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#FinanceDaily: Retail & Real Estate Softening | Debt Ceiling Progress?
Recorded: May 17, 2023 Duration: 1:37:21Space Recording
Short Summary
Ripple's acquisition of Swiss startup Medico reflects a strategic move to expand operations outside the U.S. amidst regulatory challenges. The trend of U.S. crypto companies moving offshore is driven by increasing legal battles, such as Ripple's $200 million fight with the SEC and Coinbase's regulatory scrutiny. These challenges indicate a potential decline in the U.S. crypto industry as companies seek more favorable environments abroad.
Full Transcription
This is the first time spaces is actually working exactly as intended.
Holy cow.
I've never come up on stage and become co-host this quickly.
Jesus.
I guess they're working on it.
All right, everybody that's listening, we're going to be starting in a couple of minutes,
just waiting for everybody to show up and get them up on stage,
since Twitter always makes it so hard.
Jeff, did you watch the interview last night?
Yeah, and the shareholders meeting, so I can run through a summary of that when you're ready.
Yeah, yeah, we can kind of sprinkle that.
Well, maybe we start there.
That might be a good place to start.
But, yeah, we're just waiting for everybody else to show up.
Sure.
Yeah, only 100-something people in the room right now.
So usually 7.05-0-5 central.
Sounds good.
Cool, cool.
But actually, outside of that, what did you think about the actual interview?
I mean, I thought it was, I mean, it was compelling.
It was revealing.
And, you know, and I think, you know, Elon went through a lot of the key topics during the actual shareholders' meeting.
But, you know, I think, you know, the interview was really, really well done by David Faber and kind of revealed how Elon thinks.
Yeah, I mean, some of the questioning around the election was interesting.
Some of the questioning around Soros was interesting.
His response was the funniest response I've heard in a long time.
Essentially, I think Caleb tweeted out that that's the definition of fuck you, money.
Right.
which is so true.
He was just like,
well, if I lose some money,
I lose some money.
Who cares?
It's like not a big deal.
That number's got to be a lot less
than what Elon has, though, right?
That number's got to be a lot less than what he has,
but he also put in $44 billion for a company.
So the stakes are also higher.
But, you know,
it's kind of fascinating how...
how having that much money unlocks your ability to do whatever the hell you want.
Right.
And so, and I think that that number is different for everybody.
And it changes as you get older.
I remember when I was younger, one of my friends and I did a little game where we sat down and we were like, okay, here's a piece of paper, write down at what point, what number you'd be happy.
Like for the rest of your life.
And I wrote down that number and I look at that number now and I laugh my ass off.
I'm like, what a fucking child.
Like, are you kidding right now?
I'll tell you guys that number.
This is like when I was 19.
So super young.
That number was $10 million.
What a crazy low number if you think about it.
But yeah, no, it was fascinating.
And so I'm assuming that number is not the same for the rest of you right now.
I mean, Mish makes that much in a week.
All right. Awesome.
Well, I think we have a lot of people in now.
And I want to make sure that we get through this really quickly, Jeff.
Because just so people are aware, there's a lot of earning stuff going on right now.
Neely on the back end is listening live to the call from Target.
And she'll be, you know, cutting us all off on purpose to give us any nice nuggets that are coming through.
So thank you, Neely.
Appreciate it.
Yeah.
I don't know if people know, but she's super mean, so I let her kind of do whatever she needs to do on these.
I'm just kidding.
All right, Jeff.
Go ahead.
Tell us a little bit about the shareholder meeting.
I see that up in the nest, you've put in Gary Black's tweet around the big takeaways.
And actually, for everybody that's listening...
What were your first impressions of both the Tesla annual shareholder meeting and Dave, Dave Farber's interview of Elon Musk?
If there's anything you want us to talk about specifically, just go to the bottom right into the comments.
and, you know, please share your thoughts.
If we like your thoughts and your insights,
or even just in general, we'll put them up in the nest,
and we'll discuss them.
And if you, like, really kill it, we'll bring you up
and give you an opportunity to give us your insights.
Appreciate everybody listening.
All right, Jeff, go ahead.
Yeah, so I posted this tweet from Gary.
So first off, there's about a thousand retail investors invited to the mean.
So this is growing every year.
It's almost getting kind of like...
to be a little bit of a Berkshire type experience.
It's not there yet, but it's growing every single year.
The demand for tickets was much higher than that.
And it was at, you know, their Gigatexas facility,
which is now producing over 5,000 vehicles a week,
you know, many times more than it was just a year ago.
So, you know, the key takeaways,
and I agree with these from Gary from kind of my notes as well.
And...
And I would actually even start with.
There was a couple of key board elections.
So they reelected Elon, obviously, to the board.
The chair, Robin Denholm was reelected.
And then J.B. Stravel, who was the former CTO of Tesla, and who's now CEO of Redwood
Materials, he was formally elected to the board.
So that was some of the key proceedings prior.
All the other shareholder votes kind of went per plan for Tesla.
No big surprises.
I think Elon did kind of throw an interesting curveball because every year there's something about cobalt mining.
Yeah.
And Elon can let everyone know, like, you know, Tesla is moving far and far away from cobalt use.
It's very small.
The current batteries are in highest use or lithium iron phosphate and nickel-based.
And he says there's actually more, a higher percentage of cobalt use in smartphone batteries, which is true.
I know that.
And, yeah.
So anyway, there was a couple of things before this.
But yeah, a couple of the big takeaways is, you know,
there's a lot of great questions from the shareholders themselves,
and that's where some of the takeaways actually came from.
So one of them was around advertising, and Elon agreed,
that Tesla would try advertising, you know, in kind of key targeted areas to kind of broaden, you know,
the understanding of not only EVs because they're the leader in EVs, but also just the safety of being inside of a Tesla,
you know, from a crash, you know, the key takeaway there is, you know, if you're involved in a collision in a Tesla,
it is the safest structure to be inside of per per NHTSA and their crash test ratings they literally ship the top
you know, three of the top five cars from a crash test performance are Tesla's.
And then the other thing is just full self-driving right now from a crash statistics perspective,
it can drive six times the amount of miles per collision than a car without full self-driving today.
So it's already six times.
safer than human driving and their goal is to get it, you know, much greater than 10.
So anyway, just it's the safest.
So anyway, the whole advertising piece was around awareness, you know, could be around
awareness of safety and just, you know, the, you know, what's driving an EV like.
The other big takeaway is Elon's not going anywhere.
He was asked point blank.
you know, are you stepping down as CEO?
Is anything changing?
He goes, I'm not going anywhere.
And the thing he really called out, and I think it came out in the Faber interview as well,
is he believes the AI opportunity, both in terms of full self-driving in the car and then the generative AI opportunity,
with what he sees inside of Tesla and the Tesla AI talent.
He wants to see that through.
That's kind of his next big thing, both in the form of the bot.
and, you know, in the form of, you know, on wheels with the vehicle.
And then, of course, the...
I will say that, you know, on the robotic side,
and unfortunately I have a ton of experience in this specific space,
I'm very bearish, like, incredibly bearish on the timeline being proposed.
I mean, clearly we saw last year that it was a pretty underwhelming...
I think for most roboticists, it was quite underwhelming in terms of a release for the humanoid robot.
And I know that there's obviously a very large opportunity, and I like how it all fits together.
But being able to have a humanoid robot that can actually do the tasks that they're hoping it can.
You know, we've had collaborative robotics and we've had regular robotics.
traditional robotics for a very long time.
We've had tele-robotics
and medicine for a very long time.
I'm telling you right now, I think
that it feels
very strongly like it's a reach.
But you know, you can't bet against Elon,
but it's...
It's legitimately the data that people are, and I hate this comparison, I have to tell you, Jeff.
I've heard a lot of people say, well, the data from the cars can help train the robot.
No, it can't.
That's like not even, that's like a ridiculous comment.
And I know that people have made that.
I don't think you've ever made that comment.
But as a roboticist, as somebody, like, if you look at my background, we're.
you know, my company was a finalist and the XPRIZE for telorobotics.
And so the robot avatar XPRIZE.
This is like literally an area of expertise.
And so it's fascinating that people are doing this.
But the human or robot, I feel like it's super overblown.
Obviously, it's too close.
Yeah, the only thing I'd say is, first of all,
I respect your experience in the space.
The only thing I would just add is the demo that was shown last year at AI Day in September.
That was...
I think eight months of development inside of Tesla.
So I think what they're doing now at each successive meeting is they're showing the progress
and they're showing, you know, what's improved since the last time they showed you the bot.
So I think the rate of improvement and what I'm seeing is pretty significant.
But I agree the training data is going to have to come kind of in that form.
It's not actually going to be able to take all the auto training data and use that.
Yeah.
I agree with that, totally.
And we'll get to the bot in a minute, but he's not going anywhere.
He sees the opportunity inside a Tesla.
And he made this comment last week, too, about hiring...
Linda Yacarino, like, what is this going to do for you? Well, this is going to give me more time to work at Tesla.
So this has actually been kind of one of the big kind of open wounds with Tesla is just, is there this perception?
Elon can't spend as much time there. And then that's actually true with what was going on Twitter.
And then the other big thing was just there were kind of two soft reveals. He isn't like doing product reveals.
You know, I,
not at a product reveal, at a shareholders meeting,
or he doesn't like doing that,
but he kind of soft show that they're working on two,
most likely two cars in the kind of the 25,000 sub-MSRP space,
And that was a bit of a surprise to people.
They thought it was one and maybe one other form factor, not at 25K on the next generation platform.
So they showed, he said that they're working on two.
You know, Garrett, you know, there's, and there's people guessing of like what kind of form factors.
But he thought the volume from those two could be at least 5 million units.
per year combined. So that was another big announcement. They recommitted a cyber truck to being on
track for launch later this year. And then, you know, he kind of talked about the bot opportunity,
you know, both in the workplace and at home. And again, they didn't put a date around it or anything,
but just the size of the opportunity.
Yeah.
what was kind of discussed. So anyway, it was from my perspective of watching, you know, the last 10 of these,
it was, you know, between what Tesla shared and what the quality of the, the investor questions,
it was the best shareholder meeting I've listened to in recent memory. So I'll open it up there for any questions.
Yeah.
You know, actually there's some new news, so I want to make sure that we cover it.
And I'm not sure if it's big news.
So, Scott, I sent you the link.
But crypto firm, Ripple, buys Swiss startup Medico in...
in a bit to actually move their company outside the U.S.
and get access to certain customers, it looks like.
But Medico is a Swiss-based company,
crypto-custody services firm,
and Ripple just acquired them.
Scott, is this big news,
or is this just common right now in the industry?
Hopefully you can hear me.
Yeah, that's perfect.
Okay, because I'm going to be.
Yeah. I don't know that it's big news per se. I think it's more indicative of a very clear trend of companies in the United States making a play offshore, at least hedging their bets and moving some of their core operations out of the United States. I mean, we've seen Galaxy Digital, which is Mike Novagatz, who, you know,
guy is extremely political, extremely pro-America, moving his office is offshore Coinbase in Bermuda.
Brian Armstrong has been, the CEO of Coinbase, has been basically on a roadshow of social media taking pictures with regulators in foreign countries,
basically saying, hey, it's the United States.
We are actually willing to move offshore, calling the U.S.'s regulatory bluff to some degree.
So I think it's just more indicative of a trend of regulatory arbitrage and crypto companies making a move to secure their business if the United States continues to crack down or even goes harder.
Yeah, you know, interestingly, isn't Ripple in like a big legal battle with the SEC right now?
There was some, like, article about how they spent $200 million fighting the SEC.
It was in CNBC, I think, a week or a couple of days ago.
Yeah.
Yeah, it's absolute insanity.
You know, and there's two companies basically right now that can afford to fight the SEC in a case like this,
Ripple that's spent $200 million.
And of course, of course, Coinbase has the war chest.
I actually spoke yesterday with three lawyers from Paul Hastings,
who are one of the firms that's largely representing a number of these firms against the SEC.
One of them is next to SEC lawyer.
And they believe that there was a legitimate chance at the SEC...
loses a number of these cases.
But the problem is, even if Ripple spends $200 million and they beat the SEC,
which I think would be generally good for the industry,
the judge can basically just go back to the SEC and say,
your current premise is false.
And then the SEC can basically come back with a different reason to label,
you know, Ripple's security or whatever they're going for.
I mean, kind of the same we've seen.
the gray scale case with that gray scale suing the SEC basically to convert
GBT into an ETF. The judges have been very favorable to gray scale, but all a
gray scale win would mean some people believe it means all the sudden they get an
ETF. It just means that the SEC's current premise is deemed false and the SEC
can basically go back, come with a different reason to not approve the ETF. Even
worse, they could go and effectively
delist the futures ETFs that were that were listed.
So there's a lot of ways for the SEC to play this even if they lose.
So basically the SEC under Gensler at least will continue to just regulate by enforcement,
sue everybody assuming that they'll all settle.
It's mob tactics that basically everybody is just going to pay because they can't afford
to fight seeing what happened with Ripple.
So listen, Val, I think it's encouraging to see Ripple fighting back,
spending $200 million.
What a waste of money.
And what a flawed system.
And it's actually incredibly bearish for the U.S.
I think, you know, it's really sad that we're going to be losing, even though, as you all know, I'm not as bullish on crypto or Web3.
But it's still an entire industry that requires nurturing.
And there is, you know, especially with AI, you know, leading to,
leading to a lot of challenges like identity, I think there might actually be now an emerging use case for this entire industry where you want to know where people are.
And so, you know, I think or who people are.
And so there is something that's brewing.
I feel like there's going to be a convergence.
And I really don't want to miss out on it as somebody, you know, as a taxpayer, but also this is crazy.
This is unreal that we are anti-business right now.
And that's to your point, I mean, some people will or won't agree that, you know, blockchain obviously has a use case with AI, but this fight against blockchain just needed everybody.
Yeah, yeah, no, we lost Scott.
Scott, I'm going to, I'm going to meet you real quick.
Oh, actually, I can't because you're a co-host.
But Scott, if you can fix your audio real quick, we'll have you come back.
We'll have you speak up again.
I think you may have gotten a phone call.
Are you back yet?
Is that Scott?
I'm just in an area with minimal service.
No, no, finish your point.
We can hear you clearly now.
Yeah, I was just saying that the problem is, you know, if they come after crypto like this,
they could come after AI like this, right?
So it could be a...
All right.
We lost you again.
All right, Scott.
We're going to wait until you get into it better.
All right.
Eugene, go ahead.
Yeah, just kind of building on that.
I think it's pretty, pretty, I think it's pretty, I think it's pretty dark in, in that sense.
You know, I mean, finance and several of the crypto exchanges were actually forced, effectively forced to leave Canada just the other day, right?
Because of regulation.
And, you know, I actually, I'm going to, I'll try to post this on the nest, but I was interviewing the co-founder and CTO of Ripple.
And he was talking very explicitly about this, right?
About how they built Ripple in the United States because they are Americans and they care about being Americans.
But, you know, I think moves like this are just kind of natural based on, you know, what's happening, right?
I mean, the, the, the, the SEC lawsuit against Coinbase is even more insidious in this sense that they didn't even sue as, you know, like, Ripple, they sued Ripple itself, right?
So Ripple's been able to spend all the money that you talked about, Donish, to fight against that.
With Coinbase, they didn't even actually sue Coinbase.
They sued some of the coins.
And that means that the coinbase couldn't even, didn't have even the means to fight back.
I mean, Coinbase had to work with the SEC to go public, right?
You know, like that's kind of a natural reaction.
You would think that that's true.
But somehow, you know, we now live in a world where, you know, I think you said, an anti-business.
I think it's kind of a really bad development.
And, you know, I hope, I mean, I'm crossing my fingers, especially as somebody's been in crypto for so long that
It's going to reverse, but I frankly don't have high hopes.
I mean, this is a thesis I've had for years that we're going to,
American companies are going to be pushed out more and more, right?
Some of the best decentralized exchanges like DYDX based in New York,
they cannot service Americans.
Like literally can't service Americans.
There's some of the best exchanges in the world.
So at least when it comes to crypto, but yeah, I think this is just a natural thing.
I think more of this is going to happen.
I don't think that the future of crypto businesses look bright in the U.S.
But I'd love to debate somebody on that if somebody has a different view.
And a good example of this is yesterday.
I don't know if people saw Chmats' term.
tweet this morning about it.
But this is, again, biotech.
So, you know, I don't want to go too deep on it.
But it's more around what Lena Khan and the FTC are doing right now.
And it's incredibly anti-business.
And again, this is just to put a point on this.
Yesterday, they blocked the acquisition of Horizon Therapeutics.
which is a rare disease drug maker,
they block Amgen's ability to acquire them.
Now, can I just remind people that MNA,
I'm going to try not to cuss,
MNA is the only way drugs actually come to market.
Can we just...
Can we just take a second here and realize that, you know, if you had a family member with an orphan disease, which is a very rare disease, and nobody wants to put money into it, right?
There's no other way for that family member to get access to this medicine without MNA.
That is actually the only way it comes to market.
And now they're blocking that.
It's fascinating.
This is, like, incredibly unheard of, especially in biotech.
And there's no...
competitive nature to this.
This is literally just, there's a regime right now,
which is very clearly saying,
hey, look, we're gonna, we're gonna, by the way,
as you were walking into a recession,
blocking M&A is like a really bad idea.
So all of this is just kind of leading up to really bad policies.
And again, I don't want to go too deep into this, but this is like real.
This is a concerted effort to make poor decisions and really anti-business decisions.
But talking about business, sorry, I know that Target had their retail earnings this morning.
You know, they were very interesting and kind of...
A brief note on the Tesla account.
Yes, go ahead.
If you want to touch on those.
I'd like to move on if that's okay.
No worries.
All right.
Sorry.
Target reported earnings this morning.
They beat the earnings, but they put out a pretty negative outlook.
But beyond the top line numbers, the thing that was most interesting for me was there was a lot of insight into consumer behavior.
Specifically, the consumer discretionary merchandising categories were significantly reduced to 25% drop in discretionary merch.
You know, Neely, I know you're listening to the earnings call and the Q&A, but wanted to make sure that gave you a chance to weigh in on your big findings from the earnings.
And then if there's anything in the Q&A, go ahead.
Yeah, for sure. Thanks.
Donish.
So first and foremost, the categories that seem to do well are what they're calling kind of affordable joys.
You know, things, that's the term that they're using.
So if you just look at sales trends during the quarter, they saw a mid-teens percentage increase in beauty.
Keep in mind, they've been rolling out.
a partnership with Ulta beauty in their stores.
So I think a bigger, broader question is, is like, is that a natural overall lift to beauty or is that some share shift?
I think that's still a remaining question there.
They saw a positive high single digit increase in food.
Of course, we know from the CPI numbers that inflation is a big chunk of that increase overall.
Yeah.
And essentials like health and pet care, they saw up low single digits.
Again, we would assume that there's some inflationary lift in those sales trends overall.
Where they did see the declines in the quarter were apparel home in hardlines,
which is largely where the discretionary purchasing is within their business,
down mid-single digits to down low double digits were the ranges that they offered there overall.
And so what they noted is that within those categories of apparel, home, and hardlines, that they're seeing consumers by much closer, like just in time and right when you need it versus kind of stocking up in any form or fashion.
That makes a lot of sense when we think about like three years away from, you know, having the stockpile.
toilet paper to where we are now.
I think people are comfortable that they believe that when they need something,
it will reasonably be there when they need it from a supply chain perspective.
But, um,
I think the one of our takeaways is Target really purged a significant chunk of their discretionary overage of inventory last year.
So they headed into this year with much cleaner levels, which has certainly been helpful to mitigate this kind of headline, headwind, basically, to their top line as it relates to their margins.
But.
But they did guide down pretty substantially for the second quarter.
So it's not to the Q&A part of the call just yet.
It's still management doing their script overall, which is, you know, largely in the press release.
So not a lot of new, new, new yet.
But we'll be listening for some Q&A challenge from analysts.
The one thing that really got me was Brian Cornell, the CEO, talking about theft.
You know, that was pretty eye-popping numbers.
Five.
Cornell said that the retail giant is on track to losing $500 million from theft this year.
That is a pretty big, I know that they're really big and they do a lot of billions of dollars of work, but still, 500 million seems excessive.
It is. It's specifically he called out organized crime.
And the retail industry has been dealing with this component of shrink.
call it one to two percent of their overall inventories as an aggregate, as an industry,
year in, year out.
It definitely has been a lift.
Walmart has called it out.
They've called it out.
I believe some of the dollar stores have also called it out to some former fashion.
So, you know, what they do about it, I think, becomes...
kind of a conundrum because you kind of need local law enforcement support, right, to do something to that effect.
And that is definitely, I live in Target's backyard. They're literally in my backyard.
And I believe our law enforcement police office in Minneapolis, the city, I think we're literally at half census of law enforcement from where we were in 2020, just in number of headcount of police officers.
Right.
So it is a resource issue, you know, a lot of these local areas.
But there is definitely organized crime that was called out as well.
So that's when you get into cross state lines and other additional law enforcement support beyond local officers.
Yeah, it's fascinating. Those numbers, was anybody else as surprised as Neely and I were? I mean, I know we're hearing about this on the news, especially on the right, but, you know, isn't it fascinating that now it's making it into earning calls? Did anybody else want to comment on that before we move forward?
Oh, wow. Nobody wants to take a jab.
I mean, that's kind of like pulling a pin on a grenade and just, like, throwing it into a room dosh.
Wow. Wow. I guess this is the finance spaces.
That's a hot topic.
If this was, if this was one of Mario's evening spaces, people would be like, wrong audience.
I'm sure people have opinions on it, but it is what it is, right? And it, you know, it's.
Yeah, but, you know, the question is, should corporations be paying the price for this issue?
I mean, you know, what is the government's role in this?
I think that's, you know, as we're, as I just mentioned, Lena Khan and the FTC have significant anti-competitive actions right now.
Yet at the same time, the administration has not done anything.
And I agree with Neely that actually does come down to the local governments.
But, you know, if this is organized crime.
Yeah, it does come down to the local governments, right?
They need to step in and do something, and they're not.
But on top of that, it also comes down to the penalization of security forces.
So...
You're seeing that in California right now.
You're seeing it in Minneapolis.
Even in here, I live in the middle of Iowa.
In Des Moines, Iowa, there's a grocery chain,
high-v stores.
And years ago, I think a couple of years back,
my timing might be off on this,
they kind of upped the ante on their security force.
They have an armed security guard
who has a bulletproof vest and handcuffs,
and these are like,
I don't know if they're former law enforcement
or former military.
I've dealt with them.
They're very kind.
They just basically look like a cop.
And they said,
we're going to,
you know,
for the safety of our employees,
we're going to put one in every store.
And like,
you know,
in this particular case,
people on the left in the city
absolutely lost it.
and I'm not saying one party's to blame.
Definitely not.
But,
you know,
we're seeing,
I think that's a big pattern everywhere.
So not only is it pulling back
police forces in certain areas, but it's also the penalization of any efforts to protect property or employees,
which I just, I don't, I don't understand.
Yeah, just since the good point.
I think what you're seeing, at least here on the ground in Minneapolis, I mean, we've had several, you know,
shooting incidences over at Mall of America, which, you know, at one point was a top 10 volume property in the nation.
Yeah.
you know, you've had other, so that's brought into an issue of who actually wants to work there, right, with that sort of risk.
And so it's a very good, it's a very fair question and a good point.
In the meanwhile, retailers can only control what they can control.
Certainly they have a massive lobbying effort through the National Retail Federation that I'm sure is trying to deal with this at a national level.
And that's how you would try to navigate something like this.
But in the meanwhile, what they're having to do is probably put more and more things gated, right, behind plastic shelving and locking key, which can only affect...
discretionary spending possibly further, right?
Because it takes away from impulse buying.
If you have to stop, think, wonder, consider, find someone,
someone who may or may not be in the store.
So, you know, it's, they can only control what they can control.
But we have certainly seen Target implement,
and Walmart implement more and more behind,
behind Lock and Key sort of fixturing,
which could have some negative ramifications in future sales and conversion rates.
I just,
Yeah, I mean, I was at Target the other day, and seriously, this is really funny that you say that, because I was at Target the other day, and I don't know if it's too much information, my Fitbit broke.
And so I was like looking at possibly getting another one.
They actually had what I wanted, but the reason I didn't get it in that moment is because I looked around that particular area to buy it, and, you know, I couldn't find anybody.
So I headed out and I ended up buying it online later.
Yeah, what I see, I think this is tragic.
And what's going to happen is these stores are closing.
I'm in the Chicago area, a couple of Walmarts closed downtown.
It was pretty public what happened to the Whole Foods in San Francisco.
So there is going to be this self-healing aspect of these municipalities that don't protect their businesses are going to lose them.
And by the way, just breaking news, House Speaker Kevin McCarthy, it's breaking newsish.
House Speaker Kevin McCarthy a few minutes ago was on CNBC and was very clear that he thinks that at the end of the day they will not have a debt default.
And yesterday did say pretty clearly that he's hoping...
It is possible, actually, I want to use his words correctly.
It is possible that a deal will be reached by the end of the week.
So I will say my spidey senses are still going off.
I'm not feeling very good about all of this.
I feel like both parties are now showing that they're going to,
because there's another weird thing that just happened.
Biden actually canceled the back end of his...
trip where he was supposed to have the quad meeting and is flying back to help with closing the
negotiations, I'm confused if the deal is supposed to be done by the end of the week, then why is
the second half of the trip being canceled? I think maybe it's a backup. Nobody wants to look like
they're not caring about this. But I do, I will still say that while the market
If I was going to bet on one way or the other, I would bet that the deal won't be done, done.
And there will be some last minute straggling issues.
But maybe I'm wrong.
I'm hoping I'm wrong.
Are people, I mean, obviously the market is reacting quite positively to this.
Is this the time where you say this is not financial advice and don't make investments?
Oh, well, clearly.
Did you just hear me speak?
I was like, man, like, I don't know.
I'm clearly wrong.
But.
But yeah, no, there's not financial advice.
Thank you, Justin, for making sure that we said that.
And if you're making decisions based on what we're saying, I'm sorry for you.
That's not what the goal of this is.
I think we want people to really get more information and make their own decisions.
Thanks, Justin.
But yeah, so the...
It seems like the debt ceiling issue, at least both parties are coming in and act.
It's so fascinating how both parties at one point were acting like, no, we're not going to budge.
Janet Allen comes out, says the world is on fire.
The market still has not reacted to it, but yet we're seeing both parties soften their stance.
Yeah.
I'm just very confused about what changed in this last, you know, week that has been pushing it.
Is it the fact that, you know, other governments have come out and said, hey, don't do this?
Is it that Jamie Diamond and J.P. Morgan have said that don't do this.
Don't be silly.
Don't be idiots.
What has actually changed this conversation on the gut feeling?
Donish, I think it's, you've got to follow the money.
And we've made this statement before we have a tweet about it.
I can certainly put it back in the nest.
I mean, if you go to government shutdown, that's the next step.
That is literally the next step, right?
You're going to go to shutdown before you go to default.
And if you go to shutdown, that means they can't campaign because they have no staff.
That means they actually have to.
Fetch their own coffee as congressional representatives versus having someone help them and support them.
Okay, I would love to tell you it's more complicated than that, but I think people react to their primal needs.
And Congress continues to get paid in a shutdown.
Their staff does not, their staff is not allowed to work voluntarily.
So this is why we believe since 1960, you've seen a release of the debt ceiling of,
78 times. It's because ultimately the pain will be born by the congressional representative if they do that.
So this is why I've been saying like, yeah, I could come down to the wire.
But there's a reason why history has shown us that it gets raised 78 times.
No congressional representative wants to try to do their job without their staff.
I think it's that simple.
So just because they don't know how to work the coffee machine?
Yeah, I mean, it's kind of making light of it.
I get it, but it's facts.
It's literally facts.
I mean, there's a 51-page document by the Office of Personnel Management
that tells you what has to happen in a shutdown,
and it is explicitly clear.
You cannot voluntarily work or actually work.
as a staffer for Congress.
So, you know, they lose their staff.
They lose their people, which means they lose their ability to be on the campaign trail.
Okay.
And that's what matters too.
Yeah.
What's interesting is that they've developed a new negotiation framework that they're using
where two top Biden aides and an ally of House Speaker Kevin McCarthy are meeting on daily
to discuss outstanding items and they're working through it.
Kind of interesting that they're using like third party negotiators.
Kind of fascinating actually in some ways.
But I know that that's how business gets done in Washington anyway.
But, you know, they're kind of heralding this like new framework and I'm reading about it in every article.
I wonder why they're being so explicit about that.
Isn't that just like how things get done?
Yeah.
fascinating that they're making like such a big to do about it um and so you know wanted to
make sure with the debt ceiling conversations you know we're getting closer and closer every day
it's hard to figure out what to do and it seems like the market's waiting
Mish, wanted to get your thoughts.
Like, what is the market doing on all of this information?
Today, obviously, it's up a little bit, but, you know, it seems like we're in range
and we're just kind of going back and forth based on headline news, or maybe the market's
just completely ignoring it.
But it doesn't look like it's ignoring it since the market's up a little bit today.
Yeah.
Well, thank you.
Good morning to everybody.
Yeah, so what I did while I was listening to you all speak was come from my expertise,
which of course is really looking at the market breadth and anticipating what the market's
trying to say as opposed to looking back.
Of course, you always have to look back a little bit for the information to go forward.
But what's so interesting right now, Danish is exactly what you just said, is that we are, and this
This is no surprise to anyone in this incredibly short trading range, which what's amazing about it is that I anticipated the trading range as we go into this stagflation period, but I never thought the trading range over the last, what is it, 38 days or 39 days would be as narrow as it is with.
the SPY within 1% of the range that it's established over this last month and a half.
That's extraordinary. I don't recall ever seeing anything like that.
But what it tells me is that all this information that's coming out and all the fear that has been around the market
has not only potentially, and I say potentially, been baked into the market already, but there are some
interesting relationships, which I'll get to in a moment, that are suggesting that the market
feels looking forward that the worst is over. So let me give you some evidence of that, but also some
caution.
So the best measure we have in terms of the trading ranges right now as far as the inside sectors of the market, what I call the economic modern family, is we're very, very and almost too close for comfort to the March lows in retail.
So we've had a lot of discussion this morning about the target.
And then, of course, Home Depot coming in yesterday.
I know we have a couple of big ones left to report in the retail space.
But there's an example of where I wouldn't necessarily get too happy yet.
And that's with XRT, right?
So XRT, I love that E-T because it represents a portion of e-commerce, consumer discretionary, and also...
It also does a little bit of staples in there as well, right?
So that right now is hanging on to 60.
I'm just going to give you a number because it's an important number.
If it breaks 60, that doesn't necessarily mean the death of it, but it does mean that we might see a knee-jerk reaction in everything to the lower end of the, and getting closer to the March lows.
The same thing with the Russell 2000, right?
I read yesterday that Apple has more capitalization than the entire
2,000 stocks in the Russell 2000.
So what does that tell you?
That's a U.S.-centric.
Those are companies that are manufactured in the U.S.,
and that, too, is sitting on the precipice of the March lows.
Also sitting very close to the 80-month moving average,
which is a longer-term business cycle,
which we know in the third area,
regional banks broke in early March.
Now, speaking of regional banks, though,
It does also seem, and I was a little bit goffat at this last week, that's bottom, right?
If we look at KRE as the ETF, it's holding that low that it made after the second round of bad news came out, and it's just consolidating.
Does that mean it's bullish?
But it really what I'm saying is, is that these weak areas that I just talked about, retail, small caps, banking,
are very close to breaking down, but if they don't break down,
then all they've done now is test the lower regions
while they look around and wait for any good news.
Where is the news coming from that's potentially good?
One is the transportation sector.
It doesn't look great, but it's pretty far from the March lows.
Obviously, semiconductors, right?
I mean, especially with all the AI stuff that we've had over the last few days,
And then biotech would be the other area. And that's really talking about the actual sectors and indices to be looking at right now. Spy, of course, as I said, is just sitting there over a 410, which is amazing. Now, if I may, let me go on to the other internals. This is the good news, right? Okay, so first of all,
In terms of ratios, and you know, I've talked a lot about it's not so much what the long bonds are doing or what the junk bonds are doing or what the gold's doing.
A lot of it has to do in terms of our big view, which is all risk on, risk off market breadth indicators that we have.
Looking at the ratios is more important.
So as of last night, the spy, the S&P 500 is outperforming the long bonds.
In a recessionary environment, it's the opposite.
So that's showing some relative risk on.
The junk bonds are outperforming the long bonds.
We've talked about this a lot, even though they went down yesterday.
H.YG went down and still hovering.
Very key support here.
But more importantly, it's still doing better than the long bonds.
And this is just as of today.
It could change.
The spy is doing better than gold.
So as bullish as I was in gold, we actually have our quant models getting out on the discretionary component of the trade stops a little bit lower.
I mean, yes, I was bullish, bullish, but this is why you have to be so open-minded and
flexible. Right now, the spy is showing us that the goal may be tired.
Hey, Mitch, I mean, real quick here, you know, I'd kind of disagree with you on junk outperforming
TLT. TLT is up 3.5% year-to-date.
Hyg is up 0.33% year-to-date.
So I don't know if it's fair to say that corporate junk bonds are trading better than
long-daining treasuries.
Hey, Tim, sorry to cut everybody off. I apologize.
But U.S. Housing Start numbers are out.
Housing Start numbers, actual, was 1.401,
forecasted at $1.4 million.
Previously was 1.420.
The U.S. housing starts changed month over month.
Actual 2.2%.
forecasted negative 1.4%.
Previous was negative 0.8%.
U.S. building permits change.
Actual negative 1.5%.
They were forecasted for 0%.
And U.S. building permits, numbers, actual...
1.416 million versus forecasted 1.43 million. Previous was 1.43 million. So across the board,
it seems like housing is continuing to slow down, at least in terms of new housing. And then also,
as many may have seen, mortgage demand was dropped significantly. New mortgage apps dropped
26% down year over year.
refinings refinancings were down 43% year over year.
So, you know, very interesting housing data.
I'm not going to say I told you so yet.
Just one other comment, you know, high yield bonds versus high long dated treasuries.
Long dated treasuries have.
gone up in yield, that's down in price.
So to correlate the two of those two things is a little scary.
The one thing in the high-yield marketplace is that the high-yield marketplace is selling
out close the last three weeks also.
And the triple C component has gotten weaker.
which is, again, 775 of the 2,000 issues.
And as the default rates continue, the triple Cs will underperform.
The only two issues that came out last week were double Bs.
And one was Ball Corp, and everyone knows that because they make less...
containers and the other one I escapes you right now.
But both of them came out of very narrow spreads to Treasury.
They're trading right around par.
There is the ban by the high-yield investment community, institutional investment community.
Remember, high-yield bonds right now are coming at this 144 raise, private placements,
which excludes them from individual investors.
Well, that's great, but I just posted on Twitter since, you know, obviously this isn't something that we don't use visuals here, but I wanted to put this up on Twitter.
So this, if you look on my at Market Minute tweet that I just put up.
I'm not making this stuff up, and this is not conjecture.
This is what I'm seeing in an actual picture.
These are the measurements of the ratios.
I don't know if you can see it, but I've already talked about the first one, how the spy.
Don't talk about real numbers.
I don't want ratios.
Better finish, Alan, please.
Thank you.
I just pinned it, Mish, to the top.
Oh, okay. Thank you. Well, great, what you want, but I'm telling you what we look at so you can take it for whatever it's worth. I don't want to get into an argument about this.
I'm just trying to show that right now,
considering how we've been hovering in certain areas
at the bottom of a range close to the march lows,
while others are doing better,
and everything is sort of, except for a few stocks here and there
at a standstill, what these ratios are showing right now
is more positive than one one would think based on everything.
And if you look at the ratio between the H-Y-G-T-L-T,
that red line is the ratio line.
And you can see it's over the averages there,
which means right now it's outperforming.
It could change.
It's not wowing anything,
but it's showing that right now.
And then, of course, the spy gold I mentioned.
And then the other interesting thing is the wood versus the gold.
which also is showing wood starting to outperform gold.
And many people look at lumber as a very key ingredient in terms of what's happening to the economy.
So I just am telling you that based on everything, you want to know what I'm looking at in terms of market breadth and how we're positioning ourselves or not positioning ourselves right now.
I cannot get too negative yet unless we see certain things happen like Brussels, the retail
breakdown. Some of these relationships start to break down. Gold start to move back up. And the other
interesting things, since commodities are really so much of my focus,
is that the whole energy sector, which has been beat up to a pulp,
looks like potentially could be trying to bottom.
I'm looking at oil.
I'm looking at natural gas.
I would like oil better than natural gas.
I'm looking at some of the materials like steel,
Cleveland Cliffs.
I had actually mentioned on Charles Payne show last week,
thinking, am I nuts?
But meanwhile, it's sitting there holding.
The sauce are getting softer, in essence.
the grains are not doing so great. So all of this is showing me right now that if we can get through
a little bit longer in terms of time, some confidence and some buying may come back in.
Would I be buying everything in sight right now? No. And then the last thing that I wanted to
mention is just in terms of
Elon Musk, I don't necessarily have anything to add in terms of his interview and all of that.
But just looking at Tesla and looking at space, right?
Space is up over 4%.
That looks very interesting to me right now, as long as it holds $4.
It looks like it can work its way to five and maybe higher.
Sometimes these stocks, when Musk gets more in favor, they become more of psychological plays.
The same thing with Tesla.
I'm looking at that 170 level as very swing level.
If we can clear 170, I think that would be also an interesting clay.
And the last thing I'm going to say about the whole things that I'm looking at and how I'm looking at it,
is take a look also at another interesting commodity, and that's lithium.
I wrote an article about it last night because lithium, of course, is tied to the whole EV space, and not just that.
You know, these lithium ion batteries we use in almost all small things like our phones and laptops, etc.,
There's been talk about lithium shortages.
We know in some cases it's very government-controlled like Chile.
But right now from a technical standpoint, if we can hold around these levels that it's coming in right now, that too could be interesting.
So I hope that was helpful.
Yeah, that was super helpful.
And Mish, so from the sounds of it...
Right now, we're at important levels.
If there is positive news, we're expecting broad market increases,
especially in the sectors that you mentioned.
The market is sort of, it seems like the market is in a tight, tight range.
And there are specific commodities that you're watching.
Thank you so much, Mish.
Really appreciate it.
I wanted to kind of.
Round that out because I got to get back to the housing starts and the mortgage demand data.
So, Amy, thank you for joining us as well.
I'm going to repeat some of that information again.
I want to make sure that we touch on it because it is, it was surprising.
So new mortgage applications dropped 26% year over year.
same time last year and refinancings, which is not surprising, dropped 43% year over year.
Housing starts data was also, you know, not as positive.
So U.S. Housing Start numbers actual were $1.4.01 million versus forecast at 1.4, which is fine.
But U.S. Housing starts data...
actual 2.2 forecast negative 1.4.
The building permit data was very interesting
because I think that's more forward-looking.
Building permit data actual was negative 1.5%
versus forecasted at 0%.
So significant difference.
And then U.S. building permit numbers,
actual were 1.416 million,
forecasted at 1.43 million.
Amy, is that...
you know, is the building permit data probably more important than the housing start data,
in your opinion? Is it more forward-looking? Just want to make sure that I was correct in that
supposition. Yeah, I mean, it's all important, but I think, yeah, overall, that that's probably
the more important thing, because like you said, it's forward-looking. But, you know, I hopped on here
because I saw that mortgage application data come through, and it's not surprising to me. I mean, it's
everybody it's it's pretty obvious that nobody wants a mortgage at you know a near 7% interest rate that's not shocking
what's interesting to me is
It's just how I'm still seeing this clinging to this bullish housing narrative when this data is continuing to come in.
I mean, we had a couple little bumps maybe in February and April.
But like overall, the trajectory is just downward on all of this data.
And the home sales that are occurring right now, a lot of them are cash.
Because, again, like you saw the mortgage application demand, people don't want to take a mortgage when the interest rate is 7%.
So...
Essentially, this entire housing market is being held up on this very flimsy construction of just there's really low inventory.
And what that essentially means is there's almost no transactions.
And that's basically like a housing recession.
There's only so long, housing makes it, I think, like 18% of our GDP.
There's only so long that our country can just go forward with really, really low transactions
in a massive sector of our economy without it having really severe negative effects.
And, you know, to me, it only makes sense that the path forward is going to be more inventory is going to break through as the economy continues to show cracks in other areas.
And the result of that is going to be prices continue to come lower down.
And I don't know if it's going to be like an avalanche waterfall or if this is going to be more like a trickle effect where this is going to take a couple years.
It's going to be like a slow bleed process.
But the only really...
logical path from a market that's essentially frozen is that it's going to start to crack and move
downward. I just don't see a scenario where you've got, you know, not a lot of building. You've got
not a lot of people taking out a mortgage and buying and you've got not a lot of inventory. And a market's
frozen. I just don't see how that just jumps into another bull market.
Imagine being, imagine sitting on a roller coaster.
What happens?
You go up very, very sharply.
You get to the top and then there's a moment of just slow down.
Complete slowdown.
There's only one direction to go from here
unless you're on one of those weird roller coasters where it goes backwards.
But even then you're going down.
There's no other way.
This is not like a pause and then an increase.
Clearly, there can't be anybody here on stage.
Right.
I mean, I'm actually kind of curious to hear from the people that have their hands up and...
Me too.
Like, you know...
Is there room for it to go up more?
Like, can we just at least be honest, intellectually honest?
Like, is there, how could there be room for it to go up more?
So very interesting here, people's thoughts.
Neely, why don't you go next to me?
Yeah, I have a question, actually.
I want a clarifying question.
Because I think sometimes when you see like mortgage applications,
housing starts, building permits,
like I have a pretty deep sense of like how those figures are calculated in the methodology.
So I have, I have a question for you, Amy.
I've been wondering about this.
Do people run their credit reports first and then they apply for a mortgage?
Or is their credit run for them when they apply?
The reason why I've been asking that if it isn't obvious in the leading of the question is
it's my sense in talking with just like literally people, right?
You know, whether it's the esthetician or the hairdresser, like all the people in my life, right?
That people are like the,
The mortgage application process is getting way more restrictive, basically, on the credit and, like, running credit reports in places that they hadn't been doing that before.
I have one particular, you know, service person in my life who...
was like, we need to actually put an offer on this home by this date or our mortgage company has said they will rerun our credit.
Okay, like, so with what we know what's going on in the credit and the consumer credit numbers and what is around the corner with student loans,
where student loans and forbearance have not been showing up on credit reports, but very shortly the summer, they will.
I'm just wondering how we should read these mortgage application numbers.
Do you have a perspective on that?
Oh, that is such a great question.
You just fed me so much great information to the question, too.
No, the average consumer does not run their credit before going to apply for a mortgage.
They will, you know, go to a bank and say, hey, what can I afford?
And they're relying on the bank to tell them, here's what you're approved for, here's what you can get.
And a lot of them, you know, are surprised with what the bank comes back with.
They don't even know what's on their credit report.
They don't even know what shape their credit is in.
So even when you look at, you know, applications are really low.
But then again, there's probably a good percentage of those applications that aren't even going to be viable, mortgageable people.
the data is going to come back for them and they're going to say, hey, you know, this is what you are approved for, and it's terrible and there's nothing in their market that even meets those criteria.
So that is a really great point.
And I also think that, like, as you were speaking to, you know, student loan payments resuming and other things that maybe aren't like by now pay late.
I don't think any of that is included on the credit report.
Something I've been seen in the last...
couple months is an increase in homes in our region that are going under contract and then falling out of
contract and when that happens in and especially in this type of a type credit scenario it's it's almost
always because of the financing the financing isn't going through for whatever reason the person
maybe maybe something changed in their credit it's just between the 30 days between when they put in the
offer and when the closing came through and the banks probably have a little bit more cold feet now so they're going to be
backing out or they're going to see that come through and they're going to say, you know,
we're not going to improve you unless you pay off this thing here or you change this here.
And the people either aren't able to do it or they aren't willing to do it.
So they back out of the contract on the house.
And so that is another thing that I think we're going to see more of that going forward.
Just the financing piece is getting harder and harder with the credit tightening.
So I appreciate you bringing up those points.
I think those are all really valid things to think about.
Thank you.
Caleb?
Yeah, let me just preface.
I'm certainly not bullish on housing,
but I think it's important to kind of contextualize the application data
versus, you know, what's actually happening from a lending perspective, right?
So if we look at all real estate loans issued by commercial banks in the United States for residential real estate,
It just hit a new all-time high as of the most recent data, $2.54 trillion, right?
This time last year in June, when, you know, the housing market unequivocally peaked,
that number was 2.37 trillion, right? So we've basically gone up by about 200 billion,
let's just call it, right, back of the envelope. When we look at the rate of change in the amount
of loans outstanding, we've basically been hovering at a growth rate of 9 to even 10 percent
since October of last year, right? So we're talking about eight months, essentially, of
commercial real estate loans.
growing at a pace of 8 to 10% year over year.
So, you know, we might be seeing these application, like, apps actually slow down.
But in terms of lending activity, I don't think we're seeing necessarily a slowdown.
We're seeing, you know, perhaps a deceleration in the rate of increases in residential real estate loans.
But, you know, I think this is important, right?
And so I think a lot of people have really kind of been...
including myself, waiting for kind of the last pin to drop on real estate. When do we see
prices really accelerate lower? And when you're basically in a complete tug of war between
buyers and sellers, potential buyers don't want to buy at this level of prices with rates this
high. And potential sellers don't want to sell because I think there's like a data point where
70% of homeowners who sell their home buy a new house.
And so if they're selling their house, 70% of those people are going to be buying a new home
and basically be facing the same problems that current buyers are facing as well.
So we're in like a complete kind of like, you know, Mexican standoff, if you will,
between buyers and sellers.
And so I think kind of, you know, we can't expect to see a substantial decline in prices.
if both supply and demand are contracting at a roughly equivalent pace. And I think generally that's
what we're seeing, right? This is why we've certainly seen home prices contract, but not by a very
substantial pace given the fact that, you know, the average 30 year mortgage rate is, I think it's
above 6.5% right now. And so I think for me, one of the kind of final pins to drop is when we
actually start to see residential real estate loans contracting.
or fully decelerating on a year-over-year basis. We're not quite there yet.
So, you know, look, the mortgage purchase application, the refinance application data
has looked terrible for at least a year now, especially when you're looking at it on a year-over-year
basis, right? Just plummeting through the floor. But that hasn't provided any signal, right?
It's just been a lot of noise. It's been interesting, and it's provided a lot of good food for thought.
But in terms of providing...
you know, meaningful takeaways for home prices going forward, it hasn't really given us much.
And I think that's really because we're still seeing banks lending.
We're still seeing for those people who are able to take a mortgage, right?
They're able to go get those loans.
Right.
And so we really need to be paying attention to actually what's happening, right?
Because talk is cheap, right?
So the applications are just an application, right?
We need to be looking at what's actually going on in terms of lending activity here.
That's super important.
Yeah.
Amy, do you, I actually, Cody, go ahead.
Oh, good morning, everybody.
Yeah, I was going to say, and it's also really important to look at, you know,
nearly a third of all homes, residential homes in the United States
are owned outright in cash.
And then above and beyond that, you know, the additional, or another 40%
have a mortgage rate of somewhere between 2.9 and 4%.
So, you know, I don't see...
an environment where a lot of people are going to start dishing out their properties.
People are going to sit and wait, and this is going to grind sideways, and it could grind
sideways for another five years.
I mean, it's fascinating.
For people that are listening, you know, you're clearly seeing disagreement on the panel,
which is fascinating in many ways.
Actually, I have somebody coming up who actually is on the ground working in this.
But before she comes on, do you agree with the
the side that thinks that we're sort of at a top and we're going to start seeing a crash in
the real estate market or start seeing softening in the real estate market. Let's be more clear.
Or are you on the side that thinks that actually we don't know yet? No, I mean, that's
maybe that's capturing the other side.
I want to make sure that I'm not saying that you think that,
I don't think anybody here,
Caleb,
you're not saying that you expect prices to continue to rise.
You don't know yet.
We don't have enough info.
No, no, no.
I mean, outright,
I've been bearish on real estate now for over a year, right?
Because I was looking at what was happening with,
mortgage rates and you know you simply just can't sustain those high prices. Could it take
longer than expected before we really see kind of, you know, actual selling pressure? Yeah, 100%.
But look, I mean, here's a thing. You know, on a year over year basis, rents peaked last March
And basically, same thing for actual home prices.
Excuse me, I take that back, not on rents.
If you look at the year-over-year rate of change in home prices, that peaked in March of 2022.
But the index itself, right, looking at the Kay Schiller Index for the National Home Price Index,
that actually peaked in June.
And we've been declining fairly steadily since.
I think if I remember correctly, we're down, I think, four and a half percent since June of last year.
And that's for data, I think, for February of 2023.
So we've, you know, home prices nationally have already fallen on average four and a half percent since June of 2022. So we're, you know, we've already seen that softness. I expect to see more softness going ahead. I just, I think that there's more to be desired, if you will, to see a real capitulation.
in home prices where we, you know, maybe see a, you know, a 2% decline in a given month, right?
Like that, you know, like that could be kind of around the corner, right?
Or looking at like a three-month annualized rate of change that's maybe double digits to the downside, right?
I don't think we're there yet.
And so I'd echo what kind of Dakota just mentioned there a little bit, which is, you know,
this could really kind of be this grueling kind of downtrend, if you will, for, for years,
depending on what mortgage rates keep doing, right?
So that's the key here.
Nora, I know that you work directly in this space, so I would love to get your thoughts as well.
Thank you for joining us.
No problem.
I'm seeing softening based on price point.
What I see the national average is the story they don't tell is it's across all price points.
Higher price points are softening.
Lower price points, first-time homebuyers are not in many parts of the country.
And what do you think is leading to that?
Rents are going up so much that first-time home buyers are determined to get out.
And yet those people in those homes don't want to sell because they would have to buy.
And their interest rate is 2.5%, 3%.
They don't want 6%.
We do have that inventory issue at your lower price points.
And the lower price points vary based on what market you're in.
Yeah, because the lower price point in the Bay Area is like a million.
Right, right.
Exactly. But whatever it is, we're still seeing in many parts of the country at that first time homebuyer, five offers, competing offers going 10 grand, 20 grand, 30 grand above list.
Wow. That's very different than what the narrative has become. So it's fascinating to hear otherwise. Amy, are the other boomers just not selling as that was happening? Sorry. Go ahead, Amy. I'll let you jump in on that.
No, I actually wanted to go back to one of Caleb's points about the lending activity still being relatively high.
I think we've touched on a lot of the areas why that is.
Like, people keep talking about how inventory is so low because nobody wants to let go with that 3% interest rate.
So a lot of the selling activity that we're actually seeing this season is from home builders.
We had a lot of new home construction start building.
right after the pandemic, there was a surge of demand for homes.
So builders started building,
and there's a lot of new build inventory coming on,
especially in certain markets like in Texas
and a lot of these areas that have a lot of land
and they have a lot of builders.
Well, what builders are doing right now are...
They're basically looking at the Fed interest rate and they're saying,
we're not going to play that game.
You know, you're offering a six and a half rate.
Well, I'm not selling my home at the price I want at that rate.
So I'm going to buy down your rate.
So it's giving an illusion of holding up a price point.
But what they're essentially doing is they're spending, you know,
thousands and thousands of dollars to buy down the buyer's rate to,
I was hearing 4.99%, but somebody actually just, I was talking to the other day,
said the builder bought down the rate to 4.2%.
5%. And if you have the builder lenders willing to do this and they're doing it enough
across the country and the new builds are making up such a large percentage of the sales,
then that's going to continue to keep up this sort of propped up appearance of this market
even when you know you're starting to see...
like on the edges, it's like, well, this doesn't really make sense.
Like, how can this continue to be like this?
Because the data just keeps coming in negative.
And I don't understand why it's taken a year to get here.
Because we're kind of now in this phase where all the stops are being pulled out.
And especially with the builders, you're seeing them pull out all the stops.
They're going to do anything they can to hold those sales prices.
And what it looks like now is buying down the rates so that the lending does go through.
And then mortgage does get approved and the buyer gets in the house.
Yeah, you know, Cody, go ahead.
I love that point.
On the edges, the builders, you know, in 2008, the builders were not prepared for what was happening.
There was way too much inventory coming on to the market.
You know, you're seeing the new build numbers grind south right now.
We're watching that happen.
You know, I think it's really important to see how the, how builders have reorged since 2008 and what they've learned from that.
that crash. And a lot of these builders are recognizing that they need to kind of slow down as we go
into this cycle. They aren't building as much inventory. They're building on demand. And yeah,
maybe they're buying down some of these rates, but they've been able to bake in margin over the last
three years. And they're propped up with with positive cash flows. And as long as we manage
inventory appropriately through the cycle, again, like it,
I don't see a monster crash happening in residential real estate.
This could just be a slow grind south and inventory will continue to grind lower.
And monthly averages of inventory on market, you know, we saw climb for the past three months in our market.
And then this month, it dropped 40%.
And so I think that we'll continue to see that as we move forward here.
Yeah, you know, Nora, one last question before we move on.
I was going to say, are you seeing inventory, can you tell me a little bit more about the inventory side of the business?
Are you seeing inventories rise as well?
Inventory is rising in higher price points.
And one comment is building.
Builders cannot build at the prices that older homes were or selling at.
The cost to build has gone up.
I don't see it coming down to pre-pandemic levels.
And therefore, we're still seeing a lack of your initial homes, your first-time homebuyer inventory.
Fascinating. I mean, this is like sort of this. And so, you know, just as a reminder for everybody that's listening, this is exactly why this is not financial advice.
Because the complexity of these industries is getting so insane that I think anybody that's listening may recognize now that real estate is, you know, it seems very straightforward.
But it is not as straightforward as it first seems at first blush. But Eugene, go ahead.
Yeah, I want to ask Amy a question.
Amy, I feel like I saw a tweet from you.
I can't pull it up, but it was maybe a few days ago talking about there's a potential
reason that one might be bullish about residential real estate over the next, like,
let's call a five-year horizon.
So I want to ask you that question, and maybe you disagree with this or maybe I misread
the tweet.
But, I mean, is there a view?
I mean, I think to code this a little bit, so to build on that, like,
This may be extremely controversial on this on the space. Maybe it's not. But, you know, for those who believe in Bitcoin, right, as being a steady harbinger of assets, you know, houses are basically like a levered bet on U.S. inflation and interest rates, right? So, I mean, is there a world where actually, I mean, based on some of the things Norris was talked about, is there a world where
you know, housing action has that to be a decent event over the next like five, 10 years because of inflation in the world.
Maybe it's even a better bet than Bitcoin because it's like a lever bet.
And you know what is not something good to bet against is the U.S. is like the citizens, right?
If you're the U.S. government, you're going to protect your citizens and a significant portion of debt is housing debt.
Inflation can help alleviate some of that debt, right?
So I'm not sure if anyone else shares out to you, but that might mean that when it's bullish on your own residential real estate.
Clearly the crypto folks did.
Sorry, just kidding.
I don't know.
I don't think most crypto folks would say buying a house is a good thing, right?
Right, Donuts?
Right?
Like, I think I'd be in the minority of that.
But it actually is on inflation.
I just think like it's so interesting as a frame of reference where everything kind of comes back to that for some folks. And it's like so fascinating. It's a good thing. It's like sort of the same thing that I kind of go to. It's just fascinating. But Amy, go ahead. Please answer Eugene's question and then we'll move on.
You know, I can't say that that's an impossible scenario because, again, we still, and we've had this for the last two years, we've had these two camps.
There's these people that are firmly entrenched in this inflationary narrative, you know, that whatever we're doing right now, Paul's not vulgar, he's not going to be able to do enough to bring down inflation.
And we're going to have these other waves of inflation in the future coming forward versus, you know, the more deflationary camp who's kind of like looking at,
at the rapid, unprecedented pace of these rate hikes and just thinking, you know, at some point
something's going to break, we're going to head into a deflationary crash.
You know, real estate might sort of just sort of dink around for a while.
Like people said, like this slow, painful grind until the shoe drops on something.
And in my opinion, that something might be commercial real estate.
But I think there's going to be something that's going to cause.
a crisis in the economy. And that's where you're going to see all these other pieces that have
just sort of been struggling along the way. That's when, you know, the rug is going to get pulled
out from under them. And real estate is not going to be, or sorry, residential real estate is not
going to be the center or the vortex of that. This go around. In 2008, it was obviously that's
where all the bad loans were concentrated and that was where...
the core of that financial crisis was in residential real estate.
That is not the case today.
But that does not mean that if we have another event in the economy set off a deflationary crisis, that real estate's going to come out unscathed.
Residential real estate will still be negatively affected.
it. But if we did enter a scenario, if we somehow managed to hang on without something
breaking, which again, I think is highly, highly unlikely, but I'm going to give you the benefit
to doubt and just say, if that were to happen.
then I do think there is a case to be made that, yeah, residential real estate could just sort of grind along for the next, you know, three to five years. Maybe it'll grind up slowly. But again, I just don't see how coming off a 15-year bull run of real estate that we would just piggyback right onto another bull run. Like that's just not typically how housing cycles work. Even if the Fed jumps in and tries to manipulate as much as they can with rates and I just don't.
I don't see how we can have just a housing bull run like at infinium forever,
like without some sort of corrective measure that goes beyond just whatever tiny correction that we've seen in the last nine months.
And the demographic aspects of it are very interesting as well.
I mean, there's a large entire generation that cannot afford to buy a house right now.
And we'll likely not be able to afford to buy a house as we continue to move forward.
And I think that that's something that is very unfortunate along the way.
But Dakota, you are you unmuted.
And then I want to go to Nora and go ahead.
Yeah.
Yeah, I just want to be clear.
You know, I'm not suggesting that we see a massive bull run in residential real estate moving forward here.
You know, I just think it's difficult to bet, you know, on a massive structural event occurring.
You know, are we going to see a business cycle event happen in the markets?
I think I think that's certain, you know, and as we struggle with some of this debt ceiling stuff, you know, I don't think it's likely that we'll default, but, you know,
I do think that as the $1.2 trillion and expected treasuries come onto the market, right?
I mean, somebody has to gobble those up.
So when we see some liquidity event in the broader markets, I mean, probably.
But is that going to be something that manifests in some structural event?
It seems very unlikely.
And, you know, somebody else can probably comment on that.
Yeah.
Go ahead, Nora.
Yeah.
I want to piggyback on Amy's comment.
I agree that the foundation behind real estate is much stronger than it was 15 years ago.
What I could see happening to ease inventory is if we start seeing mass layoffs in specific parts of the country triggering required relocations.
That's where I could see even in the smaller price points,
People having to move, having to list, prices easing.
And frankly, I'd love to see this residential real estate market calm down for a period of time to allow people to catch up this full generation that cannot afford their first home.
Alan?
I feel like you brought agreement with Nora.
So I want to hear Alan's.
Alan, do you ever report?
I don't know.
No, I have no retort on housing.
Housing is the only thing I can tell you is I have a friend.
There's a large plumbing supply distributor in Long Island.
And his supply shortages still exist.
But the biggest thing that he's seeing here is that the actual plumbers are
are complaining that their margins have been squeezed so much so
that they are having to give up buying certain products to put food on their table.
So that to me means that there is a potential problem down the road
with people who build houses, who construct houses are being squeezed.
And this is Middle America, this is the middle class,
who are being hammered in here because of inflation.
I want to deviate slightly, Dr.
It goes to your area of expertise.
Did anyone see that Pfizer raised $31 million worth of financing yesterday?
31 million at a spread of approximately 1.6% above treasuries.
That's the widest I've ever seen a single-A bond and a long time of that consequence of a trade.
And that means that if you think that the 10-year treasury is yielding, let's say, 3.5%.
So you're now issuing a security of, what, 5-10?
So that distorts a lot of things that are happening in the marketplace.
And it also means that people probably sold investors, institutional investors I'm talking about, sold treasuries to buy these securities.
You combine this with the high-yield marketplace, now had its third successive day of losses.
in a row in the, let me just pull up this article,
so I don't misquote.
I just want to just bring up this one part.
I missed the connection.
So walk me through how this is connected
to our current conversation.
Is it not?
Are you just completely deviating?
Well, yeah, well, no, it's the,
now going to the high yield marketplace,
which is, funds a lot of home builders, right?
Most of the home builders are in the high yield marketplace.
There is now withdrawals from the high yield marketplace.
three days of withdrawals, and the high-yield marketplace has moved up to 875,
which correlates to the increases of mortgage rates, okay?
And all these things are distorting people, you know, are people believing,
this is the question I want to ask, are people believing that the Fed is going to pivot
and interest rates are going to be being lower and they're waiting to buy,
apply for mortgages because they think rates are going to be lower?
Is this affecting the marketplace, your mortgage market sales and your home builders?
I mean, that's definitely part of it, right?
I mean, it's half your cost of capital, especially if you have a 30-year mortgage.
It is something that I think all investors are thinking about and buyers of homes.
In fact, the home builders are offering you concessions of 1 to 2%.
You know, so they can, they can sell you a home that might be a little bit, you know, expensive above market.
I mean, you look at Toll Brothers. It's the more expensive home builders that are losing market share because, or losing, you know, top line because it's the wealthier people that are more conscious about this.
And they don't, you know, they can afford to wait. And they're the ones that are not buying. The starter home sales aren't falling as much. And when you think about,
The cost of, you know, the cost of financing, I think the majority of people that I talk to are like, you know what?
The Fed, you know, rates are going to be lower a year from now, two years from now.
We'll bite the bullet then.
But I think the bigger issue is just the...
the bid-ass spread between buyers and sellers, right?
Because the mortgage payments are higher.
You know, the buyers expect the prices of homes to come down.
And, you know, they are coming down.
I'll just post a graph here that I'll share up here in a second.
But they aren't coming down as fast as one would expect.
They're coming down across all developed markets, UK, Australia, Sweden, Canada,
New Zealand, US, but not as fast as people would like.
Yeah, I was just going to jump in here.
I think one of the things that gets particularly interesting,
which I think somebody brought up as the regional pressures around
incoming new labor to markets that are not necessarily densely developed.
So the southeast being one of those regions,
I think to the point of builders and the cost of capital, the one thing that's been very difficult, over the last three years really, like home builders have not, you know, had parabolic swings in lumber like we saw, you know, in the last 36 months.
And I think one thing that has kind of continued to weigh on.
on margin pressure for builders is their, you know,
assumption of where they were planning to sell houses that they started,
let's say, 24 months ago or 18 months ago,
and their costs are embedded at absorbently high levels relative to what you can get today
from material cost.
it really kind of begs the question who's going to budge first.
And I think that was your point, Jay, that, you know,
somebody has to eventually move around, right?
And I think that the interesting bit that kind of transcends all of this is eventually
we're going to have a position where home builders have seen some relief on the material
pricing when they're doing takeoffs for homes that are today.
But that inventory is slated for, you know,
you know,
16 months from now,
right?
So there's,
there is a delay
between when a lot of these
subcontracts get bit out,
and when plans get taken off,
and when the actual development happens,
and when the actual home gets sold.
But those costs are baked in from 16 months ago.
I will say the one thing that's been,
you know,
particularly odd is though the pressures
in material prices have come down,
the thing that has not come down and has kind of actually offset that
is the cost of labor,
cost of labor,
associated with certain, you know, um,
trades. So,
you know,
the plumbing material may come down,
but the spread that companies are having to leverage higher in order to keep
their margin healthy.
and,
you know,
de-risk a lot of the last 24 months of material problems,
et cetera,
has been this labor implication of retaining talent, right?
It's like,
great,
you can supply the plumbing material,
but if you don't have a plumber,
you know, you're kind of shit out of luck. So I think that's, that's kind of something that,
for the vast majority of builders right now, they're having to also kind of act as a risk
mitigator, not just on the labor side and in the material side, but also hedging interest rate risk
and hedging, you know, a lot of these bigger builders, it's one thing, but I think the last, you know,
four to five years people have kind of started swarming to the general contractor space on the
assumption that it's extraordinarily profitable and are starting to realize that hey i've got
cost baked in at all time highs you know in lumber roughly 18 to 24 months ago and i'm sitting
on this product and i have to either fire sale or
or I have to sit tight and continue to carry interest burden, you know, until I feel like there's going to be a buyer that comes at the table.
So it's kind of a precarious place on the, you know, residential side.
I would say the commercial side, I don't know nearly as much, but I would assume that the same pressures are true, right?
The people who are.
who own these buildings are either like well either i i sit on it and and try to occupy what i can and
cover you know any any carry that i have or you know i kind of rotated off the books at you know
90 90 cents 80 cents on the dollar um but obviously as that continues to happen more inventory
hits the market it's going to um simultaneously you know add more uh you know price downward price
pressure so
I think there's a lot of
kind of headwinds, tailwinds
for builders, but I think
the bottom line that I would
kind of highlight is just
a lot of the industry is
dealing with dynamics that are
not just interconnected, but extraordinarily fluid, right?
I mean, lenders, as an example, local and regional lenders getting pressure as of late
is absolutely impacting their ability to lend to builders that they may have
conventionally given 70% LTV to.
And that value has changed in the last 24 months.
And additionally to that, you know, these lenders have gone under extraordinary liquidity
liquidity.
requirements due to SVB, etc.
So implications all around, I think,
but generally some super interesting times for builders around.
Talking about interesting times,
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Can we continue down
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on the back end from Mario's team?
Go ahead.
Nora, you're next.
Sorry, Trevor. Go ahead, Nora.
I find it interesting that we're talking builders and contractors here.
The key in the next few years is going to be builders and contractors and trades that are large enough to weather the headwinds.
In the last few years, builders got very good about passing on their risk of materials to their buyers.
Their contracts would state if...
price of lumber went up more than 5% this buyer is going to pay more and they would write it into the
contracts and so now I wonder at the builder level how much cash they have on hand or were they
a little bit spoiled because they were able to pass those risks onto the buyers and now buyers
will not take that on
Yeah, I think that's an excellent point.
I mean, that's, that's kind of pointing to the direct narrative of either, you know, one party gets either smarter or dumber, however you want to put it.
I think that's kind of, you know, the notion of when we were talking earlier just about, you know, do we think the Fed's going to pivot or do we have the camp that's inflationary, deflationary?
The market.
forces essentially, you know, give you the price that we realistically think, you know,
an asset or something is worth, right? So I think getting back to base, these tradeoffs that are
inevitably going to happen do create a market equilibrium in some sense. And I think where we're
getting right now is a squeeze on the bid ask where builders were, were perhaps highly
spoiled to your point. And now buyers are getting nitpicky. But again, I think that the
the issue kind of stems into regional, you know, priority more so than other pressures,
because I think regionally it changes drastically.
If you look at the West Coast versus the Southeast, there are very different narratives
around, you know, builders' concerns than there are, you know, in other regions.
So I would just point that I think that the regional reflection based on, I think it was
your point, about the labor market.
is extraordinarily influential in this discussion
because companies that have large footprints
in existing markets where they could go to a different market
and save 2 to 4% on their tax basis is massive.
So you're going to start to see not just companies
but also labor workforces be more divested outside of certain regions
and more invested than others.
Yeah, no, absolutely.
Patrick, I know you have some data to share with us.
Yes, hi guys. Okay, well, I was going to show just one chart, but I think it's better maybe just to show two. I put them in the tweet of the space. And the first one, guys, it's the U.S. purchasing power. I have a chart there. It's like 100 years and I put my 10 year rate of change on it.
And the US purchasing power, essentially, it's the US dollar strength or weakness versus
other currencies adjusted for inflation, so divided by the producer price index, etc.
But what's happening right here is there's a massive, massive, a top in momentum since 1997
to all the way to today that's breaking down, clear, clear breakdown in momentum for the US purchasing
power.
Whether the U.S. dollar goes up, the DXY versus the euro, but there's more inflation to offset that so the purchasing power goes down or the DXY goes down.
Inflation stays flat.
You're still losing purchasing power.
And whenever you have these macro, micro cycles that are shifting, then commodities, anything that's real, right?
It takes more fiat to purchase that.
So whatever, silver, gold, oil, all that stuff, usually mimic is that inversely.
Then I'll bring your attention to the second chart, which goes in line guys with your U.S. house prices.
Just to give context, the U.S. house prices, even if nominally in that chart I showed, it's pretty much from bottom left.
It starts at like 1991.
It goes to top right and then had some type of peak in 2007 nominally.
Right.
But when you start pricing stuff in real terms and you see the truth, the US house price index actually peaked in 2001.
So the best value of US house prices outperforming in real terms, that was 2001 guys.
And then it tried again, 2005, and then it crashed, crash, crash, crash.
Because whatever they do to keep nominally afloat, those US house prices...
The destruction and purchase power required to keep nominally afloat, it erodes.
So you think, oh, my house price is so much more up than it was in 2006.
Yes, nominally, but your purchasing power went down the drain to keep those nominally numbers afloat.
So that's a total illusion.
Right now, it's had a bear market rally since 2011.
The U.S. house prices have actually outperformed in real terms going up up.
But if you go back to the first chart and U.S. purchasing power is heading down the drains.
And if you start seeing gold break out and keep making a move upwards, then house prices, they might stay flat.
They might even go up.
But even if they do go up, your house price index, if the purchasing power is going down faster than you're at a net loss.
Yeah, Alan?
Yeah, just one thing here. I just saw this come across Bloomberg. That is a dash to money funds, a record of $5.3 trillion and is set to continue. And it goes back to something we talked about yesterday. The market cap of Apple is $2.7 trillion, which goes back.
to what I was trying to make, everyone can establish their own ratios.
And the ratio of money market funds to the market cap of Apple is kind of intriguing to me.
One other thing that came across at Bloomberg earlier today,
CLOs are having the worst year in decades.
Jay maybe can comment on that.
And that hamper is the ability to do leverage financing because these entities,
which were raising money and giving enormous returns over the last couple of the years,
are now showing losses and therefore investors,
they're going to be harder for them to get investors.
And a lot of these investors in CLOs were banks.
So that puts pressure on the entire marketplace, not only the housing marketplace, but all markets in general.
Third point, and I'll lend it on this, is to go back that the triple C index now is almost trading at distress levels at almost 1,000, I think it's 935 basis points above treasuries, which is close to the distress level.
and if you take the instance that there's mysteriously there's 42 issues that have disappeared from the high-yield index
over the last couple of months, and that means that there's either defaults or they've not part of the index anymore.
Again, caution is needed here.
The yield curve has flattened as we talked about it, doctor.
Yesterday, I put a chart on, tweeted it.
I don't know how to put these things on your nest, but it's clearly I put a chart on Twitter,
and guys can look at it.
It may address what we talked about yesterday.
Absolutely. And on that note, we're going to be ending our spaces now. Thank you so much for everybody that joined us. We do this every morning at 8 a.m. Eastern and appreciate everybody coming on. We had some new faces today. So thank you so much.
Just quickly on Allen's point, they're 14, they're 418 CEOs globally across large-cat firms that lost their jobs this quarter. It's a multi-quarter high.
Nets. Absolutely nuts. Well, let's all pray that my job stays secure. All right, thanks guys. See you guys. Bye.
You have my vote.
