Marketplace - Does the bond market care about Biden’s election exit?

Episode Date: July 22, 2024

In the face of major news, some say the bond market can signal what comes next economically. But so far, bond yields don’t seem to be reacting to Biden’s dropping out of the presidential race. In this episode, what the crystal ball of the economy does care about in regard to elections. Plus, business investments outpace GDP gains, Nvidia employees cash in on the chipmaker’s hockey stick-shaped earnings growth and Friday’s CrowdStrike crash reveals a common cybersecurity weakness.

Hey everybody, it's Kai. Listen, is it time to upgrade your car? Give it new life by donating it to Marketplace. We'll use the proceeds to bring you more news about finance and the economy and how they affect you. Let us turn your old car into a donation to power the journalism you rely on. Go to marketplace.org slash vehicle

to donate your car today. Hey, so what do you do when the news gets to be too much? From American Public Media, this is Marketplace. In Los Angeles, I'm Kyle Rizdal. It is Monday today, the 22nd of July. Good as always to have you along, everybody. So there is a thing we do around here when the non-economic news gets, well, out of hand, all-consuming, if you will.

We go straight on past the stock market. We go past Wall Street analysts and corporate news, and we look at bonds. Because you want to know what the economy is really thinking about what's going on? The bond market is a real good place to start. And we find ourselves in that place because, I mean, you know why, right? Marketplace as a pre-Benish war gets us going. The bond market is not as much interested in who wins the presidential contest. The market cares more about whether you have a divided government or not,

rather than about which party runs the government. Dirk Willer is global head of macro strategy and asset allocation at Citi Research. If the parties have to share power, not as much gets done. But the more of the government either party controls, the more they can spend and the more debt they can create. Investors have realized something about the US political system, which is that there's no party in favor of controlling the deficit. David Kelly is chief global strategist for JP Morgan Asset Management. Controlling debt is not in the Republican platform this year. Democrats haven't mentioned it much either. We do have some really, really scary debt numbers.

Next year we'll have a debt to GDP number in excess of 100%. Marvin Lowe is senior global macro strategist at State Street Global Markets. The more debt the government takes on, the more bonds it has to issue, and the more it has to convince investors to buy them. Yeah, they'll buy, but it's gonna cost you something,

and the cost is a higher yield. A higher yield as in a higher payoff for future bonds. And this ultimately is why the bond market cares about how this election goes. A 10-year bond has to be a good deal for 10 years, so it has to predict the future for 10 years. What are interest rates going to do? What's inflation going to do? How good will this bond look? This election could make a difference in all of that. Right now, Citi's Dirk Willer says the bond market's prediction hasn't changed much with President Biden dropping out.

You know, it was expected and so forth, and that people still think, you know, Trump is right now their favorite. But the fact things haven't moved a ton also means there's a lot of uncertainty, says Steve Blitz, chief U.S. economist at TS Lombard. The politics of who's going to win and not win begin to really play on the market once Harris is the presumptive candidate and she's actually campaigning. The bond market doesn't appear to want to move any big bets either way just yet. In New York, I'm Sabri Benishur for Marketplace.

On Wall Street today, bonds, Sabri gave you a little hint right there at the end there. Stocks, we will of course get to when we do the numbers. We've been working on a series the past nine months or so called Breaking Ground, how the Biden administration's investments in this economy are playing out across the country. One of our stops was Phoenix, Arizona, with The Washington Post's Heather Long, one of our Friday regulars, as you know, to see how the CHIPS Act is changing things on the ground. And given the news of the weekend, we've gotten Heather back on the phone to talk things over. Hey, Heather. Hi, Kai. So as you, as most of us in this field have been thinking about President Biden's legacy over the past 24 hours, economic legacy in particular, what comes to mind for you?

over the past 24 hours, economic legacy in particular. What comes to mind for you? LAREEE You have to give President Biden huge credit for reviving the economy. Okay, presidents can only do so much, but come on, when he entered office, we were still in a lot of the dark days of COVID. The unemployment rate was 6.7%. There was concern that, I remember writing these articles that we might have a double dip recession, and were we going to kind of fall back into even worse territory. And they took a big risk by doing that massive stimulus in 2021 in the spring there that was very controversial, but it ended up spurring incredibly low unemployment, the longest stretch under 4% the nation's ever had, the lowest black unemployment rate ever, a huge surge in manufacturing jobs, a huge surge in new

business applications and startups. Obviously, we also had an inflation surge, but that's come way back down. The other thing he's really left a mark on in my mind is industrial policy. And I know you and I were both in Arizona staring at the early stages of that industrial policy. Right. So let's talk about that, right? We've got the CHIPS Act, we've got the Inflation Reduction Act, we've got the bipartisan infrastructure law. These are things that, as we talked about in Phoenix at the time, are going to take decades to play out. And obviously Biden wasn't

going to be around in office to see that play out. But how much do you suppose it matters now that there's going to be a change in the relatively early phases of getting this money out the door? It's a great question. So far, the CEOs that I've had a chance to speak to in those industries, particularly in the semiconductors, are still really bullish. At the end of the day, whoever wins in November is likely to want to continue this policy of reshoring American jobs and especially of ensuring that they can produce this key component, these chips.

They want that back home and that's likely to stay whether it's President Harris or President Trump or President Trump or President somebody we haven't even thought of yet. But you know, it's really a dramatic turnaround the last eight years, you know, Trump basically made tariffs mainstream again, and Biden has made industrial policy mainstream again. And it's hard to really conceptualize what a dramatic 180 that is from the 1990s and early 2000s view of how you do government economic policy. I was listening back to the recap you and I did of our Phoenix visit.

One of the things you said struck me. It was along the lines of no matter which administration is in place, no matter which party, the companies themselves have now invested billions and billions and billions of dollars and TSMC and Intel and all the rest, they're not going to walk away from that investment. It would be very hard to do. They'd obviously have to write down a ton of money to do that. And I think that's what's been the really big surprise and the really big encouraging part

of this industrial policy for all the critics who've said it can't happen or it's going to be too costly. The Biden administration can really point to, yes, we put a lot of government money in, but the companies have put three and four times as much money in. It's also a number of companies, even since we were there in March, have started apprenticeship programs and have expanded their training for workers. So these jobs are starting to materialize. They'd all like to go a little faster.

But I think there's a lot of green shoots, to use a popular word in economics. Yeah. With caveat that you're an economics reporter and not a political reporter, Vice President Harris, assuming she gets this nomination, is going to have to campaign to some degree on the Biden economic legacy, right? How does she now make that case when it's not going to pay off for a very long time? You're right. I think she's going to recite a lot of these statistics that we were speaking about, about

getting the unemployment rate down, people back to work, lowest black unemployment rate, these sorts of things. But on the core industrial policies, I think you're right. You can point to, we've started this and the factories are being built and a lot of construction boom that we certainly saw. But in terms of a ton of people whose lives have totally changed so far, that's going to be a little bit, yeah, there just aren't those tens of thousands of jobs that they're hoping for yet.

Right. Heather Long at The Washington Post. Thanks Heather. Thanks. Alright, bear with me on this one, would you? What do last week's crowd strike computer crashes have in common with the Irish potato famine of the 1840s? One word people, one word, monoculture. Much as Ireland, depending on a single kind of spud to feed most of its population, left it vulnerable to blight, so too has our reliance on ever smaller circles of software and software companies left us exposed.

Marketplace's Stephanie Hughes has more now on the software monoculture problem. Software monocultures can actually be a good thing. From a security perspective, there's actually a lot of benefits to running a smaller, standardized set of software because it allows you to spot a problem quicker and easier. Andrew Plato is a cybersecurity consultant at Tenacity. He says when there's a flaw in a core piece of that software, the problem

becomes very widespread, as was the case last Friday. Andrew Plato CrowdStrike was a popular software and it affected Microsoft Windows and that was the combo that did it. Lauren Henry Plato says one reason we tend to see the same combinations of software in lots of places is that they're familiar to the relatively few people who work in cybersecurity. Which means you tend to implement the same things over and over again at different companies. And he says when one combination seems to be working for one company, its competitors

will adopt it. Also in some workplaces, standardization is essential. Ken Berman is a professor of computer science at Cornell. He's done some research with Microsoft in the past. He says healthcare providers, for instance, have to deal with strict privacy and data protection rules under HIPAA. You want to know that every computer in the hospital is running that software. But that means that if you've managed to pick something which is vulnerable in some

way, every computer in the hospital is going to go down. Workplaces can also be reluctant to switch software systems, especially if their employees are comfortable with what they already have. Bharath Raghavan is a professor of computer science at USC. There were a few reports of companies that their software is so out of date that they actually were spared this CrowdStrike issue because they were using an even older version of Windows for some of their critical systems. It's unlikely businesses will move away from software monocultures, says cybersecurity

consultant Andrew Plato. Instead, he says they should have backup plans for when their systems do go down. I'm Stephanie Hughes for Marketplace. Coming up. People love where they live and are not always very open to things changing. Change as in climate change. But first, let's do the numbers. Dow Industrial is up 127 today, about a third percent, 40,415. The NASDAQ improved 280 points, about 1.6%, 18,07.

The S&P 500 up 59.1 and a 10%, 55.64 there. Stephanie Hughes was just telling us about the problems with businesses not diversifying their software options. Cybersecurity stock CrowdStrike crashed more than 13% today after the recent outage that hit many airlines, banks and hospitals. You know the list. brokerage Guggenheim downgraded that stock today saying new deals for the company may be delayed. You think?

Microsoft, which blamed a faulty software update by CrowdStrike for the outage, picked up 1.3% Today, bond prices fell, yield on the 10-year T-note rose to 4.25%, which is, I think, just about where it was two weeks ago, when last I was here. You're listening to Marketplace. Hey everyone, it's Rima Grace, host of This Is Uncomfortable, here to let you all know about our summer book club. Every other week we're going to recommend a book that our team loves that gets at some uncomfortable topic around money, class, our relationship to work. We'll feature a wide range of recs including classics like E.M. Forrester's A Passage to India, page turning novels like

Naomi Alderman's The Future, and personal finance books like Paco de Leon's Finance for the People. Join This Is Uncomfortable's book club by signing up for our newsletter. Be sure to sign up today at marketplace.org. This is Marketplace. I'm Kai Rizdal. We'll get a first look at second quarter gross domestic product later this week. How much the economy is growing or not. There are, in case this had somehow escaped you, four main components of gross domestic product. Consumption, there are, in case this had somehow escaped you, four main components of gross domestic product. Consumption, government spending, net exports, and business investment.

That last chunk, business investment, averages about 13% of GDP. It includes whatever businesses buy to increase capacity, think new machines for a factory floor or better software to manage payments. Now, here's why we're telling you all this. Business investment grew about three times faster than overall GDP in the first quarter, despite the headwinds facing businesses these days, like high-ish interest rates, which of course make business loans more expensive.

Marketplace's Daniel Ackerman takes it from there. Most days, if you walk into 21 Bar and Grill in Keene, New Hampshire, you'll see the taps flowing and the chef mixing up homemade buffalo sauce. But today was different. We broke through the wall finally today. Co-owner Beth Wood says this spring they bought the business next door and now they're expanding into that space. The move will double seating capacity plus we had a very very tiny kitchen and we are like quadrupling the size of our kitchen. It's a pricey move, but she thinks it'll pay off down the line.

We can now do more private events. We can do offsite catering. When lots of businesses make these kinds of investments, it says something about the economic mood, says Kevin Cummins with NatWest Markets. Typically signals optimism. Business investment has outpaced overall GDP for three of the past four quarters, but much of that growth has been limited to certain sectors. Cummins says last year, thanks to federal legislation,

We had this massive surge in manufacturing facilities that really boosted the level of structures investment. But Holly Wade with the National Federation of Independent Business says she's seeing some small businesses hold off on new investments right now. Waiting to see if interest rates start to decline a bit, you know, wait another six months, another year for cheaper financing. If the Fed starts cutting rates, more investment would go towards growing those businesses not making interest payments.

I'm Daniel Ackerman for Marketplace. A chart of Nvidia's share price is quite something. Kind of goes up like a hockey stick. The chip design company fueling the artificial intelligence boom hit a market cap of a trillion dollars barely a year ago, has tripled in value nearly since. That kind of growth has sent shockwaves through the markets, as you might imagine, through the industry and through Silicon Valley itself. Marketplace's Megan McCarty Carino has that one. You can find evidence of an Nvidia effect, even in some unlikely places in San Jose.

Is this the Denny's that has the plaque for the Nvidia guys? Yeah, that's the sign over there. Legend has it the company's founders hatched the idea for the business 30 years ago over bottomless coffees and grand slam breakfasts. Server Arnulfo Alba shows me to a big corner booth with a plaque that says, this is the booth that launched a $2 trillion company. So it's already a trillion dollars out of date.

Every day, every day they come in and take pictures all day. He says a new bigger plaque is set to be installed, the third one so far. In just a couple years, NVIDIA has sprinted past household names like Google and Facebook. Even if many people aren't quite sure how to say the company's name. CEO Jensen Wong and his signature black leather jacket has become a sort of rock star profit and jobs at his company are among the most sought after in Silicon Valley. That wasn't always the case. When we joined Nvidia, we never could have predicted that how big it would become right now.

Charles Cao and his partner Claire Mai both started working at NVIDIA straight out of grad school back in 2022 when the tech sector was in a bit of a slump. They're 25, he's an electrical engineer, she's a software engineer, and tomorrow they close escrow on their first home, a $1.5 million condo in San Francisco. We're on the top floor unit. There's also a ton of natural light. A ton of natural light, yeah. South-facing windows, top-of-the-line appliances.

They had planned to buy in their late 20s or early 30s, but bumped their timeline up. We realized, wow, we have so much in our savings now from NVIDIA. It's grown so much. Our stock has basically almost 10x. savings now from Nvidia. It's grown so much our stock has basically almost 10x. The burst of wealth from not just Nvidia, but the AI boom it's leading is rippling through the local real estate market, says Patrick Carlyle, a market analyst with brokerage Compass in the Bay Area. Virtually every statistic, and I'm talking overbidding. I'm talking days on market. Obviously median sales prices are at their most heated points since the absolute peak

of the pandemic boom. Despite mortgage rates being twice as high as they were, the median sales price of a home in the San Jose area hit $2 million. And sales of luxury homes above $5 million have jumped more than 60% over the last year as the tech-heavy Nasdaq, buoyed by Nvidia, pushes to new highs. But this Silicon Valley boom feels different, says Nolan Church, a tech recruiting consultant who's worked at Google and DoorDash.

It's kind of like a tale of two cities. For those with the highly specialized skills to work in AI or heavy investment in the industry. If you fall into that very select small subset of people, it's like ring the register. Then there's everyone else. It is the hardest it's been in the last 10 years to get hired into tech. Companies continue to shed jobs that aren't AI related, he says, and the byword of the day is lean. NVIDIA itself has only about 30,000 employees, far fewer than its big tech peers. Apple has about 160,000, Google, 180,000.

But for those riding the wave of the AI boom, like Claire Mai, Charles Sough, and their pets, the future is looking bright. We own a cat and a dog, so I've always dreamed of building little cat shells. Like an obstacle course for her. Yeah. Now that they own a home, they'll be putting their engineering talent toward that project. In Silicon Valley, I'm Megan McCarty-Corino for Marketplace. New analysis from the Union of Concerned Scientists says that assuming a medium rise in sea level,

which is all but certain for at least the next couple of decades, millions more people are going to be at risk of regular flooding by 2050. That's got scientists up and down coastal America saying we got to do something. And one of those things is moving people away from coastlines, known in the trade as managed retreat, an idea that is not, however, very popular with those people who live on those coastlines. Marketplace's Kaylee Wells reports from a shrinking beach just outside Los Angeles. When Michael Quill and I drove up to a Malibu beach during a particularly high tide a while back, here we go, here we go, it's coming up.

There was no beach left to stand on. That was a big one. He's the Marine Programs Director for the nonprofit L.A. Waterkeeper. And this is the ironically named Broad Beach. It has been steadily disappearing for decades. Most of the staircase that leads down to it has been buried in sand by the tide. I think there are another 10 stairs below the sand right here. That's the high water line. There's a row of multi-million dollar luxury beachfront homes perched on stilts above the crashing waves. In front of them stands a row of boulders that's supposed to keep the water at bay. On this day, it's not working. The waves crash over the rocks and sea water washes between the

stilts that support the houses. I'd be kind of concerned if I'm sitting there in that house and the water's going under three quarters of my house. I mean, it's just a matter of time. Since the late 1800s, sea level already has risen globally by about eight inches. It's expected to rise about another foot by 2050. Along some of California's coasts, that means as much as five feet worth of beach per year could be eroding by 2050. And by the end of the century, that rate could triple. We still, unfortunately, are seeing this risk fly under the radar.

And we know that because we're continuing to operate in a business-as-usual fashion along our coastline. Rachel Cletus with the Union of Concerned Scientists co-authored the report, and it finds that nationwide, at least 1,100 pieces of critical infrastructure—schools, hospitals, power plants, sewage systems—could be flooding monthly by 2050 because of sea level rise. And the kind of flooding that will come just on a sunny day, I'm not even talking about storms which make things even worse, but just regular high tide flooding. The recommendations in the report include elevating buildings, flood proofing them, and if necessary, relocating them.

That last idea is known as managed retreat. It's really unpopular, says Miyuki Hino. She's a city and regional planning professor at UNC Chapel Hill. People love where they live and are not always very open to things changing where they live. Relocation is also expensive. Studies, including the one from the Union of Concerned Scientists, say it'll save cities and residents money in the long term, but it can be more tempting in the short term to limp along, hoping tomorrow won't bring a catastrophic flood. That's what's been happening in Southern California now, where the main defense against sea level rise is temporary. Just add sand. With climate change, we don't really have

an option of just leaving everything the way it is. Or if we do do nothing, the impacts will be worst. Managed retreat isn't a major conversation in Malibu yet. Flooding roads and wet beachfront homes are still reserved for especially stormy days. But the dwindling strip of broad beaches sand suggests those hard conversations are creeping closer. In Malibu, California, I'm Kayleigh Wells for Marketplace. This final note on the way out today, a rare bit of good news for beleaguered plane maker Boeing. The Farnborough Air Show is on right now over in the UK, and Boeing got orders for as many as 70 new jets from Korean Air and Japan Airlines. The company is kind of distracted though, production wise, by its safety problem. Boeing delivered 175 planes through June of this year. Last year, first half of the year, 266 planes.

Our daily production team includes Andy Corbin, Elise Hassan, Maria Hollenhorst, Sarah Leeson, Sean McHenry and Sophia Terenzio. I'm Kai Rizdal. We will see you tomorrow everybody. This is APM.