Loading summary
Transcript62 lines
- [00:00]
Ann Berry
This episode is brought to you by Charles Schwab Timing the Market, Fighting Inflation Managing risk Financial decisions can be tricky. Investing isn't just math, it's psychology. Your neurons are playing favorites, and the market doesn't care. Financial Decoder, an original podcast from Charles Schwab, can help join host Mark Reape as he breaks down practical strategies to help overcome the mental traps that may affect your investing decisions. Listen@schwab.com FinancialDecoder
- [00:31]
Barry Ritholtz
Disney lending its magic to TikTok we break down a new IP deal and which licensed characters may be coming to your vertical feed Torsten Slok, the brilliant partner and chief economist of Apollo Global Management, brings big energy to the studio today with his views on today's market drivers and SpaceX, the Rockets telecom and AI juggernaut beat earnings expectations, at least on the top line. So. So why are shares crashing? We have the latest as a lock up unlock looms for Wednesday, August 5, it's blue markets Daily Diamond Barry. More market details to come. But first, Space X literally and figuratively crashing into the moon, making headlines this morning as a discarded Falcon 9 upper stage that had been drifting through space for months allegedly slammed into the moon at roughly 5,400 miles per hour, creating a new impact crater. Well, scientists stress that the event poses no danger to Earth, but what a well timed metaphor for a tough first earnings season that is. Cratering SpaceX stock last night, Elon Musk's tech giant topped analyst estimates with its quarterly revenues. That was good news, up more than 90% year over year seven, surging on strong growth from Starlink, Commercial Launch Services and the AI business. And the company also reported a smaller than expected loss, suggesting that its core businesses continued to expand rapidly. But despite those headline beats, investors hit the sell button as soon as the release hit the wire. Shares were down sharply in early trading and after hours yesterday. That's over concerns that SpaceX's AI related capital spending exploded to more than $18 billion during the quarter, blowing through far more funding than Wall street had expected and raising alarm bells on whether SpaceX will deliver returns on the cash poured into data centers, AI infrastructure and its long term vision of space based computing, while a SpaceX stock ticked down around 10% today. Also weighing on investors minds has been tomorrow's lockup expiration, which would allow early investors and insiders to sell hundreds of millions of shares, increasing supply and potentially adding even even more pressure to that share price. A dynamic, by the way, that has weighed on Space X even before now. That's the shareholders have tried to sell ahead of this window. Coming up. Well, Space X Market cap today hit $1.57 trillion, down nearly 30% from the triumphant IPO at 2.1 trillion. That lock up tomorrow. It's going to be a big day. We're going to keep on watching. Well, coming up in a moment, I'm joined in studio by Torsten Slock, partner and chief economist at Apollo. But first, this episode is brought to you by Charles Schwab.
- [03:22]
Ann Berry
Is recency bias skewing your potential stock picks is attribution bias messing with your retirement plan? Overconfidence describes our tendency to overestimate our abilities. Loss aversion helps explain why losing a dollar hurts more than gaining a dollar. Financial Decoder, an original podcast from Charles Schwab explains how these cognitive and emotional biases can affect the decisions you make about your financial life.
- [03:43]
Barry Ritholtz
Host Mark Reap, head of the Schwab center for Financial Research, and his guests offer actionable insights on what you can do to help fight off these decision making biases.
- [03:52]
Ann Berry
Download the latest episode and follow@schwab.com financial decoder or wherever you listen to.
- [04:00]
Barry Ritholtz
Known to retail and institutional investors alike as King of the Charts. That's for his snappy daily visual reports on macro trends and market shifts. Few people can present complex economic data as simply but substantively as as he does. So I was absolutely thrilled. I have been so excited for this for weeks. To welcome Torsten to the studio today to break down why the United States is propping up the Japanese yen, his optimistic view on the impact of AI on jobs, and Kevin Walsh's new approach to forward guidance. Bad timing or good medicine? Well, here it is, my conversation with Torsten Slok, partner and chief economist at Apollo Global Management, Torsten Slark. Delighted to have you here in studio. And there's one topic in particular that is top of mind and that is what is going on with the Japanese yen? Why has the United States stepped in to help bail it out? And why are not more people talking about it?
- [04:54]
Torsten Slok
Well, thank you so much for having me, but this is a really, really important question because the yen has now for several years been going down. Why has the yen been going down? Well, the yen has gone down because after Liberation Day, there was a change in what drives the yen as a currency. Before Liberation Day, the yen was a carry trade currency, basically funding yourself cheap. Because interest rates were Bas 0 in Japan, you could borrow in yen and you could take that money and invest it in U.S. treasuries, in Brazilian government bonds. In whatever Chilean government bonds, and you would get a very nice spread, which was the carry trade. You would have to every day pick up a few pennies, but if you did that and if you leveled it up, you would get a very nice return. This all changed dramatically with Liberation Day because.
- [05:39]
Barry Ritholtz
And the tariffs, let's see.
- [05:40]
Torsten Slok
And the tariffs came out, not that
- [05:41]
Barry Ritholtz
people have forgotten, but it's that tariff. It was April of last year and the tariffs come into play.
- [05:44]
Torsten Slok
And when that happened, suddenly there was a headline risk hitting the the yen, not every single day, but very frequently. Where if you were in the carry trade after the headline started coming now is trade war on trade, war off, tariffs on Japan, tariffs on Europe, tariffs on Denmark. Once those things happen, then suddenly we saw much more headline risk in the yen. And the yen was literally no longer driven by the carry trade. And instead the market was trying to figure out, well, what does then drive the yen. And this is where we are today, namely, for the last one and a half years, the yen has really mainly been driven by the fiscal year situation in Japan, which is much, much worse than it is in the US because the debt to GDP level is more than 200% in the US is about 100%. So the short answer to your question is the backdrop for what just happened is that the yen had been going down for a very extended period because the fiscal situation had been weighing so much on the Japanese economy. So on the back of this, the fears might have come around from the US government, from markets, that if the yen is allowed to depreciate too much, maybe the Japanese might begin to sell Treasuries, because The Japanese hold 1.2 trillion in treasuries. And the risk with that, of course, would be that US Interest rates will start to go up. So that's why they brought a conversation about what happened is that we had a falling yen that had fallen a lot for the 18 months, and that resulted in the US government saying, we're going to help you to try to stem some of the decline and ultimately also therefore, hopefully limit how much US Treasuries the Japanese might have to sell.
- [07:15]
Barry Ritholtz
I want to thread together some of the points that you just made and sort of try to sort of translate it perhaps into a sort of linear progression so people can follow that. Right. So $1.2 trillion of U.S. treasuries held in Japan, give us a sense how big is that relative to the overall global holdings of U.S. treasuries.
- [07:31]
Torsten Slok
Yes. So this is really simple at the moment, because U.S. gDP is about, in very round numbers, $30 trillion and, and government debt outstanding is also about $30 trillion. So from that perspective, a trillion out of 30 trillion is not an enormous amount, but it is a lot on the margin, especially if someone does dump a significant amount, in this case of course, hundreds of billions in the market, because that will run the risk that U.S. interest rates would be going up even more than what they already have.
- [07:58]
Barry Ritholtz
And I just want to sort of do the arithmetic on that for folks. That is the idea that if Japan were to, quote, dump U.S. treasuries by, by the way, a fear that people have had about China at points as well, that means increased supply of Treasuries to the market, the price of Treasuries coming down, and as a result interest rates coming up. That's the kind of simple relationship because
- [08:14]
Torsten Slok
the issue is exactly that interest rates at the moment are already a little bit too high. They went up because of Kevin Walsh at the press conference last week. They because of the fiscal broad situation in the US and now of course, you can begin to worry about that. They could also go up either because China could be dumping some Treasuries and put upward pressure on interest rates, or of course also in this case, the Japanese could be doing the same.
- [08:35]
Barry Ritholtz
So give us a bit of a history lesson. Talk about the historical relationship between the United States and Japan. We're big trading partners, right? We've got mutual ownership of government debt. The US Government did decide to do something that they did last week. What did they do?
- [08:51]
Torsten Slok
Yeah. So the US Government decided to say, you're exchange rate, the yen has gone down so much that of course the mirror image of that is that the dollar has gone up so much that this is creating some different problems. One very simple problem that it creates. Remember, when the dollar goes up, it becomes more difficult for the US to export to Japan. So as a result of that, US goods become more expensive for Japanese consumers. So a very simple way of looking at this is that when your exchange rate goes up, the rest of the world buys fewer of your things. So therefore, from a pure trade perspective, one argument could be to say, well, we are doing this simply to try to help our exports and therefore try to ultimately make it more even in the trade balance by limiting how much the Japanese yen is going down.
- [09:39]
Barry Ritholtz
So what was the actual mechanism? Talk about that, because I think it's something that doesn't get a lot of coverage. What did the US Government actually do? They went to buy yen. Talk about how they did it. Where the money came from and which organization actually did the purchase.
- [09:51]
Torsten Slok
And why. This is of course, rather unusual because normally a country, especially the US does not intervene in currency markets on behalf of others. So the way this was exactly done by the treasury also, of course, using some of the facilities that are available for this, including from the Fed, basically made this such an unusual operation, which is exactly why it's getting so much attention, because people are asking, why are we doing this? We what is the purpose of doing this? And of course, the justification ultimately is that if the exchange rate goes down too much in this case, we can now help U.S. exports by making U.S. goods, again, not as expensive for anyone in Japan that's buying goods in the US From US Companies. So the short answer to your question is that the reason why this was done was because the yen depreciation had created some problems for trade. And of course, the side effect of this, which happens to be also very beneficial, is it also lowers the risk that the Japanese are going going to sell US Treasuries. So it may also prevent the risk that there might be also upward pressure on interest rates. So this was done partly in the interest of helping the Japanese, but it was certainly also done in the interest of two things, helping US Exporters and also at the same time limiting how much upward pressure we will see on US Interest rates as a result of Japanese investors dumping US Treasuries.
- [11:10]
Barry Ritholtz
Paint a picture for us. How unusual is this kind of intervention by the United States government?
- [11:15]
Torsten Slok
It is very unusual. I have not seen it before. And it is definitely very unusual for the G3 group, namely Europe, Japan and the US to so strongly step up and say, we are going to now step in and help you, meaning limit how much the yen has been going down. The Japanese, of course, were also interested in the same because they saw the yen go down a lot. And the next question of course, becomes, and namely, how sustainable is this? Is this going to solve the problems, or is this just going to be a temporary fix where eventually, over time, that the key driver of the yen, namely the fiscal situation in Japan is going to come back again. And the fear, of course, in markets is that this is most likely, in my opinion, just going to be temporarily helpful, because if the Japanese fiscal situation is not improved, investors will come back to the same theme in a few weeks, in a few months, and say, well, it didn't change policy in Japan, so their fiscal policy is still unsustainable. So similar to some emerging market that basically sees when they have too much fiscal debt their exchange rate go down and their interest rates go up. This is exactly what we're seeing in Japan. And of course, the fear here at the moment in markets is that if that continues, then because Japan is so important, that that could ultimately again result in the Japanese selling US Treasury. So that's not what quite we are at the moment. But this is certainly a very, very important point in time where we are trying to figure out, is it possible when fundamentals say something have to happen, something have to happen, can you as a government, both US and Japanese government, can you go in and say we don't want this to happen and actually halt it? Or is the risk that it's actually going to eventually happen no matter what the government is doing at this point in time?
- [12:48]
Barry Ritholtz
Do you know what's so fascinating about this? If you go back in time and you look at where there have been interventions for currencies and where that has happened through organizations like the imf, for example, usually this kind of activity has come with a package of requirements that the recipient of the bailout's not the right word, but the sense of it, the spirit of it you get, including taking steps to address fiscal imbalances. In this instance, do you think anything's going on behind the scenes? Do you think the US Government and European counterparts are calling the Japanese government and saying, look, there's only a limited number of times we can do this. Yes, it's self interested, but what are you Japan going to do to fix your fiscal situation? I got to tell you too, last year people were getting very excited that Japan was back, that growth was back, that corporates were back. What is going wrong?
- [13:33]
Torsten Slok
No, this is exactly spot on. And as you will know, the academic literature that looks at interventions say that interventions are mostly successful. When you do two things, you signal that we are going to intervene and you say very clearly, don't just do it. You have to say it very clearly like the US and the Japanese did here. And at the same time you also exactly come with some adjustment package. I worked at the IMF for many years and exactly the whole idea from that literature and those whole ideas that the IMF has on this is exactly that you should say that we are doing this. And at the same time you should come with some popularly speaking adjustment program. Yeah, there's medicine, something to try to make sure that the disease that was underlying, why this was happening is actually getting corrected. Which is exactly why we have not seen that. We've not seen the Japanese government come out and say, oh, now we have a trajectory where instead our fiscal situation is getting better. So in that sense, this was just the intervention without the adjustment. And that is a risk that in a few weeks people may say, well, that was good for the time that it was, but now we're going back to looking at fundamentals and they still would argue for the yen to continue to go down.
- [14:35]
Barry Ritholtz
So I'm going to ask you a totally cheeky question. It's a little unfair, but if I were to suspend time and circumstance and drop you into Japan and say, torson you have free rein to do whatever is needed to be done to correct Japan's fiscal issues, what would you do?
- [14:50]
Torsten Slok
I would do two things. Number one, I would absolutely try to convince markets about that we are on a sustainable fiscal trajectory. So that involves normally like a multi year program of saying we are going to cut some expenditures and we are going to raise taxes. This is always very unpopular everywhere, in all countries, all around the world. But this is the number one answer to this problem, namely, we need a sustainable fiscal situation where you have that, yes, we know that maybe the prime deficit is still okay, but we got to get the fiscal situation in terms of overall debt levels to begin to come down. So if you can show me first the chart that this is coming down, that's the first condition for saying, now I like to see that. And then I would be convinced that things are getting better. The second thing that is really also needed in Japan is of course capital. It's also reforms. And the arrows that we had had earlier, the third era of structural reform and governance, basically getting better could be helpful in increasing growth and therefore ultimately also improving the economy. But the second answer to your question is it's not enough to show that debt is rolling over. It's also important that you show a commitment to, to also delivering growth. And the Japanese economy could get growth in many different ways. I worked at OECD in Paris. OECD wrote reports year after year after year saying what you need in Japan is of course more liberalizing product markets, more liberalizing labor markets, more competition in the economy, all these things, more innovation, more capital to finance projects, all these things would be delivering more growth. It's really not rocket science. These things are right there. But politically, it's just been very, very difficult to implement. So the answer to your question is we both need a trajectory where debt levels begin to roll over, but we also need to see much stronger commitment to increasing growth in the Japanese economy.
- [16:29]
Barry Ritholtz
Could everything you've just described that sort of prescription that you just wrote apply to Europe as well.
- [16:35]
Torsten Slok
So Europe also has many of the same problems. They don't have debt levels that are as bad as they are in Japan, but Europe certainly has Draghi wrote down 200 plus recommendations what he thought should be done in Europe. And a lot of these things, only about 10% of these things have only been done this is now two years ago. So that's why Europe also has a lot of political constraints on what they can do. Again in terms of capital markets need to be more competitive, they need some more flexible labor markets, and they also ultimately need to have more openness and competition in product markets to basically generate that growth that they also need, just like the Japanese need. And one very important aspect of that is at the moment that the US has AI.
- [17:15]
Barry Ritholtz
You're cheating towards See me Torson is literally watching me pull up his research report the impact of AI on the US Lab market. So those of you listening to just watch me sweep this paper across in
- [17:27]
Torsten Slok
front of the reason why no I before we segue to this is that if you do not have AI in Europe, you do not really have much growth. If you don't have AI in Japan, you do not have much growth. So this is a true differentiator. My job has been easy for many years. When the US was good, Japanese and Japan economies were also good. And if the US was bad, then the European and Japanese economies were also bad. At the moment, US is really good because of AI, but the European and Japanese economy is just not particularly great because they don't have AI.
- [17:52]
Barry Ritholtz
More of my conversation with Torsten Slok in just a moment.
- [17:57]
Sponsor/Ad Voice
This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome? That's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50 page restoration block. Or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it, ready to make anything online make sense. There's no place like Chrome. Check Responses Setup required compatibility and availability various 18 and now back to my
- [18:23]
Barry Ritholtz
conversation with Torsten Slok, partner and Chief Economist at Apollo Global Management. So let's talk about AI in the United States before we talk about others maybe not having it and what that means. The big debate. Two big debates in the US at the moment. Debate number one is are we going to see the return on investment into AI infrastructure that we are seeing hundreds of billions of dollars being deployed into? Number one. Question number two is if the productivity does surface does it come at the expense of human jobs?
- [18:51]
Torsten Slok
Yeah, those are absolutely the million dollar questions exactly for markets at the moment. Because what is absolutely critical is that profit margins in the AI value chain are all at the end of the value chain, not those who had the customer relationship, meaning is not OpenAI and anthropic and the frontier labs that are having high profit margins, they actually have very negative profit margins. But profit margins are in the silicon, the memory, the power. So therefore profit margins are very unusual in economics all the way at the back. So therefore, to this very important question, we need to see not only financing, of course of the customer facing product, namely large language models, but we also see, need to see of course an ROI on those investments when the companies are making when do we need to see it? So this is why consensus expects that that ROI is going to come over the next four years where we'll see net free cash flow basically double from where it is today for the hyperscalers. But this is the million dollar question, namely can that AI payoff come quick enough? Because if it doesn't come quick enough, then the question is of course whether all the compute that's being built is going to be more at risk of not being paid because there simply is not enough money coming in to finance all the investments that are being done today. So let me say this in different words. In economics, one on one, as all your listeners will know, it is all about the marginal revenue on an investment. Comparing that with the marginal cost, what is the marginal revenue at the moment? Let's just agree, token costs are going down. Claude is under some pressure now because of what's happening from open source models, open weight models to that means that the downward pressure of course on the revenue coming in at the same time, the marginal cost of building a data center and of course of developing the models is also going up. Especially the marginal cost of data center build out from land sales, from memory, from construction, from labor. All that is also becoming more expensive. So that's why the race that is the most important one is really the one about generating returns before we get to a point where there will not be enough money to finance the enormous, enormous buildout that we're seeing at the moment. And the second part of your question is what does it mean for labor? I'm very, very bullish on what this means for workers because yes, it may displace some workers if you have efficiencies in workflows, in processes, in companies. But think about what AI also is doing. The number of New businesses that are created in the US Today is at the highest level ever in US history. That means that job creation through new business formation is probably also going to continue to go up. So that's likely why the labor market continues to do so well. That's probably why the Fed is forecasting that the unemployment rate will go down because we still have very, very strong growth in the economy coming because of new businesses being created. So I'm optimistic. That is truly a wonder drug that's both going to create more productivity and is actually also going to create more jobs because people can go out and find new jobs and they will make new jobs in consulting, in finance, in, in legal services and basically go and compete with their former employers to compete with incumbents. And I think that more dynamic U.S. economy will just make the U.S. economy from an employment perspective so much stronger. So for that reason, I am not worried about people losing their jobs because of being replaced by robots or AI. I'm much more interested in, and I think a much bigger force of growth is this strength in job creation coming through business creation.
- [22:08]
Barry Ritholtz
At the moment you had a throwaway comment in there about the Fed forecasting continued labor market strength and job growth. But let's talk about the Fed and forecasting in general because Fed Chair Kevin Walsh has said basically he does not think it is appropriate for the Fed to continue to put out certain kinds of projections that it has done historically. Clarify for us, Torsten, if you don't mind. What does he mean by that and do you agree with him?
- [22:31]
Torsten Slok
If you had given your children candy for several years in a row and now you're saying you're no longer getting candy, of course they will get upset and they have to get used to that. They're no longer getting candy. So sorry for this picture, but this is actually exactly what's going on and what's happening at the moment. After many, many years since Bernanke introduced the dot plot and saying this is where rates are going over the next three years, basically financial markets almost became lazy and said, you know what, if this is where interest rates are, then we don't really need to do much because the Fed is telling us where interest rates will be. Now Kevin Walsh is moving in the direction of saying, well, by locking in where I'm telling you that interest rates are going this way, that takes away flexibility from me as a institution to say, well, if I'm no longer having the flexibility, maybe I'm then committed to and I have to stay to the whatever the forecast I had at the last meeting, even if I think that conditions have changed. So by giving up flexibility, the Fed basically said, we are now locking in at several years ago, we're locking in the expectation that interest rates will be here. Now Kevin Walsh is saying, I don't want to lock anyone into any forward path over the next several years. So I'm going to take the candy away until financial markets you figure out on your own where you think things are going, because we don't really know where things are going. We will figure it out at each meeting. But if we take away the dot plot and the forward guidance, then we will have much more flexibility at the Fed and we will not have to hang our hats on old views that we had six weeks ago. We want the complete freedom to change our view from meeting to meeting. So I know this may sound a little bit nuanced and detailed, but the bottom line to this is that Kevin Wallace is changing the message at the Fed and the way things are done and financial markets is taking some time to get used to that.
- [24:09]
Barry Ritholtz
So translate what that means into practice for financial institutions, because it's not as though financial institutions, at least at some scale and sophistication, were not doing their own independent work to try to figure out where inflation was really going to go. And maybe there was a lag time because to your point, if the Fed had locked in and needed to reassess its priors based on new data, there was a period in which that needed to happen. However, I hear everything you've said. So what? So financial institutions now figure it out on their own. What does that mean in terms of how their actions truly do change relative to what they were doing?
- [24:39]
Torsten Slok
That means that some of you are my friends in hedge funds, when they trade rates, when they trade interest rates, they of course are looking at their screens and they see a forward curve of this is what the market is expecting interest rates will do going forward. At the moment, the market is expecting that interest rates will go up. So therefore they look at that and say, okay, that's a forward curve. But the question becomes, is that the right forward curve? Is that actually how things are going to play out? If you and I have a view on, let's say in six months time that we think rates are going to be higher than what the forward curve is doing, we could of course make money because we could begin to make a bet on no market rates that we're seeing at the moment are wrong. Interest rates are actually going to be higher. So that's why by taking away the guidance on where interest rates will be there, of course you will have more volatility in financial markets. And that is ultimately the outcome by the Fed saying we need more flexibility. And as a result of that, financial markets will therefore have more volatility. So that's why volatility in financial markets, meaning uncertainty about what would the Fed do? Are they hiking at the next meeting? Are they not hiking the next meeting? All that will become a very important part of the discussion. Suddenly, after not having a discussion for like decades, because we had the, excuse me, Candy, of just giving the long, long curve prediction by the Fed and saying this is where rates will be going. So in the specifics of this, the Fed has not explained how they want to tighten financial conditions, how they want to tighten interest rates, or want to shrink the balance sheet to get inflation to come down. And if we don't know that, then we don't know exactly what the implications are for the yield curve. So therefore, what interest rates are in 612 months, just like you and I can make a bet on what Apple stock cost in six months or 12 months time, we can also make a bet on what are interest rates at in 6 months or 12 months time. And if we level that up, we can get, of course, also a nice return if we are right on our view. But now we have less guidance from the Fed in terms of where interest rates will be in 6 and 12 months time. And that is what financial markets now have to get used to.
- [26:30]
Barry Ritholtz
And is that a good thing or a bad thing?
- [26:32]
Torsten Slok
Well, this all depends on whether you like the, excuse me, candy approach or the approach of saying this is where rates will be, or whether you like the other approach of at the last meeting, that it was really unusual, the market didn't know there was a 35% chance that the Fed would hike at the last meeting. And they didn't hike. So that means that people lost money going into this meeting because Normally there's either 100% or 0% chance of something happening. And now we suddenly have that markets need to do their homework on their own and this is creating more volatility. So it's good in the sense that the Fed gets more flexibility in managing the economy, but it's unfortunate for the investors that now have to live with more volatility.
- [27:09]
Barry Ritholtz
So to that point, depending on the macro environment, was this candy or was this a throat lozenge? A medicinal candy. And let me explain what I mean by that. Over the last couple of years, perhaps the Fed has boxed itself into creating a level of predictability.
- [27:24]
Torsten Slok
Exactly.
- [27:25]
Barry Ritholtz
But what we've also had over the last several years is perhaps more unpredictability on the fiscal policy side.
- [27:30]
Torsten Slok
Exactly.
- [27:31]
Barry Ritholtz
In trade policies, specifically in some of the large bills that have gone through. So your opinion, not the data, your actual point of view, are we about to see a tripling, doubling down on volume? Is this really the time for the Fed to change? Were they steady Eddie when fiscal policy was more volatile? Are we now going to get both being super volatile? And can the markets take more nervous energy and volatility than it's already?
- [27:56]
Torsten Slok
Yeah, this is extremely important because we already have a list of bullet points that are creating volatility. The conflict in the Middle east is creating volatility. Uncertainty about Is that an emo you is there a deal is another deal has of course created a lot of volatility in financial markets. We also have a lot of volatility around the general inflation picture. Namely, is inflation too high, too low? What is the Fed going to do? Even absent whatever the Fed communication is, inflation is just too elevated. That's also creating volatility. On top of that, we also have of course conflicts in Europe, with Ukraine, Russia. We also have of course, things now coming to the Japanese situation. That's more an event risk we spoke about earlier. But the bottom line is that you're right, you could ask if we already have a fairly long list of bullet points that we're worried about, why now? Why is this happening now? And you're right, it is happening now because we just by somewhat coincidence just got a new feature and he's coming in and he would like to change things from the beginning. And it just happens to be at a time when we already have a lot of volatility on our long list of things that we're already worried about. So you're right. In that sense, adding another bullet point to an already long list of things that we worry about is not necessarily helpful. But at the same time, should Kevin Walsh instead say, you know what, I'm going to wait until these things go away because these things may not go away. So instead if he's saying the counter argument, well, all these things gives me that I need some more optionality because of these risks. So maybe Kevin Walsh is doing the right thing by saying I need some more optionality given these risk and shocks are hitting the economy. So maybe it is good for him to say, hey, I'm actually getting more optionality. But now financial markets, you have to live with a higher volatility but I have more optionality to maybe I'll hike at the next meeting or maybe I'll not hike at the next meeting.
- [29:31]
Barry Ritholtz
So if you're going to do it, do it now. And so last question view is when push comes to shove, bottom line, are you a bull at these levels of valuations in the US Equity market?
- [29:43]
Torsten Slok
I am getting quite worried about a number of different things because if the Iranians keep holding the straight up Hormuz close to the midterm election, then there's upside risk to oil prices. If the AI payoff comes slower, then there's of course downside risk to equity prices. And the third and final thing is if Kevin Walsh is not done and the FOMC raising rates, that is also a downside risk to equity prices. So I think the three things tying everything together we've talked about here, they are all three separate risks that all argue for downside risk to the S&P 500, namely everything that's going on. Of course, with AI having some risk to the downside as a result of the uncertainty about the AI payoff, also worrying about what's going on again with the Fed in terms of inflation being too high. And the final worry is this risk that is very difficult to quantify. But if the inventory of oil is going down everywhere in the world of jet fuel, helium, marine fuel, fertilizer, if that continues for the next several months until the midterm election, that could also be a downside risk. And I therefore think the answer to your question is that the downside risk to The S&P 500 are bigger than the upside risk at the moment you've
- [30:46]
Barry Ritholtz
wrapped it up in a bow. Toles and Slok, Apollo Global Management, thank you for joining. Please come back.
- [30:50]
Torsten Slok
Thank you.
- [30:50]
Barry Ritholtz
Well, huge thanks to Torsten Slok for coming on the show. It's always fun to talk to someone with the capacity to speak even more quickly and with an even cooler accent than mine. And then I do. Thanks again to Torsten for joining. Let's take a quick spin through some of the headlines that are moving the markets today, starting with Disney. Shares in the Magic Kingdom's maker, that's ticker dis rose around 2% after the company beat Wall Street's earnings expectations. Overall operating income at Disney's Parks, Cruises and experiences business jumped 20% and that was despite a 13% drop in international parks operating income, which management blamed on weaker overseas travel and tourism.
- [31:29]
Ann Berry
And Ann, last month we talked about Disney teaming up with Kraft Heinz as it looked for new ways to monetize its intellectual property. Well, now Disney is taking that strategy to TikTok in what the companies are calling a first of its kind global partnership. The the deal will let TikTok creators use Disney characters from Pixar, Marvel and Star wars to make videos, with some content also appearing on Vert Disney plus's new Vertical video feed.
- [31:53]
Barry Ritholtz
Well, some industry insiders have insisted that Vertical is the future of entertainment media. So it's interesting to see Disney jump in and of course that name Vert coming straight out of Vertical. But when it comes to this TikTok deal, I'm getting a little bit of deja vu because we can't help but remember Disney struck a deal with OpenAI's now defunct Sora to yes, enable the app users to include licensed Disney characters in their ugc. Well, overall investors liked what they saw with the Tick Tock deal. Disney, though, still working to turn things around. That stock still down about 9% year to date. Well over now to food. Shares of Bloomin brands surged nearly 40% today on the back of some meaty earnings.
- [32:34]
Ann Berry
That's right. Outback Steakhouse, the company's largest brand, posted same store sales growth of nearly 1 1/2% for the quarter. Management said customers are increasingly trading up, ordering premium cuts of steak, adding higher end sides and finishing with dessert.
- [32:46]
Barry Ritholtz
Well, this was a good example of a company trying to get a handle on its consumers. The chain recently added lower price menu options to attract more value conscious diners. But instead of sticking with the cheapest meals around 60% of guests are actually upgrading to higher priced menu items. So it's surprising, but it's working. Shares in Bloomin Brands have doubled over the course of this year.
- [33:08]
Ann Berry
And finally, it's IHOP versus Applebee's. Shares of Dine Brands, the parent company of both chains, are up almost 3% today after reporting better than expected sales.
- [33:18]
Barry Ritholtz
That's because IHOP is making a comeback. Domestic same store sales, that's the magic metric for the industry, rose 1 1/2% at the pancake chain. That number, by the way, was triple what analysts had been expecting.
- [33:29]
Ann Berry
And I was over at an IHOP this weekend with my mother. She has traded into IHOP away from Cracker Barrel, which we've talked about on the show. As far as Applebee's, I haven't been there in a while, but their dollarita, that's a $1 margarita, may not have enticed customers into the restaurant. This summer the chain saw a 1 0.8% decline in same store sales.
- [33:49]
Barry Ritholtz
Well, it's 4pm on the east coast. There it is. The market's wrapping up for the day. There's the closing bell. We don't have a ticker tape. Instead we'll throw it over to our human ticker, our producer John.
- [33:58]
Ann Berry
Stocks were mixed today. The S&P 500 retreating from yesterday's record close, finishing down nearly 210 of a percent for the day. The NASDAQ snapped its four day rally down 810 of a percent but the Dow finished up half a percent to post a new all time high.
- [34:15]
Barry Ritholtz
That's it for today's Brew Markets Daily.
- [34:17]
Ann Berry
Brew Markets Daily is hosted by Ann Berry and produced by Jean Croteau, Tarka Bellatief Avenue, Laroya and Emily Milian. Technical direction by Uchena Waugh. Brittany to Taco is our audio engineer and the president of Morning Brew Inc. Is Devin Emery.
- [34:29]
Barry Ritholtz
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. See you back here tomorrow, same time, same place.