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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Terminal and the Bloomberg Business App. Francis Donald ARBC writing,
Speaker 2: for the past six years, US consumers have borne the
Speaker 2: brunt of accumulating inflationary shocks that chapter may now be ending.
Speaker 2: Francis joins us now for more. Francis, welcome to the program.
Speaker 2: What's changing, Well.
Speaker 3: The consumer is losing the capacity to absorb any additional
Speaker 3: shocks that savings riders down, real wages are now negative,
Speaker 3: and the capacity to absorb that has existed in the
Speaker 3: entire post pandemic experience, we believe, is now fading.
Speaker 4: Now.
Speaker 3: That doesn't necessarily mean the consumer is going to collapse.
Speaker 3: There's a very strong top ten percent consumer. It just
Speaker 3: means that you're going to get more resistance going forward
Speaker 3: on passing through these additional price shocks to the consumer.
Speaker 3: Businesses are going to face harder choices because if they
Speaker 3: continue to rely on the consumer to absorb these price shocks,
Speaker 3: they're either going to see the consumer say no, thank you,
Speaker 3: some demand destruction, or you're going to see consumers that
Speaker 3: say that's fine, but we're going to need higher wages.
Speaker 3: And that's why this tipping point is so critical and
Speaker 3: isn't necessarily reliant on your inflation forecast. It simply means
Speaker 3: that the psychology that has existed for over half a
Speaker 3: decade now in the macro environment may need to pivot,
Speaker 3: and we could see it as early as three to
Speaker 3: four months from now.
Speaker 2: The bankdrop you described Francis to me, at least listening
Speaker 2: to it, would make it difficult for any central bank
Speaker 2: to high interest rates. Why does it leave Kevin Walsh
Speaker 2: and his committee.
Speaker 3: Well, certainly very challenging. We're hearing a lot from central banks,
Speaker 3: like the Bay Canada yesterday about the policy dilemma of
Speaker 3: what happens when you have higher prices that weigh on growth.
Speaker 3: But to me, the real policy dilemma is that monetary
Speaker 3: policy is just not as functional and way more complicated.
Speaker 3: When you have a substantial K economy, you have a
Speaker 3: top end consumer that could wishstand and probably needs higher
Speaker 3: interest rates, and then you have a bottom end consumer
Speaker 3: that is going to go through some cyclical weakness and
Speaker 3: maybe even some structural weakness here. So how this central
Speaker 3: bank and what we hear from Kevin worsh and how
Speaker 3: he thinks about this and this policy dilemma is going
Speaker 3: to be very important moving forward, not just what action
Speaker 3: they take, but the philosophy around a growing divide within
Speaker 3: American consumers and how does monetary policy best serve them?
Speaker 3: I think an underappreciated question we should be asking Kevin warsh.
Speaker 1: For instance, do you think that the ecpakon potentially hike
Speaker 1: rates even if the US doesn't because of the K
Speaker 1: shaped economy, that there isn't such a market divide in
Speaker 1: the euroregion as there is in the United States.
Speaker 3: Well, this is thefferentiator between the United States, and there's
Speaker 3: a few of them. One is that big divide between
Speaker 3: that top ten percent that is accumulated massive savings, massive
Speaker 3: amounts of benefits from financial markets doing well. That we
Speaker 3: don't see in the rest of the developed world. That's true,
Speaker 3: but there's also a different growth dynamic that's happening here,
Speaker 3: which is the United States growth dynamic has been upheld
Speaker 3: by structural guardrails, the AI story, big government spending, that
Speaker 3: top ten percent, very wealthy consumer.
Speaker 4: But now we're starting to see.
Speaker 3: A broadening of that growth dynamic in the United States. Now,
Speaker 3: some of it might be FIFA, some of it might
Speaker 3: be some movement around tariffs that i eep A ruling
Speaker 3: coming down, some distortions, but there's enough happening in the
Speaker 3: US economy right now that suggests that their economy is
Speaker 3: actually becoming stronger, while DM economies outside of the United
Speaker 3: States are suffering under the weight of this energy shock.
Speaker 3: So certainly how central banks choose to respond to that
Speaker 3: will be interesting. But the divergence occurring between US growth,
Speaker 3: which is being allowed to run hot, and the rest
Speaker 3: of the world is child with more of stagflationary dynamics
Speaker 3: is interesting and also a new dynamic than what we've
Speaker 3: seen over the past one to two years.
Speaker 1: Since you talk about the tipping point where either potentially
Speaker 1: you're going to start to see people pulling back because
Speaker 1: their savings are out or they're going to demand higher
Speaker 1: wages and get them. Is a really interesting one, especially
Speaker 1: as we get PPI later today and you have heard
Speaker 1: about profit margins expanding at a number of companies.
Speaker 4: Why won't workers go to.
Speaker 1: Their bosses and say, the number of tokens you would
Speaker 1: need to pay to do what I do is actually
Speaker 1: more than I'm getting paid, So pay me the amount
Speaker 1: that my tokens would be worth. I mean, why is
Speaker 1: this a value proposition not going to necessarily lead to
Speaker 1: higher wages.
Speaker 4: Well, it's actually interesting.
Speaker 3: My team this week has all been talking about token
Speaker 3: use to the cost of tokens. Are we going to
Speaker 3: reach that moment where we say, actually there is a
Speaker 3: cost of labor, and there's a cost of actually substituting out.
Speaker 4: Of labor as well.
Speaker 3: This is critical and the most important data that we're
Speaker 3: watching right now is what are companies planning to do
Speaker 3: with pass through? So numbers like PPI are more important
Speaker 3: small businesses intentions to pass through, but also uomer's ability
Speaker 3: to absorb that. So the relationship between business costs, how
Speaker 3: they're using those very large corporate margins and the choices
Speaker 3: around them are going to be critifical from transcripts to
Speaker 3: survey data.
Speaker 4: This is a moment to really zero in.
Speaker 3: On do businesses see the capacity to reduce costs in
Speaker 3: other areas and do they have the capacity or they
Speaker 3: seeing any signs that they're going to have to slow
Speaker 3: through the pass through? To me, that's the biggest Q
Speaker 3: three question.
Speaker 5: You talk about in your note. How businesses choose to
Speaker 5: carry this. We'll define the next chapter of the cycle
Speaker 5: when it comes to higher prices. Mohammed Alaran has talked
Speaker 5: about in the past. Listen to what the c suite says.
Speaker 5: What are they telling you right now?
Speaker 3: They're still talking about pass through. They're talking about a
Speaker 3: slightly more fragile consumer, but particularly at the lower end
Speaker 3: of the sphere. So this is an early development. We're
Speaker 3: not quite there yet, but in our view, we only
Speaker 3: have a couple more months of savings with the consumer
Speaker 3: before you start to see that consumer start of breakdown. So,
Speaker 3: as I said Q three Q four, watch for this
Speaker 3: transitional moment coming through. So far, surveys are saying, well,
Speaker 3: we're getting a little bit more cautious, but not quite
Speaker 3: there yet. Again, we really try to downplay soft surveys typically,
Speaker 3: but We're going to have to watch for some dynamic
Speaker 3: on that front more than we have in the past.
Speaker 5: It'll show up a little bit more before the hard data. Francis,
Speaker 5: where's the savings coming from? I remember during Christmas people
Speaker 5: were saying that the consumers are going out and they're
Speaker 5: spending their savings right now and also tax their higher
Speaker 5: tax refunds, and then it was early in this year
Speaker 5: they're spending that on higher electricity bills. Now everyone's saying
Speaker 5: they're spending that on higher gas prices.
Speaker 4: Hasn't this dried up?
Speaker 3: It has, so we've seen we have near record low
Speaker 3: savings rate right now. That's a flow type of story,
Speaker 3: and this is exactly why it doesn't matter whether you
Speaker 3: believe inflation has peaked or not. The stock of available
Speaker 3: consumption now is now beginning to decline. If you go
Speaker 3: back several years, consumers had government transfers coming through from
Speaker 3: the pandemic. They had wages that were real and positive terms.
Speaker 3: They were accruing some benefits from that stronger stock market,
Speaker 3: but mostly to the top end. Those have now depleted.
Speaker 3: So again we're not talking about a very bearish consumer outlook.
Speaker 3: There are still elements of strength We are not talking
Speaker 3: about a complete collapse. We're talking about is that the
Speaker 3: baton has to be passed on price pass through from
Speaker 3: the consumer.
Speaker 4: To businesses because businesses are.
Speaker 3: Going to see it in real time that the consumer
Speaker 3: says cannot, I do not have the capacity to continue purchasing.
Speaker 3: And there's been such a psychological focus. We've become so
Speaker 3: accustomed to this idea that is inflation and prices rise
Speaker 3: from tariffs to geopolitical shocks that they roll through to
Speaker 3: consumers with a lag. This is the point that we're
Speaker 3: trying to make, is that that six year paradigm maybe
Speaker 3: on the edge of shifting in the other direction.
Speaker 2: Stay with us more Bloomberg surveillance coming up after this
Speaker 2: and most of Raymond James wrights in the following. If
Speaker 2: Democrats win a House and or Senate majority, expect calls
Speaker 2: for federal laws limiting data centers to be near the
Speaker 2: top of the agenda at joint us. Now for more
Speaker 2: and welcome to the show. To see you once again,
Speaker 2: let's focus on this. How are things changing heading into
Speaker 2: the midsums.
Speaker 6: Well, we've argued at Raymond James that AI policy is
Speaker 6: probably the biggest market event from the midterm elections. You
Speaker 6: go back to last November, John Democrats did really well
Speaker 6: in Virginia, in New Jersey arguing that energy costs are
Speaker 6: too high, arguing against data centers. You're seeing Bernie Sanders
Speaker 6: against that. You see Hakeem Jeffries, the Democratic leader in
Speaker 6: the House, saying this will be a priority. They're trying
Speaker 6: to make those data centers the death star to the
Speaker 6: American public and say that's the problem, and then build
Speaker 6: upon that trying to have new hawkishness on China and
Speaker 6: a whole bunch of new AI policies, trying to kind
Speaker 6: of wrap this against Trump and against Republicans, especially if
Speaker 6: they win a majority. That's going to be the market
Speaker 6: concern ed.
Speaker 5: What's actually going to be the policy when it comes
Speaker 5: to what some conservatives and free market individuals are saying
Speaker 5: that this government's trying to nationalize some of these companies.
Speaker 6: Yeah, well, this has been a weird push pull emory
Speaker 6: because there has been a general angst about kind of
Speaker 6: government stakes in US companies. But with President Trump, he's
Speaker 6: had the support of Republicans in Congress because they generally
Speaker 6: support him. I do look at the AI export program
Speaker 6: that should have some of their first announcements this month,
Speaker 6: which is going to get some government financing to back
Speaker 6: AI programs around the world. Maybe we take some of
Speaker 6: that financing that we're promoting and supporting some of these
Speaker 6: hyperscalers and using that as the hook to get that
Speaker 6: equity stake. I don't think we have that proposal that
Speaker 6: Bernie Sanders talk's about that would require congressional action. That's
Speaker 6: not going to happen. I do think that because Donald
Speaker 6: Trump has created this President Emory, it is more accepted
Speaker 6: than it otherwise would have ever been.
Speaker 5: Absolutely, he's also talking about a meeting that is unconfirmed,
Speaker 5: hasn't taken place yet. Why is he doing this? I mean,
Speaker 5: the AI companies are saying, there's no me right now.
Speaker 5: Why is he just putting this out there?
Speaker 6: Well, Emory, he loves to be at the center of
Speaker 6: the most important debates, to the extent that he can
Speaker 6: be on the world stage with Putin or she or
Speaker 6: with the leaders of AI. Especially as we're seeing some
Speaker 6: of these major IPOs in the pipeline, inserting himself into
Speaker 6: that policy is really important. Secondly, recently we got an
Speaker 6: AI executive Order and we're seeing a massive policy shift
Speaker 6: with President Trump, where at the beginning of his term
Speaker 6: he did away with the Biden executive order that looked
Speaker 6: at things through a national security lens. He's starting to
Speaker 6: do that as well, and he's starting to engage here
Speaker 6: because he's not quite sure if the free release of
Speaker 6: these models is the right policy or should we have
Speaker 6: a government review. The more that he gets concerned with that,
Speaker 6: the more he's going to want to meet with these
Speaker 6: AI executives. The more this becomes a political problem, the
Speaker 6: more he's going to want to insert himself into that
Speaker 6: trying to neutralize that policy point.
Speaker 1: Is President Trump leading the charge for Republicans in terms
Speaker 1: of supporting AI development or is he offside so some
Speaker 1: of his Republican colleagues who are very concerned about this,
Speaker 1: hearing from their constituents looking for more regulation.
Speaker 4: Lisa, it might be both.
Speaker 6: We've seen kind of a huge push at the beginning
Speaker 6: of this administration to change some of the policy towards China,
Speaker 6: making an argument that unless we get these leading edge
Speaker 6: chips to China, China will develop their own. We have
Speaker 6: the deep seek moment. Then he started to say, all right,
Speaker 6: we could allow China kit to get more chips. The
Speaker 6: h two hundred. Those haven't been developed or they haven't
Speaker 6: been sold to China at the levels he thought they would.
Speaker 6: And then on Capitol Hill, that's where you've gotten the pushback.
Speaker 6: We've had introduction of legislation, the Match Act, that has
Speaker 6: already cleared committee on a pretty decent vote that would
Speaker 6: restrict some of the semiconductors going to China, would restrict
Speaker 6: some of the semi kap equipment going to China, and
Speaker 6: Republicans are telling him you have gone too far in
Speaker 6: easing up some of these restricts. We don't like the
Speaker 6: fact that you've merged the national security and economic lanes.
Speaker 6: We understand that we need to win this AI race,
Speaker 6: but giving it to China being too fast and loose
Speaker 6: on some of the national security issues, that is a
Speaker 6: concern for us, especially if this is kind of getting
Speaker 6: deployed in the way in which we hear a lot
Speaker 6: of folks in the market talk about it.
Speaker 1: And there's also a concern about the personnel and the
Speaker 1: brain trust close to the White House right now. There
Speaker 1: have been a number of departures Thomas Lynd. The most
Speaker 1: recent one is that concerning given how quickly this is
Speaker 1: moving and the need for expertise to understand how it
Speaker 1: is working and what exactly the potential applications, potential danger,
Speaker 1: potential benefits could be.
Speaker 6: Yeah, we have a lot of turnover in government as
Speaker 6: a general source. It has been a uptick lately on
Speaker 6: some of the AI policy individuals. I've talked to a
Speaker 6: number of them after they have left or kind of
Speaker 6: when they've been doing these things. I've actually been relatively
Speaker 6: impressed with an AI policy infrastructure that he had put
Speaker 6: into place. I do think the fact that we had
Speaker 6: an AI action plan that came out pretty early in
Speaker 6: the administration. Now we have an AI Executive Order. It's
Speaker 6: been an area that they've been focused on. Let's see
Speaker 6: what that staff gets replaced with. But so far it's
Speaker 6: been pretty robust. And when I've talked to that staff,
Speaker 6: one of the things that they've told me is a
Speaker 6: they want to flood the zone. They want to make
Speaker 6: US technology the default technology for the world, and just
Speaker 6: as the dollar is the reserve currency of the world,
Speaker 6: they want that US based token to be the reserve
Speaker 6: token of the world. And that's why they're trying to
Speaker 6: export this globally. If they win that, they tell me
Speaker 6: that's the most important national security issue that they can
Speaker 6: actually achieve in this administration. So I'm hoping they're right.
Speaker 2: Stay with us. Mulblemberg Surveillan's coming up after this ten
Speaker 2: motison of bad rights. In the following the Capitol poll
Speaker 2: is launching. Have to pull some capital away from tech winners,
Speaker 2: tech joint us now for more, Ted, It's good to
Speaker 2: see us, so welcome back to the program. Do we
Speaker 2: have space for all this equity?
Speaker 4: That's a million?
Speaker 7: Another question? I mean Oracle last night, just pop seven
Speaker 7: or seventy billion. If you look at Entropic, you look
Speaker 7: at open AI, you look at SpaceX, it's a big number.
Speaker 7: So portfolio managers are now struggling on how to allocate
Speaker 7: these new offerings going forward.
Speaker 2: At what are your thoughts, Ted, What are your thoughts
Speaker 2: on how we should deploy some of that capital from here?
Speaker 2: Should you be buying some of these names? Should you
Speaker 2: take it away from the winners, the guys that have
Speaker 2: been running up so quickly over the past few months.
Speaker 7: I think this cycle is so powerful that you have
Speaker 7: to be involved in these. It's just a matter of
Speaker 7: how much and what the timing is. And I think
Speaker 7: from my standpoint, other sectors that don't have this macro
Speaker 7: associate with them, they need to be drained a little bit.
Speaker 7: Portfolio managers have to get into these names just because
Speaker 7: the forward weightings are going to be so dynamic that
Speaker 7: if they don't play, they're going to underperform.
Speaker 1: Let's get a little more specific. Is the room for
Speaker 1: open AI and a potential IPO given the fact that
Speaker 1: they're cutting prices to get some of the customer base
Speaker 1: of Anthropic.
Speaker 4: My opinion is yes.
Speaker 7: If you look at what's happening just on this cycle
Speaker 7: and the amount of infrastructure pull in, the software area
Speaker 7: is going to go along for the ride, probably not
Speaker 7: upfront like the infrastructure is, but over the long term
Speaker 7: you're going to see a lot of free cash flow
Speaker 7: generated from these next generation software companies.
Speaker 1: Do you think there's going to be a bifurcation We
Speaker 1: were talking about this Citadel note just moments ago, where
Speaker 1: they're talking about a bifurcation where you've got the frontier
Speaker 1: AI concentrated among a few firms with balance sheets that
Speaker 1: are big enough to absorb it, and then you have
Speaker 1: others looking for commoditized models that are cheaper and can
Speaker 1: perform more basic tasks. Do you think that that's the
Speaker 1: world of AI that we're going to be living in
Speaker 1: for the next year or two.
Speaker 7: I think it's going to be very, very volatile. It's
Speaker 7: very hard to put your finger on how these models
Speaker 7: are actually going to settle out. There is a fair
Speaker 7: amount of deflation going on as it relates to models,
Speaker 7: if you listen to Palenteer, for example, also on token pricing.
Speaker 7: I think we've just got to let it play out
Speaker 7: and verse speculating the macro though from a AI stack perspective,
Speaker 7: is so disruptive that I think we've got to look
Speaker 7: at it more from a long term and react to
Speaker 7: the models as a materialized ted.
Speaker 5: You rightfully point out in your note that tech CEO
Speaker 5: messaging is out of touch.
Speaker 4: With eighty percent of the population.
Speaker 5: Is that why we have this letter overnight from anthropic.
Speaker 4: I think so.
Speaker 7: I mean, you know, I wish some of the tech
Speaker 7: visionaries would really define not how their companies are doing,
Speaker 7: but how AI will affect humanity in a positive way,
Speaker 7: whether it be productivity or instead of job lost, job expansion.
Speaker 7: I think when you look at the bottom seventy percent
Speaker 7: of the population, they're getting hit not only on inflation
Speaker 7: but I think there's an angst that AI could control
Speaker 7: their destiny from a work in quality of life issue.
Speaker 7: And this is happening so quickly that I think that
Speaker 7: leadership has to take it under their wing to actually
Speaker 7: communicate to that bottom seventy percent and not the top
Speaker 7: thirty percent.
Speaker 5: How are you thinking about what the US government is
Speaker 5: going to do, especially when President Trump is talking about
Speaker 5: maybe he does line up with Centaer and Bernie Sanderson
Speaker 5: they should be taking equity stakes.
Speaker 7: Oh boy, that's a loaded question. I'm not a big
Speaker 7: believer in government choosing winners and losers. I think there's
Speaker 7: going to be some mechanism that if AI does materialize
Speaker 7: in a way that we are projecting, that the bottom
Speaker 7: seventy percent, if you will, will be taken care of.
Speaker 7: I think it's conjecture at this point on what that
Speaker 7: model looks like.
Speaker 2: Ted, I just wonder if we can turn that round
Speaker 2: just to touch the government picking winners and losers. There
Speaker 2: is a loser right now and it appears to be
Speaker 2: open AI and they're picking the government, and Ted, I
Speaker 2: just wonder win. I'm trying to work that out. What
Speaker 2: are they getting get here? There's been this talk reportedly
Speaker 2: in the last year as well, that they were talking
Speaker 2: about some individuals in the c suite that maybe the
Speaker 2: government should be involved to support any potential losses because
Speaker 2: this is getting too big to fail.
Speaker 1: Ted.
Speaker 2: How do you think about that dynamic?
Speaker 7: I tell you it's moving so quickly that, to be
Speaker 7: honest with you, Jonathan, I don't think anybody really has
Speaker 7: the real view here. I think there's got to be
Speaker 7: a lot of discussions company to company and with the
Speaker 7: government to figure this out. It's moving so quickly and
Speaker 7: it is so disruptive that, quite frankly, I don't think
Speaker 7: anybody really has the answers. I think we're trying to
Speaker 7: We're trying to nail an answer that may not exist
Speaker 7: right now because of the pace of innovation. I think
Speaker 7: it's gonna it's going to play out over the course
Speaker 7: of the next couple quarters, and I think we just
Speaker 7: have to go with with with how the market develops
Speaker 7: and quite frankly, how we make the country as a
Speaker 7: whole function.
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Speaker 2: mhmm