November 18, 2025 • 38 mins
Mike Armstrong and Marc Fandetti discuss private credit's exposed cracks in the foundation. Blue Owl plunges to 2023 low after blocking exit from fund. US probes firms that borrowed $400M from private credit giant HPS. What happens when housing supply is driven by markets and not Main Street. Cheaper coffee and tomatoes won't fix the inflation problem. AI is making us rich and unhappy.
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Episode Transcript
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Speaker 1 (00:00):
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(01:06):
Armstrong and Mark Vandetti.
Speaker 2 (01:09):
Good morning, Welcome back to the Financial Exchange. Top story
of our day today continues to be the market sell
off that we've been witnessing for the last five days
or so. NASDAK currently off two percent, four intred and
fifty points SMP down one point four percent off also
off one point four percent. Taking a look around at
other markets here, you have crypto actually moving upwards today.
(01:34):
That's after several weeks of a pretty abysmal performance on
that front. Price of oil is about flat off slightly,
Gold prices moving off about half a percent, down to
four thou fifty six dollars per ounce, and in the
bond market, you've got the yield on the ten year
treasury moving down a bit to four point one percent.
(01:56):
But a pretty traditional risk off type day here, and
we've been seeing a number of measures of the course
the last few days, intensifying pressure on the overall I
think it's just really the overall AI trade. I don't
really know of many other ways to describe them.
Speaker 3 (02:14):
Dollars not really moving, goals not really moving. We know
those two are inly related. We talk about that a
lot internally, So there is no there's no thread pointing
excuse me, to a larger fear. Right, It's more this
continued gelling of this notion that maybe AI, the AI
will not be able to I'll say, pay for itself
(02:35):
right as quickly as investors have priced into AI stocks,
say adjacent stocks.
Speaker 1 (02:40):
Excuse me.
Speaker 2 (02:41):
We've been talking about this market this morning, and you know,
one of the notable pieces we mentioned is that there
haven't hasn't been a direct catalyst. I think you can
name in point twos. Oh wow, that sure is concerning
for the overall market. This company went belly up, this
bank failed, YadA, YadA, YadA. One area that though, that
we have been attached to and focusing on that. I
you know, I don't think you can draw the connection
(03:02):
between AI trade and this next story, so I don't
intend to do so. But Blue Oul Capital we briefly
described what happened here yesterday on the program, but I
want to dive in here and just give some context
around what we're seeing in private credit specifically, So again
quick synopsis. Private credit the stepchild of private equity. It's
(03:26):
just private loans being made to companies, and those loans
rather than being done by a big bank that might
put them out on the publicly traded markets and trade
in bond markets. They'll usually package them together and sell
these packaged loans to investors of some sort. Generally institutional
investors are the largest buyers of this type of stuff.
(03:48):
Insurance companies, pensions.
Speaker 3 (03:50):
Yeah, they're actual funds. They don't even package they keep service.
Speaker 2 (03:53):
These are Yeah, some of those funds are even now
publicly traded, although most of them, you know, maintain again private,
being that private equity pists and has attracted a lot
of investment and has expanded dramatically over the course of
the last fixed company years, and seeing some ugly cracks
in the foundation. So talk to us about the position
(04:13):
that Blue Owl occupies there. What do they do and
what did they do over.
Speaker 3 (04:17):
Well, they're a big private debt or credit I'll use
those terms interchangeably. Manager. They may not be a household name,
as the expression goes, but they manage a lot of
household assets. If you have a pension, some of your
pension fund, the assets that are used to pay your
monthly benefit, are probably invested in private credit sure and
there's a good chance some of that is in a
Blue Owl sure fund. Blue owl is in the news
because they have a fund, a small publicly traded version
(04:43):
or potentially publicly traded version, a so called business development corporation,
a fund that just never got traction. So they're going
to effectively close it by merging it with a larger fund.
When this merger happens, the investors in the smaller fund
that never got traction who happened behind that worth investors,
not the very sophisticated pension and institutional insurance company et
(05:04):
cetera investors we're talking about earlier. They're gonna take a
big aircut because their fund is effectively valued at less
because it is so marked to so called market.
Speaker 2 (05:16):
And effectively what happened here is they got hit with
a bunch of redemption requests, meaning a bunch of of
their investors tried to cash out of this fund all
at once, and they froze it right. They said, sorry,
we're not going to process these redemptions right now. We're
pausing all redemptions. And their solution was, Hey, take this
fund that is clearly seeing some pressure and merge it
(05:39):
with some other asset that we have. That's that okay.
Speaker 3 (05:41):
So that's slightly different than than the rationale I had
attributed to the merger. Okay, your information is probably more
correct than mine, but either way, it shows what can
happen if you get into a new vehicle that represents
it does the same thing as all their flagship products.
If the new vehicle does I said, doesn't take off.
Maybe that's too vague a way to put it, but
(06:02):
I for whatever reason, they have to close it in
this case, merge it. Uh, there's the potential that your investments.
One of the nice things about private markets, equity and
credit is that investments are not mark to market every
day like a stock is. If new information comes out
about a say IBM, that's priced in right away.
Speaker 2 (06:19):
I like, I just you said one of the nice
things about that.
Speaker 3 (06:23):
Well, from an investor for looking to reduce volatility, it
is a nice thing. It's it's a it's a little
bit phony, but it is a positive attribute from.
Speaker 2 (06:30):
A So the positive attribute that you're described, I know,
I know, just because investors is that we have imperfect
information about what we own.
Speaker 3 (06:38):
Well, no, it's that I'm a Companies are allowed to
assign valuations based on independent internal audits of the assets worth. YEP,
I wouldn't call it imperfect unless you think markets maybe
some people do, it's definitely not. It's a way. It's
it's it's a it's an artificial way to suppress volatility,
(06:59):
but it's still one of the reasons that illiquidity associated
with private equity and debt is one of the things
that allowed has allowed it historically to outperform public market
okay analogs.
Speaker 2 (07:09):
So we have this Blue Owl fund that had to
pause redemptions and is now merging with this other one,
and investors in that first one are going to be
taking a big haircut. Blue Owl stock down forty two
percent so far this year, probably out of concerns about
their core business model and whether it is that they
do this. All ties now to this US government probe
(07:30):
into in a series of firms that borrowed some four
hundred million dollars from another private credit.
Speaker 3 (07:37):
Ties into in the sense that it's the same asset
class generally, blue out has nothing to do with it
what we're about to talk about.
Speaker 2 (07:43):
Correct Thank as far as we know, the US government
is probing this firm that borrowed some four hundred million
dollars from private credit, Giant HPS, which is now owned
by Blackrock. And what we're learning here is that this
lesser known telecom company borrowed some four hundred million dollars
and is now being accused of pretty much fabricating and
(08:07):
inventing all of the revenue that was borrowed.
Speaker 3 (08:09):
The borrowers committed fraud. They said they're nateral. They said,
you excuse me, have have alleged, reputedly committed fraud. Thank
you to all your lawyers listening out there. Yes, allegedly
committed fraud.
Speaker 2 (08:23):
Uh.
Speaker 3 (08:24):
Not uncommon when financial conditions are so I'm gonna blame
the FED. You Tucker and Mike Canna be shocked. I
blame the Fed. Financial conditions have been too easy for
too long. This type of behavior becomes inevitable in that
when you are pushed to seek higher yields. If you're
an analyst looking at the if you're an underwriter, an
analyst looking at these deals, you're under pressure from your
(08:45):
manager to bring big, juicy yield deals to the fund manager,
you can get sloppy, You can your standards.
Speaker 2 (08:55):
I'll be willing to blame the perpetrator of fraud in
this case, but maybe you know, maybe the FED would
be three. But are there are.
Speaker 3 (09:01):
There are societal conditions what I'm calling sidal conditions here.
I'm trying to draw parallel to people who talk about crime.
Monetary conditions here facilitate the urge to commit fraud. It's
far more prevalent when conditions are too easy for too long.
Speaker 2 (09:16):
The other absolutely fascinating piece of this story, so the
HPS funds began lending to these companies that are controlled
by the person what was his name again, it was.
Speaker 3 (09:30):
A you're going to trying to pronounce that.
Speaker 2 (09:31):
Good for you, Ben Kim Brombat. Yeah, we're gonna go
with that. The companies began lending to the companies controlled
by this individual in twenty twenty According to the Delaware
court filings, in June of twenty twenty five, HPS, who
was doing the origination of these loans.
Speaker 3 (09:51):
HPS was the manager at the time. They're the private
credit manager for.
Speaker 2 (09:54):
The first time, began requesting copies of underlying email confirmations
verify the receivables five years after making the loan.
Speaker 3 (10:03):
Okay, So this is like you hire somebody to rent
your house out and they don't do the credit check
on the tenant.
Speaker 2 (10:10):
It's worse than that.
Speaker 3 (10:11):
Well, I'm just I know it's worse than that, Like
it's four hundred million. I'm just trying to make it relatable. Yeah,
and you asked your manager, did you look at the background?
I think I did. I don't know. I hired an
intern to do that. Let me check with them. That's
more or less what happened here, Mike.
Speaker 2 (10:24):
So you have this massive fraud for potential fraud four
hundred million dollars that's seemingly gone up in smoke one
Black Rocks probably asking some questions of this new manager
that they purchased just this year.
Speaker 3 (10:38):
Well, they missed this too. They did extend, they hired
you know, I'm gonna stop naming parties. They had somebody
do due diligence. So you're gonna be hearing this term
a lot over the next few years if we're entering
a purging period, which will ultimately be healthy but painful
in the short term. They didn't do their due diligence.
They hired someone else to do their an auditor, a
very well known one. They evidently didn't do their due diligence,
(11:01):
so no one was watching the watcher. This is not
an uncommon story.
Speaker 2 (11:06):
So why it matters. Everyone is now asking their private
credit managers out there, whether it's Blue Owl, HPS, Blackstone, KKR,
these are big, big names in this space. What was
your diligence like? Well, first of all, that you have
that loan that I own, did you check receivables for
the last five hours?
Speaker 3 (11:25):
You're never going to do that degree of due diligence
on a private market manager. That is way too granular.
The first question you ask is do we have any
exposure to this? No, I looked at those deals I passed,
and then you're going to get into that. What made
you pass on this fella? Well, I saw he had
a criminal record. Oh, that is the best predictor of
future criminal behavior is or even sure skirting the line
(11:48):
is whether or not they've been accused of it in
the past. That's where the questioning goes here.
Speaker 2 (11:51):
Again. I always try and bring this back home why
this matters to you? If you own no private credit one,
you may own some of it in a pension that
you know is paying your benefits to your insurance provider
that provides you homeowners insurance. May own a very.
Speaker 3 (12:07):
Large this time they started the practice.
Speaker 2 (12:10):
And you know, frankly who knows how bad this could be.
But you know, hypothetically, could there be enough bad loans
out there that it sinks an insurer. Two. Yes, I'm
going to say that that is always a possibility.
Speaker 3 (12:23):
It's it's it's it's the erosion of trust, which is
what happened in O eight.
Speaker 2 (12:27):
O nine, And that's the biggest point of all of this.
If there is an erosion of trust in credit markets,
it means that credit drives up. And when there is
not credit to be had, whether it's a business trying
to take out a loan or whether it is somebody
trying to buy a car, because again, private credit was
involved in both of those transactions and varying degrees, you
(12:51):
begin to have a real problem for the economy. Credit
is the is the I don't know, lifeblood, the lifeblood,
the WD forty whatever. You want to to make the
gears keep going. You need it to exist, you need
it to be prevalent. And if it starts to dry
up because of these concerns, yeah, that can lead to
some serious issues for the overall economy. And this is
(13:14):
not a story that leads you to believe that that
is pervasive. But I keep going back to this comparison
like back in twenty twenty three when we had a
couple of banks that were caught off sides, and we're
just kind of wondering, like how big is the bank
run going to be? Are there going to be more
of these? We're finding ourselves in a similar position now
with private credit, and I think it's going to take
some time to find out. Quick Break Trivias next on
(13:36):
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Speaker 2 (16:04):
Mark got a couple of housing stories today. Would you
rather cover the fifty year mortgage first? Or how the
housing market is being ruined by big corporations?
Speaker 3 (16:13):
They were both interesting, But we've talked a lot about
the fifty year and it's still a concept.
Speaker 2 (16:17):
So let's talk about what I'd difer to you this
piece from the Financial Times on corporations apparently being the
cause of all of the problems on the housing market.
So the argument Dr Horton Lenar told Brothers these companies
are so big that, like any other company that's beholding
to shareholders instead of borrowers and their customers, that a
(16:41):
lot of their free cash flow goes to share buybacks,
and they need to do whatever they would do to
keep margins high. That can include things like buying large
parcels of land and not developing it until it's opportunity
to do so. And so the author points out that,
you know, if we just had more company tition and housing,
then things would be better for the American housing system.
Speaker 3 (17:06):
That's an interesting take. This is a an editorial, it is.
Speaker 2 (17:09):
It's not from the Financial Times journalist staff. It's an
editorial it's but.
Speaker 3 (17:14):
It's done by a respected writer. I just I assume
the facts are.
Speaker 2 (17:18):
I don't know that breaking up these housing builders, well,
I just fixed the problem.
Speaker 3 (17:21):
I've not seen any serious work on the subject, which concludes.
So to study this unique data on two different markets,
one that was concentrated, dominated by big builders backed by
big lenders, in another that was more fragmented, smaller. She
makes the point about Bailey savings and loan from what
(17:43):
the hell's it called?
Speaker 2 (17:44):
Prote Wonderful life?
Speaker 3 (17:45):
Thank you, A wonderful life, sorry, it's been a while
since I've seen it. She makes the point that that's
not how mortgages are made anymore. They're made by a
big bank, which is comfortable because it's got relationships with
one of the big builders, and then it securitizes those mortgages.
Speaker 1 (17:59):
Et cetera.
Speaker 3 (18:00):
Soo would a more fragmented market function better? If you're
objected by function specifically, we mean bring increased supply. I'm
just noting I have not seen any evidence as the
point I was trying to get.
Speaker 2 (18:10):
And by the way, I debate that the market is
so concentrated. D R Horton, the largest one out there
in twenty twenty two, represented thirteen percent of new homes.
Lenar was ten point seven, Paul t was four point five.
That doesn't seem like a monopolistic market to me. I'm
sure there are some metro areas where that's the case,
but that doesn't seem like a monopoly to me. The
other proposals that are out there. I mean, again, I.
Speaker 3 (18:32):
Had sales or I'm sorry I didn't.
Speaker 2 (18:36):
I just looked this up. This was in terms of
total total builder volume in forty seven metro areas.
Speaker 3 (18:43):
Okay, so that number of homes.
Speaker 2 (18:45):
Yeah, so I mean volume wise is thirteen percent market
share up?
Speaker 3 (18:49):
Okay, So the way to study if you were going
to if you're gonna study this, and we're not, it's
not what we do. I need data on different markets
where the concentration is different, and then look at the
supply however you want to measure it, or the price
is relative to the I mean, there's a way to
get at this. I don't have the data. Maybe someone has.
Speaker 2 (19:06):
I think other policies out there. Again, I think you
have to go after the supply side. I think policies
like rent control are just very clearly stupid and not
going to work well. But if you want to fix it,
you got to go after supply. To go after supply,
I really think the only way to do it is
loosen restrictions around home buildings so that it is more
(19:27):
profitable to build homes for large and small home builders alike.
And if you want to pair that with something like
the author mentions a land value tax mainly discouraging entities
from just owning undeveloped land by taxing it more, maybe
that would help too. I'm not really sure, but those
two to me are the only policies that actually fix
(19:48):
the problem. A fifty year mortgage doesn't, breaking up big
home builders doesn't. And I don't know. Everyone's looking for
the magic bullet, and I don't think it exists. Quick
Break Wall Street watched next.
Speaker 1 (20:08):
Bringing the latest financial news straight to your radio. Every day.
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Time now for Wall Street. Watch a complete look at
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Speaker 5 (20:27):
Markets again in negative territory following yesterday's pullback as concerns
circulated around high tech valuations. Wall Street's also digesting the
first batch of retail earnings this morning from Home Depot.
Right now, the Dow is down by nearly nine tenths
of one percent or four hundred and three points s
and P five hundred down six tenths of one percent,
(20:49):
Nasdaq down nine tenths one percent or two hundred and
four points lower, RUSS two thousands down about a quarter percent, ten,
Your treasure Reil flat now at four point one two
nine percent, and rude oil up about a third of
a percent, rating just above sixty dollars a barrel. Home
Depot falling over three percent after the home improvement retailer
missed third quarter earnings expectations, marketing its third consecutive miss.
(21:13):
Home Depot also cut its full year profit outload breaking
news this morning after Microsoft announced new strategic partnerships with
Nvidia and ais startup Inthropic. Microsoft and Nvidia will invest
a combined fifteen billion dollars in Anthropic, while Anthropic committed
to purchase thirty billion dollars of computing capacity from Microsoft's
(21:34):
Azero cloud service. Both Microsoft and Nvidia are down about
two percent.
Speaker 1 (21:40):
Meanwhile, we have.
Speaker 5 (21:41):
Another major Internet outage to report, this time stemming from
cloud Fare. The outage was affecting several major websites and
services offline, including open ais Chat, GPT, and social media
platform x However, the outage reportedly has been as resolved
cloud Fir stock is now down over one percent, and
(22:02):
according to The Financial Times, activist investor Elliott Management has
built a large steak in Barrack where Elliott here is
encouraged by the idea that the gold miner could be
split into two companies. Barrackstock is up over one percent.
I'm Tucker Silvan, that is Wall Street Watch and in
the previous segment, we asked you the trivia question what
(22:22):
year was the final Calvin and Hobbes strip published? That
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Speaker 2 (22:38):
Mark, we're talking about housing in the last segment, I
want to continue that with a discussion of the fifty
year mortgage, So removing the conversation about is this a
fix for housing affordability, which I do not believe it is.
I want to just talk about this car affordability right,
Like you know, you extend the duration of the loans,
it's not going to make the underlying asset more affordable
(23:00):
on the surface though, like terrible idea, good, you know,
fantastic idea. I've already laid my claim. I don't think
it's a fix to the overall housing affordability piece, But
is it substantially a worse idea than the thirty year mortgage,
which I think everyone you know in the US looks
at as kind of the holy grail of good opportunities.
(23:23):
I don't know that I look at it as substantially
more dangerous or worse than a thirty year mortgage.
Speaker 3 (23:30):
Well, aside from the obvious criticisms of a longer mortgage,
which you could also levy at the thirty versus the
twenty versus, they all apply. Sure, you could take a
fifteen or twenty year fixed rate when you buy a
house versus a thirty, and the same arguments of the
thirty versus the fifty apply. It's going to take you
longer to build positive equity. You'll have negative equity. Said differently,
(23:53):
for a longer period of housing prices drop.
Speaker 2 (23:58):
The biggest criticism that I have of it is that
it's further government invention into the housing market, right like.
Speaker 3 (24:05):
Yeah, it's not some innocent let's let the market find
the right.
Speaker 2 (24:09):
No, it's not. Because the only reason that a bank
is going to issue a fifty year mortgage.
Speaker 3 (24:13):
We'll need the way to the government is because.
Speaker 2 (24:15):
The government will buy that mortgage from you. So that's
my biggest criticism. And by the way, that exists for
the thirty year there's no bank out there that is
willing to lend Mike Armstrong money for thirty years at
three and a quarter percent to buy a home. The
only reason that exists is because the government says, yeah,
we'll buy that off of you. That sounds like a
pretty good deal. And so the government actively supports the
(24:36):
housing market. And so my biggest criticism is, yeah, if
you're doing fifty year loans, then we are the ones
paying for it, the American taxpayer, to basically fund that
tool to feed into the housing market. I guess the
other big criticism is the reason the thirty year mortgage
has worked so well is because housing prices have appreciated
(24:58):
over fifty sixty years to the tune of two to
three percent per year. I have no reason to believe
that that is about to reverse itself. But if we
went on a fifty year time period where housing prices
depreciated or did not appreciate it by two percent, then
that fifty year mortgage looks a lot less attractively.
Speaker 3 (25:16):
Going to take you longer to build equity, right, I mean,
I'm not opposed to experimenting with different combinations in an
unfettered in an environment where the degree of government intervention
is modest or non existent. But here they're talking about
(25:37):
throwing the weight of the government behind it, which makes
me uncomfortable, like it makes you uncomfortable. But the theoretical
arguments against it to me aren't that compelling because you
could make them unless I'm missing something, correct me if
I am make them against the thirty verses twenty or
the fifteen.
Speaker 2 (25:51):
Yeah, I guess, but I can't of see them.
Speaker 1 (25:54):
Mike.
Speaker 2 (25:54):
I feel like it's been this. It's been just this
big issue because of who proposed at President Trump, and
either people love the idea or hate the idea, and
there hasn't been a lot of judging of it on
its merits, and I think on its merits, I don't
see it as something that's going to ruin or fix
that house.
Speaker 3 (26:11):
Of all the economic ideas that have come out of
this administration over the past six months, this is the
least flaky thing. Yeah, no offense, but the trade policy
has been erradic and counterproductive. We're not going to talk
about trade today, maybe we will later in the week.
Monetary policy has been the interference with in meddling and
monetary policy has been horrendous and will will pay negative
dividends for years to come. As anyone who's looked at
(26:34):
the issue as concluded this is like the least potentially harmful.
Speaker 2 (26:38):
If you have your own thoughts on the fifty year mortgage,
I'd be interested to hear them, just you know it,
questions or thoughts. You can text the show at sixty
one seven, three six two thirteen eighty five. But it
is just a story that has got a lot of
attention because you know, the thirty year mortgage is applicable
to just about everybody. Almost everyone's lives have been touched
by a thirty year mortgage in some way or another,
and so it's been getting a lot of attention. Teking
(27:00):
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(27:43):
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Speaker 1 (28:26):
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Speaker 2 (28:42):
Mark. Last week, the White House announced they'll be waiving
some tariffs on agricultural goods sold at the grocery store
that we do not largely grow in the United States. Coffee,
What was else on the list? Avocados, bananas were all
on the list. And we're starting to see that piece
from Jonathan Bloomberg not going to fix the overall inflation problem.
(29:05):
He's right, Waving tariffs on these products are not going
to fix the overall inflation problem. You're gonna, you know,
put this in the terms of the Fed and monetary policy.
I'm going to try and put it. I guess a
little bit differently, which is.
Speaker 3 (29:22):
What do you think about inflation? If not in terms
of monetary place.
Speaker 2 (29:26):
You do have to let you I'm talking about the
sec the seeming trend that we have away from globalism,
and the last fifty years have been defined by goods
prices coming down or staying cheap because of globalism, trading technology,
trading technology and manufacturing stuff in China. And if we
are getting away from a more global society, I have
(29:49):
a tough time believing that prices can do what they
did for the last fifty years. Yes, you know monetary policy,
so you.
Speaker 3 (29:55):
Say last so since the Great Modern since vulk are
going to handle on inflation causing a big recession which
Troft in nineteen economy Troft bottomed out in nineteen eighty two.
Since then, inflation has for the most part been low
and stable, with the exception of the COVID inflation. We
don't need to get into the causes of the co
COVID inflation. They're still debated. But what causes inflation in
(30:17):
the short term is that some prices don't move you
could say they're rigid or sticky, while other prices do.
That pushes the average up. Question is does that persist.
The answer to that question is, I'm just reciting modern
macro here. This is the consensus. You ask any economist,
this is what they're going to tell you, for the
most part, unless they're sort of fringy monitorists or something.
(30:38):
Some prices are sticky, they don't change. Other Look, let
me be more concrete. Oil goes up by a lot.
I own a store. I'm not going to go through
and resticker everything. I'm going to wait, so the average
price is going to go up under that scenario. Similarly,
you can have a negative supply so called supply shock.
I'm using oil as an example here that brings the
average down. So in the short term, inflation is a
(30:58):
result of these nominal rigidities. To use a term, economists
would use price stickiness coupled with various prices. It could
be insurance one month, oil the next, avocados the following,
couple with some prices that move by a lot, changing
the average. That's short run inflation. Long run, it's a
function every virtually every economist degrees of how much money
(31:21):
the FED prints relative to money demand. And that's why
we say the FED, or at least I do say
the Fed's job is to act like them, like the
economy's thermostat.
Speaker 2 (31:29):
And for now we are still running three percent inflation.
We haven't got inflation, but inflation remains.
Speaker 3 (31:35):
So do you want to turn the thermostat down when
the room temperature is I'm gonna watch this. Should the
FED be turning should be? Should the FED be turning
up the heat? Should the FED be heating up the
labor market when it's already seventy eight degrees. I don't
know if that analogy works.
Speaker 2 (31:52):
But not convinced, or does the FED just say, oh,
you know what, our new price target is actually three
percent annual inflation. But then you lose credit.
Speaker 3 (32:00):
Credibility is the key. If there's one word that comes
out of the FED, the experience of the FED misreading
the state of the economy and misreading their own ability
to control inflation in the nineteen seventies, it is credibility.
They lost it. It took the biggest recession since the
Great Depression in nineteen eighty one eighty two to get
that credibility back. I don't know that they've gotten it backs.
(32:20):
I don't know that they've recovered it since the COVID inflation.
My guess is no. If you look at inflation expectations,
which are also elevated, which is why the Fed's eagerness
to cut rates here seeming eagerness is a bit of
a puzzle.
Speaker 2 (32:33):
Let's say a quick break. When we come back. Stack
Roulette is next.
Speaker 1 (32:37):
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Speaker 2 (33:34):
Wall Street Journal today writing about the AI revolution. Here's
the subject line, which I kind of like the most
joyless tech revolution ever. AI is making us rich and unhappy. Yeah,
we'll see how long the rich part lasts, but the
unhappy piece is pretty interesting to me, and I wonder
if you do detect this mark. I definitely hear the
(33:57):
fear and skepticism from some about AI and how they
feel it's coming for their job and it's going to
be this terrible thing. I definitely hear the fear, but
I also do see some joy from AI, like I
see people making stupid Okay, perfect example, my wife most
(34:17):
useless usage of AI that I can think of. Our
dog and cat hate each other and shows so she
had AI put together a picture of the two of
them snuggling by uploading pictures of the two animals separately.
Totally useless, but not doable without artificial intelligence. She does
not have the editing skills to be able to make
(34:38):
that happen. I'm not saying it delivered her a great
degree of joy, but like I see those silly and
kind of whimsical uses of artificial intelligence all over the place.
Speaker 3 (34:48):
She used more electricity than a third world village. Yes,
uses in a day to do that.
Speaker 2 (34:53):
One hundred percent.
Speaker 3 (34:53):
Yes right, yes, we all do it.
Speaker 2 (34:55):
Yeah, Like I've used it to write like silly sounding
poems to my daughters. Like I do see the whimsical
uses of AI and people and people enjoying it.
Speaker 3 (35:08):
Excuse me, I have to short a bunch of companies.
Speaker 2 (35:10):
Yeah again, Like, this is my concern about the industry
is that the use cases that I'm seeing of this
technology are dumb and unpropp Compare.
Speaker 3 (35:19):
That to what we used to do in the nineties.
Like one day we're doing spreadsheets and lotus one two three,
pretty primitive. The next day, I'm mocking something up and
Excel and emailing it to a colleague across the country.
That was life changing, That was productivity enhancing. I'm just
feeling it with AI. Yet, Mike, you're being a little facetious.
Speaker 2 (35:37):
For every one of those, there were, you know, three
thousand pets dot com that were just complete idiot ideas
of how we were going to make money on the Internet.
So you know, I'm not I'm not poop pooing the differences,
but there were plenty of bad use cases for the
Internet back in then.
Speaker 3 (35:54):
That wasn't really an Internet point. It was more of
a an IT point about tools that enhanced people's productivity
and allowed people to move on to higher value added things.
You didn't have to spend all day if you were
an admin an administrative assistant typing, for example, the goofball
like me who developed the content could put it right
(36:16):
into a word processor and get a pretty clean copy
to the end user.
Speaker 2 (36:21):
Okay, fair, but you have specifically told me that you
do not see why any investment firm would need to
hire an entry level analyst anymore.
Speaker 3 (36:28):
No, I've said I could see needing far fewer if
you still need someone with experienced overse The case I
was bringing up specifically, is build me a table of
the top ten stocks by price to book value in
reverse order for one, three, and five. I could do
(36:49):
that myself in factset or something, or I could tell
their AI chatbot to do it. Oh that's great. I
don't need We're not going to need to hire someone
to do the grunt work for me.
Speaker 2 (37:00):
It should.
Speaker 5 (37:02):
It?
Speaker 3 (37:02):
Should it not? Look this is my sort of narrow perspective.
There are plenty of people who say it has been
life changing for them, just not enough to convince me
that it will meet the growth expectations required to justify
the investments. And I think that is a healthy attitude,
particularly when you're a fiduciary. Is we are in our
(37:23):
day jobs?
Speaker 2 (37:23):
Yeah, I don't know. Like the the debate around is
AI going to make us happy or unhappy? I don't
know that.
Speaker 1 (37:33):
What is that?
Speaker 3 (37:33):
Who asked that question?
Speaker 2 (37:36):
Sorry? I just I don't. I don't know. Like that
doesn't seem like the most relevant detail to me. It's
going to make some people miserable, it's going to make
some people really happy. The Internet, you know, what did
the Internet do it? Brought vast amounts of information to
all parts of the world that didn't previously have access
to it, and it also created the opportunity for terrible
(37:59):
disinformation that has impacted all sorts of horrible things. It's
allowed for distribution of terrible content online. So AI is
going to have the same positives and negatives too.
Speaker 3 (38:11):
If you look at their happiness, you know, don't go puppy, Yeah,
don't go for a walk in the park. I don't
think you're not going to find it in yours in
your computer terminal.
Speaker 2 (38:21):
Yeah. I tend to agree, but nobody thinks that.
Speaker 3 (38:23):
Nobody know this new computer is going to make me happier.
Speaker 1 (38:25):
Nobody?
Speaker 3 (38:27):
Oh really? Okay, sorry?
Speaker 2 (38:28):
Why do people line up at the store for the
next iPhone? Right? I mean yeah, I think people do.
Markets are in negativetory territory, but substantially better than when
we started the show. SMP off a little bit more
than six tens of percent now and Nasdaq off nine
tens of a percent. We'll have a full recap for
you and more on the day of Nvidia's earnings tomorrow
on the Financial Exchange
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(01:06):
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Speaker 2 (01:09):
Good morning, Welcome back to the Financial Exchange. Top story
of our day today continues to be the market sell
off that we've been witnessing for the last five days
or so. NASDAK currently off two percent, four intred and
fifty points SMP down one point four percent off also
off one point four percent. Taking a look around at
other markets here, you have crypto actually moving upwards today.
(01:34):
That's after several weeks of a pretty abysmal performance on
that front. Price of oil is about flat off slightly,
Gold prices moving off about half a percent, down to
four thou fifty six dollars per ounce, and in the
bond market, you've got the yield on the ten year
treasury moving down a bit to four point one percent.
(01:56):
But a pretty traditional risk off type day here, and
we've been seeing a number of measures of the course
the last few days, intensifying pressure on the overall I
think it's just really the overall AI trade. I don't
really know of many other ways to describe them.
Speaker 3 (02:14):
Dollars not really moving, goals not really moving. We know
those two are inly related. We talk about that a
lot internally, So there is no there's no thread pointing
excuse me, to a larger fear. Right, It's more this
continued gelling of this notion that maybe AI, the AI
will not be able to I'll say, pay for itself
(02:35):
right as quickly as investors have priced into AI stocks,
say adjacent stocks.
Speaker 1 (02:40):
Excuse me.
Speaker 2 (02:41):
We've been talking about this market this morning, and you know,
one of the notable pieces we mentioned is that there
haven't hasn't been a direct catalyst. I think you can
name in point twos. Oh wow, that sure is concerning
for the overall market. This company went belly up, this
bank failed, YadA, YadA, YadA. One area that though, that
we have been attached to and focusing on that. I
you know, I don't think you can draw the connection
(03:02):
between AI trade and this next story, so I don't
intend to do so. But Blue Oul Capital we briefly
described what happened here yesterday on the program, but I
want to dive in here and just give some context
around what we're seeing in private credit specifically, So again
quick synopsis. Private credit the stepchild of private equity. It's
(03:26):
just private loans being made to companies, and those loans
rather than being done by a big bank that might
put them out on the publicly traded markets and trade
in bond markets. They'll usually package them together and sell
these packaged loans to investors of some sort. Generally institutional
investors are the largest buyers of this type of stuff.
(03:48):
Insurance companies, pensions.
Speaker 3 (03:50):
Yeah, they're actual funds. They don't even package they keep service.
Speaker 2 (03:53):
These are Yeah, some of those funds are even now
publicly traded, although most of them, you know, maintain again private,
being that private equity pists and has attracted a lot
of investment and has expanded dramatically over the course of
the last fixed company years, and seeing some ugly cracks
in the foundation. So talk to us about the position
(04:13):
that Blue Owl occupies there. What do they do and
what did they do over.
Speaker 3 (04:17):
Well, they're a big private debt or credit I'll use
those terms interchangeably. Manager. They may not be a household name,
as the expression goes, but they manage a lot of
household assets. If you have a pension, some of your
pension fund, the assets that are used to pay your
monthly benefit, are probably invested in private credit sure and
there's a good chance some of that is in a
Blue Owl sure fund. Blue owl is in the news
because they have a fund, a small publicly traded version
(04:43):
or potentially publicly traded version, a so called business development corporation,
a fund that just never got traction. So they're going
to effectively close it by merging it with a larger fund.
When this merger happens, the investors in the smaller fund
that never got traction who happened behind that worth investors,
not the very sophisticated pension and institutional insurance company et
(05:04):
cetera investors we're talking about earlier. They're gonna take a
big aircut because their fund is effectively valued at less
because it is so marked to so called market.
Speaker 2 (05:16):
And effectively what happened here is they got hit with
a bunch of redemption requests, meaning a bunch of of
their investors tried to cash out of this fund all
at once, and they froze it right. They said, sorry,
we're not going to process these redemptions right now. We're
pausing all redemptions. And their solution was, Hey, take this
fund that is clearly seeing some pressure and merge it
(05:39):
with some other asset that we have. That's that okay.
Speaker 3 (05:41):
So that's slightly different than than the rationale I had
attributed to the merger. Okay, your information is probably more
correct than mine, but either way, it shows what can
happen if you get into a new vehicle that represents
it does the same thing as all their flagship products.
If the new vehicle does I said, doesn't take off.
Maybe that's too vague a way to put it, but
(06:02):
I for whatever reason, they have to close it in
this case, merge it. Uh, there's the potential that your investments.
One of the nice things about private markets, equity and
credit is that investments are not mark to market every
day like a stock is. If new information comes out
about a say IBM, that's priced in right away.
Speaker 2 (06:19):
I like, I just you said one of the nice
things about that.
Speaker 3 (06:23):
Well, from an investor for looking to reduce volatility, it
is a nice thing. It's it's a it's a little
bit phony, but it is a positive attribute from.
Speaker 2 (06:30):
A So the positive attribute that you're described, I know,
I know, just because investors is that we have imperfect
information about what we own.
Speaker 3 (06:38):
Well, no, it's that I'm a Companies are allowed to
assign valuations based on independent internal audits of the assets worth. YEP,
I wouldn't call it imperfect unless you think markets maybe
some people do, it's definitely not. It's a way. It's
it's it's a it's an artificial way to suppress volatility,
(06:59):
but it's still one of the reasons that illiquidity associated
with private equity and debt is one of the things
that allowed has allowed it historically to outperform public market
okay analogs.
Speaker 2 (07:09):
So we have this Blue Owl fund that had to
pause redemptions and is now merging with this other one,
and investors in that first one are going to be
taking a big haircut. Blue Owl stock down forty two
percent so far this year, probably out of concerns about
their core business model and whether it is that they
do this. All ties now to this US government probe
(07:30):
into in a series of firms that borrowed some four
hundred million dollars from another private credit.
Speaker 3 (07:37):
Ties into in the sense that it's the same asset
class generally, blue out has nothing to do with it
what we're about to talk about.
Speaker 2 (07:43):
Correct Thank as far as we know, the US government
is probing this firm that borrowed some four hundred million
dollars from private credit, Giant HPS, which is now owned
by Blackrock. And what we're learning here is that this
lesser known telecom company borrowed some four hundred million dollars
and is now being accused of pretty much fabricating and
(08:07):
inventing all of the revenue that was borrowed.
Speaker 3 (08:09):
The borrowers committed fraud. They said they're nateral. They said,
you excuse me, have have alleged, reputedly committed fraud. Thank
you to all your lawyers listening out there. Yes, allegedly
committed fraud.
Speaker 2 (08:23):
Uh.
Speaker 3 (08:24):
Not uncommon when financial conditions are so I'm gonna blame
the FED. You Tucker and Mike Canna be shocked. I
blame the Fed. Financial conditions have been too easy for
too long. This type of behavior becomes inevitable in that
when you are pushed to seek higher yields. If you're
an analyst looking at the if you're an underwriter, an
analyst looking at these deals, you're under pressure from your
(08:45):
manager to bring big, juicy yield deals to the fund manager,
you can get sloppy, You can your standards.
Speaker 2 (08:55):
I'll be willing to blame the perpetrator of fraud in
this case, but maybe you know, maybe the FED would
be three. But are there are.
Speaker 3 (09:01):
There are societal conditions what I'm calling sidal conditions here.
I'm trying to draw parallel to people who talk about crime.
Monetary conditions here facilitate the urge to commit fraud. It's
far more prevalent when conditions are too easy for too long.
Speaker 2 (09:16):
The other absolutely fascinating piece of this story, so the
HPS funds began lending to these companies that are controlled
by the person what was his name again, it was.
Speaker 3 (09:30):
A you're going to trying to pronounce that.
Speaker 2 (09:31):
Good for you, Ben Kim Brombat. Yeah, we're gonna go
with that. The companies began lending to the companies controlled
by this individual in twenty twenty According to the Delaware
court filings, in June of twenty twenty five, HPS, who
was doing the origination of these loans.
Speaker 3 (09:51):
HPS was the manager at the time. They're the private
credit manager for.
Speaker 2 (09:54):
The first time, began requesting copies of underlying email confirmations
verify the receivables five years after making the loan.
Speaker 3 (10:03):
Okay, So this is like you hire somebody to rent
your house out and they don't do the credit check
on the tenant.
Speaker 2 (10:10):
It's worse than that.
Speaker 3 (10:11):
Well, I'm just I know it's worse than that, Like
it's four hundred million. I'm just trying to make it relatable. Yeah,
and you asked your manager, did you look at the background?
I think I did. I don't know. I hired an
intern to do that. Let me check with them. That's
more or less what happened here, Mike.
Speaker 2 (10:24):
So you have this massive fraud for potential fraud four
hundred million dollars that's seemingly gone up in smoke one
Black Rocks probably asking some questions of this new manager
that they purchased just this year.
Speaker 3 (10:38):
Well, they missed this too. They did extend, they hired
you know, I'm gonna stop naming parties. They had somebody
do due diligence. So you're gonna be hearing this term
a lot over the next few years if we're entering
a purging period, which will ultimately be healthy but painful
in the short term. They didn't do their due diligence.
They hired someone else to do their an auditor, a
very well known one. They evidently didn't do their due diligence,
(11:01):
so no one was watching the watcher. This is not
an uncommon story.
Speaker 2 (11:06):
So why it matters. Everyone is now asking their private
credit managers out there, whether it's Blue Owl, HPS, Blackstone, KKR,
these are big, big names in this space. What was
your diligence like? Well, first of all, that you have
that loan that I own, did you check receivables for
the last five hours?
Speaker 3 (11:25):
You're never going to do that degree of due diligence
on a private market manager. That is way too granular.
The first question you ask is do we have any
exposure to this? No, I looked at those deals I passed,
and then you're going to get into that. What made
you pass on this fella? Well, I saw he had
a criminal record. Oh, that is the best predictor of
future criminal behavior is or even sure skirting the line
(11:48):
is whether or not they've been accused of it in
the past. That's where the questioning goes here.
Speaker 2 (11:51):
Again. I always try and bring this back home why
this matters to you? If you own no private credit one,
you may own some of it in a pension that
you know is paying your benefits to your insurance provider
that provides you homeowners insurance. May own a very.
Speaker 3 (12:07):
Large this time they started the practice.
Speaker 2 (12:10):
And you know, frankly who knows how bad this could be.
But you know, hypothetically, could there be enough bad loans
out there that it sinks an insurer. Two. Yes, I'm
going to say that that is always a possibility.
Speaker 3 (12:23):
It's it's it's it's the erosion of trust, which is
what happened in O eight.
Speaker 2 (12:27):
O nine, And that's the biggest point of all of this.
If there is an erosion of trust in credit markets,
it means that credit drives up. And when there is
not credit to be had, whether it's a business trying
to take out a loan or whether it is somebody
trying to buy a car, because again, private credit was
involved in both of those transactions and varying degrees, you
(12:51):
begin to have a real problem for the economy. Credit
is the is the I don't know, lifeblood, the lifeblood,
the WD forty whatever. You want to to make the
gears keep going. You need it to exist, you need
it to be prevalent. And if it starts to dry
up because of these concerns, yeah, that can lead to
some serious issues for the overall economy. And this is
(13:14):
not a story that leads you to believe that that
is pervasive. But I keep going back to this comparison
like back in twenty twenty three when we had a
couple of banks that were caught off sides, and we're
just kind of wondering, like how big is the bank
run going to be? Are there going to be more
of these? We're finding ourselves in a similar position now
with private credit, and I think it's going to take
some time to find out. Quick Break Trivias next on
(13:36):
the Financial Exchange.
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strip was published in roughly two hundred and fifty newspapers.
So trivia question today, what year was the final Calvin
and Hobbes strip published? Once again? What year was the
final Calvin and Hobbes strip published? Uh? Be the fifth
(15:47):
person today to text us at six one seven three six,
two thirteen eighty five with the correct answer, and you
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Speaker 2 (16:04):
Mark got a couple of housing stories today. Would you
rather cover the fifty year mortgage first? Or how the
housing market is being ruined by big corporations?
Speaker 3 (16:13):
They were both interesting, But we've talked a lot about
the fifty year and it's still a concept.
Speaker 2 (16:17):
So let's talk about what I'd difer to you this
piece from the Financial Times on corporations apparently being the
cause of all of the problems on the housing market.
So the argument Dr Horton Lenar told Brothers these companies
are so big that, like any other company that's beholding
to shareholders instead of borrowers and their customers, that a
(16:41):
lot of their free cash flow goes to share buybacks,
and they need to do whatever they would do to
keep margins high. That can include things like buying large
parcels of land and not developing it until it's opportunity
to do so. And so the author points out that,
you know, if we just had more company tition and housing,
then things would be better for the American housing system.
Speaker 3 (17:06):
That's an interesting take. This is a an editorial, it is.
Speaker 2 (17:09):
It's not from the Financial Times journalist staff. It's an
editorial it's but.
Speaker 3 (17:14):
It's done by a respected writer. I just I assume
the facts are.
Speaker 2 (17:18):
I don't know that breaking up these housing builders, well,
I just fixed the problem.
Speaker 3 (17:21):
I've not seen any serious work on the subject, which concludes.
So to study this unique data on two different markets,
one that was concentrated, dominated by big builders backed by
big lenders, in another that was more fragmented, smaller. She
makes the point about Bailey savings and loan from what
(17:43):
the hell's it called?
Speaker 2 (17:44):
Prote Wonderful life?
Speaker 3 (17:45):
Thank you, A wonderful life, sorry, it's been a while
since I've seen it. She makes the point that that's
not how mortgages are made anymore. They're made by a
big bank, which is comfortable because it's got relationships with
one of the big builders, and then it securitizes those mortgages.
Speaker 1 (17:59):
Et cetera.
Speaker 3 (18:00):
Soo would a more fragmented market function better? If you're
objected by function specifically, we mean bring increased supply. I'm
just noting I have not seen any evidence as the
point I was trying to get.
Speaker 2 (18:10):
And by the way, I debate that the market is
so concentrated. D R Horton, the largest one out there
in twenty twenty two, represented thirteen percent of new homes.
Lenar was ten point seven, Paul t was four point five.
That doesn't seem like a monopolistic market to me. I'm
sure there are some metro areas where that's the case,
but that doesn't seem like a monopoly to me. The
other proposals that are out there. I mean, again, I.
Speaker 3 (18:32):
Had sales or I'm sorry I didn't.
Speaker 2 (18:36):
I just looked this up. This was in terms of
total total builder volume in forty seven metro areas.
Speaker 3 (18:43):
Okay, so that number of homes.
Speaker 2 (18:45):
Yeah, so I mean volume wise is thirteen percent market
share up?
Speaker 3 (18:49):
Okay, So the way to study if you were going
to if you're gonna study this, and we're not, it's
not what we do. I need data on different markets
where the concentration is different, and then look at the
supply however you want to measure it, or the price
is relative to the I mean, there's a way to
get at this. I don't have the data. Maybe someone has.
Speaker 2 (19:06):
I think other policies out there. Again, I think you
have to go after the supply side. I think policies
like rent control are just very clearly stupid and not
going to work well. But if you want to fix it,
you got to go after supply. To go after supply,
I really think the only way to do it is
loosen restrictions around home buildings so that it is more
(19:27):
profitable to build homes for large and small home builders alike.
And if you want to pair that with something like
the author mentions a land value tax mainly discouraging entities
from just owning undeveloped land by taxing it more, maybe
that would help too. I'm not really sure, but those
two to me are the only policies that actually fix
(19:48):
the problem. A fifty year mortgage doesn't, breaking up big
home builders doesn't. And I don't know. Everyone's looking for
the magic bullet, and I don't think it exists. Quick
Break Wall Street watched next.
Speaker 1 (20:08):
Bringing the latest financial news straight to your radio. Every day.
It's the Financial Exchange on the Financial Exchange Radio Network.
Time now for Wall Street. Watch a complete look at
what's moving markets so far today right here on the
Financial Exchange Radio Network.
Speaker 5 (20:27):
Markets again in negative territory following yesterday's pullback as concerns
circulated around high tech valuations. Wall Street's also digesting the
first batch of retail earnings this morning from Home Depot.
Right now, the Dow is down by nearly nine tenths
of one percent or four hundred and three points s
and P five hundred down six tenths of one percent,
(20:49):
Nasdaq down nine tenths one percent or two hundred and
four points lower, RUSS two thousands down about a quarter percent, ten,
Your treasure Reil flat now at four point one two
nine percent, and rude oil up about a third of
a percent, rating just above sixty dollars a barrel. Home
Depot falling over three percent after the home improvement retailer
missed third quarter earnings expectations, marketing its third consecutive miss.
(21:13):
Home Depot also cut its full year profit outload breaking
news this morning after Microsoft announced new strategic partnerships with
Nvidia and ais startup Inthropic. Microsoft and Nvidia will invest
a combined fifteen billion dollars in Anthropic, while Anthropic committed
to purchase thirty billion dollars of computing capacity from Microsoft's
(21:34):
Azero cloud service. Both Microsoft and Nvidia are down about
two percent.
Speaker 1 (21:40):
Meanwhile, we have.
Speaker 5 (21:41):
Another major Internet outage to report, this time stemming from
cloud Fare. The outage was affecting several major websites and
services offline, including open ais Chat, GPT, and social media
platform x However, the outage reportedly has been as resolved
cloud Fir stock is now down over one percent, and
(22:02):
according to The Financial Times, activist investor Elliott Management has
built a large steak in Barrack where Elliott here is
encouraged by the idea that the gold miner could be
split into two companies. Barrackstock is up over one percent.
I'm Tucker Silvan, that is Wall Street Watch and in
the previous segment, we asked you the trivia question what
(22:22):
year was the final Calvin and Hobbes strip published? That
would be nineteen ninety five. Marty from Danvers, Mass is
our winner today taking home a Financial Exchange Show t shirt,
and we played trivia every day here in the Financial
Exchange See complete contest rules at Financial Exchange Show dot com.
Speaker 2 (22:38):
Mark, we're talking about housing in the last segment, I
want to continue that with a discussion of the fifty
year mortgage, So removing the conversation about is this a
fix for housing affordability, which I do not believe it is.
I want to just talk about this car affordability right,
Like you know, you extend the duration of the loans,
it's not going to make the underlying asset more affordable
(23:00):
on the surface though, like terrible idea, good, you know,
fantastic idea. I've already laid my claim. I don't think
it's a fix to the overall housing affordability piece, But
is it substantially a worse idea than the thirty year mortgage,
which I think everyone you know in the US looks
at as kind of the holy grail of good opportunities.
(23:23):
I don't know that I look at it as substantially
more dangerous or worse than a thirty year mortgage.
Speaker 3 (23:30):
Well, aside from the obvious criticisms of a longer mortgage,
which you could also levy at the thirty versus the
twenty versus, they all apply. Sure, you could take a
fifteen or twenty year fixed rate when you buy a
house versus a thirty, and the same arguments of the
thirty versus the fifty apply. It's going to take you
longer to build positive equity. You'll have negative equity. Said differently,
(23:53):
for a longer period of housing prices drop.
Speaker 2 (23:58):
The biggest criticism that I have of it is that
it's further government invention into the housing market, right like.
Speaker 3 (24:05):
Yeah, it's not some innocent let's let the market find
the right.
Speaker 2 (24:09):
No, it's not. Because the only reason that a bank
is going to issue a fifty year mortgage.
Speaker 3 (24:13):
We'll need the way to the government is because.
Speaker 2 (24:15):
The government will buy that mortgage from you. So that's
my biggest criticism. And by the way, that exists for
the thirty year there's no bank out there that is
willing to lend Mike Armstrong money for thirty years at
three and a quarter percent to buy a home. The
only reason that exists is because the government says, yeah,
we'll buy that off of you. That sounds like a
pretty good deal. And so the government actively supports the
(24:36):
housing market. And so my biggest criticism is, yeah, if
you're doing fifty year loans, then we are the ones
paying for it, the American taxpayer, to basically fund that
tool to feed into the housing market. I guess the
other big criticism is the reason the thirty year mortgage
has worked so well is because housing prices have appreciated
(24:58):
over fifty sixty years to the tune of two to
three percent per year. I have no reason to believe
that that is about to reverse itself. But if we
went on a fifty year time period where housing prices
depreciated or did not appreciate it by two percent, then
that fifty year mortgage looks a lot less attractively.
Speaker 3 (25:16):
Going to take you longer to build equity, right, I mean,
I'm not opposed to experimenting with different combinations in an
unfettered in an environment where the degree of government intervention
is modest or non existent. But here they're talking about
(25:37):
throwing the weight of the government behind it, which makes
me uncomfortable, like it makes you uncomfortable. But the theoretical
arguments against it to me aren't that compelling because you
could make them unless I'm missing something, correct me if
I am make them against the thirty verses twenty or
the fifteen.
Speaker 2 (25:51):
Yeah, I guess, but I can't of see them.
Speaker 1 (25:54):
Mike.
Speaker 2 (25:54):
I feel like it's been this. It's been just this
big issue because of who proposed at President Trump, and
either people love the idea or hate the idea, and
there hasn't been a lot of judging of it on
its merits, and I think on its merits, I don't
see it as something that's going to ruin or fix
that house.
Speaker 3 (26:11):
Of all the economic ideas that have come out of
this administration over the past six months, this is the
least flaky thing. Yeah, no offense, but the trade policy
has been erradic and counterproductive. We're not going to talk
about trade today, maybe we will later in the week.
Monetary policy has been the interference with in meddling and
monetary policy has been horrendous and will will pay negative
dividends for years to come. As anyone who's looked at
(26:34):
the issue as concluded this is like the least potentially harmful.
Speaker 2 (26:38):
If you have your own thoughts on the fifty year mortgage,
I'd be interested to hear them, just you know it,
questions or thoughts. You can text the show at sixty
one seven, three six two thirteen eighty five. But it
is just a story that has got a lot of
attention because you know, the thirty year mortgage is applicable
to just about everybody. Almost everyone's lives have been touched
by a thirty year mortgage in some way or another,
and so it's been getting a lot of attention. Teking
(27:00):
of owning real estate and mortgages, we have a guide
out from the Armstrong Advisory Group this month for November
on owning real estate and retirement. Now, a lot of
retirees obviously get to that stage in their sixties and
they own a piece of real estate. But this guide
is really about how to assess that real estate, how
to assess the cost of that real estate over time.
(27:21):
Obviously we've all seen things like taxes and insurance go up,
but you know the cost of maintaining your home, just
naturally through life, also goes up as you age. Maybe
you're thinking about snowbirding in a certain part of the country,
the idea of owning versus renting there, What are the upsides,
what are the downsides to taking those different approaches where
(27:43):
you're making your primary residence, how those taxes play into
your overall tax situation over the course of your retirement,
and then those massive cost of living differences depending on
where you live, right. I mean, everybody talks about the
cheaper real estate outside of New England, but there are
real costs on the other side for doing so. If
you'd like your free copy of our brand new guide
(28:04):
Owning Real Estate in Retirement, give us a call at
eight hundred three nine three for zero zero one to
request your copy. You can get it online Armstrong Advisory
dot Com request your copy there as well, but the
phone number for the Armstrong Advisory Group requesting our new
guide Owning Real Estate in Retirement. It is free and
you can get it by calling eight hundred three nine
(28:24):
three four zero zero one.
Speaker 1 (28:26):
The proceeding was paid for by Armstrong Advisory Group, a
registered investment advisor. Nothing in the ad or in any
Armstrong Guide a specific financial, legal or tax advice. Consult
your own financial tax into state planning advisors before making
any investment decisions. Armstrong make contact you to offer investment
advisory services.
Speaker 2 (28:42):
Mark. Last week, the White House announced they'll be waiving
some tariffs on agricultural goods sold at the grocery store
that we do not largely grow in the United States. Coffee,
What was else on the list? Avocados, bananas were all
on the list. And we're starting to see that piece
from Jonathan Bloomberg not going to fix the overall inflation problem.
(29:05):
He's right, Waving tariffs on these products are not going
to fix the overall inflation problem. You're gonna, you know,
put this in the terms of the Fed and monetary policy.
I'm going to try and put it. I guess a
little bit differently, which is.
Speaker 3 (29:22):
What do you think about inflation? If not in terms
of monetary place.
Speaker 2 (29:26):
You do have to let you I'm talking about the
sec the seeming trend that we have away from globalism,
and the last fifty years have been defined by goods
prices coming down or staying cheap because of globalism, trading technology,
trading technology and manufacturing stuff in China. And if we
are getting away from a more global society, I have
(29:49):
a tough time believing that prices can do what they
did for the last fifty years. Yes, you know monetary policy,
so you.
Speaker 3 (29:55):
Say last so since the Great Modern since vulk are
going to handle on inflation causing a big recession which
Troft in nineteen economy Troft bottomed out in nineteen eighty two.
Since then, inflation has for the most part been low
and stable, with the exception of the COVID inflation. We
don't need to get into the causes of the co
COVID inflation. They're still debated. But what causes inflation in
(30:17):
the short term is that some prices don't move you
could say they're rigid or sticky, while other prices do.
That pushes the average up. Question is does that persist.
The answer to that question is, I'm just reciting modern
macro here. This is the consensus. You ask any economist,
this is what they're going to tell you, for the
most part, unless they're sort of fringy monitorists or something.
(30:38):
Some prices are sticky, they don't change. Other Look, let
me be more concrete. Oil goes up by a lot.
I own a store. I'm not going to go through
and resticker everything. I'm going to wait, so the average
price is going to go up under that scenario. Similarly,
you can have a negative supply so called supply shock.
I'm using oil as an example here that brings the
average down. So in the short term, inflation is a
(30:58):
result of these nominal rigidities. To use a term, economists
would use price stickiness coupled with various prices. It could
be insurance one month, oil the next, avocados the following,
couple with some prices that move by a lot, changing
the average. That's short run inflation. Long run, it's a
function every virtually every economist degrees of how much money
(31:21):
the FED prints relative to money demand. And that's why
we say the FED, or at least I do say
the Fed's job is to act like them, like the
economy's thermostat.
Speaker 2 (31:29):
And for now we are still running three percent inflation.
We haven't got inflation, but inflation remains.
Speaker 3 (31:35):
So do you want to turn the thermostat down when
the room temperature is I'm gonna watch this. Should the
FED be turning should be? Should the FED be turning
up the heat? Should the FED be heating up the
labor market when it's already seventy eight degrees. I don't
know if that analogy works.
Speaker 2 (31:52):
But not convinced, or does the FED just say, oh,
you know what, our new price target is actually three
percent annual inflation. But then you lose credit.
Speaker 3 (32:00):
Credibility is the key. If there's one word that comes
out of the FED, the experience of the FED misreading
the state of the economy and misreading their own ability
to control inflation in the nineteen seventies, it is credibility.
They lost it. It took the biggest recession since the
Great Depression in nineteen eighty one eighty two to get
that credibility back. I don't know that they've gotten it backs.
(32:20):
I don't know that they've recovered it since the COVID inflation.
My guess is no. If you look at inflation expectations,
which are also elevated, which is why the Fed's eagerness
to cut rates here seeming eagerness is a bit of
a puzzle.
Speaker 2 (32:33):
Let's say a quick break. When we come back. Stack
Roulette is next.
Speaker 1 (32:37):
Here the Financial Exchange every day from eleven to noon,
Non serious XM's Business Radio Channel one thirty two. Keep
it here for the latest business and financial news and
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(32:59):
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Speaker 5 (33:19):
This segment of The Financial Exchange is powered by a
Circle K Convenience Stores. Circle K is now the official
convenience store of the Davy Department of Massachusetts on behalf
of Circle K. Thank you, veterans for all you've done.
Speaker 2 (33:34):
Wall Street Journal today writing about the AI revolution. Here's
the subject line, which I kind of like the most
joyless tech revolution ever. AI is making us rich and unhappy. Yeah,
we'll see how long the rich part lasts, but the
unhappy piece is pretty interesting to me, and I wonder
if you do detect this mark. I definitely hear the
(33:57):
fear and skepticism from some about AI and how they
feel it's coming for their job and it's going to
be this terrible thing. I definitely hear the fear, but
I also do see some joy from AI, like I
see people making stupid Okay, perfect example, my wife most
(34:17):
useless usage of AI that I can think of. Our
dog and cat hate each other and shows so she
had AI put together a picture of the two of
them snuggling by uploading pictures of the two animals separately.
Totally useless, but not doable without artificial intelligence. She does
not have the editing skills to be able to make
(34:38):
that happen. I'm not saying it delivered her a great
degree of joy, but like I see those silly and
kind of whimsical uses of artificial intelligence all over the place.
Speaker 3 (34:48):
She used more electricity than a third world village. Yes,
uses in a day to do that.
Speaker 2 (34:53):
One hundred percent.
Speaker 3 (34:53):
Yes right, yes, we all do it.
Speaker 2 (34:55):
Yeah, Like I've used it to write like silly sounding
poems to my daughters. Like I do see the whimsical
uses of AI and people and people enjoying it.
Speaker 3 (35:08):
Excuse me, I have to short a bunch of companies.
Speaker 2 (35:10):
Yeah again, Like, this is my concern about the industry
is that the use cases that I'm seeing of this
technology are dumb and unpropp Compare.
Speaker 3 (35:19):
That to what we used to do in the nineties.
Like one day we're doing spreadsheets and lotus one two three,
pretty primitive. The next day, I'm mocking something up and
Excel and emailing it to a colleague across the country.
That was life changing, That was productivity enhancing. I'm just
feeling it with AI. Yet, Mike, you're being a little facetious.
Speaker 2 (35:37):
For every one of those, there were, you know, three
thousand pets dot com that were just complete idiot ideas
of how we were going to make money on the Internet.
So you know, I'm not I'm not poop pooing the differences,
but there were plenty of bad use cases for the
Internet back in then.
Speaker 3 (35:54):
That wasn't really an Internet point. It was more of
a an IT point about tools that enhanced people's productivity
and allowed people to move on to higher value added things.
You didn't have to spend all day if you were
an admin an administrative assistant typing, for example, the goofball
like me who developed the content could put it right
(36:16):
into a word processor and get a pretty clean copy
to the end user.
Speaker 2 (36:21):
Okay, fair, but you have specifically told me that you
do not see why any investment firm would need to
hire an entry level analyst anymore.
Speaker 3 (36:28):
No, I've said I could see needing far fewer if
you still need someone with experienced overse The case I
was bringing up specifically, is build me a table of
the top ten stocks by price to book value in
reverse order for one, three, and five. I could do
(36:49):
that myself in factset or something, or I could tell
their AI chatbot to do it. Oh that's great. I
don't need We're not going to need to hire someone
to do the grunt work for me.
Speaker 2 (37:00):
It should.
Speaker 5 (37:02):
It?
Speaker 3 (37:02):
Should it not? Look this is my sort of narrow perspective.
There are plenty of people who say it has been
life changing for them, just not enough to convince me
that it will meet the growth expectations required to justify
the investments. And I think that is a healthy attitude,
particularly when you're a fiduciary. Is we are in our
(37:23):
day jobs?
Speaker 2 (37:23):
Yeah, I don't know. Like the the debate around is
AI going to make us happy or unhappy? I don't
know that.
Speaker 1 (37:33):
What is that?
Speaker 3 (37:33):
Who asked that question?
Speaker 2 (37:36):
Sorry? I just I don't. I don't know. Like that
doesn't seem like the most relevant detail to me. It's
going to make some people miserable, it's going to make
some people really happy. The Internet, you know, what did
the Internet do it? Brought vast amounts of information to
all parts of the world that didn't previously have access
to it, and it also created the opportunity for terrible
(37:59):
disinformation that has impacted all sorts of horrible things. It's
allowed for distribution of terrible content online. So AI is
going to have the same positives and negatives too.
Speaker 3 (38:11):
If you look at their happiness, you know, don't go puppy, Yeah,
don't go for a walk in the park. I don't
think you're not going to find it in yours in
your computer terminal.
Speaker 2 (38:21):
Yeah. I tend to agree, but nobody thinks that.
Speaker 3 (38:23):
Nobody know this new computer is going to make me happier.
Speaker 1 (38:25):
Nobody?
Speaker 3 (38:27):
Oh really? Okay, sorry?
Speaker 2 (38:28):
Why do people line up at the store for the
next iPhone? Right? I mean yeah, I think people do.
Markets are in negativetory territory, but substantially better than when
we started the show. SMP off a little bit more
than six tens of percent now and Nasdaq off nine
tens of a percent. We'll have a full recap for
you and more on the day of Nvidia's earnings tomorrow
on the Financial Exchange
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