October 11, 2024 • 38 mins
Mike Armstrong and Marc Fandetti discuss JPMorgan and other banks reporting earnings with better than expected results. Fed officials seem split on what the latest inflation data means for future rate cuts. The 2-year-old bull market has just done something that shows it has further to run. Why has the election frozen Wall Street?
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Speaker 1 (00:00):
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(01:06):
Face is the Financial Exchange with Mike Armstrong and Mark Vandetti.
Speaker 2 (01:13):
Good morning, Happy Friday, Welcome back to the Financial Exchange
as we officially kick off earning season here in October
with some very exciting large banks reporting earning, so we'll
be diving into that. We also received an additional inflation
report after yesterday's CPI reading, which, if you missed, came
in a little bit hotter than anticipated. That's what the
(01:34):
Producer Price Index, and I haven't had time to read
it yet, but six minutes ago we've got a reading
out on consumer sentiment as markets which were slightly in
negative territory to open opened up positive here with the
Dow and sp so far in positive territory, with Nasdaq
off slightly. But I want to get first mark too.
Those incredibly exciting bank earnings and if you cannot here
(01:59):
are the star arcasm in my voice. These companies are
effectively utilities at this point in time, subsidized and backed
by the US taxpayer, and so they don't generally do
anything or tell you much. That's incredibly exciting. Although JP
Morgan tries Jamie Chase, Jamie Diamond of JP Morgan Chase
that's his name, does try and spice that up a
(02:20):
little bit by telling you that the world's coming to
an end every thirty to sixty days, but generally speaking
well received on markets this morning, after Wells Fargo and
JP Morgan reported earnings. JP Morgan up over five percent,
Wells Fargo the same here big picture mark as rates
have started to come down beginning of a rate cutting cycle.
(02:42):
Any major takeaways you had from these two companies who
reported this one, We'll.
Speaker 3 (02:47):
Just talk generally about the key metric of bank profitability,
whether it's a big bank or a small bank. It's
so called net interest margin.
Speaker 2 (02:55):
That is good. What banks do. They take your money
and they lend it.
Speaker 3 (02:59):
So it's just a spread. I'm oversimplifying a little bit.
And you would think when rates were coming down when
the Fed lowers, I should be I should qualify that
when the Fed lowers short term rates, longer term rates
tend to come down at least that's the immediate effect.
But that hasn't happened over.
Speaker 2 (03:15):
The past four exact opposite. But yeah, yeah, except.
Speaker 3 (03:18):
For the five million times that hasn't happened. No, But seriously,
on average, the Fed, FED easing reverber rates down, the
so called yelker. We talk about that later, we talked
about the FED. The point I wanted to make was
you would think when rates come down that banks net
interest margins would suffer because compression.
Speaker 2 (03:36):
Right, If rates are coming down, you would imagine there's
less of us.
Speaker 3 (03:39):
You're making new loans, so you make a mortgage. You
you're able to get less for the interest rates lower
on that mortgage. You're paying out roughly the same, maybe
slightly less to depositors. That spread historically for small banks anyway,
interestingly enough, but not large banks has becomes has been
subjected to pressure when the FED is easy. So I
(04:01):
guess the point I'm trying to make is is that
don't assume that just because the FED is lowering rates,
it's going to be a tougher net interest margin environment
for banks, large banks in particular. It's hard to say
whether or not the FED cutting rates is good or
bad small banks. Yeah, academics who've looked at this, and
as you could tell, I looked it up this morning
because a contrary to my history when we talk about
(04:23):
individual companies, I actually wanted to make a contribution to
this segment, and my contribution here is, don't assume that
falling rates are necessarily bad for big banks with complicated assets,
some of which are very long lived. They're far less sensitive,
as it turns out, to changes in the FED Funds
rate than smaller or local banks are.
Speaker 2 (04:42):
Yeah, so if you're a local regional bank, let's talk
about why this would be. You know, rates coming down
would be a clear hit to the margin. You know,
just think about your local experience. If you have money
in your checking account, regardless of whether you're with Bank
America or Marx Credit Union and hot Dog Stand, you're
(05:03):
probably not making a whole lot of money in your
checking account. And in that local bank, that net interest
margin is. Again, all that they do at that local
bank is take your money and lend it out. They
don't have usually wealth management divisions, they don't have investment banks.
If your Marx Bank and hot Dog Stand, they just
do lending and deposits. JP Morgan and Wells Fargo are
(05:29):
very different companies in that regard. They have their own
credit card businesses, They have their own wealth management divisions,
some of the largest wealth management divisions in the world.
They have their own investment banks, and when some of
the like the perfect example here would be, did JP
Morgan and Wells Fargo and all these banks lose all money,
you know, lose a ton of money in the twenty tens. No,
(05:50):
they were doing all right because even though net interest
margin was quite low, they make all sorts of money
on trading, wealth management, and investment banking in addition to
what they see on net interest margin, which is quite
frankly why these banks are so boring. Yeah.
Speaker 3 (06:04):
So, I guess for an individual investor, if you are
concerned about the effect of falling rates on bank profits,
larger banks, because of their longer dated assets, are less
their net interest margin is less sensitive. Academics of research
this have found it. This is not my work, just
regurgitating the sort of consensus. They should be less volatile
(06:27):
in a falling interest rate in falling profitability environment, and
a bank, as you point out, like JP Morgan or Wells,
if they've gotten their act together, may actually be able
to do just find because of their various business lines
and sources of potential profitability.
Speaker 2 (06:42):
But as you can tell, our general consensus here is
that when you're talking about companies that are by definition
and by law too big to fail, their earnings are
kind of boring in terms of what they end up reporting.
So banks have done quite well this year. Wells Fargo
up five and a half percent today, up twenty three
and a half percent for the year, JP Morgan Chase
(07:03):
up five percent today, up thirty percent for the year.
Speaker 3 (07:06):
Well handily beating the broad market.
Speaker 2 (07:07):
Yeah, the entire banking sector doing quite well this year
in spite of the new you know trend which is
going to be rates coming down and again the net
impact on a bank like JP. Like who in the
last year do you know anyone who has gotten a
mortgage from Wells Fargo or Japen Morgan Chase. I don't
know anyone who has ever gotten a mortgage from Bank
(07:31):
America jpall in.
Speaker 3 (07:32):
Our region but maybe elsewhere.
Speaker 2 (07:34):
But even Bank of America, which has a huge presence,
like nobody actually goes to them for mortgages from what
I see, because they don't tend to be competitive. And
so the traditional banking as I think of it, these
giant banks don't do that much of it anymore. They
just don't get all that much into the home equity
line of credit to end mortgage origination space. They leave
(07:54):
that to other players, and they have bigger fish to
fry in terms of you know, giant corporate lending arms
and different and things that they do today.
Speaker 3 (08:02):
So I don't know off and with there. If I
had to guess, I'd say they have a substantial share
nationally mortgage marshals. They may have in every market, yeah,
and a bigger share in maybe big metro areas or
areas where they're headquartered.
Speaker 2 (08:15):
What I find what I find incredibly interesting about again,
not every bank, but Bank America and JP Morgan have
made it a real point that they want to expand
their physical banking presence. I know this isn't necessarily about
their their earnings right here, but that is a substantial
reversal from where it seemed the industry was going over
(08:37):
the last few years. Right I did a bunch of
my banking through a brokerage firm where they didn't even
have any branches. It was literally just an online bank
checking account. What they seem to be finding here is
a lot of people are okay with digital banking, but
a prerequisite to opening a new account is having a
local branch in their area, which.
Speaker 3 (09:00):
I agree with, you know, on a person I ended
up with TD because they have a bank in my town. Tucker,
would you will lunder your money?
Speaker 2 (09:07):
Tucker? Oh they will, Yeah, have any money's jus they'll
they'll clean it up for you, Tucker.
Speaker 3 (09:12):
Would I don't. I don't want to slander them, although.
Speaker 2 (09:16):
I just did, and they were just find a whole
bunch of money for exactly.
Speaker 3 (09:20):
I'm also a loyal customer. I think they're absolutely fantastic.
Speaker 2 (09:23):
I mean, Tucker, would you open up a checking account,
like a primary checking account with a bank that doesn't
have a local presence, because I think even I, who
am very comfortable with the digital experience.
Speaker 4 (09:34):
Yeah, in this day and age, I have no problem
with that. You would, Yeah, I wouldn't have a problem
with that.
Speaker 2 (09:39):
See for me, it's the one in every three years
that I actually have to go into the branch. I
would be very It.
Speaker 3 (09:45):
Caused me to change. It was a one in multi
year experience where I threw my hands up and said.
Speaker 2 (09:50):
I can't.
Speaker 4 (09:50):
I can't remember the last time I went inside my bank.
Speaker 2 (09:53):
You know, Actually, the same story I have. I have
a colleague who was down in Tennessee for years, had
an account with Wells Fargo, had an issue where he
had to be at a branch. And guess what, there's
zero branches for Wells Fargo anywhere. I think it's southern Connecticut.
Speaker 3 (10:11):
You need debit cards same day because you lost your
wallet stupidly as I did. You will wish you had
a branch within your area.
Speaker 2 (10:18):
Again.
Speaker 3 (10:19):
It's why I switched, But it's different for everybody.
Speaker 2 (10:21):
Let's take a quick break when we come back. We've
had dual inflation reports over the last two days. I
want to break them down and get Mark Fandeaty's take
on yesterday's all important CPI report and what it might
mean for the Federal Reserve. We'll be right back after this.
Speaker 1 (10:36):
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Speaker 2 (11:34):
Mark. One week ago, according to Chicago Mercantyle Exchange, there
was almost no doubt that the Federal Reserve would be
cutting interest rates by fifty basis points. There was even
a possibility of seventy five basis points by year end. Still,
overall likelihood seems to be pointing for two rate cuts
before year end. Here, with the final meeting of the
year occurring on December eighteenth, we will see what plays out.
(11:58):
But since about a week ago, we've now gotten a
hot unexpected jobs report, two hundred and fifty four thousand
jobs created, with the unemployment dropping down to four to
one or nearly to four point you know, nearly to
four percent if you round down. We yesterday got a
CPI report which was by no means catastrophic, but also
(12:20):
didn't quite play into the Fed's narrative of rapidly reducing,
not reducing, rapidly shrinking inflation rapidly disinflating. So talk to
me about what we actually saw in the report yesterday,
because we're continuing to get a lot of help from
gas prices, which I personally enjoy quite a bit. But
(12:43):
when you take a look at the numbers here, we're
not in that perfect two percent range right now.
Speaker 3 (12:50):
Yeah, I'll use the analogy of weight and weight loss
because we can all relate. I'm sorry, I know this much.
I haven't heard this one is my old standby. Yeah,
you guys, I think inflation is like fat people.
Speaker 2 (13:03):
No, it's consistent.
Speaker 3 (13:05):
If you were trying to measure your progress toward a
weight loss goal, you wouldn't look at the gain or
the decrease over any short period like a few hours
or even a day. You would take a multi day average,
and you might take even a longer term perspective than that,
depending on your goal and the time frame. And we
(13:27):
all know from our experience with that that progress can
be reversed. You could see a good mini trend in
weight loss and you could have a bad weekend and
that sets you back. The inflation process is similar and
that inflation price pressures. And by inflation we mean the
change in prices. Prices have gone up by about twenty
five percent since COVID started. Sure they're not going back
(13:50):
down abs in a severe economic contraction. We can talk
more about those dynamics maybe at some point, but you
ask specifically, where are we today, and it's really hard
to say. Inflation has come down a lot. The rate
of change in prices has come down a lot over
the past two years or so. We know that it
peaked at about nine percent. I'm using the CPI, the
Consumer Price Index as an example. There are others peaked
(14:13):
at about nine. Now it's down two year over year,
about two and a half. I'm going round up a
little bit. That's really good considering there hasn't been a
major economic calamity, which is usually what's required to get
inflation down by that much.
Speaker 2 (14:23):
Arguably, every time you've seen inflation come down, you know.
Speaker 3 (14:26):
The estimated sacrifice ratio is somewhere around three percentage points
of unemployment for every percentage point of inflation. That was
roughly the so called sacrifice ratio of the disinflation experience
of the early nineteen eighties. So by past disinflation standards,
this was a miracle economically. And I know a lot
of you your lived experience is different than that. You
don't think the economy's great. I get that, but this
(14:48):
has been a really good disinflation in historical terms. So
is the job done? Have we achieved the soft landing?
That question isn't settled. And one reason for that is
one point in yesterday's report, which is so called core inflation,
which is a better measure of what's actually going on
with inflation because it strips out the erratic stuff. I'll
(15:09):
go back to the weight analogy. If you're weighing yourself,
you wouldn't do it right after dinner. You'd probably wait
till the next morning. We all do it. Sure, Core
inflation's a little bit like that. You want to strip
out recent disturbances that are going to be fleeting. So
core inflation was up point three percent month over month.
That's up about three and a half percent. I'm rounding
up a little bit over the past year. So core
(15:30):
inflation's up a lot more over the past year than
is so called headline inflation. And if you look at
another measure, of course, so called median, which is literally
just the price in the middle of all the prices
that the Bureau of Labor Statistics.
Speaker 2 (15:46):
Measures, thousands of them they do.
Speaker 3 (15:48):
And one way, you know, we talk about median home
prices and median salaries and stuff because you don't want
the big outliers or the you don't want the extremes
on either end to distort the true picture. So you
look at the median, Mike. You like to take three
and six month averages and then annualize them. You do
this all the time. That's why we call you three
month average Armstrongs right. Internally, if you look at the
(16:09):
three month median, it's about three point seven percent when
you annualize it, six month medium three point five. So
they tell a story similar to the recent history of core.
So there are measures, Mike, and I'll wrap with this.
There are measures of the trend and inflation which researchers
favor because they do filter out the noise that can
(16:30):
distort the true picture. That suggests that inflation has settled down,
but it's settled down a good percentage point to a
percentage point and a half higher than the fed's goal.
And this is important. The fed's goal is two percent.
Speaker 2 (16:42):
Yeah, and you can't, unlike in months past, we can't
look at any one item here and say, well, it's
that darn shelter costs, for instance, that's just keeping core
inflation higher. This was a big story that we talked
about over the last several years. Like, ah, man, we
can see on other sources that rents are coming down,
it's just not feeding into the CPI. Well guess what
it did. And inflation is still a little bit higher
(17:06):
than you would learn.
Speaker 3 (17:06):
You in mind, we talk about this a lot internally. Yeah,
it becomes a game of whack a mole. Yeah, we
just gonna get shelter in the control.
Speaker 2 (17:11):
Great, we did that.
Speaker 3 (17:12):
It's again like dieting, I just got to cut out Dorito's. Yeah,
but you substituted it with two ring dings every day.
So it doesn't that suggest that there's something underlying all
of this? The answer is I'm being rhetorical. The answers, yes,
there is, and it's the economy running an excess of
its speed limit. That's what puts upward pressure on inflation.
(17:33):
That was the key lesson of the nineteen seventies. Even
though rates were high, they weren't high enough. And economic
growth it may not seem gangbusters relative to the eighties
and nineties, but it's pretty strong relative potential that might
be putting upward pressure on inflation.
Speaker 2 (17:46):
Like, so, thus far, like I said, you've had a
job's report that came in hotter than expected, albeit nothing catastrophic,
no massive wage spikes. And I would not call this
inflation report catastrophic either. Uh you know, by no means
is it catastrophic. But you do start asking yourself, like,
all right, well, if we weren't getting all this help
(18:06):
from oil prices, which we know do seep through to
other costs ultimately, what would this all look like, right?
If if energy prices were moving upwards instead of downwards,
What would this overall narrative look like and sound like,
because that's completely out of it if.
Speaker 3 (18:22):
They were just neutral instead of down seven percent of
right the past year.
Speaker 2 (18:25):
So I think where I go with all this though,
is I'm not sure how much this sways Jerome Powell
and the other governors from their current path. They've been
pretty clear about it, and furthermore, their data that they're
going to get on both inflation and jobs for the
month of October, and my mind is muddied. I don't
(18:47):
know how you feel about it, but you know, looking
at the way hurricanes have, you know, affected data in
the past, I think the data you're going to get
on both of these figures is going to be a
little bit muddied in October, at least maybe in November,
and so probably not enough to alter their path unless
it's just a gangbuster inflation and jobs report.
Speaker 3 (19:07):
Sounds like these guys are hell bent on continuing to
cut raids. Based on their public remarks, this is reminiscent
of the nineteen seventies. I don't need to be so
apocalyptic here, but we did make similar mistakes. We misread
the economy's potential relative to what it was actually doing,
and as a result, inflation kept popping up again.
Speaker 2 (19:27):
Quick Break Wall Street watches next.
Speaker 1 (19:41):
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Speaker 4 (20:00):
Well markets are in positive territories. Wall Street sifts through
third quarter bank earnings unveiled this morning, in addition to
the Producer Price Index, which was flat for the month
of September, below expectations. Right now, the Dow is up
by three quarters of a percent or three hundred points,
SMP five hundred is up by two thirds of a
percent or thirty six points in the Nasdaq up by
(20:22):
over a third of a percent or sixty five points.
Russell two thousand up one in a third percent as well.
A ten year treasure yield is flat at four point
zero nine percent, and crude oil is off two thirds
of a percent, rating a seventy five dollars in thirty
six cents a barrel. JP Morgan up by four and
a half percent after beating third quarter expectations and reporting
(20:45):
a shallow we're then expected two percent drop in quarterly profit.
Wells Fargo also said its profit fell less than expected,
with net income dropping eleven percent to five point one
billion dollars. Wells Fargo up by six percent today and
black Rock shares by three percent after its earnings also
beat Street or excuse me, beat analyst forecasts. Instead, it
(21:06):
now oversees a record eleven and a half trillion dollars
of assets outside of bank earnings. Tesla shares down nearly
eight percent following its Robotaxi event last night that seemingly
underwhelmed investors. Uber and Lift stocks are seeing gained so
far today in reaction to the event, after Bank of
(21:27):
America said the event's conclusion ended six months of worrying
about what it could mean for the ride sharing stocks,
and Stilanta's shares are down by three percent after the
automaker announced major management changes, including ousting its chief financial officer.
I'm Tucker Silvan. That's Wall Street.
Speaker 2 (21:44):
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sign up ahead of time. Again. It is a live
(22:05):
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twenty fourth. Chuck and I will be down there, a
whole bunch of team members from the Armstrong Advisory Group
as well. Ed Lambert's gonna be joining us. He's the
host of the XTK Morning Show, and I'm personally excited.
We's gonna be able to drive down to the Cape
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gonna be an exciting time. You're gonna join us for
(22:25):
the live broadcast of the Financial Exchange Show. Following that,
we're gonna be doing a free educational lunch from the
Armstrong Advisory Group. Will be taking your questions, talking to
you about the upcoming election state of markets at the moment.
We're having deep conversations right now obviously about inflation and
unemployment and where all of that might go, as well
as policy proposals from both the Harris and the Trump campaigns.
(22:48):
If you'd like to join us again, the date is
Thursday October twenty fourth. You can go to Armstrong Advisory
dot com slash events, fill out a form there and
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But once again, it's Thursday October twenty fourth at the
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to Armstrong Advisory dot Com, slash events or call us
(23:11):
at eight hundred three nine three four zero zero one.
Speaker 1 (23:15):
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Speaker 2 (23:31):
Mark. I've maintained that if we get to year end
with both inflation and unemployment under four and a half percent,
then I'm calling it a soft landing for twenty twenty four. Ultimately,
an economy never actually lands. It's constantly evolving and changing.
But that's been my attempted definition of what this would
look like for a temporary soft landing. At least Federal
(23:53):
Reserve is meeting next November seventh, right day after the election,
I believe it is, and they will be setting policy.
There's been some talk now of Fed governors maybe disagreeing
a little bit with the direction of the path, and
it's going to probably get more challenging here now that
you've got these two reports, and you will get just
(24:16):
one more jobs report before that next meeting, as well
as the PCE inflation metric. But what do you suppose
the conversations are going on behind closed doors? And where
would you be Obviously neither of us are on the
federal reserve, but where would you be leading this conversation.
Speaker 3 (24:33):
It seems like, as we talked about in the last segment,
they're determined to continue to cut rates. They're highly confident
in their view that disinflation will continue. We talked about
reasons why that might be wrong. You talked about the
big special factor energy prices. Food prices can serve this
role as well, but energy prices are the historical special
(24:55):
factor culprit. They can push inflation up and distort the
true trend. They can pull it down and distort the
true trend.
Speaker 2 (25:01):
That's been the case for the last couple of years.
Speaker 3 (25:02):
It would seem that to be uh, yeah, it would
seem that that has been so so, Mike, I don't know,
and I don't think. Look, we're not privy to the
information that they're privy to. I tend to be opinionated
about this type of thing because I don't know enough
about it to be nuanced. To be honest, they get
(25:25):
you know, I take a sort of textbook. This is
what they taught us in college and after college, if
you had the privilege of studying it later. This is
what they taught us. This is what the models say.
I'm limited to that. So I see growth faster than
trend or potential. I see unemployment very low, and it's
not clear to me that this is that these are
(25:46):
circumstances that would normally be associated with a disinflation, a
disinflationary environment with with with price increases easing. They may
have information, They know these models as well as I do.
Some of them wrote chapter wrote papers on which the
textbooks that I read are based. So you know, I'm
not going to claim to know more than a PhD
academic now on the Federal Reserve if it doesn't give
(26:08):
them pause. Part of me says, why should it give
me pause? But at the same time, go ahead, really, no, no,
you're fine.
Speaker 2 (26:16):
I mean my point is much the same as yours,
which is, over the last few years, I thought that
the Federal Reserve was too slow to raise rates, didn't
go far enough quickly enough, and then kept kind of
having moments where they declared victory here and there or
at least alluded to a path to victory sooner than
they should have. And I've been critical all along the way.
(26:38):
To be fair to the Federal Reserve, the level of
disinflation that we've seen so far I didn't think was
possible given the path that has happened. I thought that
was completely impossible to get there. And they know they've
been proven right on that one factor.
Speaker 3 (26:54):
I think they got lucky. I think special factors, as
you talked about, energy prices have helped them a lot.
Supply chain unsnarling help them a lot, and to their credit,
I've not heard any FED official take take credit for
the disinflation without economic sacrifice that we've experienced over the
past two years. And the reason you and I and
others didn't think it was possible, it's because it's never
(27:15):
happened historically. Again, going back to my weight, my favorite
analogy weight loss analogy surprise. It'd be like saying I'm
gonna lose weight. I'm not gonna change a thing.
Speaker 2 (27:23):
Yeah, you know so. I mean, were I in the
Federal Reserve and I'm sitting on these two reports, I
would be a little bit hesitant about the path downwards.
And for a few reasons. One, you know, jobs report
is looking like the labor market remains a little bit
tight here, that could shift rapidly, and if it does,
then you can always continue your way down. The other
piece about this would just be I hate talking about
(27:46):
political uncertainty, but here's something that actually seems relatively certain.
Whether you have a Republican or Democrat administration taking control
of the White House next year, and assuming that the
House and Senate follow suit, which is not a sure
thing at all, but assuming they do, what does it
look like to me from an economic policy perspective is
(28:08):
either a whole bunch of tax cuts or a whole
bunch of spending. And so if you're worried about inflation,
underlying inflation, you know, contributing to the overall growth of
prices in the future. And you add that on top
of it of the government suddenly either piling more money
into people's pockets via tax cuts or piling it into
(28:29):
people's pockets via stimulus measures of one sort or another,
then you know, we've seen how that plays out as well.
And so you know, that's not the Fed's job to
grade what Congress is going to do in the future,
But they will have to react to it in the
event that that's what occurs here, and so I don't know.
(28:50):
There's a few pieces in my mind, especially after these
last couple of reports, that I think at least give
you pause to wonder, will we be seeing these lower
mortgage rates in the FED cutting rates? I think, you know,
the Chicago Mercantyle Exchange, I think still has one and
a half percent of rate cuts priced in by this
time last year. Let's go ahead and take a quick break.
When we come back, I want to move on from
(29:11):
inflation and FED talk a little bit, and I do
want to just get to a little bit of conversation
about this bull market that we've been marking the two
year anniversary of bull markets. A few stats on this,
on the state of markets that last this long, and
what might be next for this equity market. That's next
on the Financial Exchange.
Speaker 1 (29:30):
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Speaker 2 (30:31):
Two stories here, one from MarketWatch, the other from the
Journal I believe, both arguing I guess other sides of
where this market is right now. So the first title
here the market has been fabulous, maybe excessively so. And
then the other time, I watch The New York Times. Okay,
the two year old bull market has just done something
that shows it has further to run. So different perspectives
(30:56):
obviously on the market. From these two pieces, how would
you measure before we get into what the market has done,
How would you measure where we stand today in terms
of a real metric that actually matters, as opposed to say,
you know, the dows at forty nearly forty three thousand
at this point in time, which is just not a
(31:17):
terribly useful metric when considering the price of equities.
Speaker 3 (31:20):
Yeah, I guess one way to answer the question is
to ask a slightly different question and then answer it myself,
which is how expense I think you were saying this
basically how expensive it stocks right now? And when we
say that, we mean are they excessively high relative to earnings?
Because in the past that's been a bad omen. Sure,
we all know what happened after the tech bubble. It
(31:42):
was a decade's worth of negative returns. The two thousands
were a lost decade for US equities. There were plenty
of places to make money, sure, which is why it's
important to be diversified. But Mike, today, let's use the
so called Shiller pe that's a Guy Shiller, Nobel Prize
winning economist win it for this. But he developed this
simple measure of whether or not stocks relative to the
(32:05):
past ten years of average inflation adjusted earnings are expensive
or not, And right now, it's about thirty seven. All
you have to know is that that's the third highest
after two thousand, after right before or during excuse me,
the COVID crisis. That's the third highest level it's ever reached.
Speaker 2 (32:23):
So we're in company with the nine days before the
tech bubble. Yeah, twenty twenty one, before twenty twenty two
fell apart a little bit. And now yeah, and grant,
we've been in this general area for a good year, right,
it's not like we have I mean.
Speaker 3 (32:37):
Yeah, we've been here before in this cycle and it
didn't result in catastrophe. It did this was twenty twenty two.
It did result in a serious retrent. Now this wasn't
the cause.
Speaker 2 (32:47):
But the more.
Speaker 3 (32:48):
Expensive stocks get relative to past earnings and prospective earnings,
the more sort of fragile the market becomes. It suggests
over optimism and if the economic he doesn't cooperate, then.
Speaker 2 (33:01):
Doesn't tell you anything about timing.
Speaker 3 (33:02):
No, we think it's as you pointed out, Mike, and
as many people have pointed out, this measure, I'll call
it the Shiller pe out of an acknowledgment of the
guy that created it. Has been higher than it's pre
nineteen ninety average since nineteen ninety. So if you were
waiting around for stocks to get as cheap as they
got by this measure in say the early nineteen eighties,
(33:25):
you would have been out of equities for the past
three and a half decades.
Speaker 2 (33:29):
It's an important distinction. I remember at my former employer
hearing about this fund manager who actually, in hindsight, spotted
the mortgage crisis. He spotted it in like I think
it was something like two thousand and four, and starting
in that two thousand and four time period, started shorting
real estate companies and banks and all sorts of institutions
(33:50):
that were related to mortgages. And he turned out to
be right. But I think he was fired in like
two thousand and seven. He was running a fund and
he was calling for this mortgage crisis to all fall apart,
and again he was correct. He was right about the
actual fundamentals, which was there was clearly a bubble going on.
Speaker 3 (34:14):
Yeah, a lot of guys in the late nineties, so
called value managers, like Jeremy Grantham here in town, they
saw the bubble. Yep, they started warning about it in
ninety six ninety seven.
Speaker 2 (34:23):
And then they lost their investors lost a lot of.
Speaker 3 (34:26):
You probably never heard of them because they're mostly on
pension fund rosters almost went out of business, but they
were right then they had a spectacular run for the
next ten years. So there is an argument for being
a little contrarian favoring seemingly out of favor asset classes.
And by asset class, I just mean broad investment group
and Mike we talked about Cherilope. There are other measures
like ten year annualized returns. So what have the stocks
(34:50):
done on average annually over the last ten years. The
number now is a little over thirteen percent. That's quite
high by historical standards. The average return for stocks over
the past fie hundred years is closer to eleven and
the average ten year rolling return is closer to eleven
as well. So no matter how you slice it, stocks
will looking pricey. Now, if AI is the miracle productivity
and economic growth enhancing technology that it's its proponents make
(35:14):
it out to be, then maybe stocks are reasonably priced.
Speaker 2 (35:17):
Could be probably not No, no, probably no, History would
say no. Yeah, history would say no, that's very But
who's to say another you know, contradictory point here that
I don't find terribly useful. But the average bull market
since nineteen fifty, and you know, we're two years into
this bull market, right if we had a correction in
twenty twenty two, the bull market started really in October
(35:41):
of twenty twenty two that we are currently sitting in
right now. By by that one definition of it, this
bull market's two years old. The average one since nineteen
fifty lasts more than five years on average and gains
more than one hundred and eighty percent. I find that
a lot less valuable than compared to other historic times.
How pricey are stocks right now? I don't think you
(36:03):
can really use anything to say, oh, yeah, well, the
average bull market lasted five years, so of course this
one's going to last another three.
Speaker 3 (36:11):
All measures I think of valuation are a little bit arbitrary.
That seems really arbitrary and untethered to anything fundamentally.
Speaker 2 (36:18):
Yeah, just how long the average one lasts went it
does not again.
Speaker 3 (36:25):
Of all the flaky measures out there, that's my least favorite.
Speaker 2 (36:27):
Wall Street pros apparently avoiding election bets with race too
close to call. Here's my only question about this mark.
If you knew who was going to win the presidential election,
and then somehow knew who was going to win the
House in the Senate.
Speaker 3 (36:41):
Which I do.
Speaker 2 (36:42):
You would you have any idea how to invest based
on that?
Speaker 3 (36:46):
We talk about this a lot, even if you knew
the next quarter's GDP, could you guess how markets are
going to react to it?
Speaker 1 (36:51):
Now?
Speaker 2 (36:51):
I would find this. I just find these stories, and
you know, there's there's many of them. No, But I think,
but here's the thing. I actually do experience this right
like people actually feel choice paralysis, and companies are reporting
on it ahead of election, and it has nothing to
do with you know, necessarily.
Speaker 3 (37:08):
A little different though. If I had a business who's
the success of a certain potential undertaking dependent on the
regulatory regime, then I would be sweating this.
Speaker 2 (37:18):
Yeah, I I could. I could see.
Speaker 3 (37:21):
Trump now loves crypto. You're just gonna put government money
into it. He's starting a business himself. All a little
bit weird. That said, maybe it's not a bad thing
to pile on the crypto train. If the guy wins,
it's clearly gonna throw government money in favor at it.
Speaker 2 (37:33):
There's I guess, yeah, I guess there's a few issues
that I can look at, but generally the choice paralysis
that I see, like people saying, Hey, I'm just gonna
put off my vacation until after the election, Like what uh?
Individual investors that I speak to aren't a ballot like
but but Delta speaking to this like, yeah, no, we're
expecting a decrease in flight bookings around the election because
(37:54):
we always see that. And I just scratched my head saying,
why would you delay a flight? Why would you use.
Speaker 3 (38:00):
Your going to DC and you want to avoid the ransack?
Speaker 2 (38:02):
Why would you not buy a couch because you're worried
about the election? I just I scratched my head at it.
It's very strange. Let's take a quick break, but a
lot more to cover. In the second hour, we'll have
a full market recap and more. Stay tuned, folks,
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(00:20):
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(01:06):
Face is the Financial Exchange with Mike Armstrong and Mark Vandetti.
Speaker 2 (01:13):
Good morning, Happy Friday, Welcome back to the Financial Exchange
as we officially kick off earning season here in October
with some very exciting large banks reporting earning, so we'll
be diving into that. We also received an additional inflation
report after yesterday's CPI reading, which, if you missed, came
in a little bit hotter than anticipated. That's what the
(01:34):
Producer Price Index, and I haven't had time to read
it yet, but six minutes ago we've got a reading
out on consumer sentiment as markets which were slightly in
negative territory to open opened up positive here with the
Dow and sp so far in positive territory, with Nasdaq
off slightly. But I want to get first mark too.
Those incredibly exciting bank earnings and if you cannot here
(01:59):
are the star arcasm in my voice. These companies are
effectively utilities at this point in time, subsidized and backed
by the US taxpayer, and so they don't generally do
anything or tell you much. That's incredibly exciting. Although JP
Morgan tries Jamie Chase, Jamie Diamond of JP Morgan Chase
that's his name, does try and spice that up a
(02:20):
little bit by telling you that the world's coming to
an end every thirty to sixty days, but generally speaking
well received on markets this morning, after Wells Fargo and
JP Morgan reported earnings. JP Morgan up over five percent,
Wells Fargo the same here big picture mark as rates
have started to come down beginning of a rate cutting cycle.
(02:42):
Any major takeaways you had from these two companies who
reported this one, We'll.
Speaker 3 (02:47):
Just talk generally about the key metric of bank profitability,
whether it's a big bank or a small bank. It's
so called net interest margin.
Speaker 2 (02:55):
That is good. What banks do. They take your money
and they lend it.
Speaker 3 (02:59):
So it's just a spread. I'm oversimplifying a little bit.
And you would think when rates were coming down when
the Fed lowers, I should be I should qualify that
when the Fed lowers short term rates, longer term rates
tend to come down at least that's the immediate effect.
But that hasn't happened over.
Speaker 2 (03:15):
The past four exact opposite. But yeah, yeah, except.
Speaker 3 (03:18):
For the five million times that hasn't happened. No, But seriously,
on average, the Fed, FED easing reverber rates down, the
so called yelker. We talk about that later, we talked
about the FED. The point I wanted to make was
you would think when rates come down that banks net
interest margins would suffer because compression.
Speaker 2 (03:36):
Right, If rates are coming down, you would imagine there's
less of us.
Speaker 3 (03:39):
You're making new loans, so you make a mortgage. You
you're able to get less for the interest rates lower
on that mortgage. You're paying out roughly the same, maybe
slightly less to depositors. That spread historically for small banks anyway,
interestingly enough, but not large banks has becomes has been
subjected to pressure when the FED is easy. So I
(04:01):
guess the point I'm trying to make is is that
don't assume that just because the FED is lowering rates,
it's going to be a tougher net interest margin environment
for banks, large banks in particular. It's hard to say
whether or not the FED cutting rates is good or
bad small banks. Yeah, academics who've looked at this, and
as you could tell, I looked it up this morning
because a contrary to my history when we talk about
(04:23):
individual companies, I actually wanted to make a contribution to
this segment, and my contribution here is, don't assume that
falling rates are necessarily bad for big banks with complicated assets,
some of which are very long lived. They're far less sensitive,
as it turns out, to changes in the FED Funds
rate than smaller or local banks are.
Speaker 2 (04:42):
Yeah, so if you're a local regional bank, let's talk
about why this would be. You know, rates coming down
would be a clear hit to the margin. You know,
just think about your local experience. If you have money
in your checking account, regardless of whether you're with Bank
America or Marx Credit Union and hot Dog Stand, you're
(05:03):
probably not making a whole lot of money in your
checking account. And in that local bank, that net interest
margin is. Again, all that they do at that local
bank is take your money and lend it out. They
don't have usually wealth management divisions, they don't have investment banks.
If your Marx Bank and hot Dog Stand, they just
do lending and deposits. JP Morgan and Wells Fargo are
(05:29):
very different companies in that regard. They have their own
credit card businesses, They have their own wealth management divisions,
some of the largest wealth management divisions in the world.
They have their own investment banks, and when some of
the like the perfect example here would be, did JP
Morgan and Wells Fargo and all these banks lose all money,
you know, lose a ton of money in the twenty tens. No,
(05:50):
they were doing all right because even though net interest
margin was quite low, they make all sorts of money
on trading, wealth management, and investment banking in addition to
what they see on net interest margin, which is quite
frankly why these banks are so boring. Yeah.
Speaker 3 (06:04):
So, I guess for an individual investor, if you are
concerned about the effect of falling rates on bank profits,
larger banks, because of their longer dated assets, are less
their net interest margin is less sensitive. Academics of research
this have found it. This is not my work, just
regurgitating the sort of consensus. They should be less volatile
(06:27):
in a falling interest rate in falling profitability environment, and
a bank, as you point out, like JP Morgan or Wells,
if they've gotten their act together, may actually be able
to do just find because of their various business lines
and sources of potential profitability.
Speaker 2 (06:42):
But as you can tell, our general consensus here is
that when you're talking about companies that are by definition
and by law too big to fail, their earnings are
kind of boring in terms of what they end up reporting.
So banks have done quite well this year. Wells Fargo
up five and a half percent today, up twenty three
and a half percent for the year, JP Morgan Chase
(07:03):
up five percent today, up thirty percent for the year.
Speaker 3 (07:06):
Well handily beating the broad market.
Speaker 2 (07:07):
Yeah, the entire banking sector doing quite well this year
in spite of the new you know trend which is
going to be rates coming down and again the net
impact on a bank like JP. Like who in the
last year do you know anyone who has gotten a
mortgage from Wells Fargo or Japen Morgan Chase. I don't
know anyone who has ever gotten a mortgage from Bank
(07:31):
America jpall in.
Speaker 3 (07:32):
Our region but maybe elsewhere.
Speaker 2 (07:34):
But even Bank of America, which has a huge presence,
like nobody actually goes to them for mortgages from what
I see, because they don't tend to be competitive. And
so the traditional banking as I think of it, these
giant banks don't do that much of it anymore. They
just don't get all that much into the home equity
line of credit to end mortgage origination space. They leave
(07:54):
that to other players, and they have bigger fish to
fry in terms of you know, giant corporate lending arms
and different and things that they do today.
Speaker 3 (08:02):
So I don't know off and with there. If I
had to guess, I'd say they have a substantial share
nationally mortgage marshals. They may have in every market, yeah,
and a bigger share in maybe big metro areas or
areas where they're headquartered.
Speaker 2 (08:15):
What I find what I find incredibly interesting about again,
not every bank, but Bank America and JP Morgan have
made it a real point that they want to expand
their physical banking presence. I know this isn't necessarily about
their their earnings right here, but that is a substantial
reversal from where it seemed the industry was going over
(08:37):
the last few years. Right I did a bunch of
my banking through a brokerage firm where they didn't even
have any branches. It was literally just an online bank
checking account. What they seem to be finding here is
a lot of people are okay with digital banking, but
a prerequisite to opening a new account is having a
local branch in their area, which.
Speaker 3 (09:00):
I agree with, you know, on a person I ended
up with TD because they have a bank in my town. Tucker,
would you will lunder your money?
Speaker 2 (09:07):
Tucker? Oh they will, Yeah, have any money's jus they'll
they'll clean it up for you, Tucker.
Speaker 3 (09:12):
Would I don't. I don't want to slander them, although.
Speaker 2 (09:16):
I just did, and they were just find a whole
bunch of money for exactly.
Speaker 3 (09:20):
I'm also a loyal customer. I think they're absolutely fantastic.
Speaker 2 (09:23):
I mean, Tucker, would you open up a checking account,
like a primary checking account with a bank that doesn't
have a local presence, because I think even I, who
am very comfortable with the digital experience.
Speaker 4 (09:34):
Yeah, in this day and age, I have no problem
with that. You would, Yeah, I wouldn't have a problem
with that.
Speaker 2 (09:39):
See for me, it's the one in every three years
that I actually have to go into the branch. I
would be very It.
Speaker 3 (09:45):
Caused me to change. It was a one in multi
year experience where I threw my hands up and said.
Speaker 2 (09:50):
I can't.
Speaker 4 (09:50):
I can't remember the last time I went inside my bank.
Speaker 2 (09:53):
You know, Actually, the same story I have. I have
a colleague who was down in Tennessee for years, had
an account with Wells Fargo, had an issue where he
had to be at a branch. And guess what, there's
zero branches for Wells Fargo anywhere. I think it's southern Connecticut.
Speaker 3 (10:11):
You need debit cards same day because you lost your
wallet stupidly as I did. You will wish you had
a branch within your area.
Speaker 2 (10:18):
Again.
Speaker 3 (10:19):
It's why I switched, But it's different for everybody.
Speaker 2 (10:21):
Let's take a quick break when we come back. We've
had dual inflation reports over the last two days. I
want to break them down and get Mark Fandeaty's take
on yesterday's all important CPI report and what it might
mean for the Federal Reserve. We'll be right back after this.
Speaker 1 (10:36):
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Speaker 4 (11:00):
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Speaker 2 (11:34):
Mark. One week ago, according to Chicago Mercantyle Exchange, there
was almost no doubt that the Federal Reserve would be
cutting interest rates by fifty basis points. There was even
a possibility of seventy five basis points by year end. Still,
overall likelihood seems to be pointing for two rate cuts
before year end. Here, with the final meeting of the
year occurring on December eighteenth, we will see what plays out.
(11:58):
But since about a week ago, we've now gotten a
hot unexpected jobs report, two hundred and fifty four thousand
jobs created, with the unemployment dropping down to four to
one or nearly to four point you know, nearly to
four percent if you round down. We yesterday got a
CPI report which was by no means catastrophic, but also
(12:20):
didn't quite play into the Fed's narrative of rapidly reducing,
not reducing, rapidly shrinking inflation rapidly disinflating. So talk to
me about what we actually saw in the report yesterday,
because we're continuing to get a lot of help from
gas prices, which I personally enjoy quite a bit. But
(12:43):
when you take a look at the numbers here, we're
not in that perfect two percent range right now.
Speaker 3 (12:50):
Yeah, I'll use the analogy of weight and weight loss
because we can all relate. I'm sorry, I know this much.
I haven't heard this one is my old standby. Yeah,
you guys, I think inflation is like fat people.
Speaker 2 (13:03):
No, it's consistent.
Speaker 3 (13:05):
If you were trying to measure your progress toward a
weight loss goal, you wouldn't look at the gain or
the decrease over any short period like a few hours
or even a day. You would take a multi day average,
and you might take even a longer term perspective than that,
depending on your goal and the time frame. And we
(13:27):
all know from our experience with that that progress can
be reversed. You could see a good mini trend in
weight loss and you could have a bad weekend and
that sets you back. The inflation process is similar and
that inflation price pressures. And by inflation we mean the
change in prices. Prices have gone up by about twenty
five percent since COVID started. Sure they're not going back
(13:50):
down abs in a severe economic contraction. We can talk
more about those dynamics maybe at some point, but you
ask specifically, where are we today, and it's really hard
to say. Inflation has come down a lot. The rate
of change in prices has come down a lot over
the past two years or so. We know that it
peaked at about nine percent. I'm using the CPI, the
Consumer Price Index as an example. There are others peaked
(14:13):
at about nine. Now it's down two year over year,
about two and a half. I'm going round up a
little bit. That's really good considering there hasn't been a
major economic calamity, which is usually what's required to get
inflation down by that much.
Speaker 2 (14:23):
Arguably, every time you've seen inflation come down, you know.
Speaker 3 (14:26):
The estimated sacrifice ratio is somewhere around three percentage points
of unemployment for every percentage point of inflation. That was
roughly the so called sacrifice ratio of the disinflation experience
of the early nineteen eighties. So by past disinflation standards,
this was a miracle economically. And I know a lot
of you your lived experience is different than that. You
don't think the economy's great. I get that, but this
(14:48):
has been a really good disinflation in historical terms. So
is the job done? Have we achieved the soft landing?
That question isn't settled. And one reason for that is
one point in yesterday's report, which is so called core inflation,
which is a better measure of what's actually going on
with inflation because it strips out the erratic stuff. I'll
(15:09):
go back to the weight analogy. If you're weighing yourself,
you wouldn't do it right after dinner. You'd probably wait
till the next morning. We all do it. Sure, Core
inflation's a little bit like that. You want to strip
out recent disturbances that are going to be fleeting. So
core inflation was up point three percent month over month.
That's up about three and a half percent. I'm rounding
up a little bit over the past year. So core
(15:30):
inflation's up a lot more over the past year than
is so called headline inflation. And if you look at
another measure, of course, so called median, which is literally
just the price in the middle of all the prices
that the Bureau of Labor Statistics.
Speaker 2 (15:46):
Measures, thousands of them they do.
Speaker 3 (15:48):
And one way, you know, we talk about median home
prices and median salaries and stuff because you don't want
the big outliers or the you don't want the extremes
on either end to distort the true picture. So you
look at the median, Mike. You like to take three
and six month averages and then annualize them. You do
this all the time. That's why we call you three
month average Armstrongs right. Internally, if you look at the
(16:09):
three month median, it's about three point seven percent when
you annualize it, six month medium three point five. So
they tell a story similar to the recent history of core.
So there are measures, Mike, and I'll wrap with this.
There are measures of the trend and inflation which researchers
favor because they do filter out the noise that can
(16:30):
distort the true picture. That suggests that inflation has settled down,
but it's settled down a good percentage point to a
percentage point and a half higher than the fed's goal.
And this is important. The fed's goal is two percent.
Speaker 2 (16:42):
Yeah, and you can't, unlike in months past, we can't
look at any one item here and say, well, it's
that darn shelter costs, for instance, that's just keeping core
inflation higher. This was a big story that we talked
about over the last several years. Like, ah, man, we
can see on other sources that rents are coming down,
it's just not feeding into the CPI. Well guess what
it did. And inflation is still a little bit higher
(17:06):
than you would learn.
Speaker 3 (17:06):
You in mind, we talk about this a lot internally. Yeah,
it becomes a game of whack a mole. Yeah, we
just gonna get shelter in the control.
Speaker 2 (17:11):
Great, we did that.
Speaker 3 (17:12):
It's again like dieting, I just got to cut out Dorito's. Yeah,
but you substituted it with two ring dings every day.
So it doesn't that suggest that there's something underlying all
of this? The answer is I'm being rhetorical. The answers, yes,
there is, and it's the economy running an excess of
its speed limit. That's what puts upward pressure on inflation.
(17:33):
That was the key lesson of the nineteen seventies. Even
though rates were high, they weren't high enough. And economic
growth it may not seem gangbusters relative to the eighties
and nineties, but it's pretty strong relative potential that might
be putting upward pressure on inflation.
Speaker 2 (17:46):
Like, so, thus far, like I said, you've had a
job's report that came in hotter than expected, albeit nothing catastrophic,
no massive wage spikes. And I would not call this
inflation report catastrophic either. Uh you know, by no means
is it catastrophic. But you do start asking yourself, like,
all right, well, if we weren't getting all this help
(18:06):
from oil prices, which we know do seep through to
other costs ultimately, what would this all look like, right?
If if energy prices were moving upwards instead of downwards,
What would this overall narrative look like and sound like,
because that's completely out of it if.
Speaker 3 (18:22):
They were just neutral instead of down seven percent of
right the past year.
Speaker 2 (18:25):
So I think where I go with all this though,
is I'm not sure how much this sways Jerome Powell
and the other governors from their current path. They've been
pretty clear about it, and furthermore, their data that they're
going to get on both inflation and jobs for the
month of October, and my mind is muddied. I don't
(18:47):
know how you feel about it, but you know, looking
at the way hurricanes have, you know, affected data in
the past, I think the data you're going to get
on both of these figures is going to be a
little bit muddied in October, at least maybe in November,
and so probably not enough to alter their path unless
it's just a gangbuster inflation and jobs report.
Speaker 3 (19:07):
Sounds like these guys are hell bent on continuing to
cut raids. Based on their public remarks, this is reminiscent
of the nineteen seventies. I don't need to be so
apocalyptic here, but we did make similar mistakes. We misread
the economy's potential relative to what it was actually doing,
and as a result, inflation kept popping up again.
Speaker 2 (19:27):
Quick Break Wall Street watches next.
Speaker 1 (19:41):
Like us on Facebook and follow us on Twitter at
TFE show. Breaking business news is always first right here
on the Financial Exchange Radio Network. Time Now for Wall
Street Watch a complete look at what's moving markets so
far today. Right here on the Financial Exchange Radio netw work.
Speaker 4 (20:00):
Well markets are in positive territories. Wall Street sifts through
third quarter bank earnings unveiled this morning, in addition to
the Producer Price Index, which was flat for the month
of September, below expectations. Right now, the Dow is up
by three quarters of a percent or three hundred points,
SMP five hundred is up by two thirds of a
percent or thirty six points in the Nasdaq up by
(20:22):
over a third of a percent or sixty five points.
Russell two thousand up one in a third percent as well.
A ten year treasure yield is flat at four point
zero nine percent, and crude oil is off two thirds
of a percent, rating a seventy five dollars in thirty
six cents a barrel. JP Morgan up by four and
a half percent after beating third quarter expectations and reporting
(20:45):
a shallow we're then expected two percent drop in quarterly profit.
Wells Fargo also said its profit fell less than expected,
with net income dropping eleven percent to five point one
billion dollars. Wells Fargo up by six percent today and
black Rock shares by three percent after its earnings also
beat Street or excuse me, beat analyst forecasts. Instead, it
(21:06):
now oversees a record eleven and a half trillion dollars
of assets outside of bank earnings. Tesla shares down nearly
eight percent following its Robotaxi event last night that seemingly
underwhelmed investors. Uber and Lift stocks are seeing gained so
far today in reaction to the event, after Bank of
(21:27):
America said the event's conclusion ended six months of worrying
about what it could mean for the ride sharing stocks,
and Stilanta's shares are down by three percent after the
automaker announced major management changes, including ousting its chief financial officer.
I'm Tucker Silvan. That's Wall Street.
Speaker 2 (21:44):
Watch, folks. If you haven't already signed up, time is
running out two weeks almost a little bit less than
two weeks from today, Thursday, October twenty fourth, we're gonna
be doing a live broadcast of the Financial Exchange down
on Cape cod and Hyenas at the Double Tree Zort
and Suites. If you haven't signed up yet, you must
sign up ahead of time. Again. It is a live
(22:05):
broadcast of this show, the Financial Exchange on Thursday, October
twenty fourth. Chuck and I will be down there, a
whole bunch of team members from the Armstrong Advisory Group
as well. Ed Lambert's gonna be joining us. He's the
host of the XTK Morning Show, and I'm personally excited.
We's gonna be able to drive down to the Cape
in fewer than three hours for once, so this is
gonna be an exciting time. You're gonna join us for
(22:25):
the live broadcast of the Financial Exchange Show. Following that,
we're gonna be doing a free educational lunch from the
Armstrong Advisory Group. Will be taking your questions, talking to
you about the upcoming election state of markets at the moment.
We're having deep conversations right now obviously about inflation and
unemployment and where all of that might go, as well
as policy proposals from both the Harris and the Trump campaigns.
(22:48):
If you'd like to join us again, the date is
Thursday October twenty fourth. You can go to Armstrong Advisory
dot com slash events, fill out a form there and
we'll sign you up and get more information there as well.
But once again, it's Thursday October twenty fourth at the
Double Tree Resort and Suite in Hyannas. You can go
to Armstrong Advisory dot Com, slash events or call us
(23:11):
at eight hundred three nine three four zero zero one.
Speaker 1 (23:15):
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 may contact you to offer investment
advisory services.
Speaker 2 (23:31):
Mark. I've maintained that if we get to year end
with both inflation and unemployment under four and a half percent,
then I'm calling it a soft landing for twenty twenty four. Ultimately,
an economy never actually lands. It's constantly evolving and changing.
But that's been my attempted definition of what this would
look like for a temporary soft landing. At least Federal
(23:53):
Reserve is meeting next November seventh, right day after the election,
I believe it is, and they will be setting policy.
There's been some talk now of Fed governors maybe disagreeing
a little bit with the direction of the path, and
it's going to probably get more challenging here now that
you've got these two reports, and you will get just
(24:16):
one more jobs report before that next meeting, as well
as the PCE inflation metric. But what do you suppose
the conversations are going on behind closed doors? And where
would you be Obviously neither of us are on the
federal reserve, but where would you be leading this conversation.
Speaker 3 (24:33):
It seems like, as we talked about in the last segment,
they're determined to continue to cut rates. They're highly confident
in their view that disinflation will continue. We talked about
reasons why that might be wrong. You talked about the
big special factor energy prices. Food prices can serve this
role as well, but energy prices are the historical special
(24:55):
factor culprit. They can push inflation up and distort the
true trend. They can pull it down and distort the
true trend.
Speaker 2 (25:01):
That's been the case for the last couple of years.
Speaker 3 (25:02):
It would seem that to be uh, yeah, it would
seem that that has been so so, Mike, I don't know,
and I don't think. Look, we're not privy to the
information that they're privy to. I tend to be opinionated
about this type of thing because I don't know enough
about it to be nuanced. To be honest, they get
(25:25):
you know, I take a sort of textbook. This is
what they taught us in college and after college, if
you had the privilege of studying it later. This is
what they taught us. This is what the models say.
I'm limited to that. So I see growth faster than
trend or potential. I see unemployment very low, and it's
not clear to me that this is that these are
(25:46):
circumstances that would normally be associated with a disinflation, a
disinflationary environment with with with price increases easing. They may
have information, They know these models as well as I do.
Some of them wrote chapter wrote papers on which the
textbooks that I read are based. So you know, I'm
not going to claim to know more than a PhD
academic now on the Federal Reserve if it doesn't give
(26:08):
them pause. Part of me says, why should it give
me pause? But at the same time, go ahead, really, no, no,
you're fine.
Speaker 2 (26:16):
I mean my point is much the same as yours,
which is, over the last few years, I thought that
the Federal Reserve was too slow to raise rates, didn't
go far enough quickly enough, and then kept kind of
having moments where they declared victory here and there or
at least alluded to a path to victory sooner than
they should have. And I've been critical all along the way.
(26:38):
To be fair to the Federal Reserve, the level of
disinflation that we've seen so far I didn't think was
possible given the path that has happened. I thought that
was completely impossible to get there. And they know they've
been proven right on that one factor.
Speaker 3 (26:54):
I think they got lucky. I think special factors, as
you talked about, energy prices have helped them a lot.
Supply chain unsnarling help them a lot, and to their credit,
I've not heard any FED official take take credit for
the disinflation without economic sacrifice that we've experienced over the
past two years. And the reason you and I and
others didn't think it was possible, it's because it's never
(27:15):
happened historically. Again, going back to my weight, my favorite
analogy weight loss analogy surprise. It'd be like saying I'm
gonna lose weight. I'm not gonna change a thing.
Speaker 2 (27:23):
Yeah, you know so. I mean, were I in the
Federal Reserve and I'm sitting on these two reports, I
would be a little bit hesitant about the path downwards.
And for a few reasons. One, you know, jobs report
is looking like the labor market remains a little bit
tight here, that could shift rapidly, and if it does,
then you can always continue your way down. The other
piece about this would just be I hate talking about
(27:46):
political uncertainty, but here's something that actually seems relatively certain.
Whether you have a Republican or Democrat administration taking control
of the White House next year, and assuming that the
House and Senate follow suit, which is not a sure
thing at all, but assuming they do, what does it
look like to me from an economic policy perspective is
(28:08):
either a whole bunch of tax cuts or a whole
bunch of spending. And so if you're worried about inflation,
underlying inflation, you know, contributing to the overall growth of
prices in the future. And you add that on top
of it of the government suddenly either piling more money
into people's pockets via tax cuts or piling it into
(28:29):
people's pockets via stimulus measures of one sort or another,
then you know, we've seen how that plays out as well.
And so you know, that's not the Fed's job to
grade what Congress is going to do in the future,
But they will have to react to it in the
event that that's what occurs here, and so I don't know.
(28:50):
There's a few pieces in my mind, especially after these
last couple of reports, that I think at least give
you pause to wonder, will we be seeing these lower
mortgage rates in the FED cutting rates? I think, you know,
the Chicago Mercantyle Exchange, I think still has one and
a half percent of rate cuts priced in by this
time last year. Let's go ahead and take a quick break.
When we come back, I want to move on from
(29:11):
inflation and FED talk a little bit, and I do
want to just get to a little bit of conversation
about this bull market that we've been marking the two
year anniversary of bull markets. A few stats on this,
on the state of markets that last this long, and
what might be next for this equity market. That's next
on the Financial Exchange.
Speaker 1 (29:30):
Breaking business and financial news first throughout the day, only
here on the Financial Exchange Radio Network. Thanks to us
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know what you think about the stories we are covering.
This is the Financial Exchange Radio Network.
Speaker 4 (29:52):
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Speaker 2 (30:31):
Two stories here, one from MarketWatch, the other from the
Journal I believe, both arguing I guess other sides of
where this market is right now. So the first title
here the market has been fabulous, maybe excessively so. And
then the other time, I watch The New York Times. Okay,
the two year old bull market has just done something
that shows it has further to run. So different perspectives
(30:56):
obviously on the market. From these two pieces, how would
you measure before we get into what the market has done,
How would you measure where we stand today in terms
of a real metric that actually matters, as opposed to say,
you know, the dows at forty nearly forty three thousand
at this point in time, which is just not a
(31:17):
terribly useful metric when considering the price of equities.
Speaker 3 (31:20):
Yeah, I guess one way to answer the question is
to ask a slightly different question and then answer it myself,
which is how expense I think you were saying this
basically how expensive it stocks right now? And when we
say that, we mean are they excessively high relative to earnings?
Because in the past that's been a bad omen. Sure,
we all know what happened after the tech bubble. It
(31:42):
was a decade's worth of negative returns. The two thousands
were a lost decade for US equities. There were plenty
of places to make money, sure, which is why it's
important to be diversified. But Mike, today, let's use the
so called Shiller pe that's a Guy Shiller, Nobel Prize
winning economist win it for this. But he developed this
simple measure of whether or not stocks relative to the
(32:05):
past ten years of average inflation adjusted earnings are expensive
or not, And right now, it's about thirty seven. All
you have to know is that that's the third highest
after two thousand, after right before or during excuse me,
the COVID crisis. That's the third highest level it's ever reached.
Speaker 2 (32:23):
So we're in company with the nine days before the
tech bubble. Yeah, twenty twenty one, before twenty twenty two
fell apart a little bit. And now yeah, and grant,
we've been in this general area for a good year, right,
it's not like we have I mean.
Speaker 3 (32:37):
Yeah, we've been here before in this cycle and it
didn't result in catastrophe. It did this was twenty twenty two.
It did result in a serious retrent. Now this wasn't
the cause.
Speaker 2 (32:47):
But the more.
Speaker 3 (32:48):
Expensive stocks get relative to past earnings and prospective earnings,
the more sort of fragile the market becomes. It suggests
over optimism and if the economic he doesn't cooperate, then.
Speaker 2 (33:01):
Doesn't tell you anything about timing.
Speaker 3 (33:02):
No, we think it's as you pointed out, Mike, and
as many people have pointed out, this measure, I'll call
it the Shiller pe out of an acknowledgment of the
guy that created it. Has been higher than it's pre
nineteen ninety average since nineteen ninety. So if you were
waiting around for stocks to get as cheap as they
got by this measure in say the early nineteen eighties,
(33:25):
you would have been out of equities for the past
three and a half decades.
Speaker 2 (33:29):
It's an important distinction. I remember at my former employer
hearing about this fund manager who actually, in hindsight, spotted
the mortgage crisis. He spotted it in like I think
it was something like two thousand and four, and starting
in that two thousand and four time period, started shorting
real estate companies and banks and all sorts of institutions
(33:50):
that were related to mortgages. And he turned out to
be right. But I think he was fired in like
two thousand and seven. He was running a fund and
he was calling for this mortgage crisis to all fall apart,
and again he was correct. He was right about the
actual fundamentals, which was there was clearly a bubble going on.
Speaker 3 (34:14):
Yeah, a lot of guys in the late nineties, so
called value managers, like Jeremy Grantham here in town, they
saw the bubble. Yep, they started warning about it in
ninety six ninety seven.
Speaker 2 (34:23):
And then they lost their investors lost a lot of.
Speaker 3 (34:26):
You probably never heard of them because they're mostly on
pension fund rosters almost went out of business, but they
were right then they had a spectacular run for the
next ten years. So there is an argument for being
a little contrarian favoring seemingly out of favor asset classes.
And by asset class, I just mean broad investment group
and Mike we talked about Cherilope. There are other measures
like ten year annualized returns. So what have the stocks
(34:50):
done on average annually over the last ten years. The
number now is a little over thirteen percent. That's quite
high by historical standards. The average return for stocks over
the past fie hundred years is closer to eleven and
the average ten year rolling return is closer to eleven
as well. So no matter how you slice it, stocks
will looking pricey. Now, if AI is the miracle productivity
and economic growth enhancing technology that it's its proponents make
(35:14):
it out to be, then maybe stocks are reasonably priced.
Speaker 2 (35:17):
Could be probably not No, no, probably no, History would
say no. Yeah, history would say no, that's very But
who's to say another you know, contradictory point here that
I don't find terribly useful. But the average bull market
since nineteen fifty, and you know, we're two years into
this bull market, right if we had a correction in
twenty twenty two, the bull market started really in October
(35:41):
of twenty twenty two that we are currently sitting in
right now. By by that one definition of it, this
bull market's two years old. The average one since nineteen
fifty lasts more than five years on average and gains
more than one hundred and eighty percent. I find that
a lot less valuable than compared to other historic times.
How pricey are stocks right now? I don't think you
(36:03):
can really use anything to say, oh, yeah, well, the
average bull market lasted five years, so of course this
one's going to last another three.
Speaker 3 (36:11):
All measures I think of valuation are a little bit arbitrary.
That seems really arbitrary and untethered to anything fundamentally.
Speaker 2 (36:18):
Yeah, just how long the average one lasts went it
does not again.
Speaker 3 (36:25):
Of all the flaky measures out there, that's my least favorite.
Speaker 2 (36:27):
Wall Street pros apparently avoiding election bets with race too
close to call. Here's my only question about this mark.
If you knew who was going to win the presidential election,
and then somehow knew who was going to win the
House in the Senate.
Speaker 3 (36:41):
Which I do.
Speaker 2 (36:42):
You would you have any idea how to invest based
on that?
Speaker 3 (36:46):
We talk about this a lot, even if you knew
the next quarter's GDP, could you guess how markets are
going to react to it?
Speaker 1 (36:51):
Now?
Speaker 2 (36:51):
I would find this. I just find these stories, and
you know, there's there's many of them. No, But I think,
but here's the thing. I actually do experience this right
like people actually feel choice paralysis, and companies are reporting
on it ahead of election, and it has nothing to
do with you know, necessarily.
Speaker 3 (37:08):
A little different though. If I had a business who's
the success of a certain potential undertaking dependent on the
regulatory regime, then I would be sweating this.
Speaker 2 (37:18):
Yeah, I I could. I could see.
Speaker 3 (37:21):
Trump now loves crypto. You're just gonna put government money
into it. He's starting a business himself. All a little
bit weird. That said, maybe it's not a bad thing
to pile on the crypto train. If the guy wins,
it's clearly gonna throw government money in favor at it.
Speaker 2 (37:33):
There's I guess, yeah, I guess there's a few issues
that I can look at, but generally the choice paralysis
that I see, like people saying, Hey, I'm just gonna
put off my vacation until after the election, Like what uh?
Individual investors that I speak to aren't a ballot like
but but Delta speaking to this like, yeah, no, we're
expecting a decrease in flight bookings around the election because
(37:54):
we always see that. And I just scratched my head saying,
why would you delay a flight? Why would you use.
Speaker 3 (38:00):
Your going to DC and you want to avoid the ransack?
Speaker 2 (38:02):
Why would you not buy a couch because you're worried
about the election? I just I scratched my head at it.
It's very strange. Let's take a quick break, but a
lot more to cover. In the second hour, we'll have
a full market recap and more. Stay tuned, folks,
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