October 16, 2025 • 38 mins
Chuck Zodda and Mike Armstrong discuss Wall Street scrambling to gauge consumer health without retail sales. Big banks cash in on well-heeled borrowers. How Jefferies found itself at the center of First Brands' collapse. Something stinks in the financial sector.
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Episode Transcript
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Speaker 1 (00:00):
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(00:43):
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(01:06):
Zada and Mike Armstrong.
Speaker 2 (01:10):
It's Chuck, Mike and Tucker broadcasting live from the showcase
Super Lucks in Chestnut Hill. We're joined by a fantastic
audience here that has come out to hang out with
us on a beautiful, uh beautiful fall Thursday, Thursday, and
it doesn't get much better than this. So we're happy
to have everyone here. I know we still have some
(01:31):
people trickling in, and so we'll be you know, welcoming
everyone through to anyone who is live in the audience.
During the breaks, you can ask us any questions that
you might have about the show. To anyone who is
not live in the audience, you missed out, and maybe
you should come to the next one, and then you
can ask us questions in between the breaks. But we're
gonna kick things off today talk a little bit about well,
(01:55):
this this piece from Barons. What's that, Mike, that.
Speaker 3 (01:58):
Continued shut down in the lack of government data.
Speaker 2 (02:00):
Yeah, we're not getting any government data right now, and
so ultimately what it means is that Wall Street and
US we have to try to figure out what's actually
going on in the US economy and specifically what's going
on with consumer spending, because remember, consumer spending makes up,
depending on the day of the week, anywhere from about
(02:22):
sixty five to seventy five percent of overall economic activity
in the United States, and so it's kind of important
to know what's going on there. So, Mike, overall, what
are some of the ways that people are trying to
figure out what's happening with consumer spending given the fact
that we don't get retail sales data today as we
(02:43):
were supposed to, Well.
Speaker 4 (02:44):
We just had the bank's earning bank earnings come in
and a lot of people were asking there about credit
card spending, debit card spendings, try and get a read there.
But you know, honestly, it is not it's not going
to be quite the same as the retail sales data
that we get. According to fact Set, there was an
ESAY meant for total retail sales to come in at
a four tenths a percent monthly increase, which is, you know,
(03:05):
a pretty good growth rate. At the same time, we're
getting a lot of surveys of individuals who continue to
point towards higher prices and just a lack of earnings
to compel them to continue to spend. But as we
have discussed really as the trend for all of this year.
Like it or dislike it, that specific consumer that is
(03:27):
struggling to keep up with prices, that has seeing the
grocery prices stay out of their range is not really
what's been driving the growth. The growth has been coming
from that upper well spectrum, and they, according to pretty
much every private company and survey you can get your
hands on, continue to spend like it's going out of style. Yeah,
and this gets it the idea that we've talked about
(03:48):
this year. We also discussed this back in twenty twenty one,
the idea of a K shaped economy. And you're like, well, Chuck,
what the heck is a K shaped economy? How can
an economy be shaped like any letter, let alone a K?
And basically it's saying, look, those people at the high
end of the earning and assets spectrum, they are spending
like it's going out of style. The reason being number one,
(04:09):
it is going out of style, and number two, you
have all of this, you know, growth in markets that
can fuel additional purchases, and for high income earners, we're
not really seeing any signs that inflation is eating into
their purchasing power. In any meaningful way. Right now, what
evidence do we have of that?
Speaker 3 (04:28):
Right?
Speaker 4 (04:28):
We had a bunch of earnings reports from private companies
that confirmed that we had Delta reporting, we had Marriott reporting.
What else comes to mind for you that really shows
that higher end consumer keeping up.
Speaker 2 (04:37):
Well, I think that those are key data points. The
other one that I point to is we just got
a report earlier this week. I think it was from
Kelly Bluebook, but maybe it was from Edmunds. I can't
remember who, but someone in the auto space, and it showed, look,
the average price of a new vehicle purchased in September
rose to over fifty thousand dollars for the first time,
(04:58):
after we've been floating around like forty eight to forty
nine thousand for the last, you know, couple of years.
We cleared fifty thousand dollars on new vehicles for the
first time ever in that month. But at the same time,
auto delinquencies are ticking up at a rapid rate to
some of the highest levels that we've ever seen as well.
(05:18):
So you try to reconcile these two things, and you say, Okay,
I've got vehicle prices moving up to the highest level
ever well, does someone making twenty five thousand dollars a
year qualify for an auto loan for a fifty thousand
dollars vehicle? No, they don't separate question. Maybe but maybe
if tricolors making the loan, but otherwise, you know, probably not.
(05:40):
So it's not someone with low income that's buying that
new vehicle, because quite honestly, most new vehicles are purchased
by people with high incomes. The used market is where
you tend to see folks with lower incomes kind of
dominating the purchasing. And so I think that that's another
place where you're clearly seeing what's going on there, another
(06:00):
place if you want to look at it, take a
look at what's going on with restaurants. We've seen all
kinds of weakness in fast food this year, whether you're
talking McDonald's, Wendy's, you know, across the board there. It's
kind of hard to find a bright spot in the
fast food space. The place is where we've seen you know,
some decent numbers. Hey, it's in you know, places that
(06:25):
are typically a little bit higher and there when you
look at Darden and what they're seeing from like Capitol Grill,
just as an example, things have been pretty okay there.
The one place that kind of goes against that the
fast casual places have been getting beaten up. But I
think that's just because they're pricing has gotten out of whack.
Speaker 4 (06:40):
Where fast casual being the Chipotles of the world. Yeah,
you know, Chipotle's.
Speaker 2 (06:44):
COV's been struggling, COVA has been struggling Sweet Green basically
think about anything that like wealthy millennials have been attracted
to over the last few years. There's been some pullback there,
but it's hard to untangle exactly what's going on on
that front.
Speaker 4 (06:57):
Interesting mixed signal I got from somebody just the other day.
She owns a cooking class in the Boston area and
it's a it's a dedicated space where people can sign
up for I think they have a few of these
a week, and you can sign up for a common.
Speaker 3 (07:10):
Date night thing or team building thing.
Speaker 4 (07:14):
She mentioned to me that the bookings right now have
fallen to a level that she didn't even see during COVID,
which is yeah, I mean like they pretty much have
to shut down. I mean she's not including she's not
including the you know, probably six to eight week period
where they literally couldn't have any classes. But you know,
speaking to I would think of that as a slightly
(07:36):
higher end type type activity. But she said, you know,
the corporate bookings are still there, but the individual bookings
for that date night where you go out and and
take a cooking class and then need a good meal
have fallen to levels that she has never seen and
were even worse than during the COVID levels.
Speaker 2 (07:52):
Yeah, so that's that's not great when you're seeing that
type of action in those types of businesses. So I
think overall, when we look at you know, households right now,
that K shaped economy, I've actually this is not my
own uh, not my own work, Mike, but I actually
saw something that I'm gonna.
Speaker 3 (08:12):
Cite as your own work. No, play dress.
Speaker 2 (08:15):
It's not the plagiarism if you say it came from
someone else, You're like, plagiarism is when you're like, hey,
this was my original thought. No, this is very much
not my own work. But if we are in a
K shaped economy that's being dominated by artificial intelligence AI,
if you will, is it safe to say that we
are in a Cobra Kai economy?
Speaker 3 (08:39):
Ah? There it is, Chuck, I believe it is.
Speaker 2 (08:42):
Okay, I believe it is. So as we continue through
the Cobra Kai economy, let's talk a little bit about
what we saw yesterday from the Fed Beage Book, because
this is another instance where hey, in the absence of
the standard government data that we get, we start to
do things like actually read the Baisee Bok Bok, which
normally we just kind of look at the summary and say, okay,
(09:02):
you know, what gives what's going on here? But when
we dig through this basically what the Beige Book is
for those of you who aren't familiar with it, it
is the Federal Reserves twelve branches. One of the main
functions that they do that they that they conduct. They
go out in their communities on a regular basis and
they talk to business owners and they say, what are
(09:22):
you seeing? Tell me about what you're experiencing right now,
and overall the sense that you get here, and I'll
quote from CNBC, the Central Banks Periodic Beage Book, published
eight times a year, generally at about six week intervals,
categorized overall economic growth as having changed little since the
last report on September third. Labor markets were largely stable
(09:45):
as demand was muted for most of the fed's twelve districts.
When it came to prices, though Trump's duties implemented in
April and then staggered through ensuing months, showed an impact.
Quote prices rose further during the reporting period. Tariff induced
put cost increases were reported across many districts, but the
extent of those higher costs passing through to final prices varied.
(10:07):
So this was a change from before where you still
had in September and August a lot of chatter about
companies that we're using existing inventory to not have to
move prices up. Yet we're now in a lot of
cases through that existing inventory and companies that are needing
to reorder saying yeah, I've got to raise prices in
order to reorder or I've got to eat it. And
(10:27):
now my margins are going down and my profits not
as good, And might I lay someone off in the
event that I want to maintain my margins?
Speaker 4 (10:34):
Yeah, And where we continue to see this most pressure
is on those smaller firms. Walmart still able to drive
those supplier prices lower, but your run of the mill
local store with less pricing power really is struggling. I
think as we get into retail season. What I'll be
looking to differentiate on is when we look at those
(10:56):
businesses that are reporting earnings, focusing on the ones that
tend to serve a lower income consumer. I think of
the dollar stores that are out there. I think of
fast food restaurants out there. Are they continuing to see
that pullback and are we starting to see it eat
into profit margins. I've heard of many of these companies,
McDonald's especially, having to offer discounts to bring customers in,
and so do we start to see that and do
(11:17):
the big guys Walmart two again, Walmart serves many different customers,
but what they've really succeeded in over the course the
last few years has been bringing in a higher income
consumer that's worried about prices, and so they've been able
to combat this trend. Some of those other guys not
so much. And we'll be hearing from all of them
over the course of the next month or so.
Speaker 2 (11:36):
Let's take a quick break here. When we come back,
we'll talk about some of the good in the financial sector,
big bank earnings this week, which have been quite honestly,
nothing short of outstanding, and then we'll talk about some
of the bad in the financial sector, which is, Hey, Jeffries,
why did you lend so much money to first Brands?
We don't know, but we'll try to figure it out.
Speaker 3 (11:58):
After this.
Speaker 1 (12:00):
To us six one, seven, three, six two thirteen eighty
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Speaker 2 (13:06):
So we're basically through the bulk of earning season at
this point for big banks. Yes, you know, yesterday you
had kind of the last ones, Bank of America, Morgan
Stanley reporting, just going down the list of you know,
other big banks. Bank New York Mellon reported today, but
I don't really consider them a big bank. They're they're
(13:26):
kind of mid sized at this point. Same with US
Bank Court the.
Speaker 3 (13:29):
Other Chuck reported this morning as well.
Speaker 4 (13:32):
They did they did Ushwa no relation, but tomorrow you'll
have MX which again not exactly a bank, but you know,
another financial institution, but yet to your points, JP, Morgan,
Bank America, Wells fargest city, they're all done reporting earnings.
Speaker 2 (13:45):
So here's what the banks told us when I look
at them and the aggregate their investment, banking and trading
businesses were going gangbusters in Q three, knocking the cover
off the ball, just fantastic. Like you look at that
and you're like, the only thing that would be better,
as if they were better, But they're they're pretty darn good.
(14:07):
The home lending business not really much growth there, kind
of flat, kind of nondescript, but no real signs of trouble.
Speaker 4 (14:16):
They're also not really showing giving any real signs of
concern about cracks in the foundation. You'd think about, you know,
might they be worried about credit card defaults given everything
that we've been talking about with the consumer, and the
answer has been no. JPM Morgan actually lowered their expected
losses on credit card loans, and so these big banks
(14:38):
are not the best bell weather for the overall consumer.
But they you know, it's not like they just serve
the top ten percent of wealthy individuals. They do serve
a large swath of the US customer base. And for
them to basically be coming out and saying, no, we're
not seeing losses on credit cards, we're not seeing we're
(14:58):
not seeing growth on home land, but we're not seeing
any real fractures there, it speaks to some real confidence
in terms of direction right now.
Speaker 3 (15:08):
Now.
Speaker 2 (15:08):
What they are saying is more of what we talked
about in the first segment. So Bank of America UH
splits their spending growth into a few different areas, and
what they showed was, Hey, lower income households, their spending
grew point six percent year over year. Higher income households,
their spending grew two point six percent year over year. Yes,
(15:31):
there's something like there's more data that's kind of backing
that up here. So I think that when we look at,
you know, what we are seeing from the banks, they're
telling us, hey, there's nothing that's really a problem for
us yet. And quite honestly, that's what we expect from
all of the other data that we've been getting. That
(15:51):
there hasn't been anything that's shown stresses in credit card
delinquencies this year. There hasn't been anything that's shown stresses
in mortgage delinquencies. The one place that we have seen
it has been in auto loans. But you could make
the case, hey, a lot of that might be happening
at the dealer level or through non banks yep, And
that is starting to show up in other places, and
(16:13):
that's something that we're going to continue to monitor.
Speaker 4 (16:16):
Once that that I just found wild Chuck. So, Charles Schwab,
as I mentioned, reported earnings this morning, and just not
your traditional bank obviously, you know, most of us don't
have a Charles Schwab bank account, but one of the
biggest trading platforms out there, they reported one hundred and
thirty four point four billion in total net new assets.
(16:36):
That's a forty eight percent increase from a year earlier.
Speaker 2 (16:40):
Did you say forty eight.
Speaker 4 (16:42):
Forty eight percent increase from a year earlier in total
net new assets, it's more than anybody expected. Their trade
revenues is growing thirty percent topping estimates there. And this
is only coming to mind because I'm reading Andrew Ross
Orkins book nineteen twenty and you know that era of
(17:02):
speculation and all that the FED was doing to try
to combat it at the time. By the way, Little
Tea's Andreas Orkin's coming on the show next Tuesday, if
you want to tune in. But it is something that
the FED is seemingly not focused on, is the level
of speculation, the level of the asset level of the
stock market. The idea that they are planning to continue
(17:25):
to cut into.
Speaker 3 (17:27):
What is very clearly.
Speaker 4 (17:31):
A huge growth in the stock market and a huge
growth in the wealth effect is just very intriguing and
compared to other times in history, to me.
Speaker 2 (17:40):
It is I think that you can also make a
case that this is a pretty unique time in history
in terms of look, we've seen things in the economy
and markets over the last five years that we haven't
ever seen before and this is kind of an extension
of that. So you know, we've talked it, and in
(18:00):
terms of why the Fed is moving, it's because they're
clearly concerned about the labor market.
Speaker 3 (18:06):
Yep.
Speaker 2 (18:06):
And I think rightly so given some of the things
that we're seeing out there. Now. If you start to
see more and more inflation data that is piling up
suggesting that inflation is starting to grow, you know, close
to a three and a half or four percent rate
as opposed to you know, two nine to three one,
then you start having questions about, okay, like should the Fed?
(18:27):
You know, is inflation the bigger problem? But in the
absence of that inflation data, it's hard to make that case.
Speaker 4 (18:36):
Speaking of the absence of data, you know, we missed.
The last jobs report that would have come out was
that two fridays ago. Now I can't keep track of
the dates, but comes out the first Friday of every month.
Right now, we are in that survey period for the
October jobs report. If the government remains shut down, I
would think for even another week, it seems unlikely to
me that we will get.
Speaker 3 (18:54):
That October jobs data.
Speaker 4 (18:56):
Don't know, Yeah, because remember like they release it, you know,
three weeks after they actually do the collection, and it
takes a while to do it. And right now there
is no collection happening because the government's shut down, so
we may it's entirely possible we will miss the October
jobs report entirely.
Speaker 2 (19:12):
Yeah, we're now in day sixteen on the shutdown. There,
so overall banks telling us, yes, there are some problems
with the economy, but not of our doing. There's nothing
that's showing up there. Let's take a quick break. When
we come back, we do have Wall Street Watch, and
then we're gonna talk about Jeffries, the investment bank that
(19:34):
somehow decided to lend a bunch of money to first Brands.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch a complete look and what's moving market so
far today right here on the Financial Exchange Radio.
Speaker 5 (19:59):
Netw markets aren't positive territory and extending their gains driven
by AI in more strong earnings as investors can continue
to monitor the ongoing tradespat between the.
Speaker 2 (20:10):
US and China.
Speaker 5 (20:11):
Right now, the Dow is up by tenth of one percent,
or fifty four points higher. SMP five hundred is up
a third of a percent, or twenty three points higher.
Nasdaq is up two thirds of one percent, or about
one hundred and fifty points. Russell two thousand is retreating
about two tenths of one percent. Tenure treasurealed flat at
four point zero four percent, and crude oil is flat
(20:33):
as well, leedging higher training a fifty eight dollars in
thirty five cents a barrel. Shares in Taiwan Semiconductor are
mostly flat now after the chip maker reported another record
profit in the previous quarter, jumping thirty nine percent, well
above street expectations. The company also hiked its revenue outlook
for twenty twenty five. Meanwhile, Nesli said it plans to
(20:55):
reduce costs by cutting sixteen thousand jobs over two years,
sending share and the maker of kit Kats and Espresso
capsules up by eight percent. Elsewhere, JB Hunt Transport Services
posted solid third quarter results, beating on earnings and revenue.
Shares in the trucking and logistics company are surging nearly
nineteen percent on those results. Other trucking companies are also
(21:18):
seeing gains in reaction to the news. United Airlines miss
third quarter revenue estimates but beat earnings expectations that stocked
down by over three percent, travelers down by three percent
after posting mixed third quarter results. Sales in shoot excuse me,
Shares in Salesforce are jumping about seven percent after the
CRM vendor said it expects revenue above sixty billion dollars
(21:41):
in twenty twenty and twenty thirty. And tomorrow morning, ahead
of the opening bill, we'll see more financial earnings, this
time from AMEX. I'm Tucker Silva and that is Wallstree
watch Mike.
Speaker 2 (21:52):
So every every now and then on the show, we
just get this convergence where the stat that Tucker has
put together is just perfectly timed for something that's happening
in the market exactly right now. And this is one
of them, like the fifth item in the stack. It's
how Jeffries found itself at the center of first brands collapse. Tucker, Tucker,
(22:15):
when did you put this together? This was like six.
Speaker 5 (22:17):
Thirty this spe I don't remember.
Speaker 2 (22:18):
It was early early, yeah, it was. It was still
dark out. And as we sit here right now, Jeffrey's
financial open the day flat and sits here right now,
down about seven and a quarter percent in the first
hour or so of trading, And this obviously leads you
to say, what's going on? So you start digging through it.
And first let's talk about just what's going on in
(22:40):
this piece. So First Brands is the autoparts manufacturer that
turned out to be the center of a whole bunch
of questionable accounting and off balance sheet lending that now
totals somewhere in the ballpark of twelve billion dollars when
people thought it was about six billion dollars in debt
that they had outstanding.
Speaker 3 (22:59):
Yeah, I fraud may not be either case.
Speaker 4 (23:02):
Pretty questionable type stuff that was happening, and many investors
or lenders to the company left holding the bag. Here
before we go for the does this feel as though
it's not getting much coverage in the media, Not First
Brand specifically, but we've now had two bankruptcies in the
auto space and a lot of financials under pressure, and
(23:25):
it just seems to me that the only thing that
people want to talk about is either China and tariffs
or artificial intelligence.
Speaker 3 (23:32):
Well, and I know that you know, it's pretty niche.
Speaker 4 (23:35):
When we're talking about private credit, but it is kind
of the grease that makes the economy.
Speaker 2 (23:41):
Work, the grease that makes the economy. It's the grease
on the briddle of the economy. Now we're cooking. So
I think that when we talk about this, like, let's,
you know, take ourselves back to two thousand and seven.
Did anyone in April of seven, you know, want to
spend any time I'm thinking about subprime mortgages and whether
(24:02):
or not they could matter to the US economy. No,
because like no one cared, Like, yeah, I mean, Mike,
this is like asking It's like asking a golden retriever
to worry about why the lights aren't turning off. Like
there's like it doesn't matter, it's just whatever. It's not
part of their life, it's not part of their their perception.
(24:25):
So I think that when we look at this, yeah,
like no one cares about first brands because no one
cares about first brands unless you like work for them
or a related company. It's not impacting you in any way,
shape or form right now.
Speaker 4 (24:37):
And you know, people don't really care that much about
the financial sector. I mean the financial sector as a whole.
It's down about nine tenths of a percent this year.
This this morning, the S and P is up four
tenths a percent. It's kind of buried in the data here,
and it's not that impactful on the overall moves in
the stock market.
Speaker 2 (24:54):
So but but here's the thing. You've watched mad Men, indeed,
you know, and and you know, there's the famous scene
where you know, John John hamm is arguing with Peggy
I can't remember the actress's name right now, for what
the reason, Elizabeth Elizabeth, It's Moss, that's the one.
Speaker 3 (25:15):
And so it could do a whole segment, it'd be great.
Speaker 2 (25:20):
So you know, they're going back and forth, and you know,
she's like, I need like more, and he's like, I'm
giving you more. And she's like, well, you know, you know,
I need like some positive feedback in this neck. And
he's like, that's what the money's for. Like that's you know,
we get that line, that great line of like, that's
what the money's for. And ultimately that's what it comes
back to with financials is the money that's out there,
Like it all flows through there, and it's for the
(25:41):
reason that if you don't have it, none of this
actually works like that. The only reason it does is
because everyone gets paid, and the only reason that everyone
gets paid is because the financial plumbing works. And so
I look at what we're seeing today in markets, and
you know how, for the last like a month or so,
I've been saying that something stinks in the auto sector. Yes,
(26:05):
something stinks in the financial sector now and markets are picking.
Speaker 3 (26:08):
Up on it.
Speaker 2 (26:09):
Yeah, you've got again a no major news or anything.
Insurers across the board selling off three percent, insurance brokers
selling off four to five percent.
Speaker 3 (26:19):
That piece isn't obvious to me.
Speaker 4 (26:20):
We got to talk about why insurers specifically would be
selling off so earlier this week.
Speaker 3 (26:25):
SMP Global or was it over the weekend, doesn't matter.
Speaker 4 (26:27):
SMP Global, a big rating agency went out there and
gave a warning to insurance companies specifically and said that
they hold a lot of this debt on their books
that is now being called into question. And so they
put that warning out there that hey, these insurance companies
hold a fair bit of this. This is where they
have gone to juice their returns with their balance sheet
(26:49):
over the last few years. It's not been by buying
CDs and treasuries like you and I do. They've been
making or buying up the loans that other firms like
Jeffreys and KKR have been issuing to these small companies
that are off the books, not traded, and a little
bit opaque in terms of how much is out there.
Speaker 2 (27:09):
And this this is where we unfortunately like do take
a detour back to two thousand and seven because we're
gonna have to learn once again about what are called
collateralized loan obligation clos. It's basically, remember in finance, there
are two ways that everyone blows up. Typically it is
either like there's two innovations that you have on anything.
It's either how do I lend to a new you
(27:31):
know category in some way, shape or form, and then
how do I securitize what I have lent. Basically, leveraging
and securitization is the whole game in finance. Everything else
is just you know, playing games. It's it's not real money,
it's not where it's made. So with a collateralized loan obligation,
it's pretty simple. You have something that is a loan,
(27:53):
money that you've lent to someone. It is collateralized backed
by something. In a case of auto loans, it can
be backed by the VA goal. In the case of
mortgage backed securities, which are a type of clo It
can be backed by a mortgage, what was it backed
by in first Brand's case inventory and like basically like
the windshield wipers and correct. In the case of Tricolor,
(28:14):
the auto loans were backing the loans that you know
they were making, except Tricolor was then pledging them two
and three times over. You had vins that were listed
in multiple packages, it turned out. So there's all kinds
of gnarly stuff that you're finding. And the problem is
that in with insurance companies. Remember insurance companies with how
(28:36):
they are able to raise rates and how much they
have to charge in order to operate markets. It's a
very tightly regulated pricing structure in many markets. But they're
also competing for market share.
Speaker 3 (28:47):
Sure.
Speaker 2 (28:48):
One of the ways that you can try to improve
your pricing is through earning more on your general account.
Mike and Chuck each pay in one thousand dollars a
year on their auto auto insurance premiums, and hey, if
you put that in US treasuries, earning you know four percent, great.
The general account grows from two thousand dollars to two
(29:09):
thousand and eighty dollars and then they can use that
to pay claims. This is a small, simplified example, but
that's how it works. On the other hand, if two
thousand and eighty dollars is what's needed, but the insurance
company says, hey, we can go out and so and
so is selling a bunch of collateralized loan obligations that
aren't yielding four percent. They're yielding ten percent. And so,
(29:33):
Mike and Chuck, instead of you needing to pay us
one thousand dollars, you can pay us nine to fifty.
We get nineteen hundred dollars from me, We put it
into this ten percent colo, and we still get to
two thousand ninety dollars right now, and we were able
to save you some money. Isn't that great? Yes, it
is when everything's humming.
Speaker 3 (29:50):
Yeah.
Speaker 2 (29:51):
But what I'm seeing in this market today people are
getting nervous about what's going on with these lateralized loan
obligations related to private credit. This is why when you
look at the big banks, Wells Fargo's up almost a
quarter percent today. Bank of America is flat today. JP
Morgan's down less than half percent. It's not affecting them
(30:12):
because they're not the.
Speaker 3 (30:12):
Ones to do it.
Speaker 2 (30:14):
They can't anymore, but they still might end up holding
some of this if they're warehousing it in a particular
deal or something like that. But it's it's not like
the thing for them. But when you look at KKR
down two and a quarter percent, Apollo Group down two percent, like,
those are things that start to get me being like, okay,
what's going on? And then you look at the insurers
(30:35):
that are down, you know, anywhere from two to four
percent today and insurance brokers down four to seven percent,
and you're like, okay, they like the market's starting to
finally sniff out, like here's where the problem is going
to be if it's going to be there.
Speaker 3 (30:49):
So we've we've got to take a pretty quick break.
But I do want to content after we can do whatever.
Yeah right here, Yeah, that's true the game keeping.
Speaker 4 (30:57):
I want to talk a little bit about what this
could mean to the rest of the economy. Obviously, you
could have some lenders blowing up, but if credit drives up,
to me, that is a bigger story than insurance companies
having a tough go of it.
Speaker 2 (31:13):
They're both big problems for different reasons. Let's talk about
what the next three to six months might look like
in a good situation and bad situation.
Speaker 1 (31:21):
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(31:42):
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Speaker 3 (32:04):
All right.
Speaker 2 (32:04):
So last segment, Mike, we were talking about the problems
in this private credit space, and basically, the way I
see it, there are at this point two ways that
this can play out. It's entirely binary. In my opinion.
This is either going to be a problem or it's not.
There's no middle there's no middle ground in this. It's
(32:25):
like it's it's either hey, it actually is contained, and
it's a small number of companies that are the problem,
and all the people holding this are gonna figure this
out over the next six months, or they're gonna figure out, Hey,
it's it's a bigger problem and you're going to have
you know, some real issues there. So the question then
is what does it mean, you know, if it's a problem,
(32:48):
because if it's not, Basically what you'll see is all
of the places where they're worries right now, regional banks, insurers,
you know, Jeffries, all these places. Okay, like think about
the concern after Silicon Valley Bank, just as an example.
Speaker 3 (33:02):
Got contained and we moved along, we.
Speaker 2 (33:04):
Saw banks that were you know, kind of on edge
and trading nervously for a month or two, and then
everyone was like, yep, everything actually checks out. No one
actually has a problem. That's that same scale. The couple
other problem ones were dealt with over the the subsequent weeks,
and we moved into the summer of twenty three and
rallied and there was not another thought about bank failures.
(33:25):
So the path out of this is either hey, that's
where we go over the next two to three months,
or it's another cockroach pops up, another one pops up,
They start clustering and then all of a sudden it's okay,
no one knows what any of this stuff is actually worth.
Speaker 4 (33:39):
Yeah, and again you know how this relates to big
things that we're all talking about, like artificial intelligence. UBS
estimates that at a minimum, the private credit sector as
a whole is providing fifty billion dollars in quarterly financing
for AI related infrastructure. So I'm a little bit less
concerned out the auto sector blowing up, and you know
(34:03):
auto loans being a real problem. That is a problem,
but it's not going to affect the economy as a whole.
It's not going to lead into recession. It's probably not
going to spark the stock market to sell off dramatically.
The private credit lending industry taking a step back and
looking at their loans and saying we need to pause
new issuance or dramatically lower new issuance is what could
lead us into a really bad spot.
Speaker 2 (34:24):
And here's the comparison is in the run up to
two thousand and eight, Again, this is a quarter of
the size of the housing market, so it's not the
same scale. It can still cause problems, but different scale
of problems. In two thousand and eight, it was Okay,
we're concerned about these mortgage backed securities. We're going to
pull back on lending to the residential market. Which caused
(34:45):
home prices to fall further, which caused more problems with
mortgage backed securities. Was this whole cycle that you got into.
You could see a similar one in these non bank lenders,
these private equity, private credit firms that lend money out
to those middle market firms and invest companies and investing
companies that say, yeah, we're gonna pull back on deploying
capital there, and then you've got a problem in kind
(35:08):
of those mid sized businesses with trying to get financing
for either expansion or just to cover over existing financing
that's out there.
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Speaker 2 (36:21):
Taiwan Semiconductor reported earnings this morning, and they bumped up
their projection for twenty twenty five revenue growth for the
second time this year. And basically what they're saying is, Yeah,
we're the only game in town, and we've got pricing power,
and as long as y'all want some semiconductors, y'all gonna
(36:42):
have to pay more to get those semiconductors.
Speaker 4 (36:44):
I didn't know that the Taiwanese spoke with such a
Texas like accent.
Speaker 3 (36:47):
Have you been to their.
Speaker 2 (36:48):
New facility Arizona?
Speaker 4 (36:49):
If not, Yeah, in either case, when I think about this, company. Right,
we talk about valuations on Nvidia and and you know
what if the Chinese become better developing chips and are
able to outpace things here in any case, doesn't TSMC
feel a little bit more insulated to any of the
risks there? I mean, I know the Chinese want to
(37:10):
aid from invasion. Yes, aside from the Chinese literally invading Taiwan,
there is nobody else out there that is producing these
things at this scale.
Speaker 3 (37:20):
I know China wants to catch up.
Speaker 4 (37:22):
I know Intel's trying to do it here domestically, and
we're investing a lot of money in here, But doesn't
that seem like a ten year story rather than a
eighteen month threat to.
Speaker 3 (37:31):
Their business model?
Speaker 2 (37:33):
Yes?
Speaker 4 (37:33):
To me, the only threat to their business model is
Ai is a bubble and we are producing too many
chips and we all have to and all the companies
have to cut back. Then there's a real problem. But
there is nobody else that is capable of doing what
Taiwan Semi is currently able to.
Speaker 2 (37:51):
No, it's the in theory. What Intel was trying to
build itself into with their foundry business was to be
able to compete with Taiwan Semi.
Speaker 3 (38:00):
And they have utterly failed to do it.
Speaker 2 (38:01):
But it didn't work, and they're like, okay, like this
is this is not going to be part of us
going forward. We need to, you know, figure out what
to do with that business. So uh, in any case,
let's take a quick break. We still got a whole
lot more to cover. Our two of the financial exchange
is coming
Speaker 3 (38:15):
Up in a bit
The Financial Exchange is produced by Money Matters Radio and
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the hosts. Do not reflect the opinions of Armstrong Advisory
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Zada and Mike Armstrong.
Speaker 2 (01:10):
It's Chuck, Mike and Tucker broadcasting live from the showcase
Super Lucks in Chestnut Hill. We're joined by a fantastic
audience here that has come out to hang out with
us on a beautiful, uh beautiful fall Thursday, Thursday, and
it doesn't get much better than this. So we're happy
to have everyone here. I know we still have some
(01:31):
people trickling in, and so we'll be you know, welcoming
everyone through to anyone who is live in the audience.
During the breaks, you can ask us any questions that
you might have about the show. To anyone who is
not live in the audience, you missed out, and maybe
you should come to the next one, and then you
can ask us questions in between the breaks. But we're
gonna kick things off today talk a little bit about well,
(01:55):
this this piece from Barons. What's that, Mike, that.
Speaker 3 (01:58):
Continued shut down in the lack of government data.
Speaker 2 (02:00):
Yeah, we're not getting any government data right now, and
so ultimately what it means is that Wall Street and
US we have to try to figure out what's actually
going on in the US economy and specifically what's going
on with consumer spending, because remember, consumer spending makes up,
depending on the day of the week, anywhere from about
(02:22):
sixty five to seventy five percent of overall economic activity
in the United States, and so it's kind of important
to know what's going on there. So, Mike, overall, what
are some of the ways that people are trying to
figure out what's happening with consumer spending given the fact
that we don't get retail sales data today as we
(02:43):
were supposed to, Well.
Speaker 4 (02:44):
We just had the bank's earning bank earnings come in
and a lot of people were asking there about credit
card spending, debit card spendings, try and get a read there.
But you know, honestly, it is not it's not going
to be quite the same as the retail sales data
that we get. According to fact Set, there was an
ESAY meant for total retail sales to come in at
a four tenths a percent monthly increase, which is, you know,
(03:05):
a pretty good growth rate. At the same time, we're
getting a lot of surveys of individuals who continue to
point towards higher prices and just a lack of earnings
to compel them to continue to spend. But as we
have discussed really as the trend for all of this year.
Like it or dislike it, that specific consumer that is
(03:27):
struggling to keep up with prices, that has seeing the
grocery prices stay out of their range is not really
what's been driving the growth. The growth has been coming
from that upper well spectrum, and they, according to pretty
much every private company and survey you can get your
hands on, continue to spend like it's going out of style. Yeah,
and this gets it the idea that we've talked about
(03:48):
this year. We also discussed this back in twenty twenty one,
the idea of a K shaped economy. And you're like, well, Chuck,
what the heck is a K shaped economy? How can
an economy be shaped like any letter, let alone a K?
And basically it's saying, look, those people at the high
end of the earning and assets spectrum, they are spending
like it's going out of style. The reason being number one,
(04:09):
it is going out of style, and number two, you
have all of this, you know, growth in markets that
can fuel additional purchases, and for high income earners, we're
not really seeing any signs that inflation is eating into
their purchasing power. In any meaningful way. Right now, what
evidence do we have of that?
Speaker 3 (04:28):
Right?
Speaker 4 (04:28):
We had a bunch of earnings reports from private companies
that confirmed that we had Delta reporting, we had Marriott reporting.
What else comes to mind for you that really shows
that higher end consumer keeping up.
Speaker 2 (04:37):
Well, I think that those are key data points. The
other one that I point to is we just got
a report earlier this week. I think it was from
Kelly Bluebook, but maybe it was from Edmunds. I can't
remember who, but someone in the auto space, and it showed, look,
the average price of a new vehicle purchased in September
rose to over fifty thousand dollars for the first time,
(04:58):
after we've been floating around like forty eight to forty
nine thousand for the last, you know, couple of years.
We cleared fifty thousand dollars on new vehicles for the
first time ever in that month. But at the same time,
auto delinquencies are ticking up at a rapid rate to
some of the highest levels that we've ever seen as well.
(05:18):
So you try to reconcile these two things, and you say, Okay,
I've got vehicle prices moving up to the highest level
ever well, does someone making twenty five thousand dollars a
year qualify for an auto loan for a fifty thousand
dollars vehicle? No, they don't separate question. Maybe but maybe
if tricolors making the loan, but otherwise, you know, probably not.
(05:40):
So it's not someone with low income that's buying that
new vehicle, because quite honestly, most new vehicles are purchased
by people with high incomes. The used market is where
you tend to see folks with lower incomes kind of
dominating the purchasing. And so I think that that's another
place where you're clearly seeing what's going on there, another
(06:00):
place if you want to look at it, take a
look at what's going on with restaurants. We've seen all
kinds of weakness in fast food this year, whether you're
talking McDonald's, Wendy's, you know, across the board there. It's
kind of hard to find a bright spot in the
fast food space. The place is where we've seen you know,
some decent numbers. Hey, it's in you know, places that
(06:25):
are typically a little bit higher and there when you
look at Darden and what they're seeing from like Capitol Grill,
just as an example, things have been pretty okay there.
The one place that kind of goes against that the
fast casual places have been getting beaten up. But I
think that's just because they're pricing has gotten out of whack.
Speaker 4 (06:40):
Where fast casual being the Chipotles of the world. Yeah,
you know, Chipotle's.
Speaker 2 (06:44):
COV's been struggling, COVA has been struggling Sweet Green basically
think about anything that like wealthy millennials have been attracted
to over the last few years. There's been some pullback there,
but it's hard to untangle exactly what's going on on
that front.
Speaker 4 (06:57):
Interesting mixed signal I got from somebody just the other day.
She owns a cooking class in the Boston area and
it's a it's a dedicated space where people can sign
up for I think they have a few of these
a week, and you can sign up for a common.
Speaker 3 (07:10):
Date night thing or team building thing.
Speaker 4 (07:14):
She mentioned to me that the bookings right now have
fallen to a level that she didn't even see during COVID,
which is yeah, I mean like they pretty much have
to shut down. I mean she's not including she's not
including the you know, probably six to eight week period
where they literally couldn't have any classes. But you know,
speaking to I would think of that as a slightly
(07:36):
higher end type type activity. But she said, you know,
the corporate bookings are still there, but the individual bookings
for that date night where you go out and and
take a cooking class and then need a good meal
have fallen to levels that she has never seen and
were even worse than during the COVID levels.
Speaker 2 (07:52):
Yeah, so that's that's not great when you're seeing that
type of action in those types of businesses. So I
think overall, when we look at you know, households right now,
that K shaped economy, I've actually this is not my
own uh, not my own work, Mike, but I actually
saw something that I'm gonna.
Speaker 3 (08:12):
Cite as your own work. No, play dress.
Speaker 2 (08:15):
It's not the plagiarism if you say it came from
someone else, You're like, plagiarism is when you're like, hey,
this was my original thought. No, this is very much
not my own work. But if we are in a
K shaped economy that's being dominated by artificial intelligence AI,
if you will, is it safe to say that we
are in a Cobra Kai economy?
Speaker 3 (08:39):
Ah? There it is, Chuck, I believe it is.
Speaker 2 (08:42):
Okay, I believe it is. So as we continue through
the Cobra Kai economy, let's talk a little bit about
what we saw yesterday from the Fed Beage Book, because
this is another instance where hey, in the absence of
the standard government data that we get, we start to
do things like actually read the Baisee Bok Bok, which
normally we just kind of look at the summary and say, okay,
(09:02):
you know, what gives what's going on here? But when
we dig through this basically what the Beige Book is
for those of you who aren't familiar with it, it
is the Federal Reserves twelve branches. One of the main
functions that they do that they that they conduct. They
go out in their communities on a regular basis and
they talk to business owners and they say, what are
(09:22):
you seeing? Tell me about what you're experiencing right now,
and overall the sense that you get here, and I'll
quote from CNBC, the Central Banks Periodic Beage Book, published
eight times a year, generally at about six week intervals,
categorized overall economic growth as having changed little since the
last report on September third. Labor markets were largely stable
(09:45):
as demand was muted for most of the fed's twelve districts.
When it came to prices, though Trump's duties implemented in
April and then staggered through ensuing months, showed an impact.
Quote prices rose further during the reporting period. Tariff induced
put cost increases were reported across many districts, but the
extent of those higher costs passing through to final prices varied.
(10:07):
So this was a change from before where you still
had in September and August a lot of chatter about
companies that we're using existing inventory to not have to
move prices up. Yet we're now in a lot of
cases through that existing inventory and companies that are needing
to reorder saying yeah, I've got to raise prices in
order to reorder or I've got to eat it. And
(10:27):
now my margins are going down and my profits not
as good, And might I lay someone off in the
event that I want to maintain my margins?
Speaker 4 (10:34):
Yeah, And where we continue to see this most pressure
is on those smaller firms. Walmart still able to drive
those supplier prices lower, but your run of the mill
local store with less pricing power really is struggling. I
think as we get into retail season. What I'll be
looking to differentiate on is when we look at those
(10:56):
businesses that are reporting earnings, focusing on the ones that
tend to serve a lower income consumer. I think of
the dollar stores that are out there. I think of
fast food restaurants out there. Are they continuing to see
that pullback and are we starting to see it eat
into profit margins. I've heard of many of these companies,
McDonald's especially, having to offer discounts to bring customers in,
and so do we start to see that and do
(11:17):
the big guys Walmart two again, Walmart serves many different customers,
but what they've really succeeded in over the course the
last few years has been bringing in a higher income
consumer that's worried about prices, and so they've been able
to combat this trend. Some of those other guys not
so much. And we'll be hearing from all of them
over the course of the next month or so.
Speaker 2 (11:36):
Let's take a quick break here. When we come back,
we'll talk about some of the good in the financial sector,
big bank earnings this week, which have been quite honestly,
nothing short of outstanding, and then we'll talk about some
of the bad in the financial sector, which is, Hey, Jeffries,
why did you lend so much money to first Brands?
We don't know, but we'll try to figure it out.
Speaker 3 (11:58):
After this.
Speaker 1 (12:00):
To us six one, seven, three, six two thirteen eighty
five with your comments and questions about today's show, and
let us know what you think about the stories we
are covering. This is the Financial Exchange Radio Network. Find
daily interviews and full shows of the Financial Exchange on
our YouTube page. Subscribe to our page and get caught
up on anything and everything you might have missed. This
(12:22):
is the Financial Exchange Radio Network.
Speaker 5 (12:29):
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Speaker 2 (13:06):
So we're basically through the bulk of earning season at
this point for big banks. Yes, you know, yesterday you
had kind of the last ones, Bank of America, Morgan
Stanley reporting, just going down the list of you know,
other big banks. Bank New York Mellon reported today, but
I don't really consider them a big bank. They're they're
(13:26):
kind of mid sized at this point. Same with US
Bank Court the.
Speaker 3 (13:29):
Other Chuck reported this morning as well.
Speaker 4 (13:32):
They did they did Ushwa no relation, but tomorrow you'll
have MX which again not exactly a bank, but you know,
another financial institution, but yet to your points, JP, Morgan,
Bank America, Wells fargest city, they're all done reporting earnings.
Speaker 2 (13:45):
So here's what the banks told us when I look
at them and the aggregate their investment, banking and trading
businesses were going gangbusters in Q three, knocking the cover
off the ball, just fantastic. Like you look at that
and you're like, the only thing that would be better,
as if they were better, But they're they're pretty darn good.
(14:07):
The home lending business not really much growth there, kind
of flat, kind of nondescript, but no real signs of trouble.
Speaker 4 (14:16):
They're also not really showing giving any real signs of
concern about cracks in the foundation. You'd think about, you know,
might they be worried about credit card defaults given everything
that we've been talking about with the consumer, and the
answer has been no. JPM Morgan actually lowered their expected
losses on credit card loans, and so these big banks
(14:38):
are not the best bell weather for the overall consumer.
But they you know, it's not like they just serve
the top ten percent of wealthy individuals. They do serve
a large swath of the US customer base. And for
them to basically be coming out and saying, no, we're
not seeing losses on credit cards, we're not seeing we're
(14:58):
not seeing growth on home land, but we're not seeing
any real fractures there, it speaks to some real confidence
in terms of direction right now.
Speaker 3 (15:08):
Now.
Speaker 2 (15:08):
What they are saying is more of what we talked
about in the first segment. So Bank of America UH
splits their spending growth into a few different areas, and
what they showed was, Hey, lower income households, their spending
grew point six percent year over year. Higher income households,
their spending grew two point six percent year over year. Yes,
(15:31):
there's something like there's more data that's kind of backing
that up here. So I think that when we look at,
you know, what we are seeing from the banks, they're
telling us, hey, there's nothing that's really a problem for
us yet. And quite honestly, that's what we expect from
all of the other data that we've been getting. That
(15:51):
there hasn't been anything that's shown stresses in credit card
delinquencies this year. There hasn't been anything that's shown stresses
in mortgage delinquencies. The one place that we have seen
it has been in auto loans. But you could make
the case, hey, a lot of that might be happening
at the dealer level or through non banks yep, And
that is starting to show up in other places, and
(16:13):
that's something that we're going to continue to monitor.
Speaker 4 (16:16):
Once that that I just found wild Chuck. So, Charles Schwab,
as I mentioned, reported earnings this morning, and just not
your traditional bank obviously, you know, most of us don't
have a Charles Schwab bank account, but one of the
biggest trading platforms out there, they reported one hundred and
thirty four point four billion in total net new assets.
(16:36):
That's a forty eight percent increase from a year earlier.
Speaker 2 (16:40):
Did you say forty eight.
Speaker 4 (16:42):
Forty eight percent increase from a year earlier in total
net new assets, it's more than anybody expected. Their trade
revenues is growing thirty percent topping estimates there. And this
is only coming to mind because I'm reading Andrew Ross
Orkins book nineteen twenty and you know that era of
(17:02):
speculation and all that the FED was doing to try
to combat it at the time. By the way, Little
Tea's Andreas Orkin's coming on the show next Tuesday, if
you want to tune in. But it is something that
the FED is seemingly not focused on, is the level
of speculation, the level of the asset level of the
stock market. The idea that they are planning to continue
(17:25):
to cut into.
Speaker 3 (17:27):
What is very clearly.
Speaker 4 (17:31):
A huge growth in the stock market and a huge
growth in the wealth effect is just very intriguing and
compared to other times in history, to me.
Speaker 2 (17:40):
It is I think that you can also make a
case that this is a pretty unique time in history
in terms of look, we've seen things in the economy
and markets over the last five years that we haven't
ever seen before and this is kind of an extension
of that. So you know, we've talked it, and in
(18:00):
terms of why the Fed is moving, it's because they're
clearly concerned about the labor market.
Speaker 3 (18:06):
Yep.
Speaker 2 (18:06):
And I think rightly so given some of the things
that we're seeing out there. Now. If you start to
see more and more inflation data that is piling up
suggesting that inflation is starting to grow, you know, close
to a three and a half or four percent rate
as opposed to you know, two nine to three one,
then you start having questions about, okay, like should the Fed?
(18:27):
You know, is inflation the bigger problem? But in the
absence of that inflation data, it's hard to make that case.
Speaker 4 (18:36):
Speaking of the absence of data, you know, we missed.
The last jobs report that would have come out was
that two fridays ago. Now I can't keep track of
the dates, but comes out the first Friday of every month.
Right now, we are in that survey period for the
October jobs report. If the government remains shut down, I
would think for even another week, it seems unlikely to
me that we will get.
Speaker 3 (18:54):
That October jobs data.
Speaker 4 (18:56):
Don't know, Yeah, because remember like they release it, you know,
three weeks after they actually do the collection, and it
takes a while to do it. And right now there
is no collection happening because the government's shut down, so
we may it's entirely possible we will miss the October
jobs report entirely.
Speaker 2 (19:12):
Yeah, we're now in day sixteen on the shutdown. There,
so overall banks telling us, yes, there are some problems
with the economy, but not of our doing. There's nothing
that's showing up there. Let's take a quick break. When
we come back, we do have Wall Street Watch, and
then we're gonna talk about Jeffries, the investment bank that
(19:34):
somehow decided to lend a bunch of money to first Brands.
Speaker 1 (19:40):
Like us on Facebook and follow us on Twitter at
TFFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time now for Wall
Street Watch a complete look and what's moving market so
far today right here on the Financial Exchange Radio.
Speaker 5 (19:59):
Netw markets aren't positive territory and extending their gains driven
by AI in more strong earnings as investors can continue
to monitor the ongoing tradespat between the.
Speaker 2 (20:10):
US and China.
Speaker 5 (20:11):
Right now, the Dow is up by tenth of one percent,
or fifty four points higher. SMP five hundred is up
a third of a percent, or twenty three points higher.
Nasdaq is up two thirds of one percent, or about
one hundred and fifty points. Russell two thousand is retreating
about two tenths of one percent. Tenure treasurealed flat at
four point zero four percent, and crude oil is flat
(20:33):
as well, leedging higher training a fifty eight dollars in
thirty five cents a barrel. Shares in Taiwan Semiconductor are
mostly flat now after the chip maker reported another record
profit in the previous quarter, jumping thirty nine percent, well
above street expectations. The company also hiked its revenue outlook
for twenty twenty five. Meanwhile, Nesli said it plans to
(20:55):
reduce costs by cutting sixteen thousand jobs over two years,
sending share and the maker of kit Kats and Espresso
capsules up by eight percent. Elsewhere, JB Hunt Transport Services
posted solid third quarter results, beating on earnings and revenue.
Shares in the trucking and logistics company are surging nearly
nineteen percent on those results. Other trucking companies are also
(21:18):
seeing gains in reaction to the news. United Airlines miss
third quarter revenue estimates but beat earnings expectations that stocked
down by over three percent, travelers down by three percent
after posting mixed third quarter results. Sales in shoot excuse me,
Shares in Salesforce are jumping about seven percent after the
CRM vendor said it expects revenue above sixty billion dollars
(21:41):
in twenty twenty and twenty thirty. And tomorrow morning, ahead
of the opening bill, we'll see more financial earnings, this
time from AMEX. I'm Tucker Silva and that is Wallstree
watch Mike.
Speaker 2 (21:52):
So every every now and then on the show, we
just get this convergence where the stat that Tucker has
put together is just perfectly timed for something that's happening
in the market exactly right now. And this is one
of them, like the fifth item in the stack. It's
how Jeffries found itself at the center of first brands collapse. Tucker, Tucker,
(22:15):
when did you put this together? This was like six.
Speaker 5 (22:17):
Thirty this spe I don't remember.
Speaker 2 (22:18):
It was early early, yeah, it was. It was still
dark out. And as we sit here right now, Jeffrey's
financial open the day flat and sits here right now,
down about seven and a quarter percent in the first
hour or so of trading, And this obviously leads you
to say, what's going on? So you start digging through it.
And first let's talk about just what's going on in
(22:40):
this piece. So First Brands is the autoparts manufacturer that
turned out to be the center of a whole bunch
of questionable accounting and off balance sheet lending that now
totals somewhere in the ballpark of twelve billion dollars when
people thought it was about six billion dollars in debt
that they had outstanding.
Speaker 3 (22:59):
Yeah, I fraud may not be either case.
Speaker 4 (23:02):
Pretty questionable type stuff that was happening, and many investors
or lenders to the company left holding the bag. Here
before we go for the does this feel as though
it's not getting much coverage in the media, Not First
Brand specifically, but we've now had two bankruptcies in the
auto space and a lot of financials under pressure, and
(23:25):
it just seems to me that the only thing that
people want to talk about is either China and tariffs
or artificial intelligence.
Speaker 3 (23:32):
Well, and I know that you know, it's pretty niche.
Speaker 4 (23:35):
When we're talking about private credit, but it is kind
of the grease that makes the economy.
Speaker 2 (23:41):
Work, the grease that makes the economy. It's the grease
on the briddle of the economy. Now we're cooking. So
I think that when we talk about this, like, let's,
you know, take ourselves back to two thousand and seven.
Did anyone in April of seven, you know, want to
spend any time I'm thinking about subprime mortgages and whether
(24:02):
or not they could matter to the US economy. No,
because like no one cared, Like, yeah, I mean, Mike,
this is like asking It's like asking a golden retriever
to worry about why the lights aren't turning off. Like
there's like it doesn't matter, it's just whatever. It's not
part of their life, it's not part of their their perception.
(24:25):
So I think that when we look at this, yeah,
like no one cares about first brands because no one
cares about first brands unless you like work for them
or a related company. It's not impacting you in any way,
shape or form right now.
Speaker 4 (24:37):
And you know, people don't really care that much about
the financial sector. I mean the financial sector as a whole.
It's down about nine tenths of a percent this year.
This this morning, the S and P is up four
tenths a percent. It's kind of buried in the data here,
and it's not that impactful on the overall moves in
the stock market.
Speaker 2 (24:54):
So but but here's the thing. You've watched mad Men, indeed,
you know, and and you know, there's the famous scene
where you know, John John hamm is arguing with Peggy
I can't remember the actress's name right now, for what
the reason, Elizabeth Elizabeth, It's Moss, that's the one.
Speaker 3 (25:15):
And so it could do a whole segment, it'd be great.
Speaker 2 (25:20):
So you know, they're going back and forth, and you know,
she's like, I need like more, and he's like, I'm
giving you more. And she's like, well, you know, you know,
I need like some positive feedback in this neck. And
he's like, that's what the money's for. Like that's you know,
we get that line, that great line of like, that's
what the money's for. And ultimately that's what it comes
back to with financials is the money that's out there,
Like it all flows through there, and it's for the
(25:41):
reason that if you don't have it, none of this
actually works like that. The only reason it does is
because everyone gets paid, and the only reason that everyone
gets paid is because the financial plumbing works. And so
I look at what we're seeing today in markets, and
you know how, for the last like a month or so,
I've been saying that something stinks in the auto sector. Yes,
(26:05):
something stinks in the financial sector now and markets are picking.
Speaker 3 (26:08):
Up on it.
Speaker 2 (26:09):
Yeah, you've got again a no major news or anything.
Insurers across the board selling off three percent, insurance brokers
selling off four to five percent.
Speaker 3 (26:19):
That piece isn't obvious to me.
Speaker 4 (26:20):
We got to talk about why insurers specifically would be
selling off so earlier this week.
Speaker 3 (26:25):
SMP Global or was it over the weekend, doesn't matter.
Speaker 4 (26:27):
SMP Global, a big rating agency went out there and
gave a warning to insurance companies specifically and said that
they hold a lot of this debt on their books
that is now being called into question. And so they
put that warning out there that hey, these insurance companies
hold a fair bit of this. This is where they
have gone to juice their returns with their balance sheet
(26:49):
over the last few years. It's not been by buying
CDs and treasuries like you and I do. They've been
making or buying up the loans that other firms like
Jeffreys and KKR have been issuing to these small companies
that are off the books, not traded, and a little
bit opaque in terms of how much is out there.
Speaker 2 (27:09):
And this this is where we unfortunately like do take
a detour back to two thousand and seven because we're
gonna have to learn once again about what are called
collateralized loan obligation clos. It's basically, remember in finance, there
are two ways that everyone blows up. Typically it is
either like there's two innovations that you have on anything.
It's either how do I lend to a new you
(27:31):
know category in some way, shape or form, and then
how do I securitize what I have lent. Basically, leveraging
and securitization is the whole game in finance. Everything else
is just you know, playing games. It's it's not real money,
it's not where it's made. So with a collateralized loan obligation,
it's pretty simple. You have something that is a loan,
(27:53):
money that you've lent to someone. It is collateralized backed
by something. In a case of auto loans, it can
be backed by the VA goal. In the case of
mortgage backed securities, which are a type of clo It
can be backed by a mortgage, what was it backed
by in first Brand's case inventory and like basically like
the windshield wipers and correct. In the case of Tricolor,
(28:14):
the auto loans were backing the loans that you know
they were making, except Tricolor was then pledging them two
and three times over. You had vins that were listed
in multiple packages, it turned out. So there's all kinds
of gnarly stuff that you're finding. And the problem is
that in with insurance companies. Remember insurance companies with how
(28:36):
they are able to raise rates and how much they
have to charge in order to operate markets. It's a
very tightly regulated pricing structure in many markets. But they're
also competing for market share.
Speaker 3 (28:47):
Sure.
Speaker 2 (28:48):
One of the ways that you can try to improve
your pricing is through earning more on your general account.
Mike and Chuck each pay in one thousand dollars a
year on their auto auto insurance premiums, and hey, if
you put that in US treasuries, earning you know four percent, great.
The general account grows from two thousand dollars to two
(29:09):
thousand and eighty dollars and then they can use that
to pay claims. This is a small, simplified example, but
that's how it works. On the other hand, if two
thousand and eighty dollars is what's needed, but the insurance
company says, hey, we can go out and so and
so is selling a bunch of collateralized loan obligations that
aren't yielding four percent. They're yielding ten percent. And so,
(29:33):
Mike and Chuck, instead of you needing to pay us
one thousand dollars, you can pay us nine to fifty.
We get nineteen hundred dollars from me, We put it
into this ten percent colo, and we still get to
two thousand ninety dollars right now, and we were able
to save you some money. Isn't that great? Yes, it
is when everything's humming.
Speaker 3 (29:50):
Yeah.
Speaker 2 (29:51):
But what I'm seeing in this market today people are
getting nervous about what's going on with these lateralized loan
obligations related to private credit. This is why when you
look at the big banks, Wells Fargo's up almost a
quarter percent today. Bank of America is flat today. JP
Morgan's down less than half percent. It's not affecting them
(30:12):
because they're not the.
Speaker 3 (30:12):
Ones to do it.
Speaker 2 (30:14):
They can't anymore, but they still might end up holding
some of this if they're warehousing it in a particular
deal or something like that. But it's it's not like
the thing for them. But when you look at KKR
down two and a quarter percent, Apollo Group down two percent, like,
those are things that start to get me being like, okay,
what's going on? And then you look at the insurers
(30:35):
that are down, you know, anywhere from two to four
percent today and insurance brokers down four to seven percent,
and you're like, okay, they like the market's starting to
finally sniff out, like here's where the problem is going
to be if it's going to be there.
Speaker 3 (30:49):
So we've we've got to take a pretty quick break.
But I do want to content after we can do whatever.
Yeah right here, Yeah, that's true the game keeping.
Speaker 4 (30:57):
I want to talk a little bit about what this
could mean to the rest of the economy. Obviously, you
could have some lenders blowing up, but if credit drives up,
to me, that is a bigger story than insurance companies
having a tough go of it.
Speaker 2 (31:13):
They're both big problems for different reasons. Let's talk about
what the next three to six months might look like
in a good situation and bad situation.
Speaker 1 (31:21):
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.
Miss any of the show. Catch up in your convenience
by visiting Financial Exchange Show dot com and clicking the
(31:42):
on demand icon, where you'll find all of our interviews
and full showers. This is your home for the latest
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This is the Financial Exchange Radio Network.
Speaker 3 (32:04):
All right.
Speaker 2 (32:04):
So last segment, Mike, we were talking about the problems
in this private credit space, and basically, the way I
see it, there are at this point two ways that
this can play out. It's entirely binary. In my opinion.
This is either going to be a problem or it's not.
There's no middle there's no middle ground in this. It's
(32:25):
like it's it's either hey, it actually is contained, and
it's a small number of companies that are the problem,
and all the people holding this are gonna figure this
out over the next six months, or they're gonna figure out, Hey,
it's it's a bigger problem and you're going to have
you know, some real issues there. So the question then
is what does it mean, you know, if it's a problem,
(32:48):
because if it's not, Basically what you'll see is all
of the places where they're worries right now, regional banks, insurers,
you know, Jeffries, all these places. Okay, like think about
the concern after Silicon Valley Bank, just as an example.
Speaker 3 (33:02):
Got contained and we moved along, we.
Speaker 2 (33:04):
Saw banks that were you know, kind of on edge
and trading nervously for a month or two, and then
everyone was like, yep, everything actually checks out. No one
actually has a problem. That's that same scale. The couple
other problem ones were dealt with over the the subsequent weeks,
and we moved into the summer of twenty three and
rallied and there was not another thought about bank failures.
(33:25):
So the path out of this is either hey, that's
where we go over the next two to three months,
or it's another cockroach pops up, another one pops up,
They start clustering and then all of a sudden it's okay,
no one knows what any of this stuff is actually worth.
Speaker 4 (33:39):
Yeah, and again you know how this relates to big
things that we're all talking about, like artificial intelligence. UBS
estimates that at a minimum, the private credit sector as
a whole is providing fifty billion dollars in quarterly financing
for AI related infrastructure. So I'm a little bit less
concerned out the auto sector blowing up, and you know
(34:03):
auto loans being a real problem. That is a problem,
but it's not going to affect the economy as a whole.
It's not going to lead into recession. It's probably not
going to spark the stock market to sell off dramatically.
The private credit lending industry taking a step back and
looking at their loans and saying we need to pause
new issuance or dramatically lower new issuance is what could
lead us into a really bad spot.
Speaker 2 (34:24):
And here's the comparison is in the run up to
two thousand and eight, Again, this is a quarter of
the size of the housing market, so it's not the
same scale. It can still cause problems, but different scale
of problems. In two thousand and eight, it was Okay,
we're concerned about these mortgage backed securities. We're going to
pull back on lending to the residential market. Which caused
(34:45):
home prices to fall further, which caused more problems with
mortgage backed securities. Was this whole cycle that you got into.
You could see a similar one in these non bank lenders,
these private equity, private credit firms that lend money out
to those middle market firms and invest companies and investing
companies that say, yeah, we're gonna pull back on deploying
capital there, and then you've got a problem in kind
(35:08):
of those mid sized businesses with trying to get financing
for either expansion or just to cover over existing financing
that's out there.
Speaker 5 (35:16):
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Speaker 2 (36:21):
Taiwan Semiconductor reported earnings this morning, and they bumped up
their projection for twenty twenty five revenue growth for the
second time this year. And basically what they're saying is, Yeah,
we're the only game in town, and we've got pricing power,
and as long as y'all want some semiconductors, y'all gonna
(36:42):
have to pay more to get those semiconductors.
Speaker 4 (36:44):
I didn't know that the Taiwanese spoke with such a
Texas like accent.
Speaker 3 (36:47):
Have you been to their.
Speaker 2 (36:48):
New facility Arizona?
Speaker 4 (36:49):
If not, Yeah, in either case, when I think about this, company. Right,
we talk about valuations on Nvidia and and you know
what if the Chinese become better developing chips and are
able to outpace things here in any case, doesn't TSMC
feel a little bit more insulated to any of the
risks there? I mean, I know the Chinese want to
(37:10):
aid from invasion. Yes, aside from the Chinese literally invading Taiwan,
there is nobody else out there that is producing these
things at this scale.
Speaker 3 (37:20):
I know China wants to catch up.
Speaker 4 (37:22):
I know Intel's trying to do it here domestically, and
we're investing a lot of money in here, But doesn't
that seem like a ten year story rather than a
eighteen month threat to.
Speaker 3 (37:31):
Their business model?
Speaker 2 (37:33):
Yes?
Speaker 4 (37:33):
To me, the only threat to their business model is
Ai is a bubble and we are producing too many
chips and we all have to and all the companies
have to cut back. Then there's a real problem. But
there is nobody else that is capable of doing what
Taiwan Semi is currently able to.
Speaker 2 (37:51):
No, it's the in theory. What Intel was trying to
build itself into with their foundry business was to be
able to compete with Taiwan Semi.
Speaker 3 (38:00):
And they have utterly failed to do it.
Speaker 2 (38:01):
But it didn't work, and they're like, okay, like this
is this is not going to be part of us
going forward. We need to, you know, figure out what
to do with that business. So uh, in any case,
let's take a quick break. We still got a whole
lot more to cover. Our two of the financial exchange
is coming
Speaker 3 (38:15):
Up in a bit
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