian goods with a 35% tariff. Vietnam is surprised by Trump's tariff decision. A key piece of the next consumer-price report risks upsetting the bond market. The White House just took its most aggressive stance yet against Jerome Powell. Will tariffs impact Q2 earnings? Goldman Sachs is piloting its first autonomous coder in major AI milestone for Wall Street.
Mark as Played
Transcript
Episode Transcript
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Speaker 1 (00:00):
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(01:06):
and Mark Vandebbi.
Speaker 2 (01:09):
Chuck and Mark and Tucker with you today as we
wrap up and admittedly slow news week. As far as
you know, generally items, we didn't really have anything in
the way of meaningful economic data. We didn't really have
anything meaningful in the way of earnings. The closest I
think you could say is Delta, who did give us
(01:30):
a little bit of insight into what's going on with
the travel industry. But this is all preparation for next week,
which again you don't tell everyone that it's the most
important week in economics, because then people just get tired
of you saying that all the time. Next week is
going to be a fun week. We got CPI on Tuesday,
We've got PPI on Wednesday, we got retail sales and
(01:52):
initial claims in Philly fed manufacturing on Thursday, and then
on Friday, building permits, housing starts, consumer sentiments, So we're
jammed from it from an economic data standpoint. Next week
and and and and and and we got earnings kicking
off JP Morgan, Blackrocks, City Groups, Wells, Fargo Bank, New
(02:12):
York Mellon All on Tuesday, Wednesday, Jay and J. Bank
of America Morgan, Stanley, Goldman, Sachs Thursday, Netflix, Abbott Labs,
ge Aerospace, Pepsi Friday, American Express, Charles Schwab three M.
So we we were getting into it next week. So
to those of you who like begrudgingly listen to us
for ten hours this week, sorry, but next week we've
(02:35):
got some real stuff. And the Trump administration was awfully
nice to, you know, start sending out tariff letters this
week in order to continue to give us something to
talk about on the show. And we got another one
of those late yesterday when the Trump Administration announced a
thirty five percent tariff on imports from Canada effective August first. Uh,
(02:56):
this will not apply to us MCA compliant good goods,
so that's the same as the previous agreement, which basically
takes most of the stuff that Canada sends to.
Speaker 3 (03:05):
Us off the table.
Speaker 2 (03:06):
But this would be a rise from a twenty five
percent tariff on other goods up to thirty five percent,
and a the fact that this doesn't include us MCA
compliant goods, and be the fact that it's still three
weeks out and the language of the letter leaves room
for this to be adjusted. Has markets in a very
modest sell off today because once again, Mark, I don't
think markets are really believing that this is going to
(03:29):
go into effect because we've seen this before.
Speaker 4 (03:31):
Yeah, these letters are all self neutralizing, their meaningless when
you end your lengthy commentary on the history of the
relationships between the two countries and the alleged justification for
these tariffs with of course, all this could change if
you guys change your policy. It makes the prior fifteen
sentences meaningless.
Speaker 3 (03:53):
Right it does.
Speaker 2 (03:55):
I think the thing that I take away from this,
and also from a report from Blueberg on the Vietnam
deal or no deal we'll get into that is if
I'm a trading partner of the US, I don't really
know what I'm negotiating at this point. And I'll talk
about this Bloomberg piece here and again. How much of
(04:16):
this is Vietnam trying to say face, how much of
it is you know something else. I'll leave that to
anyone's imagination, but I'm gonna quote here. Vietnam's leadership was
caught off guard by US President Donald Trump's announcement last
week that it agreed to a twenty percent tariff, and
the Southeast Asian nation is still seeking to.
Speaker 3 (04:33):
Lower the rate, according to people familiar with the matter.
Speaker 2 (04:35):
Straight after last Wednesday's call with Trump, Vietnam's party chief
to Lamb told his negotiating team to keep working to
bring the tariff ray down. The twenty percent figure came
as a surprise to Vietnam, who had believed it had
secured a more favorable tariff range that people said before
the call, Vietnam had been pushing for a tariff in
the ten to fifteen percent range. And it goes on
(04:56):
to say, look, we still haven't seen anything in print
from either Vietnam or the United States, so we don't
even know if this is real. It's like it's it's
not actually in effect at this point. There's nothing from
the US Trade Representative. There's no executive order, there's no
signed memorandum of understanding. And so I think the thing
(05:16):
that I keep coming back to on this is if
I'm a country that's trying to negotiate where my my
tariff rate is going to land, what am I actually
negotiating And how long does that even stay in effect for?
Because none of these are binding documents, even the one
with the UK, which we do have. I think it's
(05:37):
like a six or seven page memorandum of understanding. Even
in there it says this is not a legally binding document.
And so I guess what I'm wondering is what do
you really.
Speaker 3 (05:48):
Do with this?
Speaker 2 (05:49):
And at what point do you just say okay, like,
do what you want? Because we need some certainty. We
can't just keep changing this every month or so. That's
not really a good way to give businesses the stability
they need to actually conduct business with our country.
Speaker 4 (06:06):
If I were a proponent of tariffs for raising revenue,
which I sort of am, I'm a consumption tax guy.
I'm a bit of a free market fanatic, Chuck, as
you may know, I don't like the income tax. I
think it distorts decision making.
Speaker 3 (06:16):
Would you be more of a VAT guy than a Yeah.
Speaker 4 (06:19):
You could call me a VAT guy. I think that's
fair anything but taxing income and all the contortions and
machinations that that forces people to undertake. Sure to avoid it, right,
I mean, you know better than anybody, not because you
avoid taxes, but because you work with people there and Chuck,
as you know, of abating taxes is a full time job. No,
(06:40):
you know what I mean it's incredibly distortionary. The left
gets a hold of it and they want to enact
their social views through the tax code. I've for a
whole lot of reasons, I would love if we just
took the sixteenth Amendment to the Constitution through it out
the window. That's not going to happen anytime soon. But
if you're in that camp, if you're an anti tax,
anti income tax fanatic like I am, you would hope
(07:02):
the tariffs could actually or something like it, at consumption
tax more broadly, could replace the income tax. That doesn't
appear to be happening. So we're not satisfied. If you're
a I want manufacturing to be restored. I want to
restore the economy. To some I think it's misguided, but personally,
but people want to restore the economy of the nineteen fifties,
when everybody took a lunch pail to a job and
(07:22):
they ate their lunch working up on a steel girder
thirty you know, stories up or something like that. I
don't know what they want, but they think we're going
to restore the economy the fifties. Fine, honest, people can disagree,
but that ain't happening. Either, So, who is this, who
is this tariff theater making happy? Other than news outlets
and maybe people like us who have something to talk
about every day because nothing's actually happening.
Speaker 3 (07:44):
Well.
Speaker 2 (07:45):
And look, if I'm being completely honest, I get kind
of tired of talking about it because my message is
always Okay, we'll see if it goes into effect, and
then we'll figure out what happens, because we've seen this
for the last six months now, where if you get
too excited about what's announced, that's not where it usually
ends up being a month from now.
Speaker 3 (08:05):
Now, the danger in.
Speaker 2 (08:06):
This is that what if this is a new approach
from the Trump administration with regards to how they plan
to implement. And the reason that I bring this up
is because of one key thing, and that is that
the Reconciliation Bill passed a week ago on Friday, on
(08:27):
fourth July, President Trump signed the BBB into law. And
I guess I kind of look at this and I go,
President doesn't need anything from Congress anymore.
Speaker 3 (08:39):
He got what he wanted.
Speaker 2 (08:41):
He doesn't need anything from Congress anymore. Does he have
to play nice? I don't know, maybe, maybe not, But
like that's a meaningful shift and by the way, this
goes a couple different ways. The BBB passed do businesses
need anything from Congress now, either.
Speaker 3 (09:01):
They don't like do they have to play nice thing?
Speaker 4 (09:03):
I'm trying to think they need heat Trump needs his
judicial appointments confirmed.
Speaker 3 (09:07):
Obviously I'm talking business.
Speaker 4 (09:09):
Yeah, No, I know I'm stretching here. You know, you're right.
Speaker 3 (09:11):
I'm sorry.
Speaker 2 (09:12):
And so if I look at it, I go, okay,
if you're a business who's previously been you know, towing though,
there's a couple different ways that I can look at this.
The first is President Trump might say, look, I don't
need support from Congress to do anything else that I
want to do. I'm going forward on the tariffs this time.
Maybe he does, maybe he doesn't.
Speaker 3 (09:29):
I don't know.
Speaker 2 (09:30):
If I'm a business, I might say, look, I've been
playing nice with you know, the Trump administration, even though
I don't like these tariffs. I'm gonna start laying people
off because honestly, my margins are being hit.
Speaker 4 (09:42):
And may like, can can we talk about that point, Chuck,
who somebody's got to eat the tariffs? I think we
agree that.
Speaker 2 (09:47):
Yeah, it's not There's there's no such thing as in
immaculate revenue rays. The money has to come from somewhere,
and so when you look at the places that can
come from, they're generally four different places that you can identify.
The first is the person the company that's actually making
(10:08):
the stuff overseas. Do they eat it either by reducing
their price or by you know, offering to pay a
portion of the tariff? Okay, that's possible. Number two, any
part of the shipping chain. Does the boat that's carrying
the stuff over from China eat part of it?
Speaker 3 (10:27):
Do railroads do? Truckers?
Speaker 2 (10:29):
That's another place that you could see it. The third
place companies do they say hey, we're going to absorb
some of the cost. And the fourth one is does
the end buyer end up paying it? There's no way
that you can get through the entire chain with it
not happening, simply because again, here's the example I'll give
my buddy imports. You know, fifty thousand dollars of stuff
(10:49):
from China gets hit with a fifteen thousand dollars tariff.
That money has to come from somewhere. It doesn't just
disappear into the ether. It's not just out there. And
so one of the things that I've also wondered about
in this is look, it's it's pretty clear that if
(11:10):
if you've criticized the tariff implementation as a company that
has been, you know, selling tariff products. You remember when
Amazon a couple months ago originally like was gonna post
like tariff prices on their one of their sites. That
went It lasted for like two hours because the Trump
administration was like, no, you're not doing this, and they
backed off.
Speaker 3 (11:27):
They're like, no, we're not going to do it.
Speaker 2 (11:30):
So part of me wonders, are we not getting a
great signal from companies because they don't want to risk
the ire of the Trump administration. But at some point
it's going to come out in the earnings and we're
just gonna be surprised by it.
Speaker 3 (11:42):
Another thing I kind of just wonder.
Speaker 2 (11:44):
About the other possibility on this again, it's it's not
that the tariff just doesn't matter, because there's no way
that with the dollars you're talking about, it just doesn't matter.
But tariff's on one and you can say, Okay, they
raise the prices of goods because obviously it's adding an
(12:04):
additional cost somewhere in the ecosystem. But if they're also
depressing demand for those goods. Do price increases not end
up coming through? And does it show up in like
the economy slowing because there's just not as much consumption.
There are a lot of different ways that you can
shake this thing, and something's gonna show up in the
second half of the year.
Speaker 3 (12:24):
I just don't know what.
Speaker 2 (12:26):
I just can't see us going the next six months
and being like, well, the US government raised three hundred
billion dollars in additional revenue and nothing happened, right.
Speaker 4 (12:36):
Yeah, And I don't know. I know, we got a
break here. I'll make a quick point. Maybe we talk
about it on the other side. Deficit's going up, not down.
You can track this stuff through May. We've spent about
fifteen billion more this the deficit has increased about fifteen
billion dollars. I'm talking about the overall deficit. So you
can tout revenue from this or that, or you can
tout this or that spending cut, but at the end
(12:56):
of the day, the deficit is growing, and thus so
is the debt. So what is the point of all
this if your objective is to raise revenue.
Speaker 3 (13:05):
Let's take a quick break here.
Speaker 2 (13:07):
When we come back let's do a little preview of
next week's CPI right after this.
Speaker 1 (13:14):
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Speaker 3 (14:13):
Mark next week. We've got CPI data on Tuesday.
Speaker 2 (14:17):
As I mentioned in the first segment, the expectations that
I'm seeing out there are for a point three percent
number for both headline and core those would both be
hotter than the point one we received on those numbers
for the month of May. And look to this point,
through the first five months of the year, the inflation data,
(14:37):
it's been unambiguously good. There's been nothing in there that
has been caused for meaningful concern. I think the question is, look,
as you start to get into June, clearly there's some
products that you know you might have seen price increases
on because of tariffs. Again, it takes a couple months
for this to all kind of work its way through
(14:57):
the system, even before out for you know, inventory that
was front loaded in order to try to avoid this.
And so it does seem if we end up starting
to print, you know, in that point three percent monthly range,
that maybe we start seeing the tariff impact showing up
in the June, July, August data as we go deeper
(15:18):
into the summer, and the idea that's been tossed around
this week that hey, tariffs don't cause inflation just because
you know, we didn't see it in May, which is
the only month that it might have showed up in,
you know, in any way, shape or form, it starts
to probably show up over the next few months.
Speaker 4 (15:33):
Here, probably it might be a little hard to tease
that out. You'd have to you'd have to isolate I
guess the sectors likely affected by tariffs. I imagine model
or researchers are working feversually to come up with some
measure of tariff driven inflation. All I could tell you,
Chuck is as a generalist, and forecasting inflation is really hard.
(15:53):
I just ran a model really fast just to give
you a sense for how big the errors are versus
your your estimate, and an ensemble of models gives you
a projection of about zero point two month over month,
so a fraction of a percent, about a fifth of
a percent, which is about where it's been. But the
(16:15):
errors are really big, and I'm just using sort of
a conventional statistical prediction method here. The errors are like
twice as big as your estimate of what inflation is
going to be, and words it could be twice that
it could be zero. And that's really the best that
you could say, just using past values of inflation. Not
getting too fancy. My point is when I do exercises
(16:37):
like this, it reminds me of the importance of humility.
Despite the overwhelming opinion of economists that tariffs are taxes
on imported goods. They should all else equal increase prices.
You got to take into account what's going on in
other parts of the economy. There could be deflationary forces
that act to offset the effects of tariffs, and they
(16:58):
may not show up in the next few months or
at all. I'm not in that camp, but it could
be the case.
Speaker 3 (17:06):
So I think where it is.
Speaker 2 (17:08):
Look, it's it's very much just kind of wait and
see here and again it's I hate to just keep
saying that, but that's that's kind of what it is.
Speaker 1 (17:18):
Like.
Speaker 2 (17:19):
It's it's this is not a situation. It's not a
situation like March of twenty twenty with with COVID, where
it's just hard stop and you know, twenty million people
apply for unemployment in the next two weeks. This is
something it's a very dynamic system that the inputs are
being changed on a daily basis basically, and so you're
(17:42):
just not quite sure what you're going to see here,
and we need to give it a little bit of
time to play out in order to see what happens.
But again, like you just do that, you look at
the numbers, and you say, there's no way that this
just has no impact. It's just I don't know exactly
how the impact is going to show up.
Speaker 3 (18:02):
Yet you brought up.
Speaker 4 (18:03):
The last recession. I think that's a key point. Our
expectations are most influenced, arguably by the most recent salient convulsion.
So in this case, we had a recession, and you've
talked about this before. We've talked about it before, COVID recession.
Speaker 3 (18:19):
Everybody knew it.
Speaker 4 (18:19):
Was coming because the government basically dictated it by FIAT stopped.
As Trump said at the time, we're telling everybody stop
doing what you're doing. He did it anyway. He was
critical at the time of that idea, but he ended
up doing it anyway anyway. It was The point is
it was really foreseeable, the Great Recession. A lot of
people saw that coming, The Fed saw it coming. They
were easing before the data told them to do so.
(18:40):
I wonder if maybe we're not conditioned to thinking, oh,
it's going to be obvious when there's another big economic
upheaval around, or a milder, more typical recession like nineteen
ninety ninety one or like two thousand and one. I
wonder if we're not spoiled a little bit by how
conspicuous the signs were for the last couple.
Speaker 2 (19:01):
Yeah, it's and look, this has been a really this
has been a really challenging business cycle for a lot
of people to analyze.
Speaker 3 (19:09):
Anyways.
Speaker 2 (19:09):
I mean, think about the last two years with all
of the people who were calling for recession that again
we were kind of looking at the data we were
going out. I don't really think so it's not there
like based on what you're seeing. But you know, we
had all to talk about the sam rule last year
and turns out, hey, this is the one time it
hasn't worked since World War Two. So it's it's been
(19:31):
a weird cycle and a lot of people have been
fooled by it.
Speaker 3 (19:35):
Quick break here Wall Street watches next.
Speaker 1 (19:41):
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Watch a complete look at what's moving market so far
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Speaker 3 (20:03):
You guessed it.
Speaker 5 (20:03):
More tariff developments to report today after President Trump threatening
a thirty five percent levy on Canadian imports to begin
on August first, up from the current twenty five percent rate.
Markets at the moment in negative territory across the board
dows off by half a percent or two hundred and
twenty five points.
Speaker 3 (20:23):
S and P five hundred.
Speaker 5 (20:24):
Is down by a quarter of a percent or sixteen points.
In the NASDAC dipping into negative territory mostly flat, Russell
two thousand is down by eight tenths of a percent
or eighteen points. A ten year treas reeled up five
basis points this morning at four point four zero percent.
In crude oil up two percent higher today, trading just
(20:45):
below sixty eight dollars a barrel. Levi shares are up
eleven percent after the genes maker reported strong results for
the first half of the year. The company also increase
its dividend and raise its full year guy it's on
several key metrics. Levi said it was still able to
raise guidance despite tariffs because consumers, especially women, are buying
(21:09):
more directly with the company. Meanwhile, Energy Giant BP said
it anticipates up to one and a half billion dollars
in after tax impairment charges and said lower oil and
gas prices will drag on its quarterly results that stock
is up by three percent. Elsewhere, the box company Real
Sense completed its spinoff from Intel, closing a fifty million
(21:32):
dollar funding round. Intel stock is retreating by one and
a half percent and shares a movie theater chain AMC Entertainment,
climbing over nine percent higher after Webbush upgraded the stock
to outperform from neutral, saying AMC is poised to benefit
from a more consistent release slate over the next several quarters.
(21:53):
I'm Tucker Silva and that is Wall Street watch Mark.
Speaker 3 (21:57):
We got a piece here today.
Speaker 2 (21:59):
It's title the White House just took its most aggressive
stance yet against Jerome Powell. And basically what it lays
out is that Russell Vatt, who is the director of OMB,
the Office of Management and Budget, has basically said, look,
we think that you are breaking the law when it
(22:19):
comes to oversight of the renovation that's going on of
the FED headquarters. I'll quote here the President is extremely
troubled by the management of the Federal Reserve system. Instead
of attempting to write the FEDS fiscal ship, you've plot
ahead with ostentatious overhaul of your Washington these DC headquarters.
It goes through a whole bunch of different things, And
of course it gets to the speculation of.
Speaker 3 (22:40):
Hey, are they going to try to fire J.
Speaker 2 (22:43):
Powell for cause rather than just you know, letting them
go because the president wants someone else? And President was
asked about this today they I for you don't know
the reporter, but I saw the transcript. They asked him,
are you going to fire J?
Speaker 3 (22:57):
Powell? And he said no? And I kind of believe.
Speaker 2 (23:01):
I really think that what the White House wants to
do is just make things absolutely miserable for J. Powell
so that he either quits or just has an awful last.
Speaker 3 (23:10):
Eight months on the job. Basically is kind of where
I think they're going.
Speaker 4 (23:14):
Yeah, why not just I don't look, we all know
he wants to replace Paul with a puppet who will
lower interest rates and keep them low, and so they
can finance the debt using short term debt, relatively using
a greater percentage of short term debt. He thinks that's
going to be some kind of panacea.
Speaker 3 (23:31):
Can we talk about that? That's not? Yeah?
Speaker 4 (23:33):
Sure? In short, no pun, or maybe the pun should
be intended. The President thinks that he can shift financing
the difference between what the government takes in and what
it spends, which we call the deficit. Using very short
term to maturity instruments, he can shift the term to
maturity of new debt in favor of short term. If
(23:54):
the Fed keeps short term interest rates low, which they
have the power to do, they can print money. They
put it non banks balance sheets. Bank can lend to
one another at lower overnight rates. So the Fed can
do this, the Treasury can do this. In theory, it'll work.
The problem, of course, is that it will probably result
in not just high, but rapidly increasing inflation.
Speaker 3 (24:12):
At least.
Speaker 4 (24:13):
I say that because it's the way it's always happened
here and elsewhere, so I think that's the present. I
don't think. I know because he said it. Economists have
a term for it, those who study monetary policy. They
call it fiscal dominance, and the meaning is straightforward. It's
when fiscal policy dominates monetary policy. Monetary policy is no
longer focused on keeping inflation low and stable and keeping
(24:34):
output as close as possible to trend output. Those considerations
go out the window. Monetary policy sole objective is helping
the government finance it's deficit. That's Trump's end goal. I
wish you would just say that, why remove Powell now?
Why not wait another few months until his terms up?
It would be less disruptive. I don't know.
Speaker 2 (24:56):
Well, and I think I want to get more just
about this, you know, this idea of more moving more
issuance to to short duration debt and and cutting interest
rates in tandem with that. So just like, let's let's
look at where things are right now in the United States.
The Fed funds rate is between four and a quarter
and four and a half and the ten year Treasury
(25:18):
right now is at four point four percent, So they're
both basically in the same ballpark.
Speaker 3 (25:24):
So what what the president's.
Speaker 2 (25:26):
Talking about doing, as you mentioned, is, Hey, I want
someone in there who's gonna cut that Fed funds rate
I think he said the other day by three percent points. Yeah, okay,
take it down to one and a quarter and then
I want to issue more debt at one and a
quarter percent instead of having to pay.
Speaker 3 (25:42):
Four percent on long term debt.
Speaker 2 (25:45):
So the first question that that you immediately think of is, Okay,
if it's that easy, why doesn't.
Speaker 3 (25:53):
Every country do that?
Speaker 4 (25:54):
Many have tried.
Speaker 3 (25:56):
What's happened to them?
Speaker 4 (25:57):
Inflation? Is the short answer. For a followed by price
controls well when THEED. When the FED puts money into
the economy, we think of the FED as lowering interest rates,
and everybody says that. It's even in economics research papers,
So even the people who have strong technical knowledge just
use lowering interest rates as a shorthand for what the
FED does. But what they really do behind the scenes
(26:18):
is they print money. They give that money to banks,
they credit to more specifically, they credit it to their accounts,
and banks in turn lend it. That's how the FED
affects demand. Technically, aggregate demand, total demands, that's what the
FED does. They also have regulatory responsibilities. They can also
target longer term interest rates. But in a nutshell, that's
(26:39):
what the FED does. They print money to stimulate or
take money out of the economy by reversing the process
I just described to reduce demand problem with the president's strategy,
and I suspect they'll I suspect we're going to try
this again, because every every couple generations, people forget the
lessons learned and then we have to try stupid things again.
(27:02):
In that sense, we're like children. When the FED does that,
it will stimulate demand that will push the economy beyond
its speed. Limited. The FED will either be forced to
hike rates to address this, or if the President doesn't
let them, or his success or if it's someone cut
from the same cloth, doesn't let them, we're going to
try price controls and browbeating companies into not raising prices,
(27:25):
similar to what the President did to Amazon and other
companies when they said they passed tariffs along. Again, these
things have been tried before. I'm jumping back and forth
between tariff and monetary policy here, but the mindset is
the same.
Speaker 2 (27:39):
The other piece that I come back to on this is,
let's say that they even you know, it goes far
as doing that and imposing, you know, yield curve control
to control the price of money across the yield curve,
you know, in an attempt to try to get things
like mortgage rates down. Yeah, the Fed does not control
mortgage nor would you want them to. You know, in
(28:03):
what world do you want the twelve people that are
sitting at the Federal Reserve to simply be able to say,
this is what mortgage rates are going to be. And
the reason why we know that they don't control them
is because we have a really clear measure that you
can look at if you want to. We actually have
a couple that you can look at on this. The
(28:26):
first is you could say, okay, let me look at
the thirty year mortgage rate and compare it to the
effective Federal funds rate and show me the difference that
we have between them. And what you see is that
basically this is it's a range that you see from
(28:47):
anywhere from mortgage rates can be anywhere from like five
to six percent above the Fed funds rate. The lowest
I've seen is about one percent above the Fed funds rate.
But the reason why that happens is ultimately because bangs
are in charge of the amount of risk that they
want to take on, and so banks might see where
interest rates are either the Fed Funds rate, more commonly
(29:09):
the tenure treasury, because really the question isn't hey can
I park this money at the Fed for thirty years?
It's do I want to lend this money to the
federal government for ten years? Do I want to lend
it to an individual for thirty likes? That's how banks
think about their balance sheet. But so what you see
is banks don't simply say okay, tenure treasury is at four,
we're going to charge five. It varies, and I'll show
(29:32):
you how much this can vary. Back in May of
twenty twenty one, the spread between the average thirty year
mortgage rate and the tenure treasury was one point three
four percent. And you think about it, and the reason
why was in May of twenty one, there still wasn't
really much inflation, interest rates were low, unemployment was falling,
and so banks might have looked at the situation and said, hey,
(29:53):
there's no inflation, we don't really need much premium. Financial
conditions are good. Sure, if we can get you know,
so two percent on a ten year treasury right now
by lending to the federal government, that's fine. We'll charge
you three and a half on your mortgage in the
first half of twenty one, and that's what they did.
Speaker 3 (30:10):
Even below that.
Speaker 2 (30:11):
I mean again, the ten year treasury I think was
at like one to six then, and this is when
you had like the two point nine percent mortgages that
were out there. Fast forward a year to May. Actually,
let's go a year and a half forward October of
twenty two, inflation rippin' where at like nine percent on inflation,
I think we were down a little bit from there
at that point where at like seven, but inflation's still high.
(30:33):
It's been high for about a year. And banks are
no longer saying yeah, we'll take one in a third
percent over the ten year treasury. Instead they're saying, no,
we need three point one percent over the ten year
treasury because the ten year right now is at four.
Inflation's running at seven, and man, we need seven percent
because if inflation stays hot, we don't want to be
(30:54):
holding the bag on this. And so that's how you
end up with, you know, seven percent mortgages. Today, inflations
come down, but there's still you know, concerns this and that.
The spread between the ten year, the thirty year mortgage
and the tenure treasury is about two point three percent.
The long term average is one seven. But it doesn't
just stay there. And so this is the thing that
I come back to when we're talking about interest rates,
(31:15):
is look, even if you move all of the issuance
to the to the short end and cut interest rates
dramatically there, yes, maybe you have an impact on the
US budget, but it might come at the cost of
reigniting inflation, which ends up making you know, lending for
other for individuals and businesses, more expensive because banks are
(31:35):
going to demand more premium. And on top of that
that inflation could actually end up making your budget situation
worse because now you have to borrow more in order
to actually fund the government. Yeah, so there's no free
lunch on all this. If if it were as simple
as hey, let's just issue all three month debt and
(31:55):
cut interest rates to zero, well, I'm sure that the
Brazilians would have figured it out by now. I'm I'm
sure the Argentinians would have figured it out by now.
I'm sure the Italians would have figured it out. Oh yes,
you know, And I say I say this as a
proud Italian because.
Speaker 4 (32:09):
We pioneered with fiscal recklessness. Check we figured this out
the hard way seventy two times. We tried every hundred
years for the Pastni.
Speaker 2 (32:17):
Yes, this this is what Italians do. We say, well,
maybe it's different this time.
Speaker 3 (32:23):
Try Come on, you know, I just don't meetball on
the rate.
Speaker 4 (32:28):
You know, like put to the money, Jack, you putting
through the money would be fine food to the money.
Speaker 2 (32:34):
Anyways, Sorry to anyone who just had to listen to
us do that.
Speaker 3 (32:39):
That's what happens when you get three Italians in a
room together.
Speaker 4 (32:41):
Couldn't help ourselves. It's like birds starting to turp, and
they all chirp, they all chime in.
Speaker 3 (32:46):
A lot of hands were weird. We're all talking with
our hands too, of course, you know.
Speaker 4 (32:49):
It's like it's a dangerous are in here all of
a sudden, very loud.
Speaker 3 (32:53):
Yeah.
Speaker 2 (32:54):
Anyways, So that's why you don't do that, is because
we Italians have tried it and it doesn't work.
Speaker 3 (33:01):
You can't just cut your way out of paying, you know,
paying on the debtity. It doesn't work that way.
Speaker 2 (33:08):
We've been there for a couple thousand years. It's it's
pretty hard. Let's take a quick break here. When we
come back, let's talk about Earning season.
Speaker 1 (33:17):
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(33:40):
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Speaker 2 (33:46):
Next week, Earning season kicks off for Q two expectations
according to Factset Earnings Insight is for a five percent
annual earnings growth. That would be the slowest that we've
seen since the fourth quarter of twenty two twenty three.
But a reminder, typically the way the game is played,
earning's estimates come down heading into the reporting and then
(34:07):
usually see the beats anywhere from about.
Speaker 3 (34:09):
One and a half to three and a half percent.
Speaker 2 (34:11):
So realistically, you'd expect this to come in somewhere in
the six and a half to you know, eight and
a half percent range. But obviously this is something where
I'm not so much interested in what companies are saying
about second quarter earnings. I want to hear, Hey, what
are they seeing in their business and how has it
evolved over the last three months, because the last time
(34:31):
the companies reported was in early April, well mid to
late April, and we just didn't have much information about
how the US economy was evolving after you know, different
tariffs and changes, and I want to hear what companies
are saying about the second after the year.
Speaker 4 (34:45):
Personally, I think that's where the skill comes in. It's
not the quantitative stuff that's that's already that's already happened.
When you see data, it's about something that's happened. That
sounds trivial, but think about it for a second. Sure
The value in this for those who possess the skill
to parse words and extract their true meaning is to
(35:05):
take the forward looking statements and do something a little
different than everybody else is doing with them. For example,
on the subject of tariffs, who's eating them? As we
talked about in the last segment.
Speaker 3 (35:17):
So I guess we'll.
Speaker 5 (35:18):
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Speaker 1 (36:15):
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Speaker 2 (36:26):
Goldman Sachs apparently is testing an autonomous software engineer powered
by a company named Cognition, and they are going to
be putting this AI engineer into the metaphorical room with
their twelve thousand other developers. The program is named Devin.
Speaker 3 (36:46):
Devin is that an acronym?
Speaker 4 (36:48):
Sorry? Okay, no, it's just devil like you look like
a devon?
Speaker 3 (36:52):
Oh okay, yeah.
Speaker 2 (36:54):
And apparently look, we're gonna see how this ends up
playing out here. The what I've gathered from actual software
engineers is you can generally use and again this even
like off the rack like AI programs to do an
awful lot of coding. It's called vibe coding because basically,
you tell the thing what to do and it comes
up with your app or your your code for whatever
(37:16):
it is that you're trying to make. But you do
still need supervision simply for a couple of reasons. The
first is, hey, is this you know, kind of the
most optimized way to do this? That's number one. But
also from a security perspective, there may be things that
you see AI coding miss and that can obviously be
you know, a pretty big deal when you're dealing with
the financial system and all the privacy regulations and know
(37:38):
your customer and and this and that. But guys, I'm
I'm telling you this, this is going to be a story.
I just I still wonder if this ultimately is where
the biggest impact is. Because everyone's looking at large language
models and saying white collar jobs are going to be replaced,
and I'm not saying they won't be, but I really
(38:01):
think there's a lot of meat on this robotics, you know,
and sensors piece there that could really have a bigger
impact on more manual labor jobs than people are thinking
right now. Just because it hasn't gotten to that point yet.
I think that is the next frontier. It may actually
be more interesting. Let's take a quick break here. We
got more coming up in just a bit.
The Financial Exchange is produced by Money Matters Radio and
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(01:06):
and Mark Vandebbi.
Speaker 2 (01:09):
Chuck and Mark and Tucker with you today as we
wrap up and admittedly slow news week. As far as
you know, generally items, we didn't really have anything in
the way of meaningful economic data. We didn't really have
anything meaningful in the way of earnings. The closest I
think you could say is Delta, who did give us
(01:30):
a little bit of insight into what's going on with
the travel industry. But this is all preparation for next week,
which again you don't tell everyone that it's the most
important week in economics, because then people just get tired
of you saying that all the time. Next week is
going to be a fun week. We got CPI on Tuesday,
We've got PPI on Wednesday, we got retail sales and
(01:52):
initial claims in Philly fed manufacturing on Thursday, and then
on Friday, building permits, housing starts, consumer sentiments, So we're
jammed from it from an economic data standpoint. Next week
and and and and and and we got earnings kicking
off JP Morgan, Blackrocks, City Groups, Wells, Fargo Bank, New
(02:12):
York Mellon All on Tuesday, Wednesday, Jay and J. Bank
of America Morgan, Stanley, Goldman, Sachs Thursday, Netflix, Abbott Labs,
ge Aerospace, Pepsi Friday, American Express, Charles Schwab three M.
So we we were getting into it next week. So
to those of you who like begrudgingly listen to us
for ten hours this week, sorry, but next week we've
(02:35):
got some real stuff. And the Trump administration was awfully
nice to, you know, start sending out tariff letters this
week in order to continue to give us something to
talk about on the show. And we got another one
of those late yesterday when the Trump Administration announced a
thirty five percent tariff on imports from Canada effective August first. Uh,
(02:56):
this will not apply to us MCA compliant good goods,
so that's the same as the previous agreement, which basically
takes most of the stuff that Canada sends to.
Speaker 3 (03:05):
Us off the table.
Speaker 2 (03:06):
But this would be a rise from a twenty five
percent tariff on other goods up to thirty five percent,
and a the fact that this doesn't include us MCA
compliant goods, and be the fact that it's still three
weeks out and the language of the letter leaves room
for this to be adjusted. Has markets in a very
modest sell off today because once again, Mark, I don't
think markets are really believing that this is going to
(03:29):
go into effect because we've seen this before.
Speaker 4 (03:31):
Yeah, these letters are all self neutralizing, their meaningless when
you end your lengthy commentary on the history of the
relationships between the two countries and the alleged justification for
these tariffs with of course, all this could change if
you guys change your policy. It makes the prior fifteen
sentences meaningless.
Speaker 3 (03:53):
Right it does.
Speaker 2 (03:55):
I think the thing that I take away from this,
and also from a report from Blueberg on the Vietnam
deal or no deal we'll get into that is if
I'm a trading partner of the US, I don't really
know what I'm negotiating at this point. And I'll talk
about this Bloomberg piece here and again. How much of
(04:16):
this is Vietnam trying to say face, how much of
it is you know something else. I'll leave that to
anyone's imagination, but I'm gonna quote here. Vietnam's leadership was
caught off guard by US President Donald Trump's announcement last
week that it agreed to a twenty percent tariff, and
the Southeast Asian nation is still seeking to.
Speaker 3 (04:33):
Lower the rate, according to people familiar with the matter.
Speaker 2 (04:35):
Straight after last Wednesday's call with Trump, Vietnam's party chief
to Lamb told his negotiating team to keep working to
bring the tariff ray down. The twenty percent figure came
as a surprise to Vietnam, who had believed it had
secured a more favorable tariff range that people said before
the call, Vietnam had been pushing for a tariff in
the ten to fifteen percent range. And it goes on
(04:56):
to say, look, we still haven't seen anything in print
from either Vietnam or the United States, so we don't
even know if this is real. It's like it's it's
not actually in effect at this point. There's nothing from
the US Trade Representative. There's no executive order, there's no
signed memorandum of understanding. And so I think the thing
(05:16):
that I keep coming back to on this is if
I'm a country that's trying to negotiate where my my
tariff rate is going to land, what am I actually
negotiating And how long does that even stay in effect for?
Because none of these are binding documents, even the one
with the UK, which we do have. I think it's
(05:37):
like a six or seven page memorandum of understanding. Even
in there it says this is not a legally binding document.
And so I guess what I'm wondering is what do
you really.
Speaker 3 (05:48):
Do with this?
Speaker 2 (05:49):
And at what point do you just say okay, like,
do what you want? Because we need some certainty. We
can't just keep changing this every month or so. That's
not really a good way to give businesses the stability
they need to actually conduct business with our country.
Speaker 4 (06:06):
If I were a proponent of tariffs for raising revenue,
which I sort of am, I'm a consumption tax guy.
I'm a bit of a free market fanatic, Chuck, as
you may know, I don't like the income tax. I
think it distorts decision making.
Speaker 3 (06:16):
Would you be more of a VAT guy than a Yeah.
Speaker 4 (06:19):
You could call me a VAT guy. I think that's
fair anything but taxing income and all the contortions and
machinations that that forces people to undertake. Sure to avoid it, right,
I mean, you know better than anybody, not because you
avoid taxes, but because you work with people there and Chuck,
as you know, of abating taxes is a full time job. No,
(06:40):
you know what I mean it's incredibly distortionary. The left
gets a hold of it and they want to enact
their social views through the tax code. I've for a
whole lot of reasons, I would love if we just
took the sixteenth Amendment to the Constitution through it out
the window. That's not going to happen anytime soon. But
if you're in that camp, if you're an anti tax,
anti income tax fanatic like I am, you would hope
(07:02):
the tariffs could actually or something like it, at consumption
tax more broadly, could replace the income tax. That doesn't
appear to be happening. So we're not satisfied. If you're
a I want manufacturing to be restored. I want to
restore the economy. To some I think it's misguided, but personally,
but people want to restore the economy of the nineteen fifties,
when everybody took a lunch pail to a job and
(07:22):
they ate their lunch working up on a steel girder
thirty you know, stories up or something like that. I
don't know what they want, but they think we're going
to restore the economy the fifties. Fine, honest, people can disagree,
but that ain't happening. Either, So, who is this, who
is this tariff theater making happy? Other than news outlets
and maybe people like us who have something to talk
about every day because nothing's actually happening.
Speaker 3 (07:44):
Well.
Speaker 2 (07:45):
And look, if I'm being completely honest, I get kind
of tired of talking about it because my message is
always Okay, we'll see if it goes into effect, and
then we'll figure out what happens, because we've seen this
for the last six months now, where if you get
too excited about what's announced, that's not where it usually
ends up being a month from now.
Speaker 3 (08:05):
Now, the danger in.
Speaker 2 (08:06):
This is that what if this is a new approach
from the Trump administration with regards to how they plan
to implement. And the reason that I bring this up
is because of one key thing, and that is that
the Reconciliation Bill passed a week ago on Friday, on
(08:27):
fourth July, President Trump signed the BBB into law. And
I guess I kind of look at this and I go,
President doesn't need anything from Congress anymore.
Speaker 3 (08:39):
He got what he wanted.
Speaker 2 (08:41):
He doesn't need anything from Congress anymore. Does he have
to play nice? I don't know, maybe, maybe not, But
like that's a meaningful shift and by the way, this
goes a couple different ways. The BBB passed do businesses
need anything from Congress now, either.
Speaker 3 (09:01):
They don't like do they have to play nice thing?
Speaker 4 (09:03):
I'm trying to think they need heat Trump needs his
judicial appointments confirmed.
Speaker 3 (09:07):
Obviously I'm talking business.
Speaker 4 (09:09):
Yeah, No, I know I'm stretching here. You know, you're right.
Speaker 3 (09:11):
I'm sorry.
Speaker 2 (09:12):
And so if I look at it, I go, okay,
if you're a business who's previously been you know, towing though,
there's a couple different ways that I can look at this.
The first is President Trump might say, look, I don't
need support from Congress to do anything else that I
want to do. I'm going forward on the tariffs this time.
Maybe he does, maybe he doesn't.
Speaker 3 (09:29):
I don't know.
Speaker 2 (09:30):
If I'm a business, I might say, look, I've been
playing nice with you know, the Trump administration, even though
I don't like these tariffs. I'm gonna start laying people
off because honestly, my margins are being hit.
Speaker 4 (09:42):
And may like, can can we talk about that point, Chuck,
who somebody's got to eat the tariffs? I think we
agree that.
Speaker 2 (09:47):
Yeah, it's not There's there's no such thing as in
immaculate revenue rays. The money has to come from somewhere,
and so when you look at the places that can
come from, they're generally four different places that you can identify.
The first is the person the company that's actually making
(10:08):
the stuff overseas. Do they eat it either by reducing
their price or by you know, offering to pay a
portion of the tariff? Okay, that's possible. Number two, any
part of the shipping chain. Does the boat that's carrying
the stuff over from China eat part of it?
Speaker 3 (10:27):
Do railroads do? Truckers?
Speaker 2 (10:29):
That's another place that you could see it. The third
place companies do they say hey, we're going to absorb
some of the cost. And the fourth one is does
the end buyer end up paying it? There's no way
that you can get through the entire chain with it
not happening, simply because again, here's the example I'll give
my buddy imports. You know, fifty thousand dollars of stuff
(10:49):
from China gets hit with a fifteen thousand dollars tariff.
That money has to come from somewhere. It doesn't just
disappear into the ether. It's not just out there. And
so one of the things that I've also wondered about
in this is look, it's it's pretty clear that if
(11:10):
if you've criticized the tariff implementation as a company that
has been, you know, selling tariff products. You remember when
Amazon a couple months ago originally like was gonna post
like tariff prices on their one of their sites. That
went It lasted for like two hours because the Trump
administration was like, no, you're not doing this, and they
backed off.
Speaker 3 (11:27):
They're like, no, we're not going to do it.
Speaker 2 (11:30):
So part of me wonders, are we not getting a
great signal from companies because they don't want to risk
the ire of the Trump administration. But at some point
it's going to come out in the earnings and we're
just gonna be surprised by it.
Speaker 3 (11:42):
Another thing I kind of just wonder.
Speaker 2 (11:44):
About the other possibility on this again, it's it's not
that the tariff just doesn't matter, because there's no way
that with the dollars you're talking about, it just doesn't matter.
But tariff's on one and you can say, Okay, they
raise the prices of goods because obviously it's adding an
(12:04):
additional cost somewhere in the ecosystem. But if they're also
depressing demand for those goods. Do price increases not end
up coming through? And does it show up in like
the economy slowing because there's just not as much consumption.
There are a lot of different ways that you can
shake this thing, and something's gonna show up in the
second half of the year.
Speaker 3 (12:24):
I just don't know what.
Speaker 2 (12:26):
I just can't see us going the next six months
and being like, well, the US government raised three hundred
billion dollars in additional revenue and nothing happened, right.
Speaker 4 (12:36):
Yeah, And I don't know. I know, we got a
break here. I'll make a quick point. Maybe we talk
about it on the other side. Deficit's going up, not down.
You can track this stuff through May. We've spent about
fifteen billion more this the deficit has increased about fifteen
billion dollars. I'm talking about the overall deficit. So you
can tout revenue from this or that, or you can
tout this or that spending cut, but at the end
(12:56):
of the day, the deficit is growing, and thus so
is the debt. So what is the point of all
this if your objective is to raise revenue.
Speaker 3 (13:05):
Let's take a quick break here.
Speaker 2 (13:07):
When we come back let's do a little preview of
next week's CPI right after this.
Speaker 1 (13:14):
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Speaker 3 (14:13):
Mark next week. We've got CPI data on Tuesday.
Speaker 2 (14:17):
As I mentioned in the first segment, the expectations that
I'm seeing out there are for a point three percent
number for both headline and core those would both be
hotter than the point one we received on those numbers
for the month of May. And look to this point,
through the first five months of the year, the inflation data,
(14:37):
it's been unambiguously good. There's been nothing in there that
has been caused for meaningful concern. I think the question is, look,
as you start to get into June, clearly there's some
products that you know you might have seen price increases
on because of tariffs. Again, it takes a couple months
for this to all kind of work its way through
(14:57):
the system, even before out for you know, inventory that
was front loaded in order to try to avoid this.
And so it does seem if we end up starting
to print, you know, in that point three percent monthly range,
that maybe we start seeing the tariff impact showing up
in the June, July, August data as we go deeper
(15:18):
into the summer, and the idea that's been tossed around
this week that hey, tariffs don't cause inflation just because
you know, we didn't see it in May, which is
the only month that it might have showed up in,
you know, in any way, shape or form, it starts
to probably show up over the next few months.
Speaker 4 (15:33):
Here, probably it might be a little hard to tease
that out. You'd have to you'd have to isolate I
guess the sectors likely affected by tariffs. I imagine model
or researchers are working feversually to come up with some
measure of tariff driven inflation. All I could tell you,
Chuck is as a generalist, and forecasting inflation is really hard.
(15:53):
I just ran a model really fast just to give
you a sense for how big the errors are versus
your your estimate, and an ensemble of models gives you
a projection of about zero point two month over month,
so a fraction of a percent, about a fifth of
a percent, which is about where it's been. But the
(16:15):
errors are really big, and I'm just using sort of
a conventional statistical prediction method here. The errors are like
twice as big as your estimate of what inflation is
going to be, and words it could be twice that
it could be zero. And that's really the best that
you could say, just using past values of inflation. Not
getting too fancy. My point is when I do exercises
(16:37):
like this, it reminds me of the importance of humility.
Despite the overwhelming opinion of economists that tariffs are taxes
on imported goods. They should all else equal increase prices.
You got to take into account what's going on in
other parts of the economy. There could be deflationary forces
that act to offset the effects of tariffs, and they
(16:58):
may not show up in the next few months or
at all. I'm not in that camp, but it could
be the case.
Speaker 3 (17:06):
So I think where it is.
Speaker 2 (17:08):
Look, it's it's very much just kind of wait and
see here and again it's I hate to just keep
saying that, but that's that's kind of what it is.
Speaker 1 (17:18):
Like.
Speaker 2 (17:19):
It's it's this is not a situation. It's not a
situation like March of twenty twenty with with COVID, where
it's just hard stop and you know, twenty million people
apply for unemployment in the next two weeks. This is
something it's a very dynamic system that the inputs are
being changed on a daily basis basically, and so you're
(17:42):
just not quite sure what you're going to see here,
and we need to give it a little bit of
time to play out in order to see what happens.
But again, like you just do that, you look at
the numbers, and you say, there's no way that this
just has no impact. It's just I don't know exactly
how the impact is going to show up.
Speaker 3 (18:02):
Yet you brought up.
Speaker 4 (18:03):
The last recession. I think that's a key point. Our
expectations are most influenced, arguably by the most recent salient convulsion.
So in this case, we had a recession, and you've
talked about this before. We've talked about it before, COVID recession.
Speaker 3 (18:19):
Everybody knew it.
Speaker 4 (18:19):
Was coming because the government basically dictated it by FIAT stopped.
As Trump said at the time, we're telling everybody stop
doing what you're doing. He did it anyway. He was
critical at the time of that idea, but he ended
up doing it anyway anyway. It was The point is
it was really foreseeable, the Great Recession. A lot of
people saw that coming, The Fed saw it coming. They
were easing before the data told them to do so.
(18:40):
I wonder if maybe we're not conditioned to thinking, oh,
it's going to be obvious when there's another big economic
upheaval around, or a milder, more typical recession like nineteen
ninety ninety one or like two thousand and one. I
wonder if we're not spoiled a little bit by how
conspicuous the signs were for the last couple.
Speaker 2 (19:01):
Yeah, it's and look, this has been a really this
has been a really challenging business cycle for a lot
of people to analyze.
Speaker 3 (19:09):
Anyways.
Speaker 2 (19:09):
I mean, think about the last two years with all
of the people who were calling for recession that again
we were kind of looking at the data we were
going out. I don't really think so it's not there
like based on what you're seeing. But you know, we
had all to talk about the sam rule last year
and turns out, hey, this is the one time it
hasn't worked since World War Two. So it's it's been
(19:31):
a weird cycle and a lot of people have been
fooled by it.
Speaker 3 (19:35):
Quick break here Wall Street watches next.
Speaker 1 (19:41):
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 3 (20:03):
You guessed it.
Speaker 5 (20:03):
More tariff developments to report today after President Trump threatening
a thirty five percent levy on Canadian imports to begin
on August first, up from the current twenty five percent rate.
Markets at the moment in negative territory across the board
dows off by half a percent or two hundred and
twenty five points.
Speaker 3 (20:23):
S and P five hundred.
Speaker 5 (20:24):
Is down by a quarter of a percent or sixteen points.
In the NASDAC dipping into negative territory mostly flat, Russell
two thousand is down by eight tenths of a percent
or eighteen points. A ten year treas reeled up five
basis points this morning at four point four zero percent.
In crude oil up two percent higher today, trading just
(20:45):
below sixty eight dollars a barrel. Levi shares are up
eleven percent after the genes maker reported strong results for
the first half of the year. The company also increase
its dividend and raise its full year guy it's on
several key metrics. Levi said it was still able to
raise guidance despite tariffs because consumers, especially women, are buying
(21:09):
more directly with the company. Meanwhile, Energy Giant BP said
it anticipates up to one and a half billion dollars
in after tax impairment charges and said lower oil and
gas prices will drag on its quarterly results that stock
is up by three percent. Elsewhere, the box company Real
Sense completed its spinoff from Intel, closing a fifty million
(21:32):
dollar funding round. Intel stock is retreating by one and
a half percent and shares a movie theater chain AMC Entertainment,
climbing over nine percent higher after Webbush upgraded the stock
to outperform from neutral, saying AMC is poised to benefit
from a more consistent release slate over the next several quarters.
(21:53):
I'm Tucker Silva and that is Wall Street watch Mark.
Speaker 3 (21:57):
We got a piece here today.
Speaker 2 (21:59):
It's title the White House just took its most aggressive
stance yet against Jerome Powell. And basically what it lays
out is that Russell Vatt, who is the director of OMB,
the Office of Management and Budget, has basically said, look,
we think that you are breaking the law when it
(22:19):
comes to oversight of the renovation that's going on of
the FED headquarters. I'll quote here the President is extremely
troubled by the management of the Federal Reserve system. Instead
of attempting to write the FEDS fiscal ship, you've plot
ahead with ostentatious overhaul of your Washington these DC headquarters.
It goes through a whole bunch of different things, And
of course it gets to the speculation of.
Speaker 3 (22:40):
Hey, are they going to try to fire J.
Speaker 2 (22:43):
Powell for cause rather than just you know, letting them
go because the president wants someone else? And President was
asked about this today they I for you don't know
the reporter, but I saw the transcript. They asked him,
are you going to fire J?
Speaker 3 (22:57):
Powell? And he said no? And I kind of believe.
Speaker 2 (23:01):
I really think that what the White House wants to
do is just make things absolutely miserable for J. Powell
so that he either quits or just has an awful last.
Speaker 3 (23:10):
Eight months on the job. Basically is kind of where
I think they're going.
Speaker 4 (23:14):
Yeah, why not just I don't look, we all know
he wants to replace Paul with a puppet who will
lower interest rates and keep them low, and so they
can finance the debt using short term debt, relatively using
a greater percentage of short term debt. He thinks that's
going to be some kind of panacea.
Speaker 3 (23:31):
Can we talk about that? That's not? Yeah?
Speaker 4 (23:33):
Sure? In short, no pun, or maybe the pun should
be intended. The President thinks that he can shift financing
the difference between what the government takes in and what
it spends, which we call the deficit. Using very short
term to maturity instruments, he can shift the term to
maturity of new debt in favor of short term. If
(23:54):
the Fed keeps short term interest rates low, which they
have the power to do, they can print money. They
put it non banks balance sheets. Bank can lend to
one another at lower overnight rates. So the Fed can
do this, the Treasury can do this. In theory, it'll work.
The problem, of course, is that it will probably result
in not just high, but rapidly increasing inflation.
Speaker 3 (24:12):
At least.
Speaker 4 (24:13):
I say that because it's the way it's always happened
here and elsewhere, so I think that's the present. I
don't think. I know because he said it. Economists have
a term for it, those who study monetary policy. They
call it fiscal dominance, and the meaning is straightforward. It's
when fiscal policy dominates monetary policy. Monetary policy is no
longer focused on keeping inflation low and stable and keeping
(24:34):
output as close as possible to trend output. Those considerations
go out the window. Monetary policy sole objective is helping
the government finance it's deficit. That's Trump's end goal. I
wish you would just say that, why remove Powell now?
Why not wait another few months until his terms up?
It would be less disruptive. I don't know.
Speaker 2 (24:56):
Well, and I think I want to get more just
about this, you know, this idea of more moving more
issuance to to short duration debt and and cutting interest
rates in tandem with that. So just like, let's let's
look at where things are right now in the United States.
The Fed funds rate is between four and a quarter
and four and a half and the ten year Treasury
(25:18):
right now is at four point four percent, So they're
both basically in the same ballpark.
Speaker 3 (25:24):
So what what the president's.
Speaker 2 (25:26):
Talking about doing, as you mentioned, is, Hey, I want
someone in there who's gonna cut that Fed funds rate
I think he said the other day by three percent points. Yeah, okay,
take it down to one and a quarter and then
I want to issue more debt at one and a
quarter percent instead of having to pay.
Speaker 3 (25:42):
Four percent on long term debt.
Speaker 2 (25:45):
So the first question that that you immediately think of is, Okay,
if it's that easy, why doesn't.
Speaker 3 (25:53):
Every country do that?
Speaker 4 (25:54):
Many have tried.
Speaker 3 (25:56):
What's happened to them?
Speaker 4 (25:57):
Inflation? Is the short answer. For a followed by price
controls well when THEED. When the FED puts money into
the economy, we think of the FED as lowering interest rates,
and everybody says that. It's even in economics research papers,
So even the people who have strong technical knowledge just
use lowering interest rates as a shorthand for what the
FED does. But what they really do behind the scenes
(26:18):
is they print money. They give that money to banks,
they credit to more specifically, they credit it to their accounts,
and banks in turn lend it. That's how the FED
affects demand. Technically, aggregate demand, total demands, that's what the
FED does. They also have regulatory responsibilities. They can also
target longer term interest rates. But in a nutshell, that's
(26:39):
what the FED does. They print money to stimulate or
take money out of the economy by reversing the process
I just described to reduce demand problem with the president's strategy,
and I suspect they'll I suspect we're going to try
this again, because every every couple generations, people forget the
lessons learned and then we have to try stupid things again.
(27:02):
In that sense, we're like children. When the FED does that,
it will stimulate demand that will push the economy beyond
its speed. Limited. The FED will either be forced to
hike rates to address this, or if the President doesn't
let them, or his success or if it's someone cut
from the same cloth, doesn't let them, we're going to
try price controls and browbeating companies into not raising prices,
(27:25):
similar to what the President did to Amazon and other
companies when they said they passed tariffs along. Again, these
things have been tried before. I'm jumping back and forth
between tariff and monetary policy here, but the mindset is
the same.
Speaker 2 (27:39):
The other piece that I come back to on this is,
let's say that they even you know, it goes far
as doing that and imposing, you know, yield curve control
to control the price of money across the yield curve,
you know, in an attempt to try to get things
like mortgage rates down. Yeah, the Fed does not control
mortgage nor would you want them to. You know, in
(28:03):
what world do you want the twelve people that are
sitting at the Federal Reserve to simply be able to say,
this is what mortgage rates are going to be. And
the reason why we know that they don't control them
is because we have a really clear measure that you
can look at if you want to. We actually have
a couple that you can look at on this. The
(28:26):
first is you could say, okay, let me look at
the thirty year mortgage rate and compare it to the
effective Federal funds rate and show me the difference that
we have between them. And what you see is that
basically this is it's a range that you see from
(28:47):
anywhere from mortgage rates can be anywhere from like five
to six percent above the Fed funds rate. The lowest
I've seen is about one percent above the Fed funds rate.
But the reason why that happens is ultimately because bangs
are in charge of the amount of risk that they
want to take on, and so banks might see where
interest rates are either the Fed Funds rate, more commonly
(29:09):
the tenure treasury, because really the question isn't hey can
I park this money at the Fed for thirty years?
It's do I want to lend this money to the
federal government for ten years? Do I want to lend
it to an individual for thirty likes? That's how banks
think about their balance sheet. But so what you see
is banks don't simply say okay, tenure treasury is at four,
we're going to charge five. It varies, and I'll show
(29:32):
you how much this can vary. Back in May of
twenty twenty one, the spread between the average thirty year
mortgage rate and the tenure treasury was one point three
four percent. And you think about it, and the reason
why was in May of twenty one, there still wasn't
really much inflation, interest rates were low, unemployment was falling,
and so banks might have looked at the situation and said, hey,
(29:53):
there's no inflation, we don't really need much premium. Financial
conditions are good. Sure, if we can get you know,
so two percent on a ten year treasury right now
by lending to the federal government, that's fine. We'll charge
you three and a half on your mortgage in the
first half of twenty one, and that's what they did.
Speaker 3 (30:10):
Even below that.
Speaker 2 (30:11):
I mean again, the ten year treasury I think was
at like one to six then, and this is when
you had like the two point nine percent mortgages that
were out there. Fast forward a year to May. Actually,
let's go a year and a half forward October of
twenty two, inflation rippin' where at like nine percent on inflation,
I think we were down a little bit from there
at that point where at like seven, but inflation's still high.
(30:33):
It's been high for about a year. And banks are
no longer saying yeah, we'll take one in a third
percent over the ten year treasury. Instead they're saying, no,
we need three point one percent over the ten year
treasury because the ten year right now is at four.
Inflation's running at seven, and man, we need seven percent
because if inflation stays hot, we don't want to be
(30:54):
holding the bag on this. And so that's how you
end up with, you know, seven percent mortgages. Today, inflations
come down, but there's still you know, concerns this and that.
The spread between the ten year, the thirty year mortgage
and the tenure treasury is about two point three percent.
The long term average is one seven. But it doesn't
just stay there. And so this is the thing that
I come back to when we're talking about interest rates,
(31:15):
is look, even if you move all of the issuance
to the to the short end and cut interest rates
dramatically there, yes, maybe you have an impact on the
US budget, but it might come at the cost of
reigniting inflation, which ends up making you know, lending for
other for individuals and businesses, more expensive because banks are
(31:35):
going to demand more premium. And on top of that
that inflation could actually end up making your budget situation
worse because now you have to borrow more in order
to actually fund the government. Yeah, so there's no free
lunch on all this. If if it were as simple
as hey, let's just issue all three month debt and
(31:55):
cut interest rates to zero, well, I'm sure that the
Brazilians would have figured it out by now. I'm I'm
sure the Argentinians would have figured it out by now.
I'm sure the Italians would have figured it out. Oh yes,
you know, And I say I say this as a
proud Italian because.
Speaker 4 (32:09):
We pioneered with fiscal recklessness. Check we figured this out
the hard way seventy two times. We tried every hundred
years for the Pastni.
Speaker 2 (32:17):
Yes, this this is what Italians do. We say, well,
maybe it's different this time.
Speaker 3 (32:23):
Try Come on, you know, I just don't meetball on
the rate.
Speaker 4 (32:28):
You know, like put to the money, Jack, you putting
through the money would be fine food to the money.
Speaker 2 (32:34):
Anyways, Sorry to anyone who just had to listen to
us do that.
Speaker 3 (32:39):
That's what happens when you get three Italians in a
room together.
Speaker 4 (32:41):
Couldn't help ourselves. It's like birds starting to turp, and
they all chirp, they all chime in.
Speaker 3 (32:46):
A lot of hands were weird. We're all talking with
our hands too, of course, you know.
Speaker 4 (32:49):
It's like it's a dangerous are in here all of
a sudden, very loud.
Speaker 3 (32:53):
Yeah.
Speaker 2 (32:54):
Anyways, So that's why you don't do that, is because
we Italians have tried it and it doesn't work.
Speaker 3 (33:01):
You can't just cut your way out of paying, you know,
paying on the debtity. It doesn't work that way.
Speaker 2 (33:08):
We've been there for a couple thousand years. It's it's
pretty hard. Let's take a quick break here. When we
come back, let's talk about Earning season.
Speaker 1 (33:17):
Right after this, find daily interviews and full shows of
the Financial Exchange on our YouTube page. Like us on
YouTube and get caught up on anything and everything you
might have missed. This is the Financial Exchange Radio Network.
The Financial Exchange is now available on your Alexis smart
speaker has to play the Financial Exchange and catch up
on anything you might have missed. This is the Financial
(33:40):
Exchange Radio Network.
Speaker 2 (33:46):
Next week, Earning season kicks off for Q two expectations
according to Factset Earnings Insight is for a five percent
annual earnings growth. That would be the slowest that we've
seen since the fourth quarter of twenty two twenty three.
But a reminder, typically the way the game is played,
earning's estimates come down heading into the reporting and then
(34:07):
usually see the beats anywhere from about.
Speaker 3 (34:09):
One and a half to three and a half percent.
Speaker 2 (34:11):
So realistically, you'd expect this to come in somewhere in
the six and a half to you know, eight and
a half percent range. But obviously this is something where
I'm not so much interested in what companies are saying
about second quarter earnings. I want to hear, Hey, what
are they seeing in their business and how has it
evolved over the last three months, because the last time
(34:31):
the companies reported was in early April, well mid to
late April, and we just didn't have much information about
how the US economy was evolving after you know, different
tariffs and changes, and I want to hear what companies
are saying about the second after the year.
Speaker 4 (34:45):
Personally, I think that's where the skill comes in. It's
not the quantitative stuff that's that's already that's already happened.
When you see data, it's about something that's happened. That
sounds trivial, but think about it for a second. Sure
The value in this for those who possess the skill
to parse words and extract their true meaning is to
(35:05):
take the forward looking statements and do something a little
different than everybody else is doing with them. For example,
on the subject of tariffs, who's eating them? As we
talked about in the last segment.
Speaker 3 (35:17):
So I guess we'll.
Speaker 5 (35:18):
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(35:39):
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Speaker 1 (36:15):
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Speaker 2 (36:26):
Goldman Sachs apparently is testing an autonomous software engineer powered
by a company named Cognition, and they are going to
be putting this AI engineer into the metaphorical room with
their twelve thousand other developers. The program is named Devin.
Speaker 3 (36:46):
Devin is that an acronym?
Speaker 4 (36:48):
Sorry? Okay, no, it's just devil like you look like
a devon?
Speaker 3 (36:52):
Oh okay, yeah.
Speaker 2 (36:54):
And apparently look, we're gonna see how this ends up
playing out here. The what I've gathered from actual software
engineers is you can generally use and again this even
like off the rack like AI programs to do an
awful lot of coding. It's called vibe coding because basically,
you tell the thing what to do and it comes
up with your app or your your code for whatever
(37:16):
it is that you're trying to make. But you do
still need supervision simply for a couple of reasons. The
first is, hey, is this you know, kind of the
most optimized way to do this? That's number one. But
also from a security perspective, there may be things that
you see AI coding miss and that can obviously be
you know, a pretty big deal when you're dealing with
the financial system and all the privacy regulations and know
(37:38):
your customer and and this and that. But guys, I'm
I'm telling you this, this is going to be a story.
I just I still wonder if this ultimately is where
the biggest impact is. Because everyone's looking at large language
models and saying white collar jobs are going to be replaced,
and I'm not saying they won't be, but I really
(38:01):
think there's a lot of meat on this robotics, you know,
and sensors piece there that could really have a bigger
impact on more manual labor jobs than people are thinking
right now. Just because it hasn't gotten to that point yet.
I think that is the next frontier. It may actually
be more interesting. Let's take a quick break here. We
got more coming up in just a bit.
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