00;00;00;11 – 00;00;09;26 Unknown Hello, and welcome back to another episode of blue Chip. Now, you have Daniel Ducey and our chief investment officer. I do senior financial advisor and Dan senior managing partner.
00;00;09;28 – 00;00;31;00 Unknown A lot of ground to cover today as markets have certainly been eventful over the last couple of weeks. But specifically, we want to talk through what the banks have been showing us by way of strong corporate earnings, can use them as a good barometer for the broader economy. We’ll talk a little bit about recent updates on inflation, the fact that it’s moving in the right direction.
00;00;31;00 – 00;00;49;00 Unknown What do we make of that. Also want to touch on the AI boom that we’ve talked so much about and how it might be facing a new test right now? Before we get over to the macro side of things, talk about the ever present geopolitical risks, what that’s doing to oil markets and finally, what that means for the Federal Reserve.
00;00;49;02 – 00;01;20;04 Unknown So without further ado, I will kick things off talking about the banks, the biggest banks across the firm are, I’m sorry, across the US, you always get corporate earnings season that starts with specifically within the financial sector, the big banks. So we like to look at the banks not always just to look at what the company themselves are doing, but more because you can get some really, really good reads on the underlying plumbing of the economy, consumer spending, so on and so forth.
00;01;20;04 – 00;01;45;09 Unknown So what we did see so far, at least this quarter, was that results from firms like JP Morgan Chase, Goldman Sachs, Bank of America, Morgan Stanley and Blackrock, generally exceeded pretty lofty expectations. A couple notable surprises here. Investment banking performed very well, and for the past couple of years we had seen high interest rates slow mergers and acquisitions and IPOs.
00;01;45;16 – 00;02;13;09 Unknown But you’re starting to see that parts of that part of those businesses recover as companies have become more comfortable operating in today’s interest rate environment. You also saw trading desks enjoy another very strong quarter. Anytime you get heightened volatility across markets, this can can bode very well for those bulge bracket firms and their trading desks. And the other nugget that I think was useful is that consumer lending remains very healthy, at least relatively healthy.
00;02;13;09 – 00;02;40;14 Unknown I would say the reason that this is important is because one question we get very frequently when talking about the underlying economy is, okay, I understand that growth is good, but, you know, how are consumers positioned? Are they taking on a lot of debt? Are they paying their credit card bills? And the commentary we see we received basically across the board was that consumers remain on strong financial footing and the environment overall is fairly healthy.
00;02;40;14 – 00;03;06;08 Unknown So as you would expect, yes, some of the stocks rallied off of these good prints. But because these banks often serve as a barometer for the broader economy, those types of results can can really support renewed optimism across the board. So I would say my takeaway is financial system appears well capitalized. You see renewed borrowing activity and consumers continue to spend despite all the things we’ve seen go on this year.
00;03;06;11 – 00;03;35;04 Unknown You know, I think about that. Nobody can be more relieved than the Federal Reserve, right? Right. They’re trying to thread the needle between inflation. But but also, you know, the hope for economic growth being tied to, you know, cutting interest rates. So I think that this ultimately these results in the banks, you know, healthy consumer and investment banking activity all increasing, you know, with rates for the rate I think gives the Federal Reserve a little more flexibility to potentially delay any sort of rate cut.
00;03;35;06 – 00;03;59;08 Unknown And you have banks as the backbone of the economy, or at least at the very least, a very important part of the economy. Banks firing from all cylinders. The idea that a recession is imminent is fading or things really is bad out there. It’s so many people here. I feel like, I’m often talking to clients and they’re just waiting for the next shoe to drop.
00;03;59;08 – 00;04;29;14 Unknown But isn’t this a prime example that things out there aren’t really as bad as the headlines might suggest? Yeah, well, and it’s also, you know, I feel like I’ve mentioned this on this podcast in the past, but when you look at a, a retail, individual survey based piece of data, like the University of Michigan Consumer Sentiment Survey, earlier this year, we had the worst level of sentiment at the consumer level that we had ever seen.
00;04;29;19 – 00;05;03;12 Unknown Right? People feel terrible. But then you look at the actual data on household balance sheets and consumer spending, and they’ve almost never been better. Right? So it’s it’s a very, very keen difference between how somebody feels versus how they actually are. Right than the stock market. But the old adage that the stock market climbs a wall of worth, it’s easy, to say, well, stocks have to drop just because they’ve continued to grow, because they’re at all time highs or continue to stay at elevated, prices.
00;05;03;15 – 00;05;35;13 Unknown But the reality is the earnings backdrop, and this is illustrated here in the banks is very, very strong. Right. Very strong. Earnings drive price. I think I’ll use that as a segue over to inflation, which does help explain or at least partially explain why consumers have been a little bit shaky, at least from the sentiment perspective. So if you think back a couple of months, we saw inflation charge higher, and that was almost entirely due to elevated energy prices off of the conflict in the Middle East.
00;05;35;16 – 00;06;03;05 Unknown But the most recent data, as we would have expected with June, having that ceasefire kind of come into play and better traffic through the Strait of Hormuz, you had inflation move in the right direction. So you saw year over year consumer prices come down. It was reflected at the wholesale index as well from producer prices. So, my takeaway here on inflation, even though gas prices are something that’s so visible.
00;06;03;05 – 00;06;25;00 Unknown Right. Again, they can make consumers feel very bad. But if you look underneath the hood with regards to inflation, everything else actually looked pretty good as well. So I think gas or the whole energy cohort within the consumer price index showed almost a half a percent decline in the month of June, which is of course very helpful.
00;06;25;00 – 00;06;50;23 Unknown But it was also things like general goods outside of food and energy that were in deflation, prices coming down, even services prices which have contributed, a large degree of any inflationary pressure we’ve seen over the last five years. Those were very modest as well. So, yes, some of the the moves in inflation and what consumers actually feel is still going to be tied to conflict resolution in the Middle East.
00;06;50;29 – 00;07;15;21 Unknown But I would say it’s at least encouraging that the inflation impact hasn’t really broadened out and spilled over into other things. Okay. So that’s that’s consistent with food and fertilizer moving fertilizer through the street. So, it’s not just gas food as well. Yeah. And again, like the kicker here is, you know, since that data came out, keep in mind that was covering the month of June.
00;07;15;26 – 00;07;41;08 Unknown We have gotten renewed pressure on the geopolitical side, which I’ll, we’ll talk about, near the end of this podcast. But it all does kind of hinge on how long this conflict over there last we’ve seen renewed escalation. If I was a betting man, I would certainly guess that in when you get the July data on CPI or PCE, that doesn’t look quite as rosy as as the June data did.
00;07;41;08 – 00;08;03;05 Unknown But you know, I feel like that like the conflict spilling over and escalating, I should say, like, basically coincided with when the June report was released. Yeah. Like almost like a throw incident away. Right? Pretty much. So there’s still a lot to unpack. And, you know, we’ll talk about implications for, for the Federal Reserve and, and some of the updates on the geopolitical side near the end here.
00;08;03;05 – 00;08;27;18 Unknown But overall, again, it’s just very consistent with that theme of, you know, emotionally how someone feels versus how they actually are. It’s why we have doctors, right? Like, it’s why you have financial advisors. All right. So switching gears a little bit, we’ve talked a lot about artificial intelligence specifically as it pertains to the equity market.
00;08;27;20 – 00;08;51;20 Unknown But, you know, this theme has certainly been top of mind for the last few years. I think what’s developing now is that as we get into the meat of earnings season here for the second quarter, investors are no longer just asking, okay, who’s putting forth the most capital to work to try to gain a good positioning in artificial intelligence?
00;08;51;23 – 00;09;17;14 Unknown Now they’re asking who’s actually making money off this. You know, it’s not just a spend. Now ask questions later. We are at later people are asking questions. So you see these large firms come out and continue to beef up these just extraordinary spending plans. And you know, right now investors are just asking the question more bluntly, what is the ROI, the return on investment on these projects?
00;09;17;16 – 00;09;43;14 Unknown How long can I expect the hold period to be to recoup? What could end up being close to $1 trillion in aggregate CapEx? Across the magnificent seven x Apple cohort? So you have seen a lot of volatility in these stocks recently specific to things like semiconductors, which have been one of the strongest performing cohorts within the US market this year.
00;09;43;17 – 00;10;00;04 Unknown And I don’t think this is a narrative that’s going to be going away anytime soon. And that narrative being who’s actually going to be making money off of this, and when is that going to happen? This has been this has been really interesting. You know, the follow up because you’re you’re seeing a lot more chatter about the Chinese models and their lower costs.
00;10;00;04 – 00;10;23;17 Unknown And companies would be more suited to use those for less complex tasks. But I mean, I think that’s a great question. Where’s the money going to be made from? Because unless this gets radically cheaper from an, I should say, more efficient from the energy usage standpoint, it’s really tough to see a path to 40% profit margins like these tech companies have with their legacy businesses.
00;10;23;20 – 00;10;51;11 Unknown Does it mean less jobs? Is less jobs part of the equation? In order to produce ROI? That’s a good question. And that’s one that it depends who you ask. But what I would say is that you have already seen a lot of the companies where there’s a very, very direct one for one correlation between what artificial intelligence can do versus what a human employee can do.
00;10;51;13 – 00;11;16;19 Unknown That’s why it’s no surprise that you have seen layoffs this year be very highly concentrated in the tech sector. If you look across, in aggregate, the economy, there isn’t really any standout outside of tech. I my numbers are going to be dated here because this is from a couple of months ago. But, the number of layoffs that was specific to information technology as a sector was something like 30 some percent increase year over year.
00;11;16;20 – 00;11;39;01 Unknown Right? So what that tells you is that there might be some specific pockets where, yes, there can be job replacement. I think anyone that would argue against that would talk about how, you know, during the Industrial Revolution, there was a lot of jobs that got taken, but also a lot of new jobs got created because certain roles didn’t have to exist before.
00;11;39;03 – 00;12;01;23 Unknown So it’s very much up in the air. I think that the folks that are spending all this cash, so you can think meta alphabet, Microsoft. I think that it is going to be a challenging tightrope to walk for them because they have and continue to kind of bet the House that number one, the demand is going to be there.
00;12;01;23 – 00;12;33;29 Unknown Number two, they can satisfy the costs that come with that. And number three, that their business models, quite frankly, are equipped to make money off of this. They’re dealing with the Chinese. Right. Have lower cost models. And that’s a huge risk. Yeah. So I will say this, I mean, I do think because we’ve talked about this, Matt, in our investment committee a lot over the last couple of years, I do think it’s actually pretty healthy that the market is starting to question, you know, what do I actually get out of this?
00;12;33;29 – 00;13;03;28 Unknown And when do I get it? Because, you know, simply put, I mean, you have new businesses that are coming into the fold, OpenAI anthropic that we aren’t really clear yet what the monetization for them looks like. Right. And if all of a sudden it’s not as good or things need to be changed from a business perspective, that those types of businesses, then that’s going to have a knock on impact on the firms that are spending all this money to satisfy the computing power.
00;13;04;01 – 00;13;26;03 Unknown So it’s not a house of cards, but the fact that you’re getting investors questioning the actual monetization side of things now is very healthy. And that’s a question, again, that we’ve been asking ourselves for the last, I don’t know, two years, but which is when you go when the clock was five years, that that’s really where that easy discussion stopped.
00;13;26;08 – 00;13;50;02 Unknown Yeah. The car companies couldn’t figure out a way to monetize. In the end, it was hot. And at that time, if you weren’t investing heavily in the future of easy, you were considered passed up. But now, you know, those those efforts and initiatives have come and gone. Yeah. Really, at the end of the day, this is where the rubber hits the road.
00;13;50;08 – 00;14;12;01 Unknown Are you making money, yes or no? Yeah. I mean, it’s more than that too, because one of the reasons why tech companies have fetched the premiums that they have is because the incredible profit margin. And if you have models coming out of China that don’t care about the profit margin, because the stock market isn’t as important to their economy as it is ours, they can continue to undercut.
00;14;12;03 – 00;14;38;03 Unknown Yeah. All right. So last two topics going to center around macroeconomic themes here. The first being, you know, the fact that we have these geopolitical risks that are continuing to drive oil markets and I would say rates as well. So we’ll talk about conflict, abroad. And then, you know, some implications for the Federal Reserve. So we we alluded to this when talking about the inflation aspect of all of this.
00;14;38;03 – 00;15;04;28 Unknown But, you know, just as soon as you had things looking like the dust was settling in the Middle East, we have somehow found ourselves basically back to square one. So as soon as you see that happen, traffic through the Strait of Hormuz has gone to basically nothing again, which pumps up oil prices. That bumps up interest rates because investors think that’s going to spur inflation.
00;15;05;01 – 00;15;30;11 Unknown And then that increases people’s expectations for Federal Reserve rate hikes. So you know, I mention that this is very impactful. Not just from an inflation perspective related to gas prices, but higher oil prices can have knock on impacts to transportation, manufacturing costs. And the fact that you have consumers spending more on gasoline, that means they spend probably less on other things.
00;15;30;13 – 00;16;02;13 Unknown So even though there doesn’t seem to be an immediate resolution on the horizon, I will say that, what the US is essentially trying to do is put Iran in a position where they don’t have any leverage. One way that that’s been coming to fruition is that there’s been talks of a pipeline that essentially routes oil around the Strait of Hormuz, so it essentially negates the need for usage of it removes Iran’s leverage.
00;16;02;13 – 00;16;20;26 Unknown So think about, the the oil vessels that are carrying oil through the Strait of Hormuz are not just Iranian oil, it’s from places like Iraq and others. So if you can route a pipeline from Iraq through Syria, all of a sudden the need for the Strait of Hormuz diminishes. And that removes a major leverage point for Iran.
00;16;20;28 – 00;16;47;19 Unknown So at least those are super stable. Yeah, yeah. Of course. What what timeline account and what timeline can that be accomplished? Certainly wouldn’t be immediate. Right now we’re trying to say no to massive building. It’s one thing. Look at the player retirement, Syria and Iraq. Yeah. Well and I guess my angle on this is, you know, from a leverage perspective doesn’t have to be built today, tomorrow, even next year.
00;16;47;21 – 00;17;11;04 Unknown I think using that as a pressure point, as a negotiating chip to put pressure on Iran to basically try to solve this, this crisis that has developed and reignited. So even though you had, inflation year over year, eventually jump up to 4.5% as CPI came back down around 3.5%. It wouldn’t be surprising to see that jump back up in July.
00;17;11;04 – 00;17;36;25 Unknown As we talked about, but, you know, even with energy constituting roughly 6% of CPI, you know, that’s really what drove the increase. So as long as there is this ongoing conflict, you know, I wouldn’t I wouldn’t expect to see any immediate resolution on oil prices. You’re going to continue to have the debate on interest rates, which is kind of where that takes us right now.
00;17;36;28 – 00;17;59;04 Unknown You know, we’ve been moving back and forth from the Federal Reserve’s perspective on trying to thread this needle like Matt talked about, between taming inflation but not making the economy overly restrictive. As long as, you know, jobs are being added. They’re in a tight spot right now and you continue to see interest rate expectations kind of move around.
00;17;59;07 – 00;18;27;23 Unknown And you’ve seen that in the Treasury yield curve. You’ve seen it in fed funds futures. So I don’t think there’s a whole lot more to say here outside of if we do continue to get lingering inflation risks and this conflict remains ongoing. Kevin Warsh, the new chair of the Federal Reserve, has been very vocal that his primary goal right now is to get inflation year over year down to 2%, not around 2%, not between 2 and 2.5%.
00;18;27;23 – 00;18;49;04 Unknown It’s 2%. He’s been way less concerned about the labor market in his views. There has been some stabilization there. But on the inflation front, that’s his primary focus. So if you get continued conflict and that feeds through to higher oil prices, which feeds into inflation, I would expect the Federal Reserve to get tighter as we get to the end of this year.
00;18;49;06 – 00;19;13;07 Unknown Daniel, today, in terms of fed funds futures and this shifts all the time. So right when you think you see a pathway into the future, the pathway into the future changes. But right now what are we looking at in terms of future fed meetings and what the expectations are driven by the fed funds future market? Where are we at in terms of a future?
00;19;13;07 – 00;19;32;05 Unknown Hi. Yeah, I’m happy I looked at this this morning because I was out of the office last week, obviously still looking at stuff, but I wasn’t looking at this specifically. And it’s changed dramatically even over the course of nine days. So right now, per fed funds futures, investors expect, a cut or, I’m sorry, a hike in September.
00;19;32;08 – 00;19;57;11 Unknown And then by the time that the meeting happens next March, they expect another one. So basically two cuts over. I’m sorry. I keep saying cuts, two hikes over the next 6 to 9 months. Essentially the path of rates is higher. Yeah. It’s, certainly the path of least resistance is higher. I think it would take I think it would take a lot in terms of progress on inflation.
00;19;57;13 – 00;20;22;29 Unknown And, on the labor side, I’m trying to think of a scenario where, like, you would get no hikes over the next year. It would probably have to be the combination of labor market material weekends and inflation stays where it is or worsens. Right. I think it would be really hard to rationalize, though, regardless of what the labor market is doing.
00;20;23;02 – 00;20;55;00 Unknown I mentioned that it’s this is not my opinion. This is what Kevin Warsh is telling the whole community is that he’s going to be laser focused on inflation. And until it gets down to his target, that’s going to be his primary focal point. So this is ever developing. You know, kind of like you said. So I would say in terms of closing thoughts on all of these topics, even with the macro picture kind of being very much in flux day to day, if you take a look under the hood, inflation data is fine outside of energy.
00;20;55;03 – 00;21;17;00 Unknown The big banks are telling you that consumers are in great financial position and at least investors are now questioning how these these major players that are spending billions of dollars on an AI build out, they’re keeping them in check. So they should they just I had to mention that Apple, you know, overtook its spot as the number one most valuable company you know from Nvidia.
00;21;17;00 – 00;21;43;08 Unknown So so that even speaks to that theme. Apple really has avoided that CapEx. Right. That all the other, you know, quote unquote mag seven or large cap tech companies have gone yeah, yeah, they’ve done it intentionally. Right. They’re staying in their lane. They don’t need to to join this conversation just because it’s in vogue. They’ll be a user of AI and provide it to their customers, but they’re doing it in a much, much less betting the house type mentality.
00;21;43;11 – 00;21;55;04 Unknown Okay. Anything else guys? Closing comments. Okay. Thanks so much to all you listening as always for tuning in for another episode of blue Chip. Now we look forward to speaking with you all again soon.
