Higher Rates Helping The Economy?... And More Bruises For Boeing 4/17/24

0:01Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast We'll break that down. Plus, insurance storm shares of travel are sharply lower on an earning and revenue miss. While premiums keep rising, so do the cost from catastrophic storms. We'll go inside the numbers. And later, ASML's really bad day and the ripple effect on semis. The monster rally united the day after earnings and the options action on Netflix ahead of their results tomorrow. I'm Melissa Lee. Coming to you live from Studio B at the NASDAQ. On the desk tonight, Karen Feinerman, Courtney Garcia, Steve Grasso, and Tim Seymour.

0:47We start off with a contrarian view on the impact of higher rates on the economy. As yields in the 10-year hover near five-month highs, Greenlight Capital's David Einhorn joining a growing list of investors saying U.S. growth could be booming now because of rate hikes, not in spite of them. Einhorn pointing out to Bloomberg that U.S. households are getting a lot of income from more than$13 trillion worth of short-term interest-bearing assets like bonds and money market accounts. That is nearly triple the$5 trillion consumer debt load, and it nets about$400 billion a year in interest at today's rates.

1:24That money could provide some real gains if it's funneled back into the economy. Just look at the change in some key data since the start of the Fed tightening cycle. GDP is growing, unemployment holding steady, corporate profits and stocks rising, all this against the backdrop of higher rates. So could the current environment to actually be supporting the economy and markets. Karen, what's your take on this very interesting view? It is a very interesting view, although I want to sort of turn it on its head a little bit, which is it is the cause of the GDP being so strong, the economy being so strong, is the cause of the higher rates.

2:00Yes, there are some benefits to that, like the ones you point out, which are really interesting. I also wonder how much tax income is boosted from all of that interest, extra income. We were talking about that before the show. This is the kind of thing we talked about before the show. And then there's also there are some downsides as well. Obviously, it's really hard on the housing market. So I think we can we can survive. I think it's the other way around, that it's the economy leading the market or leading rates higher. And that's OK. But I guess we all sort of operate on this thesis that higher rates are not good for the consumer at some point.

2:36And I think that's what Einhorn is also saying, that there is a limit. But in this sort of sweet spot here that we have here, where it's restrictive but not too restrictive, you are earning income, that this is actually not a bad thing. Not a bad thing for the economy, for consumer spending. Yeah, and I think specifically where you want to look at this is this is benefiting mostly baby boomers, right? They have over$76 trillion in net worth that they're now spending down. A lot of those people have the money in bonds, which they're benefiting from, things like money markets. They also have houses either with no mortgage or they're locked in below 4%.

3:06So it's like that huge generation, that's who's boosting the economy and continuing to spend here. And it will likely continue so when rates are higher. So where it's hurting is those like first time homebuyers can't get into the housing market. It's making things more expensive for the next generation. So it's hurting and helping certain parts of the economy. But it's why the general economy can continue to do well, even while rates are higher. And plus, we have to just enter into the valuation prism as well with the S &P, that if we're not going to get rate cuts, you can't hold this valuation.

3:37So I think you said, is it good for the markets? You cannot hold at these levels. You cannot, because the market is looking for rate cuts on the horizon. That horizon keeps getting further away. So if the horizon becomes further away, the market's got to give something back. I'm still of the opinion we have more cuts versus less cuts. And the caveat is, what's more, what's less? I still think we get three cuts. Do you still think that we're going to get a cut in May? No. Well, obviously, May seems like a real, you would have to, I think Rome would burn. But that was what you were saying that shocked us all, left us sort of like our jaws hanging down.

4:16Yeah, and I thought up until the last couple of iterations of the CPI, I thought we were able to do that. Now with Powell backtracking off of that, I think Powell realized that his language was being interpreted with the market. The market was rising, and he didn't want that. Right. So but David Einhorn is talking about he's been on record about a year ago saying sort of the same thing, but saying it's not good for the market, but it's good for Main Street. I don't know if you can make that separation between Main Street and the market anymore. I think we're too long in the tooth with that argument.

4:51I think gas, eggs, cheese, meat is hurting the average guy. So just inflation of stuff and services. inflation of everything. You ask anyone who's trying to go on vacation, right? That's what's happening right now. So although they are getting higher wages, and I do think companies could be more productive. I mean, that is the whole AI, right, sort of pixie dust. If you can be more productive, then earnings could rise, and you can even say multiple and still have a higher stock market. But I mean, we're just in this idea of thinking rates are so high, they are not so high. They are around, I don't know, the 50-year average or longer of the 10-year is a little higher than here.

5:33So we've had good times with this rate. It's just obviously the giant change from zero is, you know, that needs some adjustment. But there's been a lot of good economies in this rate environment. Right, including this one, Tim. And I guess what we're sort of trying to get at is what is the impact of a higher rate scenario on on consumers, on the economy? And are we sort of, you know, overestimating or maybe underestimating the strength of the economy in light of a higher rate? I mean, a lot of people said four and three quarters percent is going to be terrible for the stocks. Maybe it's not. Maybe four and three quarters percent or five percent is not not bad for the U.S.

6:12economy. Well, somewhere Steve Leisman will be smiling when I reference that. I think real rates haven't been this high in a long time. And although we're stuck and the Fed has acknowledged we're stuck on inflation, you know, coming down to their level, I think it's pretty interesting. But, I mean, you know, Steve is I think he's right. I mean, like there's inflation everywhere, which is, by the way, why there's no way they're going to cut in June. It's impossible. It's actually technically impossible. We've got one more CPI number in April. The May CPI comes out the morning of the June meeting.

6:45They can't even opine on that. So June is gone. And I think September is a real question. I think the fact that people have come in from five to two, I think, too, is challenging. So back to our higher rates, ultimately net good for the consumer. Courtney's right to signal those that actually are net positive in terms of their balance sheet. But I think it's the opposite for much of call it the middle class, even middle class baby boomers. So people that don't have a lot of savings. What's interesting about this whole theory in this conversation is yesterday we were saying, what happened to the banks?

7:20I mean, shouldn't the banks be the greatest beneficiaries of this very same thesis in terms of net interest income, their ability to basically lend here, sorry, borrow here and lend higher in a higher rate environment? And look, it was a great day for banks, by the way. And I don't think that there's anything particularly wrong with banks as long as credit doesn't fall apart here. But it's a fascinating time. I do think it's a great time for the 60-40 portfolio. I think it's a great time for people to have an income portfolio that gives them an opportunity to weather good times and bad and actually make money.

7:53And fixed income is really, for the first time in 20 years, for many people alive as an asset class to invest in. Our next guest sees the reaccelerating economy as a problem for the Federal Reserve. Torsten Slock is the chief economist at Apollo Global Management. Torsten, great to have you with us. Before we get to the Fed and what you think, which is no cuts in 2024, I do want to ask your thoughts about this sort of thesis that higher rates are actually good and good for the consumer. Net-net, is that true? Well, I think there are some very important nuances in that discussion. If you owe money to someone, then higher rates is not good.

8:28If you own fixed income, then higher rates is good. So that's why there's a bifurcation when it comes to consumers in terms of who is it that's being impacted by rates going up. Yes, if you have fixed income assets, if you live all fixed income, then higher rates is certainly most helpful. Whereas if you owe money on your car, if you owe money on your credit card, if you owe money on your house, which generally tends to be younger households because they generally have higher debt when you're young. That means that younger demographics, and this is what the New York Fed data is showing, they are absolutely being negatively impacted by seeing delinquency rates going up on auto loans, delinquency rates going up on credit cards.

9:04So it is a bit of a double hit where some parts of consumers are benefiting, some parts of consumers are being hit. While at the same time, you also have had, because of the Fed changing their message in November and December, that asset prices have gone up. That adds the additional dimension that is not only about my cash flow as a household, It's also about your assets and the very significant increase that we have seen in the stock market since the Fed on November the first meeting began to say, well, now we are cutting rates. We have seen a$10 trillion increase in the market cap of the S &P 500.

9:36That is a significant tailwind to consumer spending. That's the reason why the economy is reaccelerating. Retail sales have been strong. Hiring has been strong. Inflation has been strong. These are not just statistical flukes. This is absolutely because of the tailwind coming, in particular because of the stock market going up, home prices going up, and also these cash flows that are coming in particular to middle and high-income households. So I think it's interesting that you think the economy is re-accelerating. It is very strong because basically the data points that the Fed saw and interpreted initially as a bump in inflation, you actually see that as the beginning of a trend?

10:13Absolutely, because I do think that the communication from the Fed basically for one and a half years before the December FMC meeting was that interest rates are going higher, higher, higher, higher. That meant that there was no P.E. deal activity on the exit side. There was very little issuance in IG, very little issuance in high yield, very little IPO activity, very little activity in M &A. So that's why the consequence of now them saying, well, now rates are about to go down. It was that we got a boost to financial conditions. And as you can see in the chart, the implication is that the Fed now needs to work even more on getting inflation under control.

10:49So, Melissa, to your question, I do believe that rates are going to stay higher for longer. And you can see market pricing in this picture here is telling you that, yes, rates may be eventually coming down a bit. but we're still going to stick at a level between 4 % and 5%, which is dramatically higher than the zero, essentially, that we had from 2008 to 2022. Torsten, it's Karen. Thanks for being on. So what would you put as the likelihood of a cut versus a hike from the Fed as the next move? Well, let's first talk about what the market pricing is saying. And as you know, the market is now pricing that the first cut will come in September.

11:25But the market is actually beginning to price, admittedly in small single digits, that there will actually be a hike already at the meeting in May. And what is the market thinking? Well, the Fed Fund Futures curve is telling us that, well, maybe the Fed could be proactively saying, hey, we got to do more. So I don't think they will hike in the May meeting. But it's very interesting that the distribution of what the Fed will do is beginning to tilt more towards rate hikes coming. I don't think, as you also talked about earlier, that we will get any more hikes during this cycle for a lot of different reasons, partly because of course the election is upcoming, but also because of the base effects on inflation are that there is more lift in inflation in the second half of this year that comes off when we get to December and into next year.

12:10So I do think the Fed will be articulating the way that Jay Powell did yesterday of saying we will just stay higher for longer and we'll just have to wait a little while longer before we ultimately get what we will see. So what I do at the moment, back to Melissa, as before, what we're seeing today is really a sugar high coming as a result of this boost from the stock market going up. Again,$10 trillion added to household balances. Remember, consumer spending in 2023 was about$19 trillion. So we have added in wealth roughly half of consumption last year. It is a significant tailwind to restaurants, hotels, airlines, concerts, sporting events across the board.

12:47But consumer spending continues to really look good when it comes to the next several quarters. I guess the question, Torsten, is how long do you think the sugar high lasts? Because it's sort of a weird sort of cycle here, because if we stay with rates right here, then maybe the sugar high can be sustained. But that sugar high will, I would think, inevitably power rates to go higher, which would then be a cap on equities and perhaps the reason for equities to turn lower. Exactly. So I do view that that sugar high here for the stock market going up, supporting consumption. at the moment. I do view that again through the lens of, well, there's still consumers who have a lot of debt that are being more and more and more negatively impacted by high interest rates.

13:26And that's also the same thing on the credit side. There are firms that are highly levered in tech growth. Venture capital is particularly unattractive at the moment because by definition, if you invest in venture capital, you're investing in firms that have no cash flows, have no revenue, have no earnings. So therefore, those firms that are sensitive to interest rates, those households that are sensitive to interest rates will continue to be negatively impacted. So that's why we have this talk of war between those who own assets are still doing well, whereas those who own money, they're not doing particularly well.

13:56And that's exactly to your point, Melissa. We will eventually see that succeeding from the Fed, slowing things down and getting inflation down. But that's where, to answer your question, I still think we have at least several more quarters ahead of us with this tailwind still supporting in particular consumption and services. Torsten, great to speak with you. Thank you. Thank you. Torsen Slok of Apollo. Several more quarters. That's not bad, Tim. Yeah, no, it's not bad at all. It's a fascinating dichotomy. I think he's definitely talking about that divergence between the healthy consumer, the healthy corporate, and that which has a lot of debt.

14:35And I just think that's really where we are. I am sure that we are going to see credit issues. I am sure that, as the credit market is always smarter, there are places to, I think there are probably issues right now. Having said that, what we've also seen from the stock market is that the stocks that have really been outperforming, look at what's been going on in the real economy. That is more, I think, illustrative of the type of backdrop we're talking about here, where high interest rates are also benefiting some of the industrial companies, some of the companies that also have pricing power.

15:05What we're also seeing is is whether we're talking about LBMH yesterday or Diageo, which is the name that I talked about on my final trade last night. You see the companies that had that burst of consumer discretionary spending that was, I think, artificial in covid have worked through a lot of that. And they're suffering now. I mean, meanwhile, they were outperforming for a long time. You know, I think a lot of this has to do with labor hoarding. And I think labor hoarding came out. There's no one qualified for a job. You can't get any applicants for a job. So they wind up holding on to the employees they have and they pay them more.

15:39So wages have been increasing. But they're waiting for rates to come down. How long can they wait for rates, I'm sorry, for interest rates to come down to keep that crew of people they have working for them? And if that keeps getting pushed off, do they start firing? Do they start laying off? We're seeing it with the tech companies now. But that's for a different reason, right? But what happens when you start to see Main Street starting to lay off because they're saying, OK, well, rates aren't coming down. So I can't hold on to these workers anymore. Then I think the market comes in. One last thing.

16:15We're in election year. I promise we're in election. Well, this segment. We're in an election year cycle. Historically, the president, the incumbent that's in, if you're cutting rates, you get reelected. If you're raising rates, which de facto you're raising rates if you're not cutting in this environment. But if you're not doing either, you don't, because right now you still have QT. You still have QT. So that's the fact of raising rates. And if you're not and inflation is still there, it's still a high rate environment. Yeah. And you also have the perception on behalf of the American voter that the economy is not good.

16:48Right. That they are worse off than they were when President Biden was first elected. And that that's very that's a hard thing to shake. It's a hard thing. It's a hard thing to shake. And it's it's almost impossible. But when the changing narrative, as long as you have a job, that cures a lot of ills. All right. Let's get to United Airlines flying higher after posting better than expected earnings last night. A strong forecast helping that stock soar more than 17 percent today. That is its best day since November 2020. The jump coming even as airlines expect to receive fewer aircraft while Boeing's headaches continue.

17:19United also facing its own FAA safety review. Other airlines taking off today along with United. Look at that group and how they responded. Courtney, what do you think about airlines? Yeah, and I think we've been talking a lot about this, where people are having to choose what they're spending their money on with inflation. And travel has just been one of those areas that the demand has not slowed down. And that's what we're seeing when United came out today. So keep in mind, they were actually doing worse than most of the other airlines beginning of April. So take this with a grain of salt. They're doing really well, but after they were doing much more poorly than everyone else.

17:50But I do think the airlines continue to look at a positive space. I would prefer like a Delta over United Airlines, but especially when you're seeing business and international travel come back. They're both going to benefit from that. Leasing those A321 Neos, Tim, to satisfy demand, that was huge for United in this quarter. It was a big deal. And so that reaffirmation of the 24 guide, I think, you know, I think I used maybe three, maybe even four varies ahead of very good last night to say that that that's what those numbers were. They were fantastic. They gave the street visibility into where they are right now, both in terms of their airline dynamics.

18:26I think this is a bottom-up story, not a top-down. As much as I agree with what Courtney's saying around travel trends, I think maybe those travel trends might even are – I think they may be peaking more than they're accelerating, but I think the operational performance of United was extraordinary. That includes, I think, something like$7 to$9 billion in capex on average per year, 25 through 27. That will lead to free cash flow. The street loves that. I think there's obviously now upgrades galore. You've had an intraday move from the day before to where we got intraday higher, even where we closed.

19:00I mean, it's almost been a 23 percent move for a stock that had underperformed Delta over the previous six months by 25 percent. So now what do you do with it? I think you have upgrades coming. I think you can probably own both airlines here for a trade. I am a trader with airlines. Coming up, Lily's Lullaby, a potential storm cloud for Boeing and a streaming binge ahead of earnings. how Eli Lilly's weight loss drug could give you a full night's sleep, Boeing's latest headwind as a whistleblower testifies on Capitol Hill, and if the options pits are binging or booting Netflix ahead of results tomorrow.

19:32All that ahead. But first, a chip crunch for ASML. That stock dropping as sales come in short. The details from the quarter and the impact on the semispace when Fast Money returns. This is Fast Money with Melissa Lee right here on CNBC.

19:55Welcome back to Fast Money. We've got a buzzkill on ASML, the semi-equipment manufacturer, down 7 percent. Its worst day since June 2022. Q1 sales coming in lower than expected, down 21 percent year on year. While profit beat estimates, the company did stick to its full-year outlook. But bookings for the company's machinery dropped 61 percent from the prior quarter, this sending the rest of the chip stocks tumbling, including Arm Holdings, which sunk 12 percent. And this sort of tells you that maybe its main customers like a TSMC as well as a Samsung, they've got a lot of inventory that they have to themselves work through and therefore they're not ordering a lot of this equipment.

20:31Karen, you were thinking that maybe the reaction was a little muted. Actually, I know. And in that, is this potentially a canary in the coal mine? Now, a lot of analysts feel like, all right, the story is completely still intact and they had always expected greater revenue next year than this year. And we saw some analysts even upgrade. But But I can't help, given how expensive the sector is or how much, how far it's come, you can make arguments that it's not that expensive. I was surprised that we didn't see a bigger reaction. Obviously, we know NVIDIA was down three and change percent, which isn't gigantic.

21:07And so, you know, I buy into this story. I own NVIDIA. I own Dell. And it does make me nervous that are we going to look back at this and say, oh, we should have known when ASML missed. Yeah, I mean, there's so many different tentacles out of this story, so I don't negate what you're saying. And we could look back on it and see, think that that was the pinnacle moment of it. TSMC, we're going to hear from them. We're going to see maybe the developing color of the story. But it's still NVIDIA's story to lose. So I would be a buyer of NVIDIA on any of these pullbacks because it's not directly related to them at this point.

21:48It could be. Courtney, what do you think? Yeah, I think it's this one quarter is going to be hard to say because they tend to have pretty lumpy transactions. I mean, this is the low quantity, really high expensive equipment. So you tend to get, especially as some of these other industries are preserving their cash flow, you can get a pullback like this. So I don't think this in and of itself is a problem. But I do think, to your point, it has come so far that people are going to be much more critical of the valuation, the price, if you have any sort of dip like this, which you're having. So their whole story is saying, well, this is the transition year.

22:18Next year, as people start to focus back to AI and you need these equipment upgrades, that's when we're going to see it. So I think that's the question is do we see that? If you believe that story, it's a great long-term play. If you're skeptical of that, you know, maybe you stay on the sidelines. It's the UV lithography machine that is the highest value machine that ASML makes. That's the machine that's needed for AI. That's the machine that's banned from China. And it takes 18 months to manufacture. So to Courtney's point, you know, there is a lot of lumpiness when it comes to that. And that should be sort of the caveat when you take a look at the bookings number, Tim.

22:48Cantor actually came out and said buy on the weakness. Would you? Well, I think there's a couple of things going on. There's obviously the momentum in the trade. Remember, also, this is kind of a European AI play. And I think it gets very crowded in the back that there aren't as many across. You know, look at the Euro stocks 50 and those opportunities. That's just kind of a technical view. Also, as a guy that has to focus on that for a European or a global focused ETF. But I think that the orders number was a big deal. Margins were better. The problem is that people have, I think we framed this pretty well, anywhere from kind of 60 to 80 percent growth next year in 25.