Good Life’s Investment team keeps you up-to-date with timely market insights and updates to help you navigate the investment landscape.
ON THE VOLATILITY INDEX
Noah Brooks:
Welcome to the Market Enthusiast Podcast. I’m Noah Brooks. I’m with me as always, Chris Needs. Thanks for listening today, we really appreciate it. So since the last time we were sitting here talking, Chris, it seems like there’s a change in sentiment. We had a market bottom in October of ’23, and then, really, we had a massive six-month bounce, six months rally, and I don’t know if it is since the eclipse, maybe a little bit earlier than that, but it seems like there’s a little bit of change in sentiment.
Chris Needs:
Yeah. So there was no volatility in Q1 on the back of that big rally you were just mentioning. The VIX in Q1 only averaged 13.7, which is a very, very low reading and-
Noah Brooks:
Volatility Index?
Chris Needs:
Volatility Index, yep. And it just seems like we were due for some volatility. Then you add in some economic data, maybe some stickier inflation and looks like we’re getting a little bit of a repricing now, which is something I guess we kind of expected. We mentioned it in our quarterly commentary that it would make sense to see some movement here, volatility to pick up and maybe a minor repricing. And you take into account higher inflation, higher rates and sort of the high mark of sentiment and how positive and how quickly the market’s moved up. It makes sense to see a little bump in the road.
Noah Brooks:
A lot of the rally, and I don’t know how much you can actually ascribe to it as a percentage, but there’s this, I guess at the time and understanding that the Fed’s going to lower rates and the market’s moving on that understanding. And so now we’re at a position where maybe they’re pushed out. I mean nobody knows when it’s going to happen except the Fed itself, but it seems like more like a July scenario at the moment. Certainly we went through March, that didn’t happen. That was the expectation that it was going to be in March. It doesn’t feel like it’s going to happen in the short-term.
So I had someone ask me the other day, well, are we going to give back all those gains because the Fed isn’t lowering? And I had to explain that that’s not exactly how it works, but the sentiment is turning a little bit. And so I think the high in the SP 500, the all-time high, 5,264, around March 28th. And today before we got in here, we’re down to 5,026, I think it was when I looked. So that’s five, four and a half percent pullback, those types of things, I think you have the data on it, how many times it happened [inaudible 00:02:58]?
Chris Needs:
On average three to four times a year, do we see a 5% pullback? So totally normal. Nothing to run and hide for unless we get some geopolitical issues that exacerbate it. That’s a whole another-
ON GEOPOLITICAL ISSUES
Noah Brooks:
We can talk about that. I mean obviously the Middle East, as I always call it a tinderbox, it hasn’t gotten any better in the last week. This weekend most everybody out there listening has probably realized what happened or saw the news this weekend with Iran sending the drones over. I mean we all kind of know that that started, I think it started Friday night, and the drones got there maybe Sunday morning. I thought we’d wake up Monday and it would be down a thousand points or something. And that didn’t happen. I mean it wasn’t happening. We were down on Monday.
Chris Needs:
Market opened up and crude opened down and then-
Noah Brooks:
It flipped.
Chris Needs:
… the market came back down.
Noah Brooks:
I mean we’re only a few days into the week here, but that’s happened where market opens up and at the end of the day closes down. And that’s the type of sentiment change that I think is worth paying attention to. And when I say paying attention, I don’t mean like, oh my gosh, you have to make changes to the portfolios. And we are certainly not at the moment, but it’s a scenario where there’s something changing in the market. There’s a different stance that investors are taking right now than they were three or four weeks ago.
So it comes down to really when is the Fed going to lower rates? Forget the geopolitical scenario, but if the sentiment is changing, is it going to make such a difference when rates come down? I personally think we’re still in the category of why do rates need to come down, really why do rates need to come down? And the closer we get to the election, the more the Federal Reserve probably doesn’t want to adjust rates.
Chris Needs:
Yeah, that’s why I’ve been thinking July, because they don’t want to move right before the election and seem to be making a political maneuver, I guess. So it’s almost like July or-
Noah Brooks:
Or both?
Chris Needs:
… November. It’s almost like there’s no middle ground there in the… You know what I mean?
Noah Brooks:
I mean they could surprise the heck out of us. They could be like, “Hey, October. Yeah, September we’re going to do it just to prove that we can and we’re not being political, so everybody thinks we’re political and we’re not going to pull the trigger.”
Chris Needs:
And when was the last time the Fed moved? What was the previous time that they moved closest to the election? Arthur Burns essentially trying to get-
Noah Brooks:
You love this guy.
Chris Needs:
… Richard Nixon reelected. You would assume he wanted to keep his job, and that worked out. Now we could say J-PAL kind of cut in a way through his communication in December. It wasn’t an actual cut, but it cut yields, cut rates on that communication.
ON INTEREST RATES
Noah Brooks:
Yeah, well you mentioned yields, but interest rates are actually going back up. Bond yields are going back up and the bonds in general, not all bonds, but treasuries and the US bond ag that everybody looks at is actually down pretty substantial in the last two or three weeks since we’ve been here. Bond ag, I think as of yesterday was somewhere around -370 on the year, and we still have a long way to go on the year, but right now it’s down and bond investors are kind of feeling the pain again.
Chris Needs:
I think that’s what a bulk of this move is about, more so than even the geopolitical issues, which are obviously huge important issues, but I think it’s more on the back of yields and that CPI print we got, which we’ll certainly get to, because now bonds have sort of come back to reality, a place where you think they should be priced based on the information we received. But prior to this maybe start of a mini repricing in the equities, there had been no moment where they sort of repriced for rate cuts being pushed out dramatically.
Noah Brooks:
Well, that’s what I was saying earlier. If the run-up, the last six months was based on or predicated on the fact that the Fed was going to lower, and the Fed’s not lowering, I mean something’s got to give, so earnings started coming out last week. We saw some bank earnings reasonably good, not outstanding. Net interest income on some of the banks was pretty good. We’re going to see a lot more over the next few weeks.
So there’ll be a lot more indicators of if companies are being more profitable than they were last quarter or last year. It’s one of those things though where we don’t really know, and I think it’s going to be company specific. In the end, you can put an aggregate out there and figure it out, but it’s really going to be company specific. There’s going to be some landmines, I think we’re going to see, I’ll be interested nowadays. You can put all of the conference calls together and see how many times they use specific words, so we know… What’s the word I’m thinking of? Can you tell?
Chris Needs:
Oh.
ON AI IN THE MEDICAL FIELD
Noah Brooks:
Oh, boy. Hey, I shouldn’t have set him up like that. So how many times is AI going to be-
Chris Needs:
That’s been about a year now. Everybody’s trying to throw it in to get a little bump from the algorithms.
Noah Brooks:
I was doing some research the other day and I came across something in our local paper, which almost never happens here in Berks County, Pennsylvania. It was an article on a private company called Digital Diagnostics, and they make an AI system that looks at pictures of eyes, and I have it here, what does it say? Their product is LumineticsCore, designed to diagnose diabetes related eye disease without needing a physician to look at the images.
Now, I’m not familiar with this, but I imagine the example that I always use is looking at some type of mole or skin tag that people have to determine if it’s cancerous or not. The difference between having a doctor look at it based on his knowledge versus having a computer look at it and compare it to two million other pictures or three million other pictures and you get a much more accurate system.
So this is a scenario where an AI system is looking at a high-definition picture of a retina to figure out if they have this issue. And it’s one of the first things that I think, not the first thing, but it’s one of the things that I think this is really going to revolutionize medicine.
Chris Needs:
Medical instruments utilizing AI is I think one of the most interesting things we’re going to see in terms of the benefits of AI. And even if it weren’t AI making that decision, which it sounds like it may be with this one, you can still have multiple locations that are running that equipment that could be run by probably, I don’t know, someone basic who doesn’t have a medical degree. You don’t need to pay $100 an hour to have someone operate that machine and then you can still get the same results you would get otherwise.
Noah Brooks:
So I just envisioned like a fast food restaurant that does medical exams. So the computer is prescribing the advice or doling out advice. You just need someone to take a picture of the eye, right?
Chris Needs:
Yep.
Noah Brooks:
It’s like a Wendy’s for an eye exam. That’s actually not a bad idea. In terms of moving on with AI, we were talking earlier this week or late last week, there was an article most people know Moore’s Law, the idea that the number of transistors on a computer chip can double every two years. Gordon Moore, co-founder of Intel came up with that.
Chris Needs:
Part of the traitorous eight.
Noah Brooks:
Traitorous eight.
Chris Needs:
So he left and started what became Intel Corporation from William Shockley. I think they were at Cal Institute or something like that. Some university.
Noah Brooks:
Yeah, the traitorous eight. So he came up with that. But now apparently, and I don’t know if they had given it a name, but the information was similar. It was saying these large language models, essentially the chatbots, are going to develop at a rate, they’re going to double every eight months.
So whether it’s ChatGPT or one of the others that are out there, I’m only familiar with ChatGPT or Chat as I like to call him. I think calling it Chat is a little silly, but Chat, if he’s doubling every eight months, I mean when you go in there and you mess around with it, in eight months from now, if they’re able to double the information or double the quality of the information and another eight months from that, I mean how long before it’s as qualified as the smartest person out there. It seems crazy.
So the Wendy’s eye exam with the chat GPT in two years, I mean, things are going to move really fast. We always say change happens slow and then it happens fast. And I think we’re on the precipice of whether it’s AI, whether it’s chatbots, happening really, really fast. And I’m not a doomer on it. I think it’s going to change the things that we don’t like to do. I think it’s going to make everybody more productive, whether it’s people like us or we’re talking about the healthcare industry. I think it’s just going to make everything more productive, and that really is the essence of the excitement around artificial intelligence.
Chris Needs:
Definitely.
Noah Brooks:
Is that it’s going to make companies more productive, people more productive. Therefore, productivity equates to growth and earnings in the end because really what we’re investing for is cashflow and for earnings. So if these large language models start to double every eight months, a few years into it, it’s going to be a different world out there. And I guess I’m excited to see it. It’ll be in five years from now, it’s going to really-
Chris Needs:
What’s it called? I don’t know, like Ben Franklin or DaVinci, someone who’s just smart at everything. Essentially-
Noah Brooks:
As [inaudible 00:13:25]?
Chris Needs:
… you’re going to have an AI robot that’s going to be able to give you expert level information on absolutely everything. I think I’ve heard of coders, they just feed in a ton of code, and they’ll tell them what’s wrong or how to fix it, which is something they would go through thousands of lines to figure out and it’s something they can punch in and it’s like five minutes and done now.
Noah Brooks:
The way I think about it is imagine having a tutor with you from the time you’re born, and let’s just call your tutor, I don’t know, Chat. And everything that you need, you ask Chat for, and I don’t mean get me milk or something like that, get me food, but you say, “Chat, I need help with my homework.” Or, “I need to understand this process better.” Or, “I need to understand how the situation works.” And you’ve been talking to Chat since you’ve been two or three years old, now you’re going to college, and Chat’s still with you, and as you’re learning, Chat’s learning what’s going on. I mean, I think the education system in this country is going to be highly affected by large language models, and the ability to place individual learning with every single kid without having a human teacher right there.
Chris Needs:
Well think about college education, universities, how expensive they are. That might be a disruptor for them. People could opt to forego those expensive loans and what have you, and they might just teach themselves.
Noah Brooks:
I mean, I’m not hiring anybody at the moment, but if you were in a spot to hire somebody from, I don’t know, Shippensburg here in Pennsylvania versus self-taught on ChatGPT.
Chris Needs:
They come in with CFA level knowledge, maybe.
Noah Brooks:
I don’t know. All right, let’s talk a little about economics and how maybe that’s playing into some of the sentiment change there a little bit. What do you have for us?
ON THE MARCH CPI REPORT
Chris Needs:
So we had the hot CPI report come out for March’s data.
Noah Brooks:
Hot meaning just a little bit higher and hotter than expected?
Chris Needs:
Yeah. So it was only 0.1 above expectation. So headline was 3.5 year over year. Core was 3.8, but what’s the definition of a trend? Three months generally we’ll say, but six-month and three-month CPI trends are now up. We’re not seeing the permit reversal. We’re not just seeing a little bit of stickiness, just a very slight increase. Not ideal, certainly. It’s sort of the standard things we’ve been talking about. There’s transportation, insurance, gas was a big contributor this past month. Some of these things are just starting to go back up in price a little bit.
Noah Brooks:
Yeah, gas has definitely popped up in the last week here where we are in Pennsylvania. I was feeling pretty good about it. I think it got down under 3.50 for a few weeks and I was like, “Okay.” Now we’re back up 3.75 for the cheap stuff, 4.25 for the good stuff. That’s definitely going to play into it. That’s a large component in CPI.
Chris Needs:
Yeah, I had a stat here that I wanted to share on inflation. So a lot of the economists out there and talking heads on financial media have been lamenting how the rent equivalent is calculated. Huge component, 35% of CPI. So obviously has an outsized effect and it’s a lagging effect. So in ’21 and 2022 when house prices went up, it was slow to account for that. No one complained about it then. But now that home prices are sort of leveling off, and even coming in just very slightly based on, we talk like a Zillow price index and some of these more maybe month-to-month or week-to-week updated indexes, it is still higher, a little bit more elevated. I think it crossed over in maybe October or November of 2022, the CPI versus these more up-to-date ones that feed in real time data, and no one complained when it was benefiting CPI, but now that it’s hurting CPI, people are saying the methodology is flawed. But I just wanted to share one methodology that I thought was very interesting, I thought was flawed, which is the health insurance calculation.
Noah Brooks:
Oh, you said you were doing it wrong?
Chris Needs:
I think they’re doing it wrong, for sure. I think the government is doing a disservice to how they’re calculating it.
Noah Brooks:
All right, let’s hear it.
Chris Needs:
The health insurance premiums are calculated in a way you wouldn’t expect. So it’s not what we, the consumer, consumer price index or personal consumption expenditure, it’s not what we are paying. So basically, what they do to calculate this in the CPI report is it is the total premiums minus benefits paid, which essentially makes it equivalent to health insurers retained earnings. So according to their metric and their methodology in the last year, health insurance premiums on the CPI and PCE report are down 15%, and over the last five years, they’re down 3%. I don’t know about anyone else out there. I think we have fairly good insurance here, but my insurance premiums aren’t down 15% in one year, and they’re not sure as heck, not down 3% over five years.
Noah Brooks:
Before we write a strongly worded letter to our senators. Let me just ask a question. How does inflation play into that? So if it’s flat and inflation was at 9%, would it be down 9%? If the actual number was flat and inflation was down nine, would it be down nine or up nine? Excuse me. Would it be down nine?
Chris Needs:
So again, it’s just the health insurance premiums minus benefits paid, so it would have to account for the benefits paid, would they be going up 9%?
Noah Brooks:
Well, not an expert in calculating that, but you would think that it would be simply based on the actual maybe average premium?
Chris Needs:
One would think, right?
Noah Brooks:
Yeah. Why you-
Chris Needs:
I totally agree with you.
Noah Brooks:
Do you have a hypothesis on why they’re doing it this way?
Chris Needs:
Because they’ve always done it that way. That’s all I could guess. Because I don’t think that’s an accurate way to gauge the price of health insurance is the retained earnings of the health insurers. And we sort of touched on this earlier, you and me together. So what may account for this is people may have put off major surgeries during COVID or they were taking lower volume during COVID.
So all those people are coming in now the last year or two and getting major surgeries, big things being done that are high benefits, high claim numbers. So it’s sort of eating away at their retained earnings, which goes into the calculation. And even though the actual premiums haven’t gone down, technically their retained earnings are, because they’re getting the same insurance premium, but they’re doing more major surgeries and things like that.
Noah Brooks:
It doesn’t seem right to me.
Chris Needs:
It doesn’t seem logical.
Noah Brooks:
I mean you don’t measure inflation on fuel costs by how much money… It’s a [inaudible 00:21:05]-
Chris Needs:
The oil companies make.
Noah Brooks:
You would think there’d be a standardized way to measure everything.
Chris Needs:
It’s an interesting anomaly in the methodology, which I’m sure there’s more, but this was the only one that caught my eye recently.
Noah Brooks:
Let’s keep that in our grab bag and come back to that at some point. I’d love to hear someone maybe with a little bit more expertise in calculating inflation. Maybe we can have someone on to talk about that. That sounds interesting.
ON MARKET PERFORMERS
Noah Brooks:
I mentioned energy, you’re talking about healthcare. There seems to be a little bit of a rotation in the market here.
So obviously technology has been the leader for a while. I don’t have the exact stat on it, but in the last month or so, there’s a little bit of rotation. Energy’s popping up, so oil prices are popping up because of what’s going on in the Middle East. Real estate not doing so well. I don’t know that that’s really new, but energy and materials really doing well, and I think there’s an expectation out there, and even if I didn’t say some commodities are starting to do well in addition to the golds and the silvers of the world, it seems like there’s a little bit of rotation.
And I guess, going back to 2008, we had this commodities super cycle in 2008 into 2009. It was one of the only things that really, really performed while the rest of the equity markets were underperforming. Now, I don’t know that this marks a start of a super cycle or anything like that, but there’s definitely a change.
It kind of goes along with the sentiment in the stock market where we have commodities starting to do well, energy starting to do well, and that’s something to take note of. That’s definitely something to take note of. So certainly gold is at all-time highs, and now we’re starting to hear really bullish calls from some of the other large brokerage firms and economists out there. I mean, we’ve heard in the past, gold, 5,000, gold, 10,000. I don’t think we’re going to get there, at least not in the short-term, but starting to hear some pretty lofty expectations.
Chris Needs:
Interesting. Gold is at all-time highs while the dollar is strong as well. So I don’t know if that plays into China is doing a massive stimulus right now for the last several months trying to get their issues in order. And I wonder if it has to do with that sort of overpowering the strong dollar which people normally look to as a relationship is dollar strength to gold.
Noah Brooks:
Yeah, inverse relationship. So dollar goes up, gold goes down. Same with oil. Anything that’s priced in dollars throughout the world, it’s kind of an inverse relationship. When the commodity goes up, generally speaking, the dollar is going down at the same time. Not always, but generally speaking. And so now we have a situation where gold’s up what, 14% year-to-date. Dollars back up as well, I don’t know the exact amount. And that doesn’t normally happen like that. We’re going to continue to monitor that, right? We’ll come back to this in a few weeks and see what they say. Does it have anything to do with the eclipse?
Chris Needs:
I don’t know, maybe.
Noah Brooks:
I think it does, personally. No, I don’t really believe that. I don’t have any conspiracy theories about the eclipse. It was interesting to watch.
Chris Needs:
Yeah. Yeah.
Noah Brooks:
We got our glasses on, sat outside for a little bit. It was a little bit cloud cover here. I don’t know.
ON INFLATION + FAST FOOD PRICES
Chris Needs:
Before we leave this sort of inflation conversation, my fast food stat for you, anyone out there who’s rushing around and getting fast food since 2014, so 10 years. McDonald’s menu prices are up 100%.
Noah Brooks:
Whoa.
Chris Needs:
Taco Bell, which is one of my favorites, up 81%. Chipotle is up 75%.
Noah Brooks:
Wow.
Chris Needs:
So menu prices are going up. Fast food isn’t so cheap anymore.
Noah Brooks:
Yeah, I’m going to date myself here. You talk about Taco Bell, when I lived in South Florida as a kid around the time of the first Gulf War, 1991. We used to go to Taco Bell, and for two bucks you could feed yourself really, really well. They had, I think it was 29 cent hard tacos, 39 cent soft tacos. I mean-
Chris Needs:
Good deal.
Noah Brooks:
… that was a great deal back then. I don’t know what it was for inflation-adjusted today, but it was $2 you could really feed yourself. It was early ’90s. It was a long time ago.
Chris Needs:
10 tacos for $3. Yes sir. I’ll take that.
Noah Brooks:
No one tried to figure out my age on that one.
Noah Brooks:
So inflation, right? It seems like it might be picking up a little bit. We’re going to keep our eyes on it. I don’t know that that’s going to change anything. It’s certainly not, but keep your eyes on it. And that might really be playing into the sediment, pushing out the forecast for the Fed to lower rates. I mean that’s definitely happening. Anything else that we can say about inflation at the moment?
Chris Needs:
Well, we sort of laid out why the Fed won’t cut in the short term or shouldn’t. Again, that’s an important delineation is we talk about things the Fed should or shouldn’t do, but what it really comes down is what they will do. But wages are still up 4.1%, which is above inflation, which is good, for American consumers obviously, but it’s trending down, which is a positive for the Fed. That’s something they can chalk up as a win. If we saw wages reaccelerating, we talked last podcast about the wage price cycle, that would be a really bad thing if we just turn back up along with inflation turning back up.
Noah Brooks:
So it would be bad for who? It would be bad for the people that wages are going up?
Chris Needs:
For the Fed trying to stop inflation.
Noah Brooks:
Playing devil’s advocate there. No, I think you’re right. I mean you want to see people making more money. I want to see people that are working at Wendy’s making more money and having a living wage at the same time. I want to pay the least I possibly can for everything that I want.
Chris Needs:
You don’t want that 100% price increase at McDonald’s?
Noah Brooks:
Yeah, I don’t know that I want to pay 12 bucks for a Big Mac, right? That’s my go-to, by the way. I don’t want to pay 12 bucks for a Big Mac. And I’m sure there’s places in the world that do that now, that’s not right. They can’t be. No, I don’t want to pay 12 bucks for a Big Mac. I hope not to see that, at least in the short-term.
I mean eventually, we’re going to get there. That’s what inflation is. But it’s one of those things where across the board you root for people doing well, at the same time that wage inflation is what the Federal Reserve is looking at, and they don’t want to see wage inflation, they want to see it low. And I think everybody knows that the target for the Federal Reserve and inflation is 2%, and we are not there at the moment.
Chris Needs:
No.
Noah Brooks:
Now there are a few people, former treasury secretary came on Bloomberg last week and said that he thinks it’s not out of the realm of possibility to see a hike.
Chris Needs:
Yeah. Larry made clear he thought it would be a mistake to cut. I mean, that was my takeaway from him going, making the rounds through financial media is he said the job’s not done basically.
Noah Brooks:
Yeah. So that plays into the higher for longer and that certainly plays into the sentiment and the change in sentiment.
Chris Needs:
I think you could make the case that we’re basically at a market neutral rate. I don’t know, I haven’t calculated where the Taylor rule would put rates at, but based on the economy’s strength with us at 5.25 to 5.50, things aren’t at least seemingly slowing down too much. So those cuts, they’re optional. They’re not a guarantee. And the market’s starting to price that in it looks like. So-
ON BOEING
Noah Brooks:
One or two things here before we get wrapped up. I’m going to go to Boeing just for a second. So there’s another, the Boeing still in the news. We know that the CEO is going to be stepping down later this year, but it seems like it just keeps getting worse for them. We haven’t had any crashes or anything, but there’s a whistleblower out there, another whistleblower.
Chris Needs:
Another one.
Noah Brooks:
That says the entire 787 fleet is at risk. And that’s when I fly American or occasionally when fly American, that’s what I fly. And you think to yourself, oh, it’s not going to be me. But I don’t love that fact that there’s a whistleblower out there. And then you see the CEO who’s going to walk away with a $33 million payday. You’re like-
Chris Needs:
Earn it.
Noah Brooks:
Yeah, I don’t really know about that one.
Chris Needs:
Yeah, they have dueling hearings today. I think they’re in two separate hearings today that they’re testifying in, I guess as a result of the whistleblower. But it’s no high-level Boeing executives talking today. So I don’t know how much news will be garnered or information, but information is not good for the headlines.
Noah Brooks:
No, not good.
ON COMMERCIAL REAL ESTATE TRENDS + REMOTE WORK
Noah Brooks:
And one last thing before we wrap up. There was a sale of a office building, a vacant office building, saw this last week, in St. Louis. So a vacant 44-story office tower in St. Louis, St. Louis apparently sold for three and a half million dollars at some point in the last month or so, but apparently it’s a former AT&T Center. Apparently, the last time it was sold was over $200 million in 2006. Yeah, 90%
Chris Needs:
98% decline?
Noah Brooks:
Oh my goodness. No, I don’t know anything about it. They didn’t go into the details of the building as it being condemned or something, but it’s empty. And I think it just goes to show you kind of the dramatic shift in remote working.
Certainly, we know about it on the East Coast. This is Midwest, right? So you still have a lot of people in the Midwest that are doing remote work, and I think it’s gaining traction and it goes to the commercial real estate market. I think this is one of the things where maybe sentiment, people are starting to look at this stuff instead of whistling past the graveyard.
They’re starting to look at this stuff and they’re saying, “Hey, this may be an issue in the commercial real estate market.” I know we’ve been talking about it for a long time, since March.
Chris Needs:
Everyone was talking about it back in March, and it seems like it’s been sort of forgotten about, but it’s still out there. It’s still a risk. And maybe these, we’ll call them Tier C or maybe lower quality or older office buildings that aren’t perfectly positioned or optimally designed for today’s work environment are going to have trouble selling. And we might see some more purchases with discounts like that.
Noah Brooks:
Yeah. Well, it brings up a good point though, is I don’t know what class real estate this is categorized as, but there’s going to be a giant Delta between purpose-built office buildings from a few years ago or current that are being built, and the old stuff that’s been converted and wasn’t built with today’s technology in mind.
I mean, imagine trying to get Wi-Fi where you have three-foot-thick brick. I mean, that might be tough in a building, where you don’t have open space like you do today. You have a lot of smaller offices, right? No glass. Everything’s all significant walls, whether it’s steel or concrete or brick.
And so there might be a scenario here where new buildings are, I don’t want to say not fazed by it, but there’s not really an issue with new stuff. Class A, relatively new, but you’re older, less well taken care of, less adept at technology buildings, they may be converted.
And we talked about this, last week you and I did talking about malls. What’s going to happen? All these malls out there that are closing, I mean here in this town, there were two malls. They tore down half of it. But a lot of people are talking about converting them to, whether it’s assisted living or college-type dorms. Interesting.
Chris Needs:
I mean, Schuylkill Mall in my day up in Frackville, Pennsylvania, that was totally repurposed. It went from a bustling mall in the ’90s to now it’s a distribution center. I mean, they have the space, maybe that’s another way they can go with a lot of them is they’re big buildings. So something can be put in there to be utilized. But I guess someone’s probably going to take a haircut on many of these things.
Noah Brooks:
Indoor water park. Ooh, I like it.
All right, so here’s the wrap up. It seems like there is a change in sentiment in the markets’ inflation, that last mile of inflation, as they say, it seems like it’s going to be a little bit harder than going from 9:00 to 4:00. The 4:00 to 2:00 might be harder. Market’s starting to wake up to that, looks like a little bit higher for longer and maybe a small change in sentiment.
Right now we’re down four and half percent from all-time highs, which is effectively nothing. But we could fall a little bit more. Earnings are in play and that’s really going to be the telltale sign over the next two, three weeks to what happens in the future.
So for Good Life and the Market Enthusiast, I’m Noah Brooks. And with me is Chris Needs. Thank you all for listening.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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Table of Contents
ON THE VOLATILITY INDEX
Noah Brooks:
Welcome to the Market Enthusiast Podcast. I’m Noah Brooks. I’m with me as always, Chris Needs. Thanks for listening today, we really appreciate it. So since the last time we were sitting here talking, Chris, it seems like there’s a change in sentiment. We had a market bottom in October of ’23, and then, really, we had a massive six-month bounce, six months rally, and I don’t know if it is since the eclipse, maybe a little bit earlier than that, but it seems like there’s a little bit of change in sentiment.
Chris Needs:
Yeah. So there was no volatility in Q1 on the back of that big rally you were just mentioning. The VIX in Q1 only averaged 13.7, which is a very, very low reading and-
Noah Brooks:
Volatility Index?
Chris Needs:
Volatility Index, yep. And it just seems like we were due for some volatility. Then you add in some economic data, maybe some stickier inflation and looks like we’re getting a little bit of a repricing now, which is something I guess we kind of expected. We mentioned it in our quarterly commentary that it would make sense to see some movement here, volatility to pick up and maybe a minor repricing. And you take into account higher inflation, higher rates and sort of the high mark of sentiment and how positive and how quickly the market’s moved up. It makes sense to see a little bump in the road.
Noah Brooks:
A lot of the rally, and I don’t know how much you can actually ascribe to it as a percentage, but there’s this, I guess at the time and understanding that the Fed’s going to lower rates and the market’s moving on that understanding. And so now we’re at a position where maybe they’re pushed out. I mean nobody knows when it’s going to happen except the Fed itself, but it seems like more like a July scenario at the moment. Certainly we went through March, that didn’t happen. That was the expectation that it was going to be in March. It doesn’t feel like it’s going to happen in the short-term.
So I had someone ask me the other day, well, are we going to give back all those gains because the Fed isn’t lowering? And I had to explain that that’s not exactly how it works, but the sentiment is turning a little bit. And so I think the high in the SP 500, the all-time high, 5,264, around March 28th. And today before we got in here, we’re down to 5,026, I think it was when I looked. So that’s five, four and a half percent pullback, those types of things, I think you have the data on it, how many times it happened [inaudible 00:02:58]?
Chris Needs:
On average three to four times a year, do we see a 5% pullback? So totally normal. Nothing to run and hide for unless we get some geopolitical issues that exacerbate it. That’s a whole another-
ON GEOPOLITICAL ISSUES
Noah Brooks:
We can talk about that. I mean obviously the Middle East, as I always call it a tinderbox, it hasn’t gotten any better in the last week. This weekend most everybody out there listening has probably realized what happened or saw the news this weekend with Iran sending the drones over. I mean we all kind of know that that started, I think it started Friday night, and the drones got there maybe Sunday morning. I thought we’d wake up Monday and it would be down a thousand points or something. And that didn’t happen. I mean it wasn’t happening. We were down on Monday.
Chris Needs:
Market opened up and crude opened down and then-
Noah Brooks:
It flipped.
Chris Needs:
… the market came back down.
Noah Brooks:
I mean we’re only a few days into the week here, but that’s happened where market opens up and at the end of the day closes down. And that’s the type of sentiment change that I think is worth paying attention to. And when I say paying attention, I don’t mean like, oh my gosh, you have to make changes to the portfolios. And we are certainly not at the moment, but it’s a scenario where there’s something changing in the market. There’s a different stance that investors are taking right now than they were three or four weeks ago.
So it comes down to really when is the Fed going to lower rates? Forget the geopolitical scenario, but if the sentiment is changing, is it going to make such a difference when rates come down? I personally think we’re still in the category of why do rates need to come down, really why do rates need to come down? And the closer we get to the election, the more the Federal Reserve probably doesn’t want to adjust rates.
Chris Needs:
Yeah, that’s why I’ve been thinking July, because they don’t want to move right before the election and seem to be making a political maneuver, I guess. So it’s almost like July or-
Noah Brooks:
Or both?
Chris Needs:
… November. It’s almost like there’s no middle ground there in the… You know what I mean?
Noah Brooks:
I mean they could surprise the heck out of us. They could be like, “Hey, October. Yeah, September we’re going to do it just to prove that we can and we’re not being political, so everybody thinks we’re political and we’re not going to pull the trigger.”
Chris Needs:
And when was the last time the Fed moved? What was the previous time that they moved closest to the election? Arthur Burns essentially trying to get-
Noah Brooks:
You love this guy.
Chris Needs:
… Richard Nixon reelected. You would assume he wanted to keep his job, and that worked out. Now we could say J-PAL kind of cut in a way through his communication in December. It wasn’t an actual cut, but it cut yields, cut rates on that communication.
ON INTEREST RATES
Noah Brooks:
Yeah, well you mentioned yields, but interest rates are actually going back up. Bond yields are going back up and the bonds in general, not all bonds, but treasuries and the US bond ag that everybody looks at is actually down pretty substantial in the last two or three weeks since we’ve been here. Bond ag, I think as of yesterday was somewhere around -370 on the year, and we still have a long way to go on the year, but right now it’s down and bond investors are kind of feeling the pain again.
Chris Needs:
I think that’s what a bulk of this move is about, more so than even the geopolitical issues, which are obviously huge important issues, but I think it’s more on the back of yields and that CPI print we got, which we’ll certainly get to, because now bonds have sort of come back to reality, a place where you think they should be priced based on the information we received. But prior to this maybe start of a mini repricing in the equities, there had been no moment where they sort of repriced for rate cuts being pushed out dramatically.
Noah Brooks:
Well, that’s what I was saying earlier. If the run-up, the last six months was based on or predicated on the fact that the Fed was going to lower, and the Fed’s not lowering, I mean something’s got to give, so earnings started coming out last week. We saw some bank earnings reasonably good, not outstanding. Net interest income on some of the banks was pretty good. We’re going to see a lot more over the next few weeks.
So there’ll be a lot more indicators of if companies are being more profitable than they were last quarter or last year. It’s one of those things though where we don’t really know, and I think it’s going to be company specific. In the end, you can put an aggregate out there and figure it out, but it’s really going to be company specific. There’s going to be some landmines, I think we’re going to see, I’ll be interested nowadays. You can put all of the conference calls together and see how many times they use specific words, so we know… What’s the word I’m thinking of? Can you tell?
Chris Needs:
Oh.
ON AI IN THE MEDICAL FIELD
Noah Brooks:
Oh, boy. Hey, I shouldn’t have set him up like that. So how many times is AI going to be-
Chris Needs:
That’s been about a year now. Everybody’s trying to throw it in to get a little bump from the algorithms.
Noah Brooks:
I was doing some research the other day and I came across something in our local paper, which almost never happens here in Berks County, Pennsylvania. It was an article on a private company called Digital Diagnostics, and they make an AI system that looks at pictures of eyes, and I have it here, what does it say? Their product is LumineticsCore, designed to diagnose diabetes related eye disease without needing a physician to look at the images.
Now, I’m not familiar with this, but I imagine the example that I always use is looking at some type of mole or skin tag that people have to determine if it’s cancerous or not. The difference between having a doctor look at it based on his knowledge versus having a computer look at it and compare it to two million other pictures or three million other pictures and you get a much more accurate system.
So this is a scenario where an AI system is looking at a high-definition picture of a retina to figure out if they have this issue. And it’s one of the first things that I think, not the first thing, but it’s one of the things that I think this is really going to revolutionize medicine.
Chris Needs:
Medical instruments utilizing AI is I think one of the most interesting things we’re going to see in terms of the benefits of AI. And even if it weren’t AI making that decision, which it sounds like it may be with this one, you can still have multiple locations that are running that equipment that could be run by probably, I don’t know, someone basic who doesn’t have a medical degree. You don’t need to pay $100 an hour to have someone operate that machine and then you can still get the same results you would get otherwise.
Noah Brooks:
So I just envisioned like a fast food restaurant that does medical exams. So the computer is prescribing the advice or doling out advice. You just need someone to take a picture of the eye, right?
Chris Needs:
Yep.
Noah Brooks:
It’s like a Wendy’s for an eye exam. That’s actually not a bad idea. In terms of moving on with AI, we were talking earlier this week or late last week, there was an article most people know Moore’s Law, the idea that the number of transistors on a computer chip can double every two years. Gordon Moore, co-founder of Intel came up with that.
Chris Needs:
Part of the traitorous eight.
Noah Brooks:
Traitorous eight.
Chris Needs:
So he left and started what became Intel Corporation from William Shockley. I think they were at Cal Institute or something like that. Some university.
Noah Brooks:
Yeah, the traitorous eight. So he came up with that. But now apparently, and I don’t know if they had given it a name, but the information was similar. It was saying these large language models, essentially the chatbots, are going to develop at a rate, they’re going to double every eight months.
So whether it’s ChatGPT or one of the others that are out there, I’m only familiar with ChatGPT or Chat as I like to call him. I think calling it Chat is a little silly, but Chat, if he’s doubling every eight months, I mean when you go in there and you mess around with it, in eight months from now, if they’re able to double the information or double the quality of the information and another eight months from that, I mean how long before it’s as qualified as the smartest person out there. It seems crazy.
So the Wendy’s eye exam with the chat GPT in two years, I mean, things are going to move really fast. We always say change happens slow and then it happens fast. And I think we’re on the precipice of whether it’s AI, whether it’s chatbots, happening really, really fast. And I’m not a doomer on it. I think it’s going to change the things that we don’t like to do. I think it’s going to make everybody more productive, whether it’s people like us or we’re talking about the healthcare industry. I think it’s just going to make everything more productive, and that really is the essence of the excitement around artificial intelligence.
Chris Needs:
Definitely.
Noah Brooks:
Is that it’s going to make companies more productive, people more productive. Therefore, productivity equates to growth and earnings in the end because really what we’re investing for is cashflow and for earnings. So if these large language models start to double every eight months, a few years into it, it’s going to be a different world out there. And I guess I’m excited to see it. It’ll be in five years from now, it’s going to really-
Chris Needs:
What’s it called? I don’t know, like Ben Franklin or DaVinci, someone who’s just smart at everything. Essentially-
Noah Brooks:
As [inaudible 00:13:25]?
Chris Needs:
… you’re going to have an AI robot that’s going to be able to give you expert level information on absolutely everything. I think I’ve heard of coders, they just feed in a ton of code, and they’ll tell them what’s wrong or how to fix it, which is something they would go through thousands of lines to figure out and it’s something they can punch in and it’s like five minutes and done now.
Noah Brooks:
The way I think about it is imagine having a tutor with you from the time you’re born, and let’s just call your tutor, I don’t know, Chat. And everything that you need, you ask Chat for, and I don’t mean get me milk or something like that, get me food, but you say, “Chat, I need help with my homework.” Or, “I need to understand this process better.” Or, “I need to understand how the situation works.” And you’ve been talking to Chat since you’ve been two or three years old, now you’re going to college, and Chat’s still with you, and as you’re learning, Chat’s learning what’s going on. I mean, I think the education system in this country is going to be highly affected by large language models, and the ability to place individual learning with every single kid without having a human teacher right there.
Chris Needs:
Well think about college education, universities, how expensive they are. That might be a disruptor for them. People could opt to forego those expensive loans and what have you, and they might just teach themselves.
Noah Brooks:
I mean, I’m not hiring anybody at the moment, but if you were in a spot to hire somebody from, I don’t know, Shippensburg here in Pennsylvania versus self-taught on ChatGPT.
Chris Needs:
They come in with CFA level knowledge, maybe.
Noah Brooks:
I don’t know. All right, let’s talk a little about economics and how maybe that’s playing into some of the sentiment change there a little bit. What do you have for us?
ON THE MARCH CPI REPORT
Chris Needs:
So we had the hot CPI report come out for March’s data.
Noah Brooks:
Hot meaning just a little bit higher and hotter than expected?
Chris Needs:
Yeah. So it was only 0.1 above expectation. So headline was 3.5 year over year. Core was 3.8, but what’s the definition of a trend? Three months generally we’ll say, but six-month and three-month CPI trends are now up. We’re not seeing the permit reversal. We’re not just seeing a little bit of stickiness, just a very slight increase. Not ideal, certainly. It’s sort of the standard things we’ve been talking about. There’s transportation, insurance, gas was a big contributor this past month. Some of these things are just starting to go back up in price a little bit.
Noah Brooks:
Yeah, gas has definitely popped up in the last week here where we are in Pennsylvania. I was feeling pretty good about it. I think it got down under 3.50 for a few weeks and I was like, “Okay.” Now we’re back up 3.75 for the cheap stuff, 4.25 for the good stuff. That’s definitely going to play into it. That’s a large component in CPI.
Chris Needs:
Yeah, I had a stat here that I wanted to share on inflation. So a lot of the economists out there and talking heads on financial media have been lamenting how the rent equivalent is calculated. Huge component, 35% of CPI. So obviously has an outsized effect and it’s a lagging effect. So in ’21 and 2022 when house prices went up, it was slow to account for that. No one complained about it then. But now that home prices are sort of leveling off, and even coming in just very slightly based on, we talk like a Zillow price index and some of these more maybe month-to-month or week-to-week updated indexes, it is still higher, a little bit more elevated. I think it crossed over in maybe October or November of 2022, the CPI versus these more up-to-date ones that feed in real time data, and no one complained when it was benefiting CPI, but now that it’s hurting CPI, people are saying the methodology is flawed. But I just wanted to share one methodology that I thought was very interesting, I thought was flawed, which is the health insurance calculation.
Noah Brooks:
Oh, you said you were doing it wrong?
Chris Needs:
I think they’re doing it wrong, for sure. I think the government is doing a disservice to how they’re calculating it.
Noah Brooks:
All right, let’s hear it.
Chris Needs:
The health insurance premiums are calculated in a way you wouldn’t expect. So it’s not what we, the consumer, consumer price index or personal consumption expenditure, it’s not what we are paying. So basically, what they do to calculate this in the CPI report is it is the total premiums minus benefits paid, which essentially makes it equivalent to health insurers retained earnings. So according to their metric and their methodology in the last year, health insurance premiums on the CPI and PCE report are down 15%, and over the last five years, they’re down 3%. I don’t know about anyone else out there. I think we have fairly good insurance here, but my insurance premiums aren’t down 15% in one year, and they’re not sure as heck, not down 3% over five years.
Noah Brooks:
Before we write a strongly worded letter to our senators. Let me just ask a question. How does inflation play into that? So if it’s flat and inflation was at 9%, would it be down 9%? If the actual number was flat and inflation was down nine, would it be down nine or up nine? Excuse me. Would it be down nine?
Chris Needs:
So again, it’s just the health insurance premiums minus benefits paid, so it would have to account for the benefits paid, would they be going up 9%?
Noah Brooks:
Well, not an expert in calculating that, but you would think that it would be simply based on the actual maybe average premium?
Chris Needs:
One would think, right?
Noah Brooks:
Yeah. Why you-
Chris Needs:
I totally agree with you.
Noah Brooks:
Do you have a hypothesis on why they’re doing it this way?
Chris Needs:
Because they’ve always done it that way. That’s all I could guess. Because I don’t think that’s an accurate way to gauge the price of health insurance is the retained earnings of the health insurers. And we sort of touched on this earlier, you and me together. So what may account for this is people may have put off major surgeries during COVID or they were taking lower volume during COVID.
So all those people are coming in now the last year or two and getting major surgeries, big things being done that are high benefits, high claim numbers. So it’s sort of eating away at their retained earnings, which goes into the calculation. And even though the actual premiums haven’t gone down, technically their retained earnings are, because they’re getting the same insurance premium, but they’re doing more major surgeries and things like that.
Noah Brooks:
It doesn’t seem right to me.
Chris Needs:
It doesn’t seem logical.
Noah Brooks:
I mean you don’t measure inflation on fuel costs by how much money… It’s a [inaudible 00:21:05]-
Chris Needs:
The oil companies make.
Noah Brooks:
You would think there’d be a standardized way to measure everything.
Chris Needs:
It’s an interesting anomaly in the methodology, which I’m sure there’s more, but this was the only one that caught my eye recently.
Noah Brooks:
Let’s keep that in our grab bag and come back to that at some point. I’d love to hear someone maybe with a little bit more expertise in calculating inflation. Maybe we can have someone on to talk about that. That sounds interesting.
ON MARKET PERFORMERS
Noah Brooks:
I mentioned energy, you’re talking about healthcare. There seems to be a little bit of a rotation in the market here.
So obviously technology has been the leader for a while. I don’t have the exact stat on it, but in the last month or so, there’s a little bit of rotation. Energy’s popping up, so oil prices are popping up because of what’s going on in the Middle East. Real estate not doing so well. I don’t know that that’s really new, but energy and materials really doing well, and I think there’s an expectation out there, and even if I didn’t say some commodities are starting to do well in addition to the golds and the silvers of the world, it seems like there’s a little bit of rotation.
And I guess, going back to 2008, we had this commodities super cycle in 2008 into 2009. It was one of the only things that really, really performed while the rest of the equity markets were underperforming. Now, I don’t know that this marks a start of a super cycle or anything like that, but there’s definitely a change.
It kind of goes along with the sentiment in the stock market where we have commodities starting to do well, energy starting to do well, and that’s something to take note of. That’s definitely something to take note of. So certainly gold is at all-time highs, and now we’re starting to hear really bullish calls from some of the other large brokerage firms and economists out there. I mean, we’ve heard in the past, gold, 5,000, gold, 10,000. I don’t think we’re going to get there, at least not in the short-term, but starting to hear some pretty lofty expectations.
Chris Needs:
Interesting. Gold is at all-time highs while the dollar is strong as well. So I don’t know if that plays into China is doing a massive stimulus right now for the last several months trying to get their issues in order. And I wonder if it has to do with that sort of overpowering the strong dollar which people normally look to as a relationship is dollar strength to gold.
Noah Brooks:
Yeah, inverse relationship. So dollar goes up, gold goes down. Same with oil. Anything that’s priced in dollars throughout the world, it’s kind of an inverse relationship. When the commodity goes up, generally speaking, the dollar is going down at the same time. Not always, but generally speaking. And so now we have a situation where gold’s up what, 14% year-to-date. Dollars back up as well, I don’t know the exact amount. And that doesn’t normally happen like that. We’re going to continue to monitor that, right? We’ll come back to this in a few weeks and see what they say. Does it have anything to do with the eclipse?
Chris Needs:
I don’t know, maybe.
Noah Brooks:
I think it does, personally. No, I don’t really believe that. I don’t have any conspiracy theories about the eclipse. It was interesting to watch.
Chris Needs:
Yeah. Yeah.
Noah Brooks:
We got our glasses on, sat outside for a little bit. It was a little bit cloud cover here. I don’t know.
ON INFLATION + FAST FOOD PRICES
Chris Needs:
Before we leave this sort of inflation conversation, my fast food stat for you, anyone out there who’s rushing around and getting fast food since 2014, so 10 years. McDonald’s menu prices are up 100%.
Noah Brooks:
Whoa.
Chris Needs:
Taco Bell, which is one of my favorites, up 81%. Chipotle is up 75%.
Noah Brooks:
Wow.
Chris Needs:
So menu prices are going up. Fast food isn’t so cheap anymore.
Noah Brooks:
Yeah, I’m going to date myself here. You talk about Taco Bell, when I lived in South Florida as a kid around the time of the first Gulf War, 1991. We used to go to Taco Bell, and for two bucks you could feed yourself really, really well. They had, I think it was 29 cent hard tacos, 39 cent soft tacos. I mean-
Chris Needs:
Good deal.
Noah Brooks:
… that was a great deal back then. I don’t know what it was for inflation-adjusted today, but it was $2 you could really feed yourself. It was early ’90s. It was a long time ago.
Chris Needs:
10 tacos for $3. Yes sir. I’ll take that.
Noah Brooks:
No one tried to figure out my age on that one.
Noah Brooks:
So inflation, right? It seems like it might be picking up a little bit. We’re going to keep our eyes on it. I don’t know that that’s going to change anything. It’s certainly not, but keep your eyes on it. And that might really be playing into the sediment, pushing out the forecast for the Fed to lower rates. I mean that’s definitely happening. Anything else that we can say about inflation at the moment?
Chris Needs:
Well, we sort of laid out why the Fed won’t cut in the short term or shouldn’t. Again, that’s an important delineation is we talk about things the Fed should or shouldn’t do, but what it really comes down is what they will do. But wages are still up 4.1%, which is above inflation, which is good, for American consumers obviously, but it’s trending down, which is a positive for the Fed. That’s something they can chalk up as a win. If we saw wages reaccelerating, we talked last podcast about the wage price cycle, that would be a really bad thing if we just turn back up along with inflation turning back up.
Noah Brooks:
So it would be bad for who? It would be bad for the people that wages are going up?
Chris Needs:
For the Fed trying to stop inflation.
Noah Brooks:
Playing devil’s advocate there. No, I think you’re right. I mean you want to see people making more money. I want to see people that are working at Wendy’s making more money and having a living wage at the same time. I want to pay the least I possibly can for everything that I want.
Chris Needs:
You don’t want that 100% price increase at McDonald’s?
Noah Brooks:
Yeah, I don’t know that I want to pay 12 bucks for a Big Mac, right? That’s my go-to, by the way. I don’t want to pay 12 bucks for a Big Mac. And I’m sure there’s places in the world that do that now, that’s not right. They can’t be. No, I don’t want to pay 12 bucks for a Big Mac. I hope not to see that, at least in the short-term.
I mean eventually, we’re going to get there. That’s what inflation is. But it’s one of those things where across the board you root for people doing well, at the same time that wage inflation is what the Federal Reserve is looking at, and they don’t want to see wage inflation, they want to see it low. And I think everybody knows that the target for the Federal Reserve and inflation is 2%, and we are not there at the moment.
Chris Needs:
No.
Noah Brooks:
Now there are a few people, former treasury secretary came on Bloomberg last week and said that he thinks it’s not out of the realm of possibility to see a hike.
Chris Needs:
Yeah. Larry made clear he thought it would be a mistake to cut. I mean, that was my takeaway from him going, making the rounds through financial media is he said the job’s not done basically.
Noah Brooks:
Yeah. So that plays into the higher for longer and that certainly plays into the sentiment and the change in sentiment.
Chris Needs:
I think you could make the case that we’re basically at a market neutral rate. I don’t know, I haven’t calculated where the Taylor rule would put rates at, but based on the economy’s strength with us at 5.25 to 5.50, things aren’t at least seemingly slowing down too much. So those cuts, they’re optional. They’re not a guarantee. And the market’s starting to price that in it looks like. So-
ON BOEING
Noah Brooks:
One or two things here before we get wrapped up. I’m going to go to Boeing just for a second. So there’s another, the Boeing still in the news. We know that the CEO is going to be stepping down later this year, but it seems like it just keeps getting worse for them. We haven’t had any crashes or anything, but there’s a whistleblower out there, another whistleblower.
Chris Needs:
Another one.
Noah Brooks:
That says the entire 787 fleet is at risk. And that’s when I fly American or occasionally when fly American, that’s what I fly. And you think to yourself, oh, it’s not going to be me. But I don’t love that fact that there’s a whistleblower out there. And then you see the CEO who’s going to walk away with a $33 million payday. You’re like-
Chris Needs:
Earn it.
Noah Brooks:
Yeah, I don’t really know about that one.
Chris Needs:
Yeah, they have dueling hearings today. I think they’re in two separate hearings today that they’re testifying in, I guess as a result of the whistleblower. But it’s no high-level Boeing executives talking today. So I don’t know how much news will be garnered or information, but information is not good for the headlines.
Noah Brooks:
No, not good.
ON COMMERCIAL REAL ESTATE TRENDS + REMOTE WORK
Noah Brooks:
And one last thing before we wrap up. There was a sale of a office building, a vacant office building, saw this last week, in St. Louis. So a vacant 44-story office tower in St. Louis, St. Louis apparently sold for three and a half million dollars at some point in the last month or so, but apparently it’s a former AT&T Center. Apparently, the last time it was sold was over $200 million in 2006. Yeah, 90%
Chris Needs:
98% decline?
Noah Brooks:
Oh my goodness. No, I don’t know anything about it. They didn’t go into the details of the building as it being condemned or something, but it’s empty. And I think it just goes to show you kind of the dramatic shift in remote working.
Certainly, we know about it on the East Coast. This is Midwest, right? So you still have a lot of people in the Midwest that are doing remote work, and I think it’s gaining traction and it goes to the commercial real estate market. I think this is one of the things where maybe sentiment, people are starting to look at this stuff instead of whistling past the graveyard.
They’re starting to look at this stuff and they’re saying, “Hey, this may be an issue in the commercial real estate market.” I know we’ve been talking about it for a long time, since March.
Chris Needs:
Everyone was talking about it back in March, and it seems like it’s been sort of forgotten about, but it’s still out there. It’s still a risk. And maybe these, we’ll call them Tier C or maybe lower quality or older office buildings that aren’t perfectly positioned or optimally designed for today’s work environment are going to have trouble selling. And we might see some more purchases with discounts like that.
Noah Brooks:
Yeah. Well, it brings up a good point though, is I don’t know what class real estate this is categorized as, but there’s going to be a giant Delta between purpose-built office buildings from a few years ago or current that are being built, and the old stuff that’s been converted and wasn’t built with today’s technology in mind.
I mean, imagine trying to get Wi-Fi where you have three-foot-thick brick. I mean, that might be tough in a building, where you don’t have open space like you do today. You have a lot of smaller offices, right? No glass. Everything’s all significant walls, whether it’s steel or concrete or brick.
And so there might be a scenario here where new buildings are, I don’t want to say not fazed by it, but there’s not really an issue with new stuff. Class A, relatively new, but you’re older, less well taken care of, less adept at technology buildings, they may be converted.
And we talked about this, last week you and I did talking about malls. What’s going to happen? All these malls out there that are closing, I mean here in this town, there were two malls. They tore down half of it. But a lot of people are talking about converting them to, whether it’s assisted living or college-type dorms. Interesting.
Chris Needs:
I mean, Schuylkill Mall in my day up in Frackville, Pennsylvania, that was totally repurposed. It went from a bustling mall in the ’90s to now it’s a distribution center. I mean, they have the space, maybe that’s another way they can go with a lot of them is they’re big buildings. So something can be put in there to be utilized. But I guess someone’s probably going to take a haircut on many of these things.
Noah Brooks:
Indoor water park. Ooh, I like it.
All right, so here’s the wrap up. It seems like there is a change in sentiment in the markets’ inflation, that last mile of inflation, as they say, it seems like it’s going to be a little bit harder than going from 9:00 to 4:00. The 4:00 to 2:00 might be harder. Market’s starting to wake up to that, looks like a little bit higher for longer and maybe a small change in sentiment.
Right now we’re down four and half percent from all-time highs, which is effectively nothing. But we could fall a little bit more. Earnings are in play and that’s really going to be the telltale sign over the next two, three weeks to what happens in the future.
So for Good Life and the Market Enthusiast, I’m Noah Brooks. And with me is Chris Needs. Thank you all for listening.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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