May 12, 2026 • 38 mins
Inflation is accelerating again, and investors are starting to question whether the Federal Reserve still has a path to contain it.
Mike Armstrong and Marc Fandetti break down the hotter-than-expected April inflation report as rising energy, food, and housing costs push inflation further away from the Fed’s target and reignite fears of a prolonged inflation cycle.
Also covered:
Mike Armstrong and Marc Fandetti break down the hotter-than-expected April inflation report as rising energy, food, and housing costs push inflation further away from the Fed’s target and reignite fears of a prolonged inflation cycle.
Also covered:
- Why markets suddenly believe rate cuts are off the table
- The growing fear that inflation expectations are becoming embedded again
- How the Strait of Hormuz crisis continues to threaten global energy supply
- Why some analysts see uncomfortable parallels to the 1970s
- Michael Burry’s latest warning about AI-driven market excess
- The debate over whether today’s AI spending boom is becoming inflationary
- Why major tech companies are spending hundreds of billions to stay competitive in AI
- The worsening financial outlook for Social Security and government deficits
- How higher inflation and interest rates could reshape the economy for years
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Speaker 1 (00:00):
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(00:20):
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(00:43):
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(01:06):
Armstrong and Mark Vandetti.
Speaker 2 (01:12):
Good morning, Welcome back to the Financial Exchange. It's Mike,
Mark and Tucker with you on a Tuesday where markets
are in selloff mode after spending the last week around
or near their all time highs. This S and P
five hundred off now three quarters of a percent, fifty
four points a NASDAC off one and a quarter three
hundred and twenty nine points now. Jones Industrial Average off
(01:34):
about half a percent two hundred and seventy one points.
All of this on the back of an inflation report
that we got this morning at eight thirty am, confirming
what we all kind of knew, which is inflation sucks
right now. Prices overall, from a headline perspective where you'll
see it quoted, came in at a three point eight
percent year over year increase six tens a percent. If
(01:58):
you look at the month over month that fo follows
a pretty robust price increase for the month of March
as well, and it's now spreading beyond just the energy component.
Speaker 3 (02:07):
In March, when you took a look at the.
Speaker 2 (02:09):
Month over month numbers, really where you saw a surge
was energy prices. You continue to see that in April,
with energy prices overall up an additional three point eight
percent in the month of April, however, you saw food
prices increase half percent and shelter prices increase six tenths
of a percent in the month of April, all contributing
to an inflation report that was worse than anticipated. When
(02:33):
you strip out that food and energy component, which is
what some at the FED like to do when trying
to get at a sense of core inflation or trend
inflation that you know, takes out some of those big
one off price spikes, you did see that increase at
a pretty uncomfortable rate here. So in April compared to March,
you saw at a four tenths percent increase month over
(02:55):
month two point eight percent year over year. And you know,
whether you want to annualize the April figure or just
look at the year over year numbers, what you can
get a sense of is that even excluding the price
shock from energy, we're facing an a inflation report here
that is hotter than expected and puts the FED in
a diff pretty difficult position for incoming chair Kevin worsh
(03:18):
The FED Fund's target rate right now is sitting at
three and a half to three point seven five percent.
And what's important about that and this inflation report is
it is now lower than.
Speaker 3 (03:31):
The year over year inflation number.
Speaker 2 (03:34):
Now some might say that that's not the perfect comparison,
but when you talk about high inflation, what you want
is restrictive federal reserve policy that is designed to bring
that inflation back down. Or I think that's what most
would agree that you want from a federal reserve. And
you can make the argument now that you know, while
the FED had these dreams of bringing interest rates down
(03:56):
to further economic growth and ensure that we don't dip
into recession, you can now make an argument that the
Fed's policy is stimulative. And that is a problem when
you have an inflationary environment that has not been fully
defeated over the last four years. Right, this has been
this ongoing battle since twenty twenty two to bring inflation
(04:17):
back down to that two percent target. We've never gotten there,
and now we're heading back in the wrong direction.
Speaker 4 (04:22):
Yeah, the FED is certainly not responsible for the oil
price spikes. That was true in the seventies two, although
some researchers argued that easy monetary policy contributed to the
magnitude of the spike. That's probably not the case this time.
I mean, you don't need any rigorous analysis of this episode.
It's directly attributable to the conflict in Iran. So what
(04:43):
does the FED do about it? Given that the FED
is responsible for long term inflation, which is which the
FED targets at two percent, or about half the prior
twelve month inflation rate, So inflation is running at about
twice the Fed's target if you use headline CPI as
your measure, does the Fed hike rates and impose some
(05:10):
economic suffering on the economy in order to keep inflation
to reduce the rate of inflation? Or does the Fed accommodate,
so to speak, the shock do nothing? Let real interest
rates potentially go negative. Real interest rates if you use
either future inflation or as you just did, past twelve
months inflation, they're zero and zero's being generous. They're probably
(05:32):
negative right now, Which is itself stimulative? That should all
lse will contribute to inflation. It's it's a huge pickle
mic and that's an understatement. And it couldn't come at
a worst worse time for the FED, given even if
Warsh weren't perceived as the president's puppet, and the burden
is on him to prove that he isn't. But even
(05:52):
if he weren't perceived as that that which deprives the
FED of credibility and makes fighting inflation harder, it would
be a challenge even if Warsh didn't come into this
impaired by that perception.
Speaker 2 (06:07):
When we go take a look at FED funds futures,
which anybody can do, there's a free tool at the
Chicago Mercantile Exchange where you can look at where markets
are pricing in interest rates. This is not indicative of
where interest rates will actually go. They're frequently wrong about
any of this, but it does give you a sense
of where investors are laying out their bets. When I
take a look at the next upcoming meeting, which is
(06:29):
you know, only a month away now, there is basically
being priced in no possibility of a rate cut. What's
interesting to me is when I fast forward all the
way to December. At that point, you know a few
months ago, before the conflict in Iran, there is a
very high likelihood of rates being cut by that December meeting.
You know, not at that December meeting, but you know
a cumulative number of cuts by that December meeting. We
(06:51):
are now looking at today a three percent chance that
rates are lower by December than they are now, and
a ninety seven percent chance rates are at least as
high as they are now, if not higher.
Speaker 4 (07:03):
Yeah, looks oil prices could come down and that'll bring
down headline inflation. The question is what's going on with
underlying inflation core as a proxy for that. There are
other measures that trim outliers, trim mean measures, one of
which is the media and that'll be released soon by
the Cleveland Fed. It's not an official statistic, but it's
a useful way to get at trend inflation. Is there
(07:25):
excess demand in the economy? That's something the FED can
do something about.
Speaker 3 (07:29):
Well.
Speaker 2 (07:30):
I think part of the problem here is I think
that expectations around the Strait of Hormuz are beginning to change.
And some of the best case scenarios that I'm hearing
laid out by geopolitical experts it's hey, traffic returns to
a high degree of normalcy, but Iran is collecting some
sort of toll and periodically shuts it down in order
(07:50):
to show how influential they are. On the flow of
traffic or that doesn't happen. But the US is far
more militarily involved in Iran for a longer period of
time time and those are pretty ugly scenarios for inflation
either way. Last year we had the somewhat humorous taco
trade is what people were talking about in the months
(08:12):
after the layout of tariffs, when the president would, you know,
kind of bring the markets to the precipice and then
back down from the tariff plans, or negotiate with the
country and then back down at the last second. Now
we've got the nacho trade is what people are talking
about on Wall Street.
Speaker 3 (08:26):
The not a chance.
Speaker 2 (08:27):
Horror moves opens. Interesting acronym, kind of funny acronym. I
don't know that I see that reflected in markets, quite honestly.
I mean, you can go take a look at a
few well, I guess it depends on your perspective. But
if you genuinely did not believe that Hormuves was going
to reopen this year, then oil prices don't belong anywhere
(08:51):
near one hundred dollars a bar.
Speaker 4 (08:52):
I don't know what the right price is. It depends
on your assumptions about how sensitive or not demand is
and how quickly are the sources of supply can come
on line? I guess, but I do know that there
should be a risk premium now on everything that wasn't
there before we gave or Ran a blueprint for holding
the world hostage.
Speaker 3 (09:09):
Whoops.
Speaker 4 (09:09):
Now they're going to exercise they have optionality, as finance
dudes like to say Iran as optionality they didn't have before.
The price for that optionality is being We gave them
that option, by the way normally have to pay to
acquire it. We gave it to them, and they will
exercise that presumably from time to time. And the price.
Speaker 3 (09:28):
Unless we completely remove the influence of that group.
Speaker 4 (09:31):
And what takeover a country what three or four times
the size of California with ninety million people, a two
thousand year old civilization, I mean, forget about it. That's
the political environment here. I don't think we'll brook that,
we'll tolerate that. So we're going to have to live
with this sword hanging over our heads for the foreseeable future. Ever,
Ran just sort of shutting off the spicket when something
(09:54):
irritates them. By the way we showed them how to
do it.
Speaker 2 (09:56):
There is a bet that you can place on polymarket,
which again I don't view polymarket betting as predictive for
what is going to happen, but clearly put people are
wagering on things like this over there, and there's a
bet on polymarket as to whether or not the Straight
of Hormuz traffic will return to normal by end of June.
And they have a definition of normal here as a
seven day moving average of transit calls for the Straight.
Speaker 3 (10:19):
Equal to or above sixty.
Speaker 2 (10:22):
For any day between now and June thirtieth, So that's
how they're measuring the yes or no of this bet.
And back on April seventeenth, when negotiations we're seeming playing
out and talking about ceasefire, there was an eighty eight
percent chance that people were betting that, yeah, the Strait
of Hormze traffic would return to normal.
Speaker 3 (10:41):
Today we're sitting at thirty three.
Speaker 2 (10:45):
So again, where people are putting their money right now
is that there is a one in three chance that
traffic returns to normal in the Strait of Hormuz by
the end of June. And I don't think I need
to go into the details of how ugly a scenario
that looks like for er G aluminum fertilizer supplies globally
and prices here domestically for gasoline. If that traffic has
(11:09):
not returned to normal by the end of JUNEY, it
is immensely problematic for the global economy.
Speaker 4 (11:13):
I think is yeah, the next several years will be
challenging as we source supply from elsewhere or build pipelines
around it and continue the move to alternative energy. I
assume that this shock, like the first and second shocks
of the seventies, the Opek and then the Iran Revolution
shock motivated changes in behavior. This shock will too motivate
(11:37):
changes in behavior, but it took years for things to
sort of recalibrate.
Speaker 3 (11:40):
Let's take a quick break. When we come back.
Speaker 2 (11:42):
Michael Burry's got a warning out there for stock investors,
and we're playing trivia here next on the Financial Exchange.
Speaker 1 (11:48):
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(12:10):
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the Financial Exchange Radio Network.
Speaker 5 (12:26):
All right, Sam, for sure you here on the Financial
Exchange and on this day. In nineteen ninety four, Pulp
Fiction made its debut at the Canes Film Festival. Pulp
Fiction would go on to win the highest award at
the festival. Unfortunately for Pulp Fiction, it did not win
Best Picture at the Academy Awards. So our trivia question today,
(12:47):
which movie beat Pulp Fiction for the Best Picture Academy Award?
Once again? Which movie beat Pulp Fiction for the Best
Picture Academy Award? Be the fourth person today to text
us at six one seven three six two thirteen eighty
five with correct answer along with keyword trivia, and you
(13:07):
win a Financial Exchange Show T shirt. Let's get the
fourth correct response to text us to the numbers six
one seven three six two thirteen eighty five with correct
answer along with keyword trivia. We'll win that T shirt.
See complete contest rules at Financial Exchange Show dot com.
Speaker 2 (13:23):
Well, Michael Burry is out with another warning for stock
investors as he compares today's markets to the two thousand's peak.
And I want, actually, I want to spend a minute
on Michael Burry here, because it's been a hot minute
since we've talked about him, and the guy was incredibly successful.
If you've seen the film Big Short, which now came
(13:45):
out eleven years ago, dear God. He was portrayed by
Christian Bale in that film, So if you can think
back to that film, that's who portrayed him. If you
read the book, then you might remember it a little
bit better. But he very early on in the mid
two thousands, identified what he estimated to be a massive
problem with the housing sector and specifically the mortgage market
(14:08):
involved in the housing sector, and effectively created the financial
products that allowed himself and other investors to short that
market via via his hedge fund.
Speaker 3 (14:22):
The Few Things.
Speaker 2 (14:23):
So he was one correct and made his investors in
absolute fortune in that fund. And I think most people
are kind of aware of that that, hey, he successfully
bet against the housing market and made these investors a fortune.
What people, I think failed to realize. And the book
itself actually makes this point. He started shorting the housing
market in two thousand and five, his investors attempted to
(14:47):
bail out on him and completely exit his fund. He
had to restrict withdrawals, he had to stand up to
his investors and basically tell them they were wrong for
three years before finally getting that massive payoff after the
thing all fell apart, and since then, maybe he would disagree,
but I don't think you can point to any massive
(15:08):
successes in calling a big macro trend like the one
that we experienced in two thousand and eight. It's not
to say he's a bad investor. It's just to say
that he has issued plenty of other warnings, one about
the ETF industry back in twenty nineteen, several since twenty
twenty about meme stocks and other concerning areas of the market.
And honestly, at this stage, I guess my point.
Speaker 3 (15:31):
Would be a fewfold.
Speaker 2 (15:32):
He'll probably be right about some big thing again in
the future because he makes a lot of big, bold predictions.
But most people cannot invest like Michael Burry does, Meaning
most people can't afford to sit on the sideline of
a market for three years and lose money while the
rest of the stock market is making tremendous amounts of
money and stick with that all the way through seeing
(15:55):
the biggest financial crisis that we've ever seen in history.
And so here's my overall take with this, Michael Berry,
you know, an important role in calling the financial crisis
and bringing it to light and being able to successfully
explain it to investors. Unclear that he has any predictive
value for the future, or that even if he does,
(16:16):
anybody else should listen to his advice and invest the
way that he does.
Speaker 4 (16:22):
Yeah, I mean certain segments of the market are at
extreme values, whether you prefer fundamental analysis like the price book,
price sales.
Speaker 2 (16:29):
And that's where I struggle is because a lot of
his points that he's making right now I tend to
agree with, like, sure, the market does well, that's in
a lot of ways looks similar to Yeah.
Speaker 4 (16:36):
But that's that's that's circular. If if you think of
value in excess of X is extreme, then by definition
the market is extreme. Is priced for extreme outcomes that
are unlikely to So I don't love that because it's
in the eye of the beholder. Sure, but okay, So
that's the fundamental approach. It's a technical approach. Some people
(16:57):
like to create a two hundred day or whatever moving
average series and compare that to the current price, or
compare that to the fifty day moving average series. Technicians
do all kind they contort themselves in all kinds of
different ways to arrive at and I'm not I actually
think there's a lot to it because those prophecies can
become self fulfilling. So it's almost undeniable that the market
(17:20):
that market valuation or technical measures of market fundamental or
technical are at extremes. The question is do the investments
being made today by technology companies generate the income to
provide the free cash flow? And I'm missing a lot
of steps between net income and free cash flow and
my little in my little monologue here, but to justify
(17:43):
these investments. I happen to think that Bury's probably right
because big periods of overinvestment of investment, excuse me, have
generally resulted in over capacity. Free cash flow doesn't bounce back,
a lot of companies will go out of business. So
from that perspective, if that's what his thesis is, I
think he's probably right. But I think you made the
(18:04):
mom I'm going on and on here, please jump it. Okay, Well,
so how do you bet against it. In five four
oh five, he went to Goldman and Deutsche Bank and
others and said, I want to bet against these very
particular slices of these complex portfolios of mortgages you have.
Speaker 3 (18:19):
How do I do that?
Speaker 4 (18:20):
And they said, well, you can create something called a
credit default swap CDs. That's like an insurance policy. That'd
be like me buying an insurance policy on you. Like
I've seen Mike eating lately, He's up to like three
whoppers a day. Can I buy an insurance policy on him?
And Goldman, Sachs or whatever.
Speaker 3 (18:37):
Saying yeah, okay, I mean we'll do it.
Speaker 4 (18:38):
Not an interested party, but yeah, we agree he's a
time bomb.
Speaker 3 (18:43):
So he bought. They actually didn't have to agree.
Speaker 2 (18:44):
They just said, yeah, we'll create the product for you,
and we'll make money by selling the other side of
that trade to somebody else.
Speaker 3 (18:49):
Yeah.
Speaker 4 (18:49):
But at my point, it all had to come together,
so there was no marketable instrument for him to express
his views. He right at the time, as I understand it,
the credit of false swaps, they're not you had to
createtly trade it. He and the bankers had to get
together and agree that it made sens as you point
out for both sides.
Speaker 2 (19:06):
Yeah today, I mean, if he really stands by this,
I guess there's two ways to do it. Exit the
positions or bet against them. It's a lot more. It's
a completely let what your do do today than back
in two thousand and eight, So who knows if he's
actually expressing all that is the other piece of this.
Let's take a quick break when we come back. Full
market update on a sell off day due to inflation concerns.
That's next on the Financial Exchange.
Speaker 1 (19:40):
Bringing the latest financial news straight to your radio. Every day.
It's the Financial Exchange on the Financial Exchange Radio Network.
Tell you out full Wall Street Watch, treking the stocks,
the data, and the headlines driving markets so far today
right here on the Financial Exchange Radio Network.
Speaker 5 (20:01):
Well, markets are selling off by midday after the April
Consumer Price Index revealed consumer prices rose three point eight
percent from a year ago, marking inflation's highest level in
three years, driven by higher gas prices. Right now, the
Dow is down nearly half a percent, or two hundred
and eighteen points, SMP five hundred down nearly nine tens
(20:22):
of a percent, Nasdaq selling off over one and a
half percent or three hundred and ninety nine points lower,
Rusted two thousand, selling off two point three percent, Tenure
Treasure reeled up three basis points at four point four
to five to one percent, and Oil jumping four percent,
trading at one hundred and two dollars a barrel well.
(20:43):
eBay said it has rejected video game retailer Game stops
unsolicited fifty six billion dollar takeover proposal, saying it was
neither credible nor attractive. Game Stop down by over one percent,
while eBay's stock is down modestly. Meanwhile, The Financial Times
reported that Nelson Peltz is Treon Fund Management is seeking
investor backing for a bid to take fast food chain
(21:05):
Wendy's private, after the restaurant operator shares have fallen more
than forty percent over the past year. Wendy stock is
rallying nearly sixteen percent on the day. Elsewhere, Hymns and
Hers sinking fourteen percent after it swung to a quarterly
loss after the telehealth Companies moved to alter its weight
loss offerings drove up costs, and under Armour stock is
(21:26):
dropping eighteen percent after the athletic apparel company posted a
fall in quarterly revenue I'm Tucker Silvan. That is Wall
Street Watching. In the previous segment, we asked you the
trivia question which movie beat pulp Fiction for the Best
Picture Academy Award back in what nineteen ninety four? That
would be Forrest Gump and Raymond from Cumberland, Rhode Island.
(21:47):
Who is our winner today? Taking on the Financial Exchange
showed t shirt. Congrats to Raymond and we played trivia
every day here on the Financial Exchange. Seek complete contest
rules at Financial Exchange show dot com.
Speaker 2 (21:59):
Well, we just got wrapped up talking about one bankrupt
government trust fund. Why don't we skip over to another one,
which is the Social Security Trust Fund, which is not
bankrupt today like the Highway Trust Fund is. But let's
kind of go through because we have two pieces from
Barons today on proposals for how to solve all of
(22:19):
our problems and fix the Social Security Trust Fund. One
of them is arguing that you got to just cut
benefits for everybody, because otherwise you start getting into a
program that's just a welfare program, which is not how
social Security was designed.
Speaker 3 (22:35):
The other is.
Speaker 2 (22:38):
Do exactly that, which is tax the rich more or
cut the benefits for the rich.
Speaker 3 (22:41):
Only and maintain them for lower class people because.
Speaker 2 (22:45):
They need that money more and it's getting at the
fairness piece of it, and.
Speaker 3 (22:53):
All reasonable proposals. I don't know.
Speaker 2 (22:55):
By the way, their proposal is that you place a
hard five percent limit on draw down the Retirement Trust
Fund this year, which would equate to a roughly six
percent cut in annual benefits for all Social Security recipients.
I'm not convinced that would actually permanently solve the problem.
May just kind of slow it down and kick it
down the kick the can down the road further. But
(23:16):
I guess that's better than just, you know, driving off
the cliff with no plan in place. The other proposals
that are out there include, you know, raising the tax limit,
cutting benefits for those who already have over one hundred
thousand dollars in benefits. Look, any combination of these might
be able to fix the problem, but the reality is
(23:39):
that we keep just driving towards a cliff with no
actual plan in place. And listen, if you're listening right
now and you are lamenting the fact that the program
was designed poorly, or the changes that were made over
the last few years regarding inflation and regarding you know,
the benefits for the web provision, and those are unfair
(24:03):
and benefited other people and made the system more bankrupt,
or that you know, government officials borrowing from the trust
Fund and then you know, bankrupting that way. You're welcome
to your opinion on that, but it's not constructive, right,
Like I do hear people complaining about that all the time.
But the fact of the matter is, however it happened,
the Trust Fund is going belly up in about five years,
(24:24):
and we are not holding our lawmaker's feet to the
fire to actually fix the problem. And that's I mean
partly our lawmaker's fault. It's kind of all our faults too,
Like we're far more interested in talking about these exciting
things like war in Iran and you know, you know
which president is going to give us a bigger tax
cut instead of saying, hey, we have this failing system
(24:46):
that our oldest and most vulnerable population rely upon, and
you are doing absolutely nothing to fix the problem.
Speaker 3 (24:54):
So I wave us in part.
Speaker 4 (24:56):
Yeah, it's it's not gonna happen. We'll fix it when
the crisis is at our doorstep. That's kind of our.
Speaker 2 (25:02):
Nature, which is so frustrating because what that means is
that probably we're just going to print the money and
increase the deficit.
Speaker 4 (25:11):
Okay, yeah, so there's a few ways to finance it.
Tax that you can inflate it in a way, you
can inflate the expenses away, but the latter would be
economically disruptive. The former could sap demand. So you're sacrificing
economic growth today in exchange for call it future social.
Speaker 2 (25:30):
I like a good tax cut as anybody, as much
as anybody else, But we continue to vote in politicians
who all they want to do is increase spending or
cut taxes and not actually solve our nation's real problem.
Speaker 4 (25:42):
Like we've got terrible fiscal policy right now. We've had
terrible fiscal policy for the past couple of administrations. The
deficit has not come down since Obama, and I don't
think it was a big priority of his. Of course,
Congress has a lot to do with it, and I
think we just have to resign to the fact that,
(26:02):
much like with the consequences of the Strait of Horn
Moves being if not closed indefinitely, faced with a threat
of closure indefinitely, that is a fact of life. We
have to live with. That's going to mean higher prices
probably for everything, slightly higher prices, higher risk premia.
Speaker 1 (26:19):
Go ahead.
Speaker 2 (26:20):
I was going to say that, whether you are a
Democrat or a Republican, just in the last five no,
forget about last five just in the last two years,
you have had a president from each party successfully put
into place policy that made the social security problem worse.
The Social Security Fairness Act passed by Biden made the
problem worse. The tax cuts, the One Big Beautiful Bill
(26:42):
Act that gave an additional tax credit to sixty five
and older individuals made the Social Security Trust Fund problem worse.
Both of them took money directly out of the fundraising
mechanism for that trust fund. So plenty of blame to go.
Speaker 3 (26:55):
Give me.
Speaker 4 (26:56):
All these things, the war and the Middle East and this,
and just stepping back, they all point to a world
of more volatile economic growth and lower more recessions because
if it's more volatile and lower, you dip below trend
or zero more frequently. Higher interest rates because of higher
inflation and more volatile interest rates. This ain't going to
(27:17):
be like the halcyon days of the eighties, the first
half of which were a little bit rocky for a
while and before they leveled out. The eighties until the
Great Recession were a true golden era. That term gets
thrown a lot, thrown around a lot now by people
who think they can will one into existence because they're
so great. But the fact is you don't know till
(27:37):
long after the fact. Relative to that, we're in for
just a much more volatile period, a future period, no
matter how you want to measure.
Speaker 2 (27:46):
It, regardless of how and in what way we resolve
the social Security problem, it is going to remain a
critical component of Americans retirements for decades to come. And
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fact duran, what do I do about this program that
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Speaker 2 (28:57):
Markets have gotten a little bit worse since we last covered.
The NASA now down three hundred and ninety five points
or one and a half percent. We're gonna take quick
break when we come back. Stack Roulette is next on
the Financial Exchange.
Speaker 1 (29:09):
Okay, real time financial insight as news breaks. The Financial
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(29:30):
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Speaker 3 (29:47):
Time for good of stack Roulette. What do you have
for us today.
Speaker 4 (29:50):
Mark, we talked earlier about measures of underlying inflation that
get at what inflation is really doing, because headline is
can be noisy, can be distorted by one offs, as
you put it. One measure of underlying inflation is core
that the federal government reports, which strips out food and energy.
Another strips out now this is not calculated by the
(30:12):
federal government, but rather by a federal Reserve bank. This
strips out big movements no matter what sector they come from,
the thinking being those are probably fleeting and not representative
of underlying inflation, which arguably the Fed controls Median. The
median figure, the one in the middle, literally is a
(30:32):
measure that researchers like yep for that reason. And we
just got a read on median inflation. It came in
at point four percent month over month.
Speaker 3 (30:39):
That's you have a sense of the last time we
saw reading like that.
Speaker 4 (30:42):
It's been Yeah, I don't have the full series in
front of me. IT'SO point four is where this sucker
was running when inflation was high. Now, Mike, this could
be a fluke, but median is not. Median doesn't get
headfaked by one offs in this or that component of inflation.
(31:03):
It's a pretty robust measure of the tendency of anything,
which is why they talk about median salaries in median
home prices. So, I think for those like me that
are becoming a little bit alarmist about inflation, given that
we just came off a mini great inflation that ended
in two thousand and late twenty twenty three or so,
(31:25):
this argues for more rather than less alarmism.
Speaker 2 (31:30):
Yeah, I'm trying to take a look at the series
here to see the last time we appear to have
gotten at that annualized rate. It looks like it was
early twenty twenty four, the last time we've seen anything.
Speaker 3 (31:44):
Quite Yeah, we need to see a few months, yeah, to.
Speaker 4 (31:47):
Be to have the interpretation that this is pointing to.
Now this will be like demand driven inflation, because this
is core. This is something arguably the FED has control.
So I'm not really sure how to interpret this. I
don't I cannot imagine the energy price shock seeping in
to so called I know I'm using all these terms change.
When I say core, I say underlying, I say trend.
(32:08):
That we basically mean the same thing.
Speaker 3 (32:09):
It'd be surprising to see it happen that poickly.
Speaker 2 (32:12):
Again, the main thing that I'm looking at with this
inflation report that threw me off was that that number
on shelter costs jumping up so much, And I have
seen others argue, I don't know how qualified they are
to point it out, but I've seen others argue that
this is a phenomenon from the government shut down, where
in October they attributed shelter costs increase at a zero
(32:34):
percent rate because the government was shut down and they
didn't actually measure it. And for some reason, they do
that measurement every six months, and now we're catching up
to that artificially low shelter inflation number over the course
of the last six months. So maybe that is also
playing a role in this overall inflation report at the
(32:54):
same time that energy price spikes are.
Speaker 3 (32:56):
But suffice to.
Speaker 2 (32:59):
Say, very obviously inflation at this rate is immensely problematic
for the FED, it's problematic for consumers, and it is
problematic for the US economy as a whole should it
take hold and stay there for a period of time.
Speaking of inflation problem, piece from Bloomberg today, AI's big
guns have a serious inflation problem what they're referring to
(33:23):
is the fact that the giant behemoth spenders in the
space right now, which you would consider Microsoft, Amazon, Facebook's
parent Meta, and Google's parent Alphabet to be part of,
are now on trend to spend seven hundred plus billion
dollars on capital expenditures in twenty twenty six, and I've
seen some estimates of over a trillion dollars in twenty
(33:44):
twenty seven. And what they're also telling you at the
same time is that a lot of that increase that
you're seeing, because this was only five hundred something a
few months ago, is not due to them saying, hey,
we need even more capacity than we realized. It's hey,
we want to build out the same capacity, but the
prices for all of this stuff has absolutely ballooned, and
so therefore we are facing a much higher price tag.
(34:08):
Some of this is actually logical to me, because in
some of these areas of say building models or having
the most reliable and fastest infrastructure that can be relied
upon for this stuff, it might end up being some
form of a first to market winner take all scenario.
I think about a company like Google who has search
(34:29):
absolutely cornered, not that they were the first ones there.
Speaker 3 (34:33):
But having that advantage.
Speaker 2 (34:35):
In a market like this where you are the go
to clearly has a bunch of advantages.
Speaker 1 (34:40):
Right.
Speaker 2 (34:41):
Was Facebook the absolute best social media platform?
Speaker 3 (34:44):
Well maybe maybe not, but they.
Speaker 2 (34:46):
Got the most users and that's where everybody wanted to
be and they now maintain a lot of that dominance.
For that reason, Google, likewise and search has been able
to do so because that's how you conduct a search today.
Maybe there's a first mover advantage for some of the companies.
Where I see that, where I see that argument as
problematic is that it seems to be going in every
(35:07):
single area of AI. So when I, you know, go
to when I attend conferences of financial advisors, there seems
to be this attitude of we need to rush out
there and be the very first one to adapt AI
in our practice, because if we don't, then the big
guys are and they're going to beat us to market,
and they're going to come up with something that's just
absolutely uh, you know, killer and put us out of business.
Speaker 1 (35:31):
Uh.
Speaker 2 (35:31):
Those who are developing the models are saying, hey, we
have to rush to get the very best model out
the door every month and be the best in the first,
because otherwise, you know, CHATCHBT will get all the users.
And when I see the data center construction, they're all saying, Hey,
we've got to get these data centers up and running
as quickly as possible for no matter the price, because
if we don't, then somebody else will and it's going
(35:53):
to be to you know, beat us to market and win.
Speaker 3 (35:55):
All this stuff.
Speaker 4 (35:55):
Of course, they can't all win.
Speaker 2 (35:57):
They won't all win, And I just wonder the exact
opposite approach seems to be getting taken by Apple right now.
Speaker 4 (36:04):
Look, if you're an investor, you care about free cash flow,
right because that's what's used to pay dividends and.
Speaker 3 (36:09):
Repay that's that's over the long term.
Speaker 4 (36:11):
Yeah, that's that's the bottom line.
Speaker 3 (36:12):
Yeah.
Speaker 4 (36:13):
So what is free cash flow? Well, it's it's the
I'm sorry to be like a CFA level one person
here or wherever they introduced these concepts.
Speaker 3 (36:20):
Maybe it was level two. Uh, that's this.
Speaker 4 (36:22):
You get operating cash flow and you take off your
capital expenditures. If this The point of this article that
hit home for me is what if there's there's permanent
sort of elevated prices for these things and your future
capex is high relative to whatever the rate was that
made your free cash flow such that it made you
(36:45):
a very attractive company to own. What if you're just
spending a lot more to just to just to stand still,
the so called red queen problem. What if cap future
capex is going to be high because of this? Like,
as a shareholder, that doesn't sit well with me. I'm
interested only in free cash flow. Forget about operating cash flow,
forget about net income and all that other stuff. I
just want to know what's available to either buy my
stockback or pay dividends. But if we have to run
(37:08):
really fast just to stay in place, that's not particularly
attractive for me as an investor. I don't think this
is I'm just a generalist.
Speaker 3 (37:18):
Yeah, I hear it, But I think that's a question.
Speaker 4 (37:20):
That's a question that I would demand i've answered, and
that nobody can answer.
Speaker 2 (37:23):
What's fascinating to me is, you know, there's four companies
that I mentioned to Amazon, Meta Alphabet, and Microsoft have
spent at least.
Speaker 3 (37:32):
A decade, all of them now as these.
Speaker 2 (37:37):
Capital unintensive, high profitable, highly profitable, and high growth businesses,
and they are very quickly trying to transform themselves into
capital intensive, high growth businesses that are on the cutting
edge of a new technology.
Speaker 4 (37:52):
And yeah, you're generating a lot of free cash flow
as it is. Unless you think this is going to
put you out of business. I mean, that's a pretty
good mom. I know this sounds horribly naive. These guys
know their business is far better than I do. I'm
not even scratching the surface, but I'm just not sure
I get this.
Speaker 2 (38:12):
We've got to take a quick break for the next
twenty two hours. Markets are down s and p off
eight tens of percent as we close out the show.
We'll be back at it tomorrow with a full recap
and more. Have a great rest of your day, folks,
The Financial Exchange is produced by Money Matters Radio and
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(01:06):
Armstrong and Mark Vandetti.
Speaker 2 (01:12):
Good morning, Welcome back to the Financial Exchange. It's Mike,
Mark and Tucker with you on a Tuesday where markets
are in selloff mode after spending the last week around
or near their all time highs. This S and P
five hundred off now three quarters of a percent, fifty
four points a NASDAC off one and a quarter three
hundred and twenty nine points now. Jones Industrial Average off
(01:34):
about half a percent two hundred and seventy one points.
All of this on the back of an inflation report
that we got this morning at eight thirty am, confirming
what we all kind of knew, which is inflation sucks
right now. Prices overall, from a headline perspective where you'll
see it quoted, came in at a three point eight
percent year over year increase six tens a percent. If
(01:58):
you look at the month over month that fo follows
a pretty robust price increase for the month of March
as well, and it's now spreading beyond just the energy component.
Speaker 3 (02:07):
In March, when you took a look at the.
Speaker 2 (02:09):
Month over month numbers, really where you saw a surge
was energy prices. You continue to see that in April,
with energy prices overall up an additional three point eight
percent in the month of April, however, you saw food
prices increase half percent and shelter prices increase six tenths
of a percent in the month of April, all contributing
to an inflation report that was worse than anticipated. When
(02:33):
you strip out that food and energy component, which is
what some at the FED like to do when trying
to get at a sense of core inflation or trend
inflation that you know, takes out some of those big
one off price spikes, you did see that increase at
a pretty uncomfortable rate here. So in April compared to March,
you saw at a four tenths percent increase month over
(02:55):
month two point eight percent year over year. And you know,
whether you want to annualize the April figure or just
look at the year over year numbers, what you can
get a sense of is that even excluding the price
shock from energy, we're facing an a inflation report here
that is hotter than expected and puts the FED in
a diff pretty difficult position for incoming chair Kevin worsh
(03:18):
The FED Fund's target rate right now is sitting at
three and a half to three point seven five percent.
And what's important about that and this inflation report is
it is now lower than.
Speaker 3 (03:31):
The year over year inflation number.
Speaker 2 (03:34):
Now some might say that that's not the perfect comparison,
but when you talk about high inflation, what you want
is restrictive federal reserve policy that is designed to bring
that inflation back down. Or I think that's what most
would agree that you want from a federal reserve. And
you can make the argument now that you know, while
the FED had these dreams of bringing interest rates down
(03:56):
to further economic growth and ensure that we don't dip
into recession, you can now make an argument that the
Fed's policy is stimulative. And that is a problem when
you have an inflationary environment that has not been fully
defeated over the last four years. Right, this has been
this ongoing battle since twenty twenty two to bring inflation
(04:17):
back down to that two percent target. We've never gotten there,
and now we're heading back in the wrong direction.
Speaker 4 (04:22):
Yeah, the FED is certainly not responsible for the oil
price spikes. That was true in the seventies two, although
some researchers argued that easy monetary policy contributed to the
magnitude of the spike. That's probably not the case this time.
I mean, you don't need any rigorous analysis of this episode.
It's directly attributable to the conflict in Iran. So what
(04:43):
does the FED do about it? Given that the FED
is responsible for long term inflation, which is which the
FED targets at two percent, or about half the prior
twelve month inflation rate, So inflation is running at about
twice the Fed's target if you use headline CPI as
your measure, does the Fed hike rates and impose some
(05:10):
economic suffering on the economy in order to keep inflation
to reduce the rate of inflation? Or does the Fed accommodate,
so to speak, the shock do nothing? Let real interest
rates potentially go negative. Real interest rates if you use
either future inflation or as you just did, past twelve
months inflation, they're zero and zero's being generous. They're probably
(05:32):
negative right now, Which is itself stimulative? That should all
lse will contribute to inflation. It's it's a huge pickle
mic and that's an understatement. And it couldn't come at
a worst worse time for the FED, given even if
Warsh weren't perceived as the president's puppet, and the burden
is on him to prove that he isn't. But even
(05:52):
if he weren't perceived as that that which deprives the
FED of credibility and makes fighting inflation harder, it would
be a challenge even if Warsh didn't come into this
impaired by that perception.
Speaker 2 (06:07):
When we go take a look at FED funds futures,
which anybody can do, there's a free tool at the
Chicago Mercantile Exchange where you can look at where markets
are pricing in interest rates. This is not indicative of
where interest rates will actually go. They're frequently wrong about
any of this, but it does give you a sense
of where investors are laying out their bets. When I
take a look at the next upcoming meeting, which is
(06:29):
you know, only a month away now, there is basically
being priced in no possibility of a rate cut. What's
interesting to me is when I fast forward all the
way to December. At that point, you know a few
months ago, before the conflict in Iran, there is a
very high likelihood of rates being cut by that December meeting.
You know, not at that December meeting, but you know
a cumulative number of cuts by that December meeting. We
(06:51):
are now looking at today a three percent chance that
rates are lower by December than they are now, and
a ninety seven percent chance rates are at least as
high as they are now, if not higher.
Speaker 4 (07:03):
Yeah, looks oil prices could come down and that'll bring
down headline inflation. The question is what's going on with
underlying inflation core as a proxy for that. There are
other measures that trim outliers, trim mean measures, one of
which is the media and that'll be released soon by
the Cleveland Fed. It's not an official statistic, but it's
a useful way to get at trend inflation. Is there
(07:25):
excess demand in the economy? That's something the FED can
do something about.
Speaker 3 (07:29):
Well.
Speaker 2 (07:30):
I think part of the problem here is I think
that expectations around the Strait of Hormuz are beginning to change.
And some of the best case scenarios that I'm hearing
laid out by geopolitical experts it's hey, traffic returns to
a high degree of normalcy, but Iran is collecting some
sort of toll and periodically shuts it down in order
(07:50):
to show how influential they are. On the flow of
traffic or that doesn't happen. But the US is far
more militarily involved in Iran for a longer period of
time time and those are pretty ugly scenarios for inflation
either way. Last year we had the somewhat humorous taco
trade is what people were talking about in the months
(08:12):
after the layout of tariffs, when the president would, you know,
kind of bring the markets to the precipice and then
back down from the tariff plans, or negotiate with the
country and then back down at the last second. Now
we've got the nacho trade is what people are talking
about on Wall Street.
Speaker 3 (08:26):
The not a chance.
Speaker 2 (08:27):
Horror moves opens. Interesting acronym, kind of funny acronym. I
don't know that I see that reflected in markets, quite honestly.
I mean, you can go take a look at a
few well, I guess it depends on your perspective. But
if you genuinely did not believe that Hormuves was going
to reopen this year, then oil prices don't belong anywhere
(08:51):
near one hundred dollars a bar.
Speaker 4 (08:52):
I don't know what the right price is. It depends
on your assumptions about how sensitive or not demand is
and how quickly are the sources of supply can come
on line? I guess, but I do know that there
should be a risk premium now on everything that wasn't
there before we gave or Ran a blueprint for holding
the world hostage.
Speaker 3 (09:09):
Whoops.
Speaker 4 (09:09):
Now they're going to exercise they have optionality, as finance
dudes like to say Iran as optionality they didn't have before.
The price for that optionality is being We gave them
that option, by the way normally have to pay to
acquire it. We gave it to them, and they will
exercise that presumably from time to time. And the price.
Speaker 3 (09:28):
Unless we completely remove the influence of that group.
Speaker 4 (09:31):
And what takeover a country what three or four times
the size of California with ninety million people, a two
thousand year old civilization, I mean, forget about it. That's
the political environment here. I don't think we'll brook that,
we'll tolerate that. So we're going to have to live
with this sword hanging over our heads for the foreseeable future. Ever,
Ran just sort of shutting off the spicket when something
(09:54):
irritates them. By the way we showed them how to
do it.
Speaker 2 (09:56):
There is a bet that you can place on polymarket,
which again I don't view polymarket betting as predictive for
what is going to happen, but clearly put people are
wagering on things like this over there, and there's a
bet on polymarket as to whether or not the Straight
of Hormuz traffic will return to normal by end of June.
And they have a definition of normal here as a
seven day moving average of transit calls for the Straight.
Speaker 3 (10:19):
Equal to or above sixty.
Speaker 2 (10:22):
For any day between now and June thirtieth, So that's
how they're measuring the yes or no of this bet.
And back on April seventeenth, when negotiations we're seeming playing
out and talking about ceasefire, there was an eighty eight
percent chance that people were betting that, yeah, the Strait
of Hormze traffic would return to normal.
Speaker 3 (10:41):
Today we're sitting at thirty three.
Speaker 2 (10:45):
So again, where people are putting their money right now
is that there is a one in three chance that
traffic returns to normal in the Strait of Hormuz by
the end of June. And I don't think I need
to go into the details of how ugly a scenario
that looks like for er G aluminum fertilizer supplies globally
and prices here domestically for gasoline. If that traffic has
(11:09):
not returned to normal by the end of JUNEY, it
is immensely problematic for the global economy.
Speaker 4 (11:13):
I think is yeah, the next several years will be
challenging as we source supply from elsewhere or build pipelines
around it and continue the move to alternative energy. I
assume that this shock, like the first and second shocks
of the seventies, the Opek and then the Iran Revolution
shock motivated changes in behavior. This shock will too motivate
(11:37):
changes in behavior, but it took years for things to
sort of recalibrate.
Speaker 3 (11:40):
Let's take a quick break. When we come back.
Speaker 2 (11:42):
Michael Burry's got a warning out there for stock investors,
and we're playing trivia here next on the Financial Exchange.
Speaker 1 (11:48):
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(12:10):
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Speaker 5 (12:26):
All right, Sam, for sure you here on the Financial
Exchange and on this day. In nineteen ninety four, Pulp
Fiction made its debut at the Canes Film Festival. Pulp
Fiction would go on to win the highest award at
the festival. Unfortunately for Pulp Fiction, it did not win
Best Picture at the Academy Awards. So our trivia question today,
(12:47):
which movie beat Pulp Fiction for the Best Picture Academy Award?
Once again? Which movie beat Pulp Fiction for the Best
Picture Academy Award? Be the fourth person today to text
us at six one seven three six two thirteen eighty
five with correct answer along with keyword trivia, and you
(13:07):
win a Financial Exchange Show T shirt. Let's get the
fourth correct response to text us to the numbers six
one seven three six two thirteen eighty five with correct
answer along with keyword trivia. We'll win that T shirt.
See complete contest rules at Financial Exchange Show dot com.
Speaker 2 (13:23):
Well, Michael Burry is out with another warning for stock
investors as he compares today's markets to the two thousand's peak.
And I want, actually, I want to spend a minute
on Michael Burry here, because it's been a hot minute
since we've talked about him, and the guy was incredibly successful.
If you've seen the film Big Short, which now came
(13:45):
out eleven years ago, dear God. He was portrayed by
Christian Bale in that film, So if you can think
back to that film, that's who portrayed him. If you
read the book, then you might remember it a little
bit better. But he very early on in the mid
two thousands, identified what he estimated to be a massive
problem with the housing sector and specifically the mortgage market
(14:08):
involved in the housing sector, and effectively created the financial
products that allowed himself and other investors to short that
market via via his hedge fund.
Speaker 3 (14:22):
The Few Things.
Speaker 2 (14:23):
So he was one correct and made his investors in
absolute fortune in that fund. And I think most people
are kind of aware of that that, hey, he successfully
bet against the housing market and made these investors a fortune.
What people, I think failed to realize. And the book
itself actually makes this point. He started shorting the housing
market in two thousand and five, his investors attempted to
(14:47):
bail out on him and completely exit his fund. He
had to restrict withdrawals, he had to stand up to
his investors and basically tell them they were wrong for
three years before finally getting that massive payoff after the
thing all fell apart, and since then, maybe he would disagree,
but I don't think you can point to any massive
(15:08):
successes in calling a big macro trend like the one
that we experienced in two thousand and eight. It's not
to say he's a bad investor. It's just to say
that he has issued plenty of other warnings, one about
the ETF industry back in twenty nineteen, several since twenty
twenty about meme stocks and other concerning areas of the market.
And honestly, at this stage, I guess my point.
Speaker 3 (15:31):
Would be a fewfold.
Speaker 2 (15:32):
He'll probably be right about some big thing again in
the future because he makes a lot of big, bold predictions.
But most people cannot invest like Michael Burry does, Meaning
most people can't afford to sit on the sideline of
a market for three years and lose money while the
rest of the stock market is making tremendous amounts of
money and stick with that all the way through seeing
(15:55):
the biggest financial crisis that we've ever seen in history.
And so here's my overall take with this, Michael Berry,
you know, an important role in calling the financial crisis
and bringing it to light and being able to successfully
explain it to investors. Unclear that he has any predictive
value for the future, or that even if he does,
(16:16):
anybody else should listen to his advice and invest the
way that he does.
Speaker 4 (16:22):
Yeah, I mean certain segments of the market are at
extreme values, whether you prefer fundamental analysis like the price book,
price sales.
Speaker 2 (16:29):
And that's where I struggle is because a lot of
his points that he's making right now I tend to
agree with, like, sure, the market does well, that's in
a lot of ways looks similar to Yeah.
Speaker 4 (16:36):
But that's that's that's circular. If if you think of
value in excess of X is extreme, then by definition
the market is extreme. Is priced for extreme outcomes that
are unlikely to So I don't love that because it's
in the eye of the beholder. Sure, but okay, So
that's the fundamental approach. It's a technical approach. Some people
(16:57):
like to create a two hundred day or whatever moving
average series and compare that to the current price, or
compare that to the fifty day moving average series. Technicians
do all kind they contort themselves in all kinds of
different ways to arrive at and I'm not I actually
think there's a lot to it because those prophecies can
become self fulfilling. So it's almost undeniable that the market
(17:20):
that market valuation or technical measures of market fundamental or
technical are at extremes. The question is do the investments
being made today by technology companies generate the income to
provide the free cash flow? And I'm missing a lot
of steps between net income and free cash flow and
my little in my little monologue here, but to justify
(17:43):
these investments. I happen to think that Bury's probably right
because big periods of overinvestment of investment, excuse me, have
generally resulted in over capacity. Free cash flow doesn't bounce back,
a lot of companies will go out of business. So
from that perspective, if that's what his thesis is, I
think he's probably right. But I think you made the
(18:04):
mom I'm going on and on here, please jump it. Okay, Well,
so how do you bet against it. In five four
oh five, he went to Goldman and Deutsche Bank and
others and said, I want to bet against these very
particular slices of these complex portfolios of mortgages you have.
Speaker 3 (18:19):
How do I do that?
Speaker 4 (18:20):
And they said, well, you can create something called a
credit default swap CDs. That's like an insurance policy. That'd
be like me buying an insurance policy on you. Like
I've seen Mike eating lately, He's up to like three
whoppers a day. Can I buy an insurance policy on him?
And Goldman, Sachs or whatever.
Speaker 3 (18:37):
Saying yeah, okay, I mean we'll do it.
Speaker 4 (18:38):
Not an interested party, but yeah, we agree he's a
time bomb.
Speaker 3 (18:43):
So he bought. They actually didn't have to agree.
Speaker 2 (18:44):
They just said, yeah, we'll create the product for you,
and we'll make money by selling the other side of
that trade to somebody else.
Speaker 3 (18:49):
Yeah.
Speaker 4 (18:49):
But at my point, it all had to come together,
so there was no marketable instrument for him to express
his views. He right at the time, as I understand it,
the credit of false swaps, they're not you had to
createtly trade it. He and the bankers had to get
together and agree that it made sens as you point
out for both sides.
Speaker 2 (19:06):
Yeah today, I mean, if he really stands by this,
I guess there's two ways to do it. Exit the
positions or bet against them. It's a lot more. It's
a completely let what your do do today than back
in two thousand and eight, So who knows if he's
actually expressing all that is the other piece of this.
Let's take a quick break when we come back. Full
market update on a sell off day due to inflation concerns.
That's next on the Financial Exchange.
Speaker 1 (19:40):
Bringing the latest financial news straight to your radio. Every day.
It's the Financial Exchange on the Financial Exchange Radio Network.
Tell you out full Wall Street Watch, treking the stocks,
the data, and the headlines driving markets so far today
right here on the Financial Exchange Radio Network.
Speaker 5 (20:01):
Well, markets are selling off by midday after the April
Consumer Price Index revealed consumer prices rose three point eight
percent from a year ago, marking inflation's highest level in
three years, driven by higher gas prices. Right now, the
Dow is down nearly half a percent, or two hundred
and eighteen points, SMP five hundred down nearly nine tens
(20:22):
of a percent, Nasdaq selling off over one and a
half percent or three hundred and ninety nine points lower,
Rusted two thousand, selling off two point three percent, Tenure
Treasure reeled up three basis points at four point four
to five to one percent, and Oil jumping four percent,
trading at one hundred and two dollars a barrel well.
(20:43):
eBay said it has rejected video game retailer Game stops
unsolicited fifty six billion dollar takeover proposal, saying it was
neither credible nor attractive. Game Stop down by over one percent,
while eBay's stock is down modestly. Meanwhile, The Financial Times
reported that Nelson Peltz is Treon Fund Management is seeking
investor backing for a bid to take fast food chain
(21:05):
Wendy's private, after the restaurant operator shares have fallen more
than forty percent over the past year. Wendy stock is
rallying nearly sixteen percent on the day. Elsewhere, Hymns and
Hers sinking fourteen percent after it swung to a quarterly
loss after the telehealth Companies moved to alter its weight
loss offerings drove up costs, and under Armour stock is
(21:26):
dropping eighteen percent after the athletic apparel company posted a
fall in quarterly revenue I'm Tucker Silvan. That is Wall
Street Watching. In the previous segment, we asked you the
trivia question which movie beat pulp Fiction for the Best
Picture Academy Award back in what nineteen ninety four? That
would be Forrest Gump and Raymond from Cumberland, Rhode Island.
(21:47):
Who is our winner today? Taking on the Financial Exchange
showed t shirt. Congrats to Raymond and we played trivia
every day here on the Financial Exchange. Seek complete contest
rules at Financial Exchange show dot com.
Speaker 2 (21:59):
Well, we just got wrapped up talking about one bankrupt
government trust fund. Why don't we skip over to another one,
which is the Social Security Trust Fund, which is not
bankrupt today like the Highway Trust Fund is. But let's
kind of go through because we have two pieces from
Barons today on proposals for how to solve all of
(22:19):
our problems and fix the Social Security Trust Fund. One
of them is arguing that you got to just cut
benefits for everybody, because otherwise you start getting into a
program that's just a welfare program, which is not how
social Security was designed.
Speaker 3 (22:35):
The other is.
Speaker 2 (22:38):
Do exactly that, which is tax the rich more or
cut the benefits for the rich.
Speaker 3 (22:41):
Only and maintain them for lower class people because.
Speaker 2 (22:45):
They need that money more and it's getting at the
fairness piece of it, and.
Speaker 3 (22:53):
All reasonable proposals. I don't know.
Speaker 2 (22:55):
By the way, their proposal is that you place a
hard five percent limit on draw down the Retirement Trust
Fund this year, which would equate to a roughly six
percent cut in annual benefits for all Social Security recipients.
I'm not convinced that would actually permanently solve the problem.
May just kind of slow it down and kick it
down the kick the can down the road further. But
(23:16):
I guess that's better than just, you know, driving off
the cliff with no plan in place. The other proposals
that are out there include, you know, raising the tax limit,
cutting benefits for those who already have over one hundred
thousand dollars in benefits. Look, any combination of these might
be able to fix the problem, but the reality is
(23:39):
that we keep just driving towards a cliff with no
actual plan in place. And listen, if you're listening right
now and you are lamenting the fact that the program
was designed poorly, or the changes that were made over
the last few years regarding inflation and regarding you know,
the benefits for the web provision, and those are unfair
(24:03):
and benefited other people and made the system more bankrupt,
or that you know, government officials borrowing from the trust
Fund and then you know, bankrupting that way. You're welcome
to your opinion on that, but it's not constructive, right,
Like I do hear people complaining about that all the time.
But the fact of the matter is, however it happened,
the Trust Fund is going belly up in about five years,
(24:24):
and we are not holding our lawmaker's feet to the
fire to actually fix the problem. And that's I mean
partly our lawmaker's fault. It's kind of all our faults too,
Like we're far more interested in talking about these exciting
things like war in Iran and you know, you know
which president is going to give us a bigger tax
cut instead of saying, hey, we have this failing system
(24:46):
that our oldest and most vulnerable population rely upon, and
you are doing absolutely nothing to fix the problem.
Speaker 3 (24:54):
So I wave us in part.
Speaker 4 (24:56):
Yeah, it's it's not gonna happen. We'll fix it when
the crisis is at our doorstep. That's kind of our.
Speaker 2 (25:02):
Nature, which is so frustrating because what that means is
that probably we're just going to print the money and
increase the deficit.
Speaker 4 (25:11):
Okay, yeah, so there's a few ways to finance it.
Tax that you can inflate it in a way, you
can inflate the expenses away, but the latter would be
economically disruptive. The former could sap demand. So you're sacrificing
economic growth today in exchange for call it future social.
Speaker 2 (25:30):
I like a good tax cut as anybody, as much
as anybody else, But we continue to vote in politicians
who all they want to do is increase spending or
cut taxes and not actually solve our nation's real problem.
Speaker 4 (25:42):
Like we've got terrible fiscal policy right now. We've had
terrible fiscal policy for the past couple of administrations. The
deficit has not come down since Obama, and I don't
think it was a big priority of his. Of course,
Congress has a lot to do with it, and I
think we just have to resign to the fact that,
(26:02):
much like with the consequences of the Strait of Horn
Moves being if not closed indefinitely, faced with a threat
of closure indefinitely, that is a fact of life. We
have to live with. That's going to mean higher prices
probably for everything, slightly higher prices, higher risk premia.
Speaker 1 (26:19):
Go ahead.
Speaker 2 (26:20):
I was going to say that, whether you are a
Democrat or a Republican, just in the last five no,
forget about last five just in the last two years,
you have had a president from each party successfully put
into place policy that made the social security problem worse.
The Social Security Fairness Act passed by Biden made the
problem worse. The tax cuts, the One Big Beautiful Bill
(26:42):
Act that gave an additional tax credit to sixty five
and older individuals made the Social Security Trust Fund problem worse.
Both of them took money directly out of the fundraising
mechanism for that trust fund. So plenty of blame to go.
Speaker 3 (26:55):
Give me.
Speaker 4 (26:56):
All these things, the war and the Middle East and this,
and just stepping back, they all point to a world
of more volatile economic growth and lower more recessions because
if it's more volatile and lower, you dip below trend
or zero more frequently. Higher interest rates because of higher
inflation and more volatile interest rates. This ain't going to
(27:17):
be like the halcyon days of the eighties, the first
half of which were a little bit rocky for a
while and before they leveled out. The eighties until the
Great Recession were a true golden era. That term gets
thrown a lot, thrown around a lot now by people
who think they can will one into existence because they're
so great. But the fact is you don't know till
(27:37):
long after the fact. Relative to that, we're in for
just a much more volatile period, a future period, no
matter how you want to measure.
Speaker 2 (27:46):
It, regardless of how and in what way we resolve
the social Security problem, it is going to remain a
critical component of Americans retirements for decades to come. And
if you are planning out your retirement and trying to
fact duran, what do I do about this program that
very likely will see changes early on in my retirement,
(28:07):
and you want to understand how those changes could affect
the success of your retirement. Give the folks at Armstrong
Advisory Group call. We actively test this out with our
clients on how it would impact their overall retirement success
should changes to Social Security or taxation or other factors
play into their retirement future. If you have questions like
(28:28):
that you want to learn more, give us call at
Armstrong eight hundred three nine three for zero zero one.
You can book a time for us to call you
back at Armstrong Advisory dot Com. But that phone number
again eight hundred three nine three for zero zero one.
Speaker 1 (28:42):
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 and to state planning advisors before
making any investment decisions. Armstrong may contact you to offer
investment advisory services.
Speaker 2 (28:57):
Markets have gotten a little bit worse since we last covered.
The NASA now down three hundred and ninety five points
or one and a half percent. We're gonna take quick
break when we come back. Stack Roulette is next on
the Financial Exchange.
Speaker 1 (29:09):
Okay, real time financial insight as news breaks. The Financial
Exchange is live on x Watch the show and follow
us for the most up to date business news you
need to know. This is the Financial Exchange, market insight,
retirement strategies, real talk about Wall Street and economic trends,
all live every day on our YouTube channel. Go to
(29:30):
YouTube dot com slash the Financial Exchange Show. This is
the Financial Exchange.
Speaker 3 (29:47):
Time for good of stack Roulette. What do you have
for us today.
Speaker 4 (29:50):
Mark, we talked earlier about measures of underlying inflation that
get at what inflation is really doing, because headline is
can be noisy, can be distorted by one offs, as
you put it. One measure of underlying inflation is core
that the federal government reports, which strips out food and energy.
Another strips out now this is not calculated by the
(30:12):
federal government, but rather by a federal Reserve bank. This
strips out big movements no matter what sector they come from,
the thinking being those are probably fleeting and not representative
of underlying inflation, which arguably the Fed controls Median. The
median figure, the one in the middle, literally is a
(30:32):
measure that researchers like yep for that reason. And we
just got a read on median inflation. It came in
at point four percent month over month.
Speaker 3 (30:39):
That's you have a sense of the last time we
saw reading like that.
Speaker 4 (30:42):
It's been Yeah, I don't have the full series in
front of me. IT'SO point four is where this sucker
was running when inflation was high. Now, Mike, this could
be a fluke, but median is not. Median doesn't get
headfaked by one offs in this or that component of inflation.
(31:03):
It's a pretty robust measure of the tendency of anything,
which is why they talk about median salaries in median
home prices. So, I think for those like me that
are becoming a little bit alarmist about inflation, given that
we just came off a mini great inflation that ended
in two thousand and late twenty twenty three or so,
(31:25):
this argues for more rather than less alarmism.
Speaker 2 (31:30):
Yeah, I'm trying to take a look at the series
here to see the last time we appear to have
gotten at that annualized rate. It looks like it was
early twenty twenty four, the last time we've seen anything.
Speaker 3 (31:44):
Quite Yeah, we need to see a few months, yeah, to.
Speaker 4 (31:47):
Be to have the interpretation that this is pointing to.
Now this will be like demand driven inflation, because this
is core. This is something arguably the FED has control.
So I'm not really sure how to interpret this. I
don't I cannot imagine the energy price shock seeping in
to so called I know I'm using all these terms change.
When I say core, I say underlying, I say trend.
(32:08):
That we basically mean the same thing.
Speaker 3 (32:09):
It'd be surprising to see it happen that poickly.
Speaker 2 (32:12):
Again, the main thing that I'm looking at with this
inflation report that threw me off was that that number
on shelter costs jumping up so much, And I have
seen others argue, I don't know how qualified they are
to point it out, but I've seen others argue that
this is a phenomenon from the government shut down, where
in October they attributed shelter costs increase at a zero
(32:34):
percent rate because the government was shut down and they
didn't actually measure it. And for some reason, they do
that measurement every six months, and now we're catching up
to that artificially low shelter inflation number over the course
of the last six months. So maybe that is also
playing a role in this overall inflation report at the
(32:54):
same time that energy price spikes are.
Speaker 3 (32:56):
But suffice to.
Speaker 2 (32:59):
Say, very obviously inflation at this rate is immensely problematic
for the FED, it's problematic for consumers, and it is
problematic for the US economy as a whole should it
take hold and stay there for a period of time.
Speaking of inflation problem, piece from Bloomberg today, AI's big
guns have a serious inflation problem what they're referring to
(33:23):
is the fact that the giant behemoth spenders in the
space right now, which you would consider Microsoft, Amazon, Facebook's
parent Meta, and Google's parent Alphabet to be part of,
are now on trend to spend seven hundred plus billion
dollars on capital expenditures in twenty twenty six, and I've
seen some estimates of over a trillion dollars in twenty
(33:44):
twenty seven. And what they're also telling you at the
same time is that a lot of that increase that
you're seeing, because this was only five hundred something a
few months ago, is not due to them saying, hey,
we need even more capacity than we realized. It's hey,
we want to build out the same capacity, but the
prices for all of this stuff has absolutely ballooned, and
so therefore we are facing a much higher price tag.
(34:08):
Some of this is actually logical to me, because in
some of these areas of say building models or having
the most reliable and fastest infrastructure that can be relied
upon for this stuff, it might end up being some
form of a first to market winner take all scenario.
I think about a company like Google who has search
(34:29):
absolutely cornered, not that they were the first ones there.
Speaker 3 (34:33):
But having that advantage.
Speaker 2 (34:35):
In a market like this where you are the go
to clearly has a bunch of advantages.
Speaker 1 (34:40):
Right.
Speaker 2 (34:41):
Was Facebook the absolute best social media platform?
Speaker 3 (34:44):
Well maybe maybe not, but they.
Speaker 2 (34:46):
Got the most users and that's where everybody wanted to
be and they now maintain a lot of that dominance.
For that reason, Google, likewise and search has been able
to do so because that's how you conduct a search today.
Maybe there's a first mover advantage for some of the companies.
Where I see that, where I see that argument as
problematic is that it seems to be going in every
(35:07):
single area of AI. So when I, you know, go
to when I attend conferences of financial advisors, there seems
to be this attitude of we need to rush out
there and be the very first one to adapt AI
in our practice, because if we don't, then the big
guys are and they're going to beat us to market,
and they're going to come up with something that's just
absolutely uh, you know, killer and put us out of business.
Speaker 1 (35:31):
Uh.
Speaker 2 (35:31):
Those who are developing the models are saying, hey, we
have to rush to get the very best model out
the door every month and be the best in the first,
because otherwise, you know, CHATCHBT will get all the users.
And when I see the data center construction, they're all saying, Hey,
we've got to get these data centers up and running
as quickly as possible for no matter the price, because
if we don't, then somebody else will and it's going
(35:53):
to be to you know, beat us to market and win.
Speaker 3 (35:55):
All this stuff.
Speaker 4 (35:55):
Of course, they can't all win.
Speaker 2 (35:57):
They won't all win, And I just wonder the exact
opposite approach seems to be getting taken by Apple right now.
Speaker 4 (36:04):
Look, if you're an investor, you care about free cash flow,
right because that's what's used to pay dividends and.
Speaker 3 (36:09):
Repay that's that's over the long term.
Speaker 4 (36:11):
Yeah, that's that's the bottom line.
Speaker 3 (36:12):
Yeah.
Speaker 4 (36:13):
So what is free cash flow? Well, it's it's the
I'm sorry to be like a CFA level one person
here or wherever they introduced these concepts.
Speaker 3 (36:20):
Maybe it was level two. Uh, that's this.
Speaker 4 (36:22):
You get operating cash flow and you take off your
capital expenditures. If this The point of this article that
hit home for me is what if there's there's permanent
sort of elevated prices for these things and your future
capex is high relative to whatever the rate was that
made your free cash flow such that it made you
(36:45):
a very attractive company to own. What if you're just
spending a lot more to just to just to stand still,
the so called red queen problem. What if cap future
capex is going to be high because of this? Like,
as a shareholder, that doesn't sit well with me. I'm
interested only in free cash flow. Forget about operating cash flow,
forget about net income and all that other stuff. I
just want to know what's available to either buy my
stockback or pay dividends. But if we have to run
(37:08):
really fast just to stay in place, that's not particularly
attractive for me as an investor. I don't think this
is I'm just a generalist.
Speaker 3 (37:18):
Yeah, I hear it, But I think that's a question.
Speaker 4 (37:20):
That's a question that I would demand i've answered, and
that nobody can answer.
Speaker 2 (37:23):
What's fascinating to me is, you know, there's four companies
that I mentioned to Amazon, Meta Alphabet, and Microsoft have
spent at least.
Speaker 3 (37:32):
A decade, all of them now as these.
Speaker 2 (37:37):
Capital unintensive, high profitable, highly profitable, and high growth businesses,
and they are very quickly trying to transform themselves into
capital intensive, high growth businesses that are on the cutting
edge of a new technology.
Speaker 4 (37:52):
And yeah, you're generating a lot of free cash flow
as it is. Unless you think this is going to
put you out of business. I mean, that's a pretty
good mom. I know this sounds horribly naive. These guys
know their business is far better than I do. I'm
not even scratching the surface, but I'm just not sure
I get this.
Speaker 2 (38:12):
We've got to take a quick break for the next
twenty two hours. Markets are down s and p off
eight tens of percent as we close out the show.
We'll be back at it tomorrow with a full recap
and more. Have a great rest of your day, folks,
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