WEBVTT - Fed Says Most Districts Saw Flat or Declining Economic Activity 0:00:02.920 --> 0:00:10.719 Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg business 0:00:10.720 --> 0:00:13.960 Week Inside, from the reporters and editors who bring you 0:00:14.000 --> 0:00:18.360 America's most trusted business magazine, plus global business, finance and 0:00:18.400 --> 0:00:22.840 tech news. The Bloomberg Business Week Podcast with Carol Messer 0:00:23.040 --> 0:00:25.800 and Tim Stenebek from Bloomberg Radio. 0:00:27.160 --> 0:00:30.680 Going through the Paige Book, the anecdotal summary of what 0:00:30.880 --> 0:00:33.240 is going on when it comes to overall economic activity 0:00:33.520 --> 0:00:37.240 in the Fed's districts. Economic activity grew slightly in three districts, 0:00:37.240 --> 0:00:39.800 while the number of districts that reported flat or declining 0:00:39.840 --> 0:00:43.640 activity rose from five in the prior period to nine 0:00:43.760 --> 0:00:47.080 in the current period. Employment levels were study overall, though 0:00:47.080 --> 0:00:50.760 there were isolated reports that firms filled only necessary positions, 0:00:51.080 --> 0:00:55.960 reduced hours in shifts, or lowered overall employment levels through attrition. Still, 0:00:56.000 --> 0:01:00.160 reports of layoffs remained rare. On balance, wage growth was 0:01:00.200 --> 0:01:02.800 modest well Increases in non labor input costs and selling 0:01:02.800 --> 0:01:06.240 prices range from slight to moderate. From all on this, 0:01:06.319 --> 0:01:09.280 we turned to Stephen Blitze's chief US economist at Global 0:01:09.360 --> 0:01:11.959 Data TS Lombard. He joins us here in the Bloomberg 0:01:12.080 --> 0:01:15.360 BusinessWeek Studio. Important to keep in mind this is anecdotal 0:01:15.680 --> 0:01:19.760 evidence from the FEDS districts, but it does give a 0:01:19.760 --> 0:01:22.960 good idea of changes from different periods of time and 0:01:23.280 --> 0:01:26.480 how employers are feeling about the economy. What are your takeaways? 0:01:26.640 --> 0:01:30.320 Well, I wouldn't downgrade the fact that it's anecdotal information, 0:01:30.440 --> 0:01:33.160 because if you go back to the time leading into 0:01:33.440 --> 0:01:37.839 eighth nine, they valued and they learned in their sort 0:01:37.840 --> 0:01:41.800 of you know, Monday morning quarterbacking of going in the 0:01:41.959 --> 0:01:46.360 value of anecdotal information. And I'm really not surprised by 0:01:46.640 --> 0:01:50.320 what this said because if you look at the economic 0:01:50.400 --> 0:01:53.600 data that's coming out, right, and I expect the Friday 0:01:53.640 --> 0:01:57.360 employment number not to be particularly surprising either direction. 0:01:57.760 --> 0:01:59.320 So in line with expectations. 0:01:59.360 --> 0:02:01.160 Yeah, in line with expectations in other ways. They don't 0:02:01.200 --> 0:02:04.640 expect minus one hundred thousand or something like that. But 0:02:04.840 --> 0:02:09.800 what this number tells you, This tells you why Powell 0:02:09.880 --> 0:02:13.520 said what he did at Jackson Hole making a for 0:02:13.600 --> 0:02:18.240 a FED chair, a very blanket statement saying you know it, 0:02:18.639 --> 0:02:23.280 the easing of labor markets stops here, all right, And 0:02:23.720 --> 0:02:27.200 anecdotal information is very important to them at turns in 0:02:27.280 --> 0:02:29.359 the cycle because they lead the data. 0:02:29.639 --> 0:02:32.120 So how are you thinking about all the data that's 0:02:32.160 --> 0:02:34.720 coming in right now, because it really seems like we're 0:02:34.720 --> 0:02:38.640 in a situation where the market at least is very sensitive. 0:02:38.680 --> 0:02:41.239 They don't want to see, for example, a labor market 0:02:41.280 --> 0:02:43.240 that's too hot. They don't want to see when that 0:02:43.360 --> 0:02:45.320 is too weak. How are you kind of putting all 0:02:45.320 --> 0:02:46.240 of this together? 0:02:46.919 --> 0:02:51.639 Well, I think on the edges, right, there's no recession, right, 0:02:51.680 --> 0:02:54.800 and so on the edges you see weakening economic growth. 0:02:54.840 --> 0:02:58.240 The July personal income data is actually pretty good, especially 0:02:58.720 --> 0:03:01.920 on real spending for discretionary items in other words, not 0:03:01.919 --> 0:03:06.560 counting food, energy, rent. So it's actually pretty good, right, 0:03:07.000 --> 0:03:10.840 So this is really about this is unusual for most cycles, 0:03:10.880 --> 0:03:14.600 and that this is really about the FED easing before 0:03:15.040 --> 0:03:19.480 recessionary data takes place as opposed to the usual, which 0:03:19.560 --> 0:03:22.920 is catching up, right, And they don't want to be 0:03:22.960 --> 0:03:26.320 in catch up mode, right, And by anyone's model, the 0:03:26.320 --> 0:03:29.080 funds raise at least one hundred basis points too high. 0:03:29.320 --> 0:03:32.440 So the real question is how fast do you get 0:03:32.480 --> 0:03:36.080 down there? And the data will determine that the market 0:03:36.200 --> 0:03:39.200 is figuring that once they do the twenty five, the 0:03:39.360 --> 0:03:42.440 data will soften enough to scare the market to do 0:03:42.560 --> 0:03:45.320 like a fifty in December, and then another twenty five 0:03:45.400 --> 0:03:48.400 in December, and that's how you get your one hundred right. 0:03:48.680 --> 0:03:53.520 The moves after that, right is really in anticipation of 0:03:53.560 --> 0:03:57.160 the funds rate going down to adjust for an inflation 0:03:57.320 --> 0:04:00.280 rate by the next year it's two percent instead of three. 0:04:01.000 --> 0:04:04.200 I'm looking at labor markets. In the beij book, it 0:04:04.280 --> 0:04:07.160 says that employment levels STEVE were generally flat to up 0:04:07.200 --> 0:04:11.880 slightly in recent weeks. A few districts reported that firms 0:04:11.920 --> 0:04:15.520 reduced shifts and hours, left advertised positions unfilled, or reduced 0:04:15.560 --> 0:04:19.200 headcount through attrition, though accounts of layoffs remained rare. Employers 0:04:19.240 --> 0:04:21.839 were more selective with their hires and less likely to 0:04:21.920 --> 0:04:25.960 expand their workforces, citing concerns about demand and an uncertain 0:04:26.400 --> 0:04:29.920 economic outlook. Is this coupled with the Jolts data that 0:04:29.960 --> 0:04:33.080 we got earlier today, Is this a return to normalcy? 0:04:34.160 --> 0:04:37.680 Well, that's that's the question, right, and that's always that's 0:04:37.680 --> 0:04:40.000 been the question all along as to whether or not 0:04:40.120 --> 0:04:43.080 this is just a return to a normal economy or 0:04:43.279 --> 0:04:45.080 this is a precursor to recession. 0:04:45.120 --> 0:04:45.640 What do you think? 0:04:46.000 --> 0:04:48.960 I think that in what I'm reading here, this is 0:04:49.040 --> 0:04:51.279 typical precursor of recession. 0:04:51.320 --> 0:04:52.880 He said, we're not in a recession right now. 0:04:52.880 --> 0:04:54.680 No, we're not. We're not in a recession now to 0:04:54.720 --> 0:05:00.160 be very clear. Right, but before firms start to lay 0:05:00.160 --> 0:05:02.840 people off, right, what do they do, just in our 0:05:02.880 --> 0:05:06.440 own experience, right, they slow wage increases, maybe they don't 0:05:06.480 --> 0:05:09.800 give wage increases. They cut travel. Business travel is an 0:05:09.800 --> 0:05:13.800 important you know, ask you know, hotels what they're seeing 0:05:13.800 --> 0:05:16.560 in business travel, not vacations, but business travel. 0:05:17.120 --> 0:05:17.320 Uh. 0:05:17.360 --> 0:05:20.800 And then they cut hours, and then there's unfilled positions 0:05:20.839 --> 0:05:22.320 and they say, you know what, we're not going to 0:05:22.360 --> 0:05:23.200 fill this position. 0:05:23.480 --> 0:05:25.360 We've been hearing for two or three years that a 0:05:25.400 --> 0:05:28.479 recession is just around the corner. Why is what? And 0:05:28.520 --> 0:05:30.520 it hasn't it hasn't arrived. 0:05:30.640 --> 0:05:32.240 Well, we haven't gone around enough corners yet. 0:05:32.279 --> 0:05:35.440 Okay, maybe we haven't. What's different about this environment? 0:05:36.040 --> 0:05:39.000 Well, the difference is that this is not a normal 0:05:39.080 --> 0:05:43.159 cycle because there was a mandated shutdown and then a 0:05:43.240 --> 0:05:46.680 mandated reopening which was COVID, right, and you had a 0:05:46.720 --> 0:05:50.520 tremendous amount of fiscal stimulus along with that, and so 0:05:50.720 --> 0:05:55.640 you had this unreal, unsustainable six percent growth whatever it 0:05:55.680 --> 0:05:58.919 was in twenty twenty two. So the economy is going 0:05:58.960 --> 0:06:02.480 from six down to two two and a half, so 0:06:02.720 --> 0:06:06.200 which is its normal cycle. As the impact of all 0:06:06.320 --> 0:06:09.719 these stuff kind of washes through, so it's very hard 0:06:09.760 --> 0:06:13.880 to tell what is just returning to normal and when 0:06:13.880 --> 0:06:17.719 are you going past that? Now, the Fed really didn't 0:06:17.760 --> 0:06:20.600 get tight until earlier late last year, earlier this year. 0:06:20.640 --> 0:06:25.440 And my favorite indicator is the inversion of the real 0:06:25.520 --> 0:06:28.400 yeald curve, so real three month yels versus real ten 0:06:28.440 --> 0:06:33.280 yure yelds, and that inverted last November, and that's about 0:06:33.360 --> 0:06:37.320 a twelve month till, you know, on average, which is 0:06:37.360 --> 0:06:40.520 always a dangerous number, but on average is about twelve months, 0:06:40.520 --> 0:06:43.719 which puts you into coming into recession at the end 0:06:43.800 --> 0:06:46.040 of this year. But of course, you know, it's not 0:06:46.080 --> 0:06:49.840 necessarily faded if the Fed does what it wants to 0:06:49.880 --> 0:06:53.159 do in terms of easing financial conditions, and the key 0:06:53.279 --> 0:06:55.880 one is to actually cut the cost of short. 0:06:55.760 --> 0:06:58.360 Term financing, which they're set to do. 0:06:58.640 --> 0:07:01.680 Which they will do twenty five in September. Unless, as 0:07:01.720 --> 0:07:06.080 a unless there's a unless there's a big negative surprise, right, 0:07:06.120 --> 0:07:09.000 there's no upside number like let's say it's two undred 0:07:09.000 --> 0:07:12.160 and fifty thousand that's gonna keep them, especially given this 0:07:12.280 --> 0:07:15.080 anecdotal information that will keep them from cutting twenty five. 0:07:15.360 --> 0:07:18.120 So the question is twenty five or fifty, and you 0:07:18.120 --> 0:07:21.720 would need a really poor employment number to get fifty. 0:07:22.000 --> 0:07:23.760 Steve, We're gonna have to leave it there. Steven Blitz, 0:07:23.840 --> 0:07:26.880 Chief US Economists at Global Data TS Lumbar joining us 0:07:26.920 --> 0:07:29.520 here in the Bloomberg at Business Week studio. Always good 0:07:29.520 --> 0:07:31.400 to see you. 0:07:31.400 --> 0:07:34.920 You're listening to the Bloomberg Business Week podcast. Catch US 0:07:34.960 --> 0:07:38.200 Live weekday afternoons from two to five pm Eastern. Listen 0:07:38.240 --> 0:07:40.920 on Apple Cardplay and then broud Auto with a Bloomberg 0:07:40.960 --> 0:07:44.120 Business app, or watch US Live on YouTube. 0:07:44.760 --> 0:07:46.680 Well Suprilla. It is a bound when talking about what 0:07:46.760 --> 0:07:49.360 happened with the video. Yesterday, shares fell more than nine 0:07:49.400 --> 0:07:51.920 point five percentator Race nearly two hundred and eighty billion 0:07:51.960 --> 0:07:54.360 dollars in market cap. It lost more than the market 0:07:54.400 --> 0:07:56.960 cap of Adobe, which is one of the thirtiest thirty 0:07:57.040 --> 0:08:00.160 biggest stocks in the US market. Shares hired by the 0:08:00.320 --> 0:08:04.200 three tenths of one percent as we speak. Then, aftermarkets closed, 0:08:04.200 --> 0:08:06.760 Ian King and Leah Nyland exclusively reported that the US 0:08:06.880 --> 0:08:10.120 Justice Department sent subpoenas to Innvidia and other companies as 0:08:10.120 --> 0:08:13.000 it seeks evidence that the chip maker violated anti trust laws, 0:08:13.160 --> 0:08:16.320 an escalation of its investigation into the dominant provider of 0:08:16.400 --> 0:08:19.240 AI processors. We got with us Ian King, Bloomberg News 0:08:19.280 --> 0:08:21.600 US Semiconductor and networking reporter, joining us from our San 0:08:21.640 --> 0:08:24.840 Francisco bureau. Ian. The dust has settled a little bit 0:08:25.200 --> 0:08:28.440 in the last eighteen hours twenty hours or so since 0:08:28.440 --> 0:08:32.679 you and Leah reported this story. As the dust settles, 0:08:32.679 --> 0:08:35.480 remind us what is that issue here and what the 0:08:35.600 --> 0:08:37.200 Justice Department is alleging. 0:08:38.559 --> 0:08:41.920 I mean, the important thing is that this is a subpoena. 0:08:42.080 --> 0:08:47.720 They've been surveying in Vidia's customers and competitors. Now they've 0:08:47.760 --> 0:08:49.439 moved to a subpoena, which, as you know, is a 0:08:49.480 --> 0:08:55.680 legally enforceable requirement to provide information. So what we think 0:08:55.880 --> 0:08:58.520 in terms of what this signifies is that they are 0:08:58.559 --> 0:09:02.960 moving closer to wards launching a formal complaint alleging that 0:09:03.080 --> 0:09:05.079 in Video has try and gross rules here. 0:09:05.480 --> 0:09:09.320 Remind us what Invidia has said thus far about these subpoenas. 0:09:09.880 --> 0:09:13.400 Yeah, in response to our story, they came back and 0:09:13.440 --> 0:09:17.720 they were quite feisty. They didn't deny the facts. What 0:09:17.760 --> 0:09:21.520 they said was, look, people buy our chips because they're good. 0:09:21.960 --> 0:09:24.920 If they don't, they can go elsewhere. So really, you know, 0:09:25.240 --> 0:09:28.679 showing a degree of irritation, I would say with this, 0:09:28.840 --> 0:09:31.640 they believe in truth and engineering. They believe that they 0:09:31.679 --> 0:09:34.360 are where they are because they are the best engineers 0:09:34.360 --> 0:09:35.520 for this type of product. 0:09:36.320 --> 0:09:40.800 So what is at the core of the DOJ probe? 0:09:40.880 --> 0:09:43.480 What part of Nvidia's supply chain are they really looking 0:09:43.520 --> 0:09:43.880 at here? 0:09:44.600 --> 0:09:47.079 Yeah, I mean, we won't really know that until as 0:09:47.080 --> 0:09:51.600 a formal complaint filed, but our reporting basically shows that 0:09:51.720 --> 0:09:54.200 what they're looking at is the idea. And this is 0:09:54.520 --> 0:09:57.439 something that's happened in the chip industry before with companies 0:09:57.480 --> 0:10:00.920 like Intel, where if you make multiple products for a 0:10:01.040 --> 0:10:03.760 data center, such as what in VideA does you know 0:10:03.920 --> 0:10:09.120 networking software? They supply software, models, services, and the chips say, 0:10:09.160 --> 0:10:11.680 if you only want to buy the chips, maybe you're 0:10:11.679 --> 0:10:14.640 paying more, maybe you're not getting the kind of supply 0:10:14.760 --> 0:10:17.880 that you want, compared to those that are buying everything. 0:10:19.440 --> 0:10:22.320 That's one of the examples that's that's sort of been 0:10:22.520 --> 0:10:27.800 thrown around. Maybe there's some kind of pricing differentiation going 0:10:27.800 --> 0:10:30.360 on that the customers don't like or think is unfair. 0:10:30.880 --> 0:10:32.680 All of these kind of ideas when you have a 0:10:32.720 --> 0:10:35.400 company like in Video, which is so utterly dominant in 0:10:35.400 --> 0:10:35.880 one area. 0:10:35.960 --> 0:10:37.720 Okay, well you bring up a good point in that 0:10:37.800 --> 0:10:40.000 it is utterly dominant in this in this one area, 0:10:40.200 --> 0:10:42.360 and you said, well, essentially the response has been if 0:10:42.360 --> 0:10:45.240 you don't like our product, you can go elsewhere? Can consumers? 0:10:45.480 --> 0:10:47.120 Can customers really go elsewhere? 0:10:48.160 --> 0:10:51.960 Sort of? I think the problem. I mean, obviously, competitors 0:10:52.000 --> 0:10:55.439 such as Intel and AMD are really you know, it's 0:10:55.480 --> 0:10:58.000 taken them a while, and AMD is closer but still 0:10:58.000 --> 0:11:00.599 not really at the level that in Video is that, 0:11:00.800 --> 0:11:03.040 and Intel, by its own admission, it is kind of 0:11:03.040 --> 0:11:06.120 trailing far behind. So in that sense, no, but there 0:11:06.120 --> 0:11:10.000 are other aspects to this. A company like AWS, Amazon's 0:11:10.040 --> 0:11:13.040 web services, they do their own networking, they do their 0:11:13.080 --> 0:11:16.240 own servers, they do their own software. So maybe they 0:11:16.280 --> 0:11:18.920 just want the chips. Maybe it's hot. I'm giving you 0:11:18.920 --> 0:11:23.400 a hypothetical here. Maybe it's difficult for them because they 0:11:23.400 --> 0:11:25.680 don't want to buy everything. So that's the kind of 0:11:25.800 --> 0:11:28.680 argument that exists that maybe some of these companies that 0:11:28.720 --> 0:11:31.240 have the expertise and the ability to do a lot 0:11:31.280 --> 0:11:34.800 of themselves want just the chips and want those chips 0:11:34.800 --> 0:11:36.520 on for fair terms. 0:11:37.080 --> 0:11:38.960 What do you make of the move in the stock 0:11:39.160 --> 0:11:42.680 we saw obviously in video fall almost ten percent yesterday, 0:11:42.720 --> 0:11:47.360 but it's actually in positive territory right now. Is that 0:11:47.520 --> 0:11:51.600 move justified with the news that you're reporting. 0:11:52.600 --> 0:11:54.440 I mean, I think you would have to ask my 0:11:54.520 --> 0:11:57.199 market's colleagues a little bit more about that. I mean, 0:11:57.280 --> 0:11:59.680 looking at what was happening yesterday, and this is before 0:11:59.760 --> 0:12:04.000 US went out, there was you know, obviously all of 0:12:04.040 --> 0:12:07.959 the chips related stocks sold off, and those that had 0:12:08.000 --> 0:12:11.440 been tied to this kind of AI frenzy were amongst 0:12:11.440 --> 0:12:14.520 the leaders, and obviously in video led everybody because of 0:12:14.520 --> 0:12:18.000 its market happ it had a huge impact on the indexes, 0:12:18.080 --> 0:12:22.320 and particularly chip related index So that had happened pre 0:12:22.840 --> 0:12:25.880 to this. I mean, what we should do is probably 0:12:25.960 --> 0:12:29.400 separate the short term fluctuations between the long term impact 0:12:29.480 --> 0:12:33.160 of something like an antitrust investigation, which will take a 0:12:33.200 --> 0:12:35.440 long time and which will likely be appealed if there 0:12:35.520 --> 0:12:38.200 is an investigation, if there is a formal complaint, and 0:12:38.240 --> 0:12:41.440 if the courts decide in favor of the government's case 0:12:41.480 --> 0:12:42.839 whenever that is brought. 0:12:42.760 --> 0:12:45.480 Okay, whenever that is Broughty in help us understand and 0:12:45.480 --> 0:12:48.080 help our audience understand what the next piece of this 0:12:48.160 --> 0:12:49.920 puzzle would be. What are you watching for? 0:12:50.760 --> 0:12:53.320 Yeah, I mean there would be a formal complaint would 0:12:53.320 --> 0:12:55.679 be the next step we have to say in that 0:12:55.800 --> 0:13:01.160 regard these things typically have taken years. Actions against Microsoft, 0:13:01.200 --> 0:13:03.839 actions in the past against Intel, and quite a lot 0:13:03.840 --> 0:13:06.800 of them have you know, very little material impact on 0:13:06.840 --> 0:13:10.200 a company's fortunes because I guess what technology moves quicker 0:13:10.240 --> 0:13:15.160 than the legal system. But at the same time, it's clear, 0:13:15.559 --> 0:13:18.760 not only in the US but worldwide that AI and 0:13:18.800 --> 0:13:22.920 who controls it, who controls these vital passways, is a clear, 0:13:23.440 --> 0:13:28.840 you know, strategic geopolitical security focus for governments around the world. 0:13:29.280 --> 0:13:31.640 So I think we could take this as part of 0:13:31.720 --> 0:13:34.160 a you know, a broader look at these things, and 0:13:34.200 --> 0:13:36.720 obviously an influence that governments feel they need to bring 0:13:37.000 --> 0:13:38.400 to bear upon this market. 0:13:38.600 --> 0:13:40.360 Hey, in what we have you, we'd be remiss if 0:13:40.360 --> 0:13:43.120 we didn't ask you for your view on what happened 0:13:43.200 --> 0:13:45.520 yesterday when it came to the socks. When it came 0:13:45.559 --> 0:13:47.760 to the chip stocks, we saw all thirty components of 0:13:47.760 --> 0:13:50.760 the socks down yesterday. The socks had its worst day 0:13:51.160 --> 0:13:54.679 going all the way back to twenty twenty. There was 0:13:54.720 --> 0:13:57.720 this UBS note that came out yesterday. But other than that, 0:13:58.400 --> 0:14:02.920 why did we see such a decline in chip stocks yesterday? 0:14:03.120 --> 0:14:06.800 I mean, it's look at the multiples, look at the 0:14:06.880 --> 0:14:10.920 run ups that we've had this year, last year. It's 0:14:11.000 --> 0:14:14.280 clear that a huge amount of money has been shifted 0:14:14.440 --> 0:14:17.760 into this sector, and it's happened very very quickly, in 0:14:17.880 --> 0:14:20.920 video being the prime example of that. When you get 0:14:20.920 --> 0:14:23.480 that kind of concentration, you obviously attract a lot of 0:14:23.960 --> 0:14:27.239 retail investors and a lot of people who don't potentially 0:14:27.640 --> 0:14:29.800 have the knowledge. So you have a lot of you know, 0:14:29.840 --> 0:14:32.040 what people will call fast money coming into a sector 0:14:32.080 --> 0:14:34.600 which traditionally didn't really have it. So that's going to 0:14:34.640 --> 0:14:39.400 make any rollover, any sense that perhaps we've got ahead 0:14:39.440 --> 0:14:42.360 of ourselves a little bit even more precipitous. When people 0:14:42.400 --> 0:14:45.600 get nervous and when they pull back, that is one 0:14:45.640 --> 0:14:49.520 explanation of what happened yesterday, and we've seen that happen recently. 0:14:49.720 --> 0:14:52.360 And then guess what the money came rolling back in again. 0:14:52.480 --> 0:14:56.200 So you would have to ask, you know, long term 0:14:56.240 --> 0:14:58.920 investors and short term investors what their viewpoint is and 0:14:58.960 --> 0:15:01.640 what their biases to me, that is the kind of 0:15:01.720 --> 0:15:04.480 explanation that I've heard that makes most sense to describe 0:15:04.480 --> 0:15:05.160 what's going on. 0:15:05.280 --> 0:15:07.960 Well, we certainly appreciate that explanation, and we certainly appreciate 0:15:07.960 --> 0:15:11.080 all the coverage that you and the team covering Nvidia 0:15:11.120 --> 0:15:14.440 and other chip companies. Ian King, Bloomberg News US Semiconductor 0:15:14.440 --> 0:15:17.760 and Networking reporter, joining us from our San Francisco bureau. 0:15:18.200 --> 0:15:20.680 Now we're going to talk Intel because the Biden Harris 0:15:20.720 --> 0:15:23.880 Administration's big bet on Intel to lead a US chip 0:15:23.880 --> 0:15:26.880 making renaissance is in grave trouble. This as a result 0:15:27.240 --> 0:15:30.520 of the company's mounting financial struggles. It creates a potentially 0:15:30.600 --> 0:15:35.720 damaging setback for the country's most ambitious industrial policy in decades, 0:15:35.840 --> 0:15:39.520 so writes Mackenzie Hawkins, Bloomberg News US Economic and Industrial 0:15:39.600 --> 0:15:43.720 policy reporter. She joined us from Washington, d C. Mackenzie 0:15:43.760 --> 0:15:46.000 Intel is supposed to receive eight and a half billion 0:15:46.040 --> 0:15:48.960 dollars in grants and eleven billion dollars in loans. That's 0:15:48.960 --> 0:15:52.080 as a result of the Chips Act from twenty twenty two, 0:15:52.720 --> 0:15:57.400 but only if the chip maker meets key milestones. Where 0:15:57.480 --> 0:16:00.400 is Intel right now in relation to those miles stones? 0:16:02.400 --> 0:16:05.960 So President Joe Biden went to Intel's factory site in 0:16:06.080 --> 0:16:09.360 Arizona in March and announced this massive grant and loan 0:16:09.400 --> 0:16:11.560 package from the chips Stacked and what could be and 0:16:11.600 --> 0:16:15.400 would be the program's largest award. And Intel, like more 0:16:15.440 --> 0:16:17.560 than a dozen other companies that are supposed to receive 0:16:17.640 --> 0:16:20.280 US government subsidies, is in the middle of a pretty 0:16:20.280 --> 0:16:23.680 intense due diligence process that comes after reaching that preliminary 0:16:23.680 --> 0:16:27.240 agreement earlier this year, and once the company signs a 0:16:27.280 --> 0:16:30.280 final term sheet and hits milestones on each of four 0:16:30.320 --> 0:16:33.400 projects that Intel's Chipsacked Award is supposed to support, they 0:16:33.440 --> 0:16:35.600 could start to receive funding from the government in the 0:16:35.640 --> 0:16:39.520 form of a reimbursement for companies spending. But Intel has 0:16:39.600 --> 0:16:43.120 resisted certain due diligence requests from the Biden administration and 0:16:43.520 --> 0:16:46.600 had a pretty disastrous financial report early last month that 0:16:46.640 --> 0:16:50.160 calls into question whether the company will ever be able 0:16:50.200 --> 0:16:52.640 to reach the milestones that would trigger that disbursement in 0:16:52.680 --> 0:16:53.280 the first place. 0:16:53.960 --> 0:16:56.880 So what is the US really looking here when it's 0:16:57.000 --> 0:17:00.920 examining these milestones, Like, what exactly are the milestones that 0:17:00.960 --> 0:17:02.040 Intel has to meet? 0:17:03.800 --> 0:17:06.959 So the government has been actually pretty quiet on the milestones. 0:17:07.000 --> 0:17:09.600 They're very bespoke arrangements that go on not just a 0:17:09.640 --> 0:17:12.480 company by company basis, but a project by project one. 0:17:12.600 --> 0:17:15.959 So in Intel's portfolio, for example, you have everything from 0:17:16.000 --> 0:17:18.320 an R and D facility in organ to a small 0:17:18.359 --> 0:17:21.480 packaging project in New Mexico, and each of those facilities 0:17:21.520 --> 0:17:25.520 have different timelines, different milestones, and different portions of Intel's 0:17:25.520 --> 0:17:28.720 grant that would fund those projects. But across the board, 0:17:28.760 --> 0:17:31.240 one of the key metrics for the Biden administration is 0:17:31.359 --> 0:17:34.280 general commercial viability, and the best way for a company 0:17:34.280 --> 0:17:37.359 to demonstrate that is by lining up major customers. So 0:17:37.400 --> 0:17:40.639 if you compare Intel to a company like Taiwan's TSMC, 0:17:40.840 --> 0:17:44.040 which is widely regarded to have the world's best semiconductor 0:17:44.160 --> 0:17:47.400 technology and has orders from pretty much every major tech 0:17:47.480 --> 0:17:50.440 name in the books, Intel doesn't actually have any major 0:17:50.480 --> 0:17:53.080 customers lined up for its US facilities. It has some 0:17:53.200 --> 0:17:56.639 interest from companies including Media Tech, Broadcom, and Microsoft, but 0:17:56.680 --> 0:17:59.240 none of them have reached full production yet. The Commerce 0:17:59.280 --> 0:18:02.000 Secretary Hers Steff actually reached out to executives out in 0:18:02.119 --> 0:18:05.119 Vidia and AMD and asked them to consider manufacturing it 0:18:05.160 --> 0:18:08.440 Intel's Ohio facility, which could become the world's largest chip 0:18:08.480 --> 0:18:11.439 making factory if it's fully built out, and neither company 0:18:11.480 --> 0:18:12.159 plans to do so. 0:18:12.680 --> 0:18:15.480 Hey mackenzie, how did this story change just in the 0:18:15.560 --> 0:18:19.160 last month, Because at the beginning of August, Intel reported 0:18:19.240 --> 0:18:24.119 earnings and it was the worst single day in decades. 0:18:24.240 --> 0:18:27.280 As you note, two major credit raterers downgraded the firm's 0:18:27.320 --> 0:18:30.680 debt to just a few notches above junk. The chip 0:18:30.720 --> 0:18:34.240 maker also slashing about fifteen thousand jobs. How did this 0:18:34.320 --> 0:18:35.879 story change just in the last month. 0:18:37.520 --> 0:18:40.080 So the process that Intel's going through right now, which 0:18:40.119 --> 0:18:42.879 is the preliminary agreement followed by months of due diligence 0:18:42.920 --> 0:18:45.600 ahead of a final award, was always the process that 0:18:45.640 --> 0:18:48.639 the company was going to go through. But of the 0:18:48.800 --> 0:18:54.480 entire chipsack portfolio, which includes companies like TSMC, Samsung, sk Heinex, Micron, 0:18:55.119 --> 0:18:58.600 Intel has perhaps seen the biggest change in the company 0:18:58.600 --> 0:19:01.760 position in the industry from when that preliminary agreement was 0:19:01.800 --> 0:19:04.080 announced to now. And so we're in a bit of 0:19:04.119 --> 0:19:07.280 a holding pattern. The Biden administration and just about everybody 0:19:07.359 --> 0:19:09.439 else are waiting to see what the company will do, 0:19:09.800 --> 0:19:12.400 and they're set to evaluate options at a mid September 0:19:12.440 --> 0:19:15.879 board meeting. So if the company does something like split 0:19:15.880 --> 0:19:19.719 off its manufacturing division or scale back its global factory plans. 0:19:19.920 --> 0:19:22.000 That could have an impact on its negotiations with the 0:19:22.040 --> 0:19:24.600 Biden administration. And to put a finer point on it, 0:19:25.080 --> 0:19:27.800 if and there is an indication yet that this is happening, 0:19:27.800 --> 0:19:30.680 but if the company does decide to pair back any 0:19:30.680 --> 0:19:34.240 of its US plans specifically, that would almost certainly cause 0:19:34.240 --> 0:19:36.080 a reduction in its overall chip sacked toward. 0:19:37.040 --> 0:19:40.520 I'm wondering, if maybe we can zoom out, just for 0:19:40.640 --> 0:19:45.160 people who are just tuning in now, why has Intel 0:19:45.320 --> 0:19:49.240 not been able to kind of capture that frenzy that 0:19:49.280 --> 0:19:53.919 there is, at least in the market for semiconductors. You 0:19:53.960 --> 0:19:56.000 know in videas the top performing stock in the S 0:19:56.040 --> 0:19:58.160 and P five hundred. It's been a huge theme this year, 0:19:58.359 --> 0:20:01.040 and yet we have Intel, which is a very well 0:20:01.080 --> 0:20:04.600 known name, and it just hasn't been able to ride 0:20:04.640 --> 0:20:06.920 that wave. The stock is down something like sixty percent 0:20:07.280 --> 0:20:09.760 year to date. Just get us up to speed on 0:20:09.880 --> 0:20:11.800 exactly what they're missing. 0:20:13.280 --> 0:20:16.639 So, you know, Intel is an American technological giant. This 0:20:16.760 --> 0:20:19.520 is the company that gave Silicon Valley its name. But 0:20:19.760 --> 0:20:23.160 there have been several years of strategic and technological blunders 0:20:23.200 --> 0:20:26.840 that CEO pat Glsinger came into leadership of the company 0:20:26.880 --> 0:20:29.720 aiming to turn around with a massive bet on Intel's 0:20:29.760 --> 0:20:33.199 factory division for factories that are known as foundries in 0:20:33.400 --> 0:20:37.359 chips peak. But the foundry business has struggled. They posted 0:20:37.359 --> 0:20:40.560 a seven billion dollar loss last year, and they missed 0:20:40.600 --> 0:20:43.639 out on a big AI wave that companies like TSMC 0:20:43.760 --> 0:20:46.480 have been able to ride. And so now Intel is 0:20:46.600 --> 0:20:49.800 sort of playing catch up against foreign competitors and their 0:20:49.840 --> 0:20:54.320 technology still lags several generations behind the cutting edge, and 0:20:54.400 --> 0:20:57.920 they've struggled to convince major other players in the industry, 0:20:58.160 --> 0:21:00.840 who get the bulk of their orders for AI chips 0:21:00.880 --> 0:21:03.919 from the industry leader TSMC, to take a bet on 0:21:03.960 --> 0:21:06.879 their factory processes. So it's a bit of a spiral 0:21:06.920 --> 0:21:10.040 for Intel right now as they're trying to convince investors, 0:21:10.080 --> 0:21:13.480 convince the government, and convince industry that their technology is 0:21:13.480 --> 0:21:15.160 worth taking a bet on McKenzie. 0:21:15.200 --> 0:21:17.360 On the US side of this, the US government side 0:21:17.359 --> 0:21:19.560 of this, the support that Intel was set to get 0:21:19.600 --> 0:21:21.880 from the US government is set to get from the 0:21:22.000 --> 0:21:24.720 US government. What does the US government want to see? 0:21:24.760 --> 0:21:27.639 Is this about jobs? Is about security? Is it about both. 0:21:29.440 --> 0:21:31.879 So if we go thirty thousand foot and look at 0:21:31.880 --> 0:21:35.160 the Chips Act overall, this was a landmark law that 0:21:35.320 --> 0:21:38.680 was that President Joe Biden signed just about two years ago, 0:21:38.720 --> 0:21:41.800 two years ago last month, and the goal is basically 0:21:41.920 --> 0:21:45.560