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- [00:01]
Sponsor/Announcer
Support for the show comes from bcx, the public ticker for private tech. The US Stock market started history's greatest wave of wealth creation. From factory workers in Detroit to farmers in Omaha, anyone can own a piece of the great American companies. But today, our most innovative companies are staying private longer, which means everyday Americans are missing out. Until now. Introducing vcx, a public ticker for private tech, now available wherever you buy stocks. Visit getvcx.com for more info. That's getvcx.com carefully consider the investment material before investing, including objectives, risks, charges and expenses. This and other information can be found in the Fund's prospectus@getvcx.com this is a Paid sponsorship.
- [00:47]
Sponsor/Advertiser
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- [01:28]
Mark Zandi
If you sit in the sun, you may just get burned. But some people are willing to take that chance.
- [01:34]
Sponsor/Advertiser
There is this certain degree of nihilism of like, oh well, the world is bad anyway. Why wouldn't I just also get a tan?
- [01:43]
Mark Zandi
Tan maxing. That's this week on Explain it to Me. Find new episodes wherever you get your podcasts. Money market matter.
- [02:01]
Ed Elson
If money is evil, then that building is hell.
- [02:03]
Mark Zandi
The show goes on. Sell Sell.
- [02:10]
Ed Elson
Welcome to Prof. G Markets. I'm Ed elson. It is July 15th. Let's check in on yesterday's market vitals. The major indices climbed on a better than expected inflation report. More on that in a minute. The inflation reading also sent treasury yields low. Meanwhile, Brent crude declined after President Trump scrapped his idea for a 20% fee on cargo in the Strait of Hormuz. And finally, IBM plunged 25% after pre announcing earnings that missed expectations. It was its worst day of all time. Okay, what else is happening? Inflation cooled to an annual rate of 3.5% in June, which was lower than economists had predicted. Consumer prices fell 0.4% between May and June. That was the largest one month decrease since April 2020. Much of that drop was driven by lower energy prices after the US Iran ceasefire eased fears of supply disruptions. But that relief may be short lived. Last week, of course, President Trump declared The ceasefire over, and yesterday the US Launched a new round of strikes on Iranian targets. Brent crude has since climbed back to around $85 a barrel, raising the prospect that energy prices and inflation could move higher again. So, joining us to discuss this inflation report, we are speaking with Mark Zandi, chief economist at Moody's Analytics. Mark, great to see you. Thank you for joining us on the show. Inflation's come down. We were at 4.2, which was really high, down, down to 3.5. Still pretty high, but lower than expected. I think the bigger question, though, is how much of that was because oil prices went lower in June. And I asked that because oil prices are, of course, rising again, which makes me think maybe this is not here to stay.
- [04:06]
Mark Zandi
Yeah, it's odd when you said inflation is easing to 3.5%. You know, it is easing, it's down, but, you know, it's still awfully high, uncomfortably high. You know, as everyone knows, the Fed's target, what is 2% inflation. That's kind of what we take as being a comfortable rate of inflation and I think under what I'll call underlying inflation, kind of abstracting from all the vagaries of the data. And by the way, in this report, there was a lot of noise. I don't know if you noticed, but it was a very noisy report and a lot of anomalies in the data. And I'm not sure how much to read into it. But abstracting from that, I think underlying inflation is kind of 3 to 3.5% somewhere in there. Again, uncomfortably high. And that's abstracting from the swings in energy prices related to the war, which obviously added a lot to inflation coming into the war back in the spring, early summer, and is now detracting from inflation. But abstracting from that, we're at a very high, uncomfortable level of inflation. And this is after a number of years of very high inflation. In fact, inflation's been above the Fed's target for five years. And so the cost of living is extraordinarily high. It reflects the cumulative effect of those high rates of inflation. And I think people just are feeling very uncomfortable with that. And hopefully the Iran work moves in the right direction here and begins to abate. But as you point out, that's now a new risk.
- [05:39]
Ed Elson
I think the big question is, is this going to be the trend? Will we keep seeing the number go down? And that's what I'm trying to understand from this report. Does this tell us that inflation, inflation is now headed in the right direction, specifically down, or is This a blip because what we know about last month is that specifically when we look at the energy markets, people seem to think the war was over. Now here we are in July, prices are going back up and people seem to think, no, it's not because the President told us as much.
- [06:15]
Mark Zandi
I mean, obviously a lot depends on what the President does or doesn't do and whether the strait reopens and we get oil flowing through or not. There's no way to know for sure. Obviously, given the ups and downs and all arounds here, I think the most likely scenario is that the incentives here for the President and the Iranian regime to figure this out and open up the strait over time and get oil flowing, get oil prices down are pretty high and that they will figure that out. But obviously I say that with no confidence. This can go in a boatload of directions if we just assume I'm right, oil prices come down and inflation continues to come in, it'll take time. It's not going to come in fast. It's going to be sticky. I think that there's a lot of other things going on here. Artificial intelligence is juicing up inflation. Immigration policy is juicing up inflation. There's just a lot of slew of things going on that suggest that while inflation will come in, assuming the Iran war sticks roughly to script, it's not going to come in fast, it's going to come in slow and sticky and it might not be a couple, three years before we get back to anything
- [07:22]
Ed Elson
we all feel comfortable with. Do you expect that three and a half will, it'll go up from three and a half over the next few months? It'll go, go down. I mean, what, directionally, where do you think we're headed?
- [07:34]
Mark Zandi
I think we're directionally lower. Again, assuming that, you know, the Ron war doesn't go off the rails here and oil prices stay where they, roughly where they are, let's say 80, 85 bucks a barrel then I do think we will see it come in. Because the other thing to consider on inflation that's really fundamental is the, is the job market. You know, that that goes to wages and cost of labor and that is the single most important driving force of inflation. And right now the labor market is soft. We saw that in the last jobs report. We're not creating a whole lot of jobs and there's slack in the labor market that's continuing to increase, that's putting downward pressure on wages. Wage growth is below the rate of inflation and slowing across all different wage groups. And that should ultimately drive the rate of inflation lower. But again, that's a process that takes time. That doesn't happen in a month or two or three, that happens in a year. Two or three.
- [08:31]
Ed Elson
Just looking at the US inflation rate compared to other nations, we currently have the highest inflation rate in the G7, which is quite interesting because it seemed as though we were kind of the most sheltered from what was happening to oil prices as a result of the Iran war. But now I guess that's not really the case. I mean, what do you make of the fact that we're actually in a worse spot now than many of our peers?
- [09:04]
Mark Zandi
Yeah, I think that goes to the fact that most other countries provide subsidies or regulate the price of energy. They don't let it pass through. The Europeans don't let it pass through. Some countries do, some Asian countries, but most don't. The US is very different in that as soon as oil prices go up, our cost of gasoline, diesel, jet fuel goes immediately up. Now there's problems with that and that is we're all struggling with lower purchasing power, real incomes are declining and it's hurting the economy. But the benefit of that is we adjust a lot more quickly. We pull back on our driving, we fly less, we become more efficient in the use of trucks that deliver packages to our door. The rest of the world will ultimately be a pass through, but it just takes a much longer period of time for that to occur. The other thing that might be going on to help explain, and this is a little more problematic, is lack of competition. Competition in different industries has eroded over time. Increasing number of industries are dominated by a few companies that can set prices more significantly or are able to hold price their pricing for longer in the face of weakening demand or slower costs of doing business. And so that lack of competition, which is I think occurred over the years and become more pronounced now, maybe may be also playing a role in the higher rates of inflation that we're seeing here and the fact that maybe why inflation? The reason why inflation might be more sticky here because businesses are under less pressure to cut prices because of the lack of competition or the less lessening of competition.
- [10:49]
Ed Elson
Kevin Walsh, new Fed Chair, spoke to Congress. He said the CPI drop does not mean, quote, mission accomplished on inflation. He seems to be a lot more hawkish than people expected. What do you make of his statements? What do you think this means for interest rates going forward?
- [11:08]
Mark Zandi
Yeah, I've been surprised at how, as you say hawkish, he has been going back to the FOMC meeting. The policy Making committee meeting, he used the words price stability several times and he convinced investors that he's serious about that. If you could look at inflation expectations, what bond investors think inflation will be in the future, they came back down, back to where they were prior to the Iran war. And so they're convinced that he's going to work hard to keep inflation down. That's his primary focus. And I take a great deal of solace in that because six months ago when we were having these conversations, I was much worried about the Fed's independence and that whoever the Fed chair was going to be could buckle under the weight of the pressure from the president who says he wants lower interest rates. But I feel less worried about that. We'll have to see, you know, obviously there's. We'll have to see how this plays out and there's a lot to be learned. But so far so good. And I think that feels very good. Now does mean the potential for higher rates. I mean, markets are now anticipating, last I looked, might come in today with these better inflation numbers. But last I looked, two rate increases quarter point each time. And so the investors are expecting that that hawkish rhetoric will translate into higher interest rates. And one of the side effects of more hawkish Fed chair is you're going to have higher rates for longer. But I think ultimately the key thing here is Fed independence. And I feel much better about that in the wake of all the things that Kevin Marsh has done since he's been appoint.
- [12:45]
Ed Elson
Do you have a view on the pulse for interest rates for the year ahead? I mean, this seems to be the biggest question for investors. Will rates go up or down or will they stay flat? And people have been debating this since the beginning of the year. Everyone seemed to agree they were going to come down heading into the year. That's changed now. Do you have a view on that debate?
- [13:08]
Mark Zandi
Yeah, Corset. I've got lots of views. Yeah. Even on the World Cup. I got a view. So. Or will the Phillies win? Yeah, I got it. Yeah, I got a view. It's a bit outside of consensus. I don't think the Fed's going to raise or lower rates. I think policy will remain unchanged because I do think, you know, they have two mandates. One is low and stable inflation, and that's what we've been focused on that would call for higher rates. But the other mandate is full employment. And there the job market, in my humble opinion, is soft. It's weak. I mean, we're not creating any jobs. All the jobs we're Creating is in the healthcare sector. It's very narrow. If you lose your job, you're in big trouble because you can't get hired back. Hiring rates are very low. The share of the unemployed that are unemployed for long periods of time is now rising and very high wage growth is very weak. And so I worry that there's slack in the labor market. You don't see it in the unemployment rate because labor force is collapsing. People are leaving the labor force. And if the labor force participation rate had just remained unchanged over the past year, the unemployment rate would be 5%. And we'd all be talking, talking very differently if it was 5%. And so I think the job market is very soft, and I think ultimately that will convince the committee not to raise rates. But, you know, like many things, like which way is this war going to go, I say this with low levels of confidence because, you know, obviously there's a lot of uncertainty here.
- [14:36]
Sponsor/Announcer
Right.
- [14:36]
Ed Elson
It seems like the question is, as usual, which one is more of a problem? I think I tend to err on the side of the inflation problem is more of a problem because I'm personally very worried about what we're seeing in terms of the Iran situation. But I take your point. And you said this recently in your social media. You said that the commentary on the employment report for June was, quote, much too dismissive of how weak the numbers looked. And so I guess we find ourselves in the same position that the Fed always finds itself in, which is, you got to choose.
- [15:13]
Mark Zandi
Well, although they're pushed into this really bad place, right? I mean, because of policy. I mean, because of the terrorists, because of immigration, because of the war that leads to weaker growth and higher inflation. That's stagflation. This is a stagflation environment. And what do you do with that at the Fed? Do you focus on inflation or do you focus on growth? And it's a very tough spot to be in, and that's the situation that they're in. My the sense is they punt and they say, I can't figure out which one to focus on. I'm not changing rates, but I hear you. I mean, at the end of the day, push comes to shove, they've got to focus on inflation. Now, I think the deciding factor ultimately on that will be inflation expectations. If inflation expectations stay down, then they may be able to get away without raising rates because inflation should come in. If inflation expectations start to rise, say, you know, right now inflation expectations are based on the expectation the Fed's going to actually raise rates. Now let's say that we, they say, okay, we're not, they're not raising rates, so inflation expectations start to rise, therefore they got to raise rates. I mean, so I know that's mind numbing, but that's the way this, this all works.
- [16:20]
Ed Elson
It does make your head spin.
- [16:23]
Mark Zandi
Yeah. It's like a hall of mirrors. Yeah.
- [16:26]
Ed Elson
All right. Mark Zandi, chief economist at Moody's Analytics. Mark, appreciate your time. Thank you.
- [16:31]
Mark Zandi
Thank you.
- [16:35]
Ed Elson
After the break, Wall street banks make a killing again. And for even more markets insights, you can subscribe to my weekly newsletter simply put@simply put. Prof.gmedia.com.
- [16:55]
Sponsor/Advertiser
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- [17:24]
Years ago, Netflix said that its main competitor wasn't some other streaming service.
- [17:28]
It was sleep.
- [17:29]
And maybe that explains why all of a sudden, Netflix has games, it has tons of reality shows, it has video podcasts, and maybe going forward, it even has YouTube videos. This week on the Vergecast, we try to figure out what Netflix is going forward and whether it's still a streaming service we want. Plus the future of smart glasses, what's going on with quantum computing, and yes, we have a Trump phone. All that on the Vergecast. Wherever you get podcasts,
- [17:56]
Nate Sloan or Charlie Harding
it all started with Call me maybe. Over 10 years ago, we created Switched On Pop to listen closer, uncovering the song craft behind even the glossiest of pop hits. Since then, we've released almost 500 episodes. We've defined the sounds of our modern soundtrack and interviewed hundreds of musicians and music insiders, including the singer of Call Me maybe herself, Carly Rae Jepsen. I'm musicologist Nate Sloan. And I'm songwriter Charlie harding. And on July 14, switched on pop is embarking on a new chapter. We're stepping out from behind our microphones and in front of the camera to stream our podcast on Netflix. Now you'll still be able to listen to the show anywhere you get podcasts, but now you'll be able to watch us each week, breaking down the sounds of the moment, digging into musical minutia with your favorite artists, and offering questionable dad jokes. As always, we're kicking off our Netflix debut with a four part series on the art of the song with help from artists, producers and songwriters like Aaron Dessner, Audrey Hobert, Trevor Horn, Cypress Hill and Tayla Parks. Stream switched on pop on Netflix and anywhere you get podcasts every Tuesday starting on July 14th.
- [19:06]
Ed Elson
We're back with Prof. G Markets. Five of America's biggest banks just reported earnings and they all delivered the same message. Wall street is booming. JP Morgan beat on the top and bottom lines with CEO Jamie Dimon announcing record revenues across every major business. Goldman Sachs posted one of its strongest quarters in history with profits up nearly 80% year over year. And bank of America, Wells Fargo and Citigroup all topped expectations as well. Driving those results was a revival in deal including $500 million in fees from the largest IPO of all time, SpaceX. But investors didn't reward the banks equally. Goldman popped nearly 9% on the news. JP Morgan and Bank of America both rose about 2% while Wells Fargo and Citigroup fell 2 and 5% respectively. So here to tell us what Wall Street's blowout quarter means for the markets and for the economy, we are speaking with Saul Martinez, head of US Financials research at hsbc. Saul, thanks for joining us. On property markets blowout earnings across the board according to Jamie Dimon, it's quote getting close to as good as it gets for JP Morgan and for basically everyone. Why is it such a good time to be a bank right now?
- [20:28]
Saul Martinez
Right now you have almost a perfect storm of a good economic backdrop, a resilient economy, high real rates which is positive for the net interest margins of banks. And you're seeing a resurgence of deal making activity, asset prices are going higher. So you have a backdrop that is supportive of a wide, wide range of businesses. Everything from traditional banking which is benefiting from good loan growth, good net interest income growth, good net interest margins. But what was exceptional I guess was most exceptional, I think about the results this quarter were the capital markets businesses. Deal making is, is, is back in spades. So this quarter investment banking fees for the five companies you, you highlighted grew anywhere from 30 to 55% year on year. And it's across product IPO activity which is, you know, has been historically low, has rebounded and at the same time M and A activity has been strong. Debt issuance is historically elevated. And then on top of that, what in what may have surprised more than that is on the trading side. So banks intermediate, you know, trades they finance institutional investors and that those businesses are also booming, especially equities, which was up for those banks anywhere from 45 to 90% year on year and that. So it's almost the perfect storm where traditional banking, capital markets businesses are doing well and it's reflective of a good economic backdrop with high rates or higher rates than we've had in the past and a lot of deal making activity going on.
- [22:11]
Ed Elson
So just to go through some of these things that are going right, you've got the loan growth, you've got these, the phenomenal equities trading, which I mean it basically sounds like clients, investors are trading stocks more than double than they were in some cases or sorry, close to double what they were trading from a year ago. So that's booming and I assume a lot of that is the volatility that's happening in the markets that often increases trading M and A, the deal making and then of course the IPOs, the most significant of which was SpaceX, which all five of these banks were underwriters of. My question, how important was that SpaceX IPO to these earnings and how important will these future IPOs, namely OpenAI and Anthropic, be to these earnings as well? Or are they less important?
- [23:05]
Saul Martinez
Well, I mean if you look at them in isolation, it's not, they're not huge numbers relative to the total revenue numbers. So even, even, you know, we don't know the exact, you know, fees collected by each individual bank. But it helps the equity capital markets business, but that's pretty small proportion of the overall revenue stream. Now don't get me wrong, you've seen IPO activity more broadly rebound and that is helping investment banking fees generally. And you do have additional IPOs, large IPOs that could be coming, which provide an additional tailwind possibly later this year and into early next year. So it's helpful, it's not the biggest driver. That said, there are other, there's a sort of a multiplier effect also from some of these transactions. You mint a lot of billionaires, for example, with something like SpaceX and that provides opportunities for your wealth management business. There are trading opportunities around that. There's going to be index rebalances around SpaceX, which forces investors to reposition their portfolio so your market making activity increases. So looking at the IPO fees and the investment banking fees in isolation on these deals probably tells you only part of the story. There's sort of a multiplier effect on a lot of these transactions, whether they're IPOs or you know, M and A transactions as well, where you have a lot of that same phenomenon going on, where they're, where it helps you in multiple of your capital markets businesses. So you're, you're, you're seeing that multiplier effect really take hold right now.
- [24:43]
Ed Elson
Might be a crude way to put it, but when stuff happens in the capital markets, that's a good thing for banks. One of the things that is happening that David Solomon pointed out was the AI infrastructure buildout, which has been a boon for the company. He pointed out all of these data centers that are being built and financed. And that's kind of interesting because, you know, you could understand why, you know, Nvidia would be a winner of the AI buildout. You wouldn't immediately think of Wall Street. Why have they benefited from this build out?
- [25:18]
Saul Martinez
It's sort of a similar answer to the prior answer. There's sort of a multiplier dynamic, right? We think about AI. There's sort of the first order or first order of magnitude is on the financing side. So you have banks lending more, you have more debt issuance, you have more debt capital markets issuance, you have sort of an economic multiplier effect. It's not just the AI infrastructure companies, it's also the energy companies and other firms that benefit from that. And there's financing, there's lending, there's, you know, there's debt issuance, there's, you can, there, there are opportunities to lend and then distribute them to some of those products for your wealth management clients. And on top of that, now you have IPO activity going. So, you know, there's, there's a tailwind there. You have wealth management opportunities for, for, you know, folks who are newly minted billionaires. So there's again, there's, you know, there think about banks. They provide, you know, wealth, you know, a store of value with wealth management products and deposits. When there's a lot of value creation, all of those things benefit. And I think with the AI buildout, it flows back into banks, whether they're investment banks or traditional banks in numerous ways.
- [26:38]
Ed Elson
Jamie Dimon. So he said that this is as good as it gets. He later followed that comment up with a slightly more cautious statement. He said, quote, we just don't know how long it's going to last. What could end or run out for these banks? What should they be worried about at this point?
- [26:55]
Saul Martinez
It is hard to envision continued growth off of the base we're on. And I think that could be a headwind for, eventually be a headwind for some of these companies and for the stocks to continue to do well. I think the other thing I would just mention is a little Bit more mundane. And you saw it with Wells Fargo. We talked about loan growth being good. That is driving net interest income, which for traditional banks, this is the biggest revenue item. But if you start to see deposit cost pressure, higher funding costs, we now have one rate hike built into the forward curve. Banks are growing. There's a little bit more competition. If that starts to eat away at the net interest income growth in the second half of the year and next year, that's also something that could derail the positive thesis. And again, you kind of saw that with Wells Fargo today because that was one of the concerns that people had was funding costs and what it means for net interest income growth.
- [27:52]
Ed Elson
Just one final question before we let you go. Jamie Dimon had some interesting things to say about JP Morgan's use of AI. He said that in some discrete areas, AI had been used to, quote, reduce jobs by 30 or 40%. He then sort of amended that. He said that those employees were offered jobs elsewhere, but the net net is. He's saying AI is reducing their reliance on people in certain areas. I'd be interested to get your reactions to those comments. And also this idea that AI could be used on Wall street to one, replace people and two, increase profits, it's a fair question.
- [28:34]
Saul Martinez
And I think that was in response to a question I asked of Jamie about AI. Look, I think banks are in the early innings of their adopting use cases for AI. I think they're generally been focused on efficiency enhancements and cyber risks and fraud. But the AI tools are advancing so rapidly that, you know, I think companies generally, not just banks, have to look at whether existing organizational structures make sense and what the right way to be organized and what the right headcount levels are. I mean, you saw in late February Block, and I know Block's very different than JP Morgan, but they cut 40% of their headcount, basically arguing that given the advancements of AI tools, the way they're organized should be very different. And I think is banks look at their organizational structures and their headcounts. There. There is a possibility that in some cases, you know, there, there could be, you know, there could be changes in how headcount is, are constituted and what the right. And I think companies generally, and banks specifically will have to think about what the right way to be organized is and how many employees they need. That's not to say you're going to see massive headcount reductions, but it is something that I think all companies will have to deal with. And this is also a very politically sensitive Topic. Right. AI just generally speaking. So I do think management teams will have to think about how they frame these discussions and what the right level is and how they communicate that. But it is a potentially something that could really enhance efficiency, but exactly how it plays out in terms of organizational structure. Right levels of personnel. Right levels of personnel in which groups of the business, that is all going to have to play out over time. I think one final thing here, Ed, that I'd mention is that Jamie does argue that this will all get competed away. I think that's his argument that some of the benefits will, you know, in a competitive sector will, will get competed away. And I agree with that to a point because, you know, I do think in a competitive market that happens. But excess returns can last a long time. And, you know, those who are first movers could have, you know, significant advantages here.
- [31:09]
Sponsor/Announcer
All right.
- [31:10]
Ed Elson
Saul Martini is head of US Financials Research at hsbc. Saul, we appreciate your time.
- [31:15]
Saul Martinez
Anytime.
- [31:20]
Ed Elson
As we wrap up a quick word on the CPI report that we just discussed with Mark. First things first, let's recognize this is good news. I would never come on here and celebrate higher inflation just to say I told you so. Inflation is the fuel of the affordability crisis. It is the difference between eating and going hungry for millions of Americans. So anytime the number goes down, that is a good thing. And no, I don't think that the BLS is lying. Having said that, it would be premature to celebrate this because while the number did go down, what we also know is that the reason it went down is because last month oil prices went down as investors anticipated a swift end to the Iran war, which as of this week has officially been proven very wrong. The Memorandum of Understanding is over. According to the President, the ceasefire is over. The Strait of Hormuz is blocked once again. And lo and behold, here we are in July and oil prices are again rising. We're now up to $85 a barrel. That is up 20% from the prices we experienced in June. The prices which were of course, reflected in that CPI report that we're now all expected to celebrate. So, no, this isn't a great report. It's good insofar as it's a temporary sigh of relief. But it's bad insofar as it is a temporary sigh of relief. This is most likely a blip in the long story of the Iran War, the war that many had said was coming to an end, but that many must now admit is only just beginning. On a brighter but unrelated note, I will end this show with one final message. It's coming home. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Kristen o' Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profg Markets from Profgy Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.