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The Economy Looks Fine Until Energy Hits · The Financial Exchange Show

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Speaker 1: donation today. This is the Financial Exchange with Chuck Zada,
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Speaker 1: and Mike Armstraw.
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Speaker 2: Chuck, Mike and Tucker with you here as we kick
1:12
Speaker 2: off what is going to be a busy, busy, busy
1:15
Speaker 2: busy show. We have a whole bunch of earnings from
1:19
Speaker 2: yesterday that we need to get to Google, Amazon, Facebook, Microsoft,
1:26
Speaker 2: We've got Jay Powell's last meeting as FED chair recapping
1:31
Speaker 2: what happened there.
1:32
Speaker 4: But we're going to kick things off.
1:33
Speaker 2: With some of the economic data that we received this morning,
1:37
Speaker 2: specifically starting off with what we saw from Q one GDP. Mike,
1:43
Speaker 2: your initial thoughts on the two percent growth rate that
1:46
Speaker 2: we clocked in at for Q one.
1:50
Speaker 3: The contribution from where we're going to get to those
1:53
Speaker 3: companies' earnings and where they're spending is starting to really
1:57
Speaker 3: show up in a powerful way, I guess would be
1:59
Speaker 3: my my main conclusion with all this. We already knew
2:02
Speaker 3: it was going to back in January, the Saint Louis
2:05
Speaker 3: FED had put together some pieces on where they estimate
2:10
Speaker 3: you know, GDP growth, or rather whether they estimate the
2:13
Speaker 3: AI buildout is going to contribute to GDP growth, and
2:17
Speaker 3: they had put together a number, you know, combined with
2:20
Speaker 3: some banks that you know, the categories at least at
2:23
Speaker 3: the end of twenty twenty five, for AI specific CAPEX
2:27
Speaker 3: was contributing about thirty nine percent of total GDP in
2:31
Speaker 3: this most recent reading. I mean, correct me if I'm wrong, Chuck.
2:34
Speaker 3: I think three quarters of the two percent GDP is
2:38
Speaker 3: coming from business investment to generally, and it's one of
2:42
Speaker 3: the highest reads we've seen in years of growth in
2:46
Speaker 3: business investment, which is probably a lot being driven by
2:50
Speaker 3: the AI data center buildout.
2:53
Speaker 4: Yeah.
2:53
Speaker 2: I think that when you look at this, there are
2:56
Speaker 2: there are a few takeaways, and I want to look
2:58
Speaker 2: at this in the context of like the BRA economic
3:00
Speaker 2: data that we've been getting over the last several months
3:04
Speaker 2: as well, which Mike, is it fair to say that
3:06
Speaker 2: when we look at the labor market, the labor market
3:10
Speaker 2: appears to have stopped worsening and may actually be getting
3:14
Speaker 2: marginally better.
3:15
Speaker 3: Yeah, that is I think certainly what you can look
3:18
Speaker 3: at with the aggregate data. I mean, I again speaking
3:22
Speaker 3: about individuals and speaking two individuals. I continue to get
3:26
Speaker 3: the news stories from folks that you know, really tough
3:29
Speaker 3: to find that job as a new college grad. But
3:31
Speaker 3: in the aggregate you are absolutely correct, and partly because
3:34
Speaker 3: of the pace of baby boomers retiring. The labor market
3:37
Speaker 3: has shown some signs of improvement and certainly hasn't worsened
3:40
Speaker 3: over the last six months. So the labor market seems
3:43
Speaker 3: to be finding a little bit of stability. Is it
3:45
Speaker 3: also fair to say that the housing market in general. Again,
3:50
Speaker 3: I know that everything's local. I know that, you know,
3:51
Speaker 3: everyone's got their own opinion about what's going on in
3:53
Speaker 3: their street and this and that.
3:54
Speaker 2: But again we're talking the big data because that's what
3:58
Speaker 2: matters ultimately. The housing data also showing a little bit
4:03
Speaker 2: of firmness in terms of not that twenty twenty six
4:07
Speaker 2: is going to be a knock your socks off here,
4:09
Speaker 2: but that the worst is over from a pricing perspective
4:13
Speaker 2: in parts of the country that were badly hit the
4:15
Speaker 2: last couple of years, and now it's being reflected in
4:18
Speaker 2: more transaction volume, that additional inventory is starting to clear,
4:21
Speaker 2: and so housing net net this year probably close to
4:25
Speaker 2: neutral overall, like, not a huge driver in either direction
4:29
Speaker 2: of either slow down or acceleration.
4:31
Speaker 3: Yeah, I think as in terms of its contribution to
4:33
Speaker 3: the economy, you write it's it's stable, it's not falling
4:37
Speaker 3: or gaining. I don't know that it's a market that
4:39
Speaker 3: encourages a whole lot of new building. But yeah, the
4:43
Speaker 3: more stable you get in places like Texas and Florida,
4:46
Speaker 3: you can probably expect some more building in those places.
4:49
Speaker 2: So I think that overall, with that in mind, here,
4:53
Speaker 2: I think the interesting thing that this report shows, and
4:56
Speaker 2: again I mentioned on I think it was either yesterd
5:00
Speaker 2: Day Show or the day before, whenever it was, I said, look,
5:03
Speaker 2: to a certain extent, you've got to kind of discount
5:05
Speaker 2: this Q one number just because most of the quarter
5:09
Speaker 2: happened before the Iran conflict even started. Yeah, and an
5:13
Speaker 2: even larger part happened before you started seeing any major
5:16
Speaker 2: impacts from it.
5:17
Speaker 4: You know.
5:17
Speaker 2: It's it's just, you know, any kind of energy disruption
5:22
Speaker 2: didn't really show up anywhere except in the form of
5:25
Speaker 2: price throughout the you know, kind of second half of
5:28
Speaker 2: March really like that's when the most the heaviest impacts were.
5:32
Speaker 2: But you still had ships that had already exited the
5:34
Speaker 2: straightup hoorror moves that were going places in the world,
5:36
Speaker 2: and so it wasn't something where you would expect, you know,
5:39
Speaker 2: too much impact from the Iran conflict in this quarter,
5:43
Speaker 2: just because a lot of it was kind of baked already, sure,
5:45
Speaker 2: like it's it's just how it was. But what this
5:48
Speaker 2: quarter showed is when we look at again, what is
5:54
Speaker 2: the breakdown between all of these different things, personal consumption expenditures,
5:58
Speaker 2: what households are spending money on. Good spending was basically flat,
6:04
Speaker 2: no real shift there. You did see a meaningful, you know,
6:08
Speaker 2: continued increase in services expenditures. Now a decent chunk of
6:11
Speaker 2: that was driven by healthcare. But again I'm not going
6:13
Speaker 2: to get into the weeds because like quarter to quarter
6:16
Speaker 2: on like these sub things, it doesn't really matter. But
6:19
Speaker 2: personal consumption expenditures again were fine. They weren't great, they
6:24
Speaker 2: weren't awful, they were fine, Like they were kind of
6:26
Speaker 2: muddling along, which is what you would expect because hey,
6:30
Speaker 2: look in you know, January and February, the retail sales
6:32
Speaker 2: numbers were pretty muted. Some of that was weather, some
6:35
Speaker 2: of that was other things, but like none of this
6:37
Speaker 2: was you know, unexpected. The piece that we are seeing,
6:41
Speaker 2: and this meshes with what we've seen from data sets
6:44
Speaker 2: like ism, manufacturing, you know, freight rates and things like that.
6:49
Speaker 2: Gross private domestic investment accelerated for the fourth quarter in
6:55
Speaker 2: a row, and so you're continuing to see a move
6:59
Speaker 2: that happening there. Predominantly the main driver there fixed investment
7:04
Speaker 2: in non residential construction, so AGA, data centers and stuff
7:10
Speaker 2: like that.
7:11
Speaker 4: You know, I do.
7:13
Speaker 3: Wonder how much of that is coming just specifically from
7:15
Speaker 3: data centers.
7:16
Speaker 4: I know, we know, Mike, No, we we basically know.
7:20
Speaker 2: Computers in peripheral equipment added zero point five to eight
7:24
Speaker 2: percent to GDP for the quarter.
7:27
Speaker 4: It's a big chunk there.
7:29
Speaker 2: And this has been pretty consistent over the last five
7:31
Speaker 2: quarters or so. And computers in peripheral equipment. MIC, is
7:35
Speaker 2: that because everyone is suddenly going out and buying new
7:39
Speaker 2: dells now some people buying new iPads like crazy. No,
7:44
Speaker 2: it's like this is the stuff. It's it's it's servers
7:47
Speaker 2: and chips that are driving this. So a lot of
7:50
Speaker 2: it is there. Uh And and so I think that
7:52
Speaker 2: this is something that's that's meaningful as as well when
7:55
Speaker 2: you look at this, and so I think my takeaway
7:59
Speaker 2: from the quarter, because again I am of the opinion, hey,
8:01
Speaker 2: Q one represents a different world than the one we
8:04
Speaker 2: now live in, is the quarter was just fine. It
8:08
Speaker 2: wasn't terrible, it wasn't amazing, It was just fine, and
8:13
Speaker 2: that's okay.
8:14
Speaker 4: Two percent GDP growth.
8:15
Speaker 2: If you do that every quarter, that's probably in line
8:18
Speaker 2: with what the realistic capacity is for the US economy.
8:22
Speaker 2: And there's nothing wrong with that. It's a perfectly cromulent quarter.
8:26
Speaker 2: And if you do that four times in a row,
8:28
Speaker 2: you got a nice little year. Nothing outstanding, nothing terrible,
8:31
Speaker 2: but it is what it is. Like, it's fine. The
8:34
Speaker 2: place that's going.
8:35
Speaker 4: To be interesting.
8:35
Speaker 2: And again, I think where I get to out of
8:38
Speaker 2: this is pre Iran conflict. There were some real signs
8:43
Speaker 2: that things were stabilizing pretty solidly in the US economy
8:47
Speaker 2: after a Q four that was not very good and
8:50
Speaker 2: had us concerned about the labor market and other things.
8:53
Speaker 4: Q one like kind.
8:54
Speaker 2: Of makes Q four look like an outlier to the downside,
8:58
Speaker 2: you know, like as Q two and three of last year,
9:00
Speaker 2: we're both good three eight and four to four for
9:02
Speaker 2: GDP and then he printed this point five percent GDP
9:05
Speaker 2: number in Q four and you're like, oh, like, is
9:07
Speaker 2: the labor market finally catching up with US? Q one
9:11
Speaker 2: kind of looks like, no, it's not. And given the
9:12
Speaker 2: other strength in the labor market, I think the interesting
9:15
Speaker 2: thing right now is what broader markets are telling you
9:19
Speaker 2: about the state of the economy is yes, commodity prices
9:21
Speaker 2: are ripping higher, it's not ripping higher in a fashion
9:25
Speaker 2: that's impacting the US economy horribly negatively. Yet it may
9:30
Speaker 2: at some point become too much of a problem. But
9:33
Speaker 2: right now, again, like I just look at the latest
9:35
Speaker 2: weekly jobless claims from today, Mike. Did you happen to
9:40
Speaker 2: see the weekly jobbles claims number? The new one nine right,
9:44
Speaker 2: one hundred and eighty nine thousand, Mike, Not only is
9:47
Speaker 2: it nothing? Okay when we go and take a look
9:51
Speaker 2: at the data set and say, okay, one hundred and
9:55
Speaker 2: eighty nine thousand weekly claims, Like, when's the last time
9:58
Speaker 2: we saw something you know in that you know, in
10:01
Speaker 2: that ballpark in that vicinity. Do you know when the
10:05
Speaker 2: last time is that we saw that late twenty tens,
10:09
Speaker 2: nineteen sixties? Jeez, Okay, we did have we printed one
10:14
Speaker 2: hundred and ninety thousand a couple of years back, back
10:17
Speaker 2: in September of twenty two. So like again, it's not
10:20
Speaker 2: to say that like we haven't been like in this ballpark,
10:23
Speaker 2: but it is something where you're like, hey, for like
10:25
Speaker 2: this actual number, you got to go back to the
10:27
Speaker 2: nineteen sixties to find the last time that you printed.
10:30
Speaker 3: This with a much smaller population, yes, right, much smaller population. Yeah.
10:35
Speaker 2: So I think my takeaway is, look for Q one,
10:39
Speaker 2: the US economy was in good shape, and it makes
10:42
Speaker 2: Q you know, Q four of last year look like
10:44
Speaker 2: an outlier. The question is, how are higher commodity prices
10:49
Speaker 2: and you know, additional demand for energy going to impact
10:54
Speaker 2: the economy going forward. And it's a real question as
10:59
Speaker 2: we get deeper into Q two. Remember we basically have
11:02
Speaker 2: no Q two data yet. The first April data we're
11:05
Speaker 2: gonna start getting tomorrow with ism manufacturing, and then we
11:08
Speaker 2: really kick into it next week. So I think the
11:12
Speaker 2: question is, hey, what does Q two look like? And remember,
11:14
Speaker 2: even the April data is going to differ from how
11:17
Speaker 2: things look later in the quarter, when the global energy
11:20
Speaker 2: picture looks dramatically different. So there's an evolution that's going
11:23
Speaker 2: to happen here. But overall, the picture in Q one
11:27
Speaker 2: it's fine, it's not great, it's not horrible. It's it's
11:30
Speaker 2: a good quarter. You're grading this out solid BB plus, Right,
11:36
Speaker 2: that's what it looks like there. Let's let's take a
11:39
Speaker 2: quick break and when we return let's see we want
11:44
Speaker 2: to talk about PC data, then a little uh yeah,
11:47
Speaker 2: let's let's.
11:47
Speaker 3: Go over to inflation and and of course yesterday's FED
11:51
Speaker 3: meeting was yesterday too. On top of all the earnings
11:53
Speaker 3: and the GDP and everything else quick.
11:57
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13:03
Speaker 3: Mike.
13:03
Speaker 2: We got PCE inflation data out this morning. Which did
13:06
Speaker 2: you do? You have to catch like the big news
13:08
Speaker 2: on this, Uh, just say in the headline, no, Chuck,
13:14
Speaker 2: I didn't. The big news, mic is that we are
13:18
Speaker 2: finally now caught up from the government shutdown five months later.
13:24
Speaker 2: We're finally getting the data at the time of month,
13:29
Speaker 2: in the correct month that we're supposed to, which is
13:32
Speaker 2: exciting to me as someone who's a creature of habit.
13:34
Speaker 4: Yeah and knows.
13:35
Speaker 2: Hey, you look for PCE on you know, the last
13:38
Speaker 2: Thursday or Friday of the month. Uh, it's nice that
13:42
Speaker 2: we're back to that. So here here's what we've got
13:45
Speaker 2: on PCE. The month over month numbers point three percent
13:49
Speaker 2: on core, point seven percent on headline.
13:52
Speaker 4: Not really shocking. These are in line with expectations.
13:54
Speaker 3: Yeah, not much different from what we saw on CPI,
13:56
Speaker 3: which I think was point nine and point two per
13:59
Speaker 3: the same measures.
14:00
Speaker 4: Correct.
14:01
Speaker 2: Uh, annually pc now running at two point eight percent
14:05
Speaker 2: on headline.
14:06
Speaker 4: I'm sorry, I know those are not updated.
14:08
Speaker 2: We've got PC now running at three point five percent
14:13
Speaker 2: on headline, and core is at three point two percent.
14:18
Speaker 2: So I think that when we look at this, the
14:22
Speaker 2: picture as I interpret it is, Look, you've got inflation
14:27
Speaker 2: that is now firmly, especially after we get the April data,
14:30
Speaker 2: which is going to be inflected upward further because of
14:34
Speaker 2: the additional rise in gas prices during that time. You're
14:38
Speaker 2: gonna have headline inflation somewhere in the ballpark of four percent, uh,
14:42
Speaker 2: you know, give or take a few tenths sure, and
14:45
Speaker 2: you're gonna have core somewhere in the ballpark of three
14:49
Speaker 2: to three and a quarter, give or take, you know again,
14:51
Speaker 2: kind of a tenth or two. It's it's gonna depend
14:53
Speaker 2: just on the exact pass through so far to core.
14:56
Speaker 2: And I think what this means, you know, in so
15:00
Speaker 2: far as the Fed, because again, this is the reason
15:02
Speaker 2: why PCE matters to markets. It's not because markets care
15:06
Speaker 2: about inflation as it relates to people's everyday lives. It's
15:10
Speaker 2: markets care about inflation as far as hey, what are
15:13
Speaker 2: j Powell and soon to be Kevin Warsh going to do?
15:18
Speaker 2: And so it does present a challenging situation for the
15:21
Speaker 2: FED to cut into right now, and I think this
15:24
Speaker 2: is kind of a good time to dovetail to some
15:26
Speaker 2: of Powell's comments from yesterday, if you're okay with that.
15:28
Speaker 3: Yeah, I didn't catch the press conference live, but it
15:31
Speaker 3: was his last press conference as chairperson, and there's a
15:35
Speaker 3: there's a fair bit to dig into.
15:36
Speaker 2: There, so items that I think were notable on the
15:42
Speaker 2: inflation side yet because he was asked specifically about this,
15:46
Speaker 2: So he then he started to go backwards talking about tariffs,
15:50
Speaker 2: and he said, look, we believe tariffs would leave to
15:52
Speaker 2: a one time price increase and then would go away
15:55
Speaker 2: over time, and our expectations or that we would see
15:58
Speaker 2: that in the next two quarters. Basically, Hey, prices started
16:01
Speaker 2: going up from tariffs in Q two and three of
16:04
Speaker 2: last year, and as you lap those, you should see
16:06
Speaker 2: those tariff impacts.
16:07
Speaker 4: Fall away, he said.
16:10
Speaker 2: He then went on with energy, It's so hard to
16:12
Speaker 2: say how things can play out, but we are already
16:15
Speaker 2: looking through the tariff shock, and so we're gonna be
16:18
Speaker 2: cautious about that, basically saying, look, we tried to look
16:21
Speaker 2: through that. Remember the FED when we talk about interest
16:24
Speaker 2: rates and where they've moved them over the last couple
16:27
Speaker 2: of years, when we take a look at the effective
16:31
Speaker 2: federal funds rate right now, you end up in a
16:34
Speaker 2: place where, hey, the Fed did go through and again
16:38
Speaker 2: very much a mini one, but a mini cutting cycle
16:42
Speaker 2: last year. And the reason that they did that was
16:44
Speaker 2: they said, look, we can look through the tariff inflation piece.
16:49
Speaker 2: But Paul said, look, we're already looking through the tariff inflation,
16:52
Speaker 2: so we're gonna be cautious about it.
16:53
Speaker 4: Energy hasn't peaked yet.
16:55
Speaker 2: And so we want to see the backside of that
16:58
Speaker 2: and progress on tariffs before we talk about reducing rates further.
17:03
Speaker 3: So basically, I'm willing to look through one crisis price shock,
17:07
Speaker 3: but not too at the same time. Is yeah, one
17:10
Speaker 3: way of implying that.
17:12
Speaker 2: And he then went on to say, he goes, look
17:14
Speaker 2: like you can have any number of permutations as to
17:16
Speaker 2: you know, how long the straightupfoe moves remains closed, and
17:19
Speaker 2: it's not really worth, you know, building those into our
17:21
Speaker 2: models because it like it's you won't get anywhere. You
17:26
Speaker 2: could have models where it's closed for another week, another month,
17:29
Speaker 2: another year, and that doesn't tell you anything. Ultimately, you
17:32
Speaker 2: need to see when it opens, and that's what's going
17:34
Speaker 2: to determine what you do, which is a reasonable like point.
17:38
Speaker 2: I mean, there's a very different policy prescription if the
17:40
Speaker 2: energy shock lasts for two months as opposed to two years.
17:43
Speaker 3: Yep.
17:45
Speaker 2: So I think that was interesting, and I think in
17:49
Speaker 2: the context of what we're seeing from on the inflation
17:51
Speaker 2: side right now, it sure doesn't seem like there are
17:55
Speaker 2: any members of what's going to be the Open Market
17:59
Speaker 2: Committee going far because remember Warsh is going to end
18:01
Speaker 2: up taking Moron spot. Because j Powell did say that
18:08
Speaker 2: he is going to continue to serve on the Board
18:10
Speaker 2: of Governors after his FED chair chairmanship ends on May fifteenth,
18:15
Speaker 2: for a length of time that's yet to be determined. Now,
18:18
Speaker 2: he did say he will quote maintain a low profile
18:21
Speaker 2: as FED governor And did neither of you, neither of
18:23
Speaker 2: you watch this, right, I wasn't living for you did
18:27
Speaker 2: so might actually be one of the funnier things I've
18:30
Speaker 2: seen a FED chair or any professional economists ever do.
18:34
Speaker 2: Someone asked him, Hey, Jay, what does like a low
18:37
Speaker 2: profile look like? And he just like slumped down and
18:40
Speaker 2: hid behind the podium.
18:42
Speaker 4: Oh really, yes, like.
18:45
Speaker 2: Yeah, you know, like find the video. It's like it's
18:47
Speaker 2: it's very good actually, and and kind of physical comedy
18:52
Speaker 2: from the chairman of the y. It's like the guy
18:54
Speaker 2: literally goes jay like, what does a low profile look
18:56
Speaker 2: like for you?
18:57
Speaker 4: And without saying anything, he just shrinks.
18:59
Speaker 2: Down behind the podium, which I thought was good. He
19:03
Speaker 2: did go on to say, look, there's only room for
19:06
Speaker 2: one chair on the committee, and Kevin Walsh is that chair.
19:10
Speaker 2: So okay, that's kind of the lay of the land
19:13
Speaker 2: on where things are going there. I have a couple
19:15
Speaker 2: more things that I do want to touch on, but
19:17
Speaker 2: I know we've got to get to break here, so
19:19
Speaker 2: let's take a quick break. When we come back, we've
19:23
Speaker 2: got Wall Street Watch and then a little bit more
19:26
Speaker 2: on the FED and inflation going forward.
19:40
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19:47
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19:52
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19:56
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19:59
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20:00
Speaker 5: On the busiest day of the week, markets are mixed
20:02
Speaker 5: as investors sift through a flurry of big tech earnings,
20:06
Speaker 5: economic data points including first quarter GDP, the PCE index,
20:10
Speaker 5: and jobless claims. On top of all that, FED chairman
20:13
Speaker 5: Jerome poul announced he would stay on as FED governor
20:16
Speaker 5: after his term ends. Right now, the Dow is up
20:19
Speaker 5: one point two percent, SMP five hundred edging only three
20:23
Speaker 5: points higher, NASDAC retreating about five tenths of one percent.
20:28
Speaker 5: Rust two thousand, or half a percent I should have said.
20:32
Speaker 5: Ruster two thousand is up about half a percent ten.
20:34
Speaker 5: Your Treasure Reeled is down two basis points at four
20:36
Speaker 5: point three nine four percent, and crude oil pulling back
20:40
Speaker 5: nearly two percent, trading at one hundred and five dollars
20:43
Speaker 5: a barrel. Facebook parent Meta posted its largest quarterly revenue
20:47
Speaker 5: jump in five years. However, shares are plunging ten percent
20:51
Speaker 5: in reaction to the company's plans to spend even more
20:54
Speaker 5: money on AI. Amazon down by one percent after the
20:58
Speaker 5: e commerce trant saw its total rentvenue and profit climb
21:01
Speaker 5: in the first quarter, driven by growing AI services and
21:05
Speaker 5: cloud sales. Microsoft shares are falling five percent after the
21:08
Speaker 5: company reported strong cloud growth and an increase in paid
21:12
Speaker 5: AI subscribers. Microsoft also said capital spending will increase sixty
21:16
Speaker 5: one percent this year compared to twenty twenty five. Alphabet
21:20
Speaker 5: jumping five percent after the Google parent posted a twenty
21:23
Speaker 5: two percent jump in first quarter revenue and an eighty
21:26
Speaker 5: one percent increase in net income. ELI Lilly saw its
21:30
Speaker 5: revenue climb fifty six percent in the first quarter on
21:33
Speaker 5: the heels of growth for its GLP one drugs. Lily
21:36
Speaker 5: stock is rallying eight percent, and after today's closing, Bell
21:40
Speaker 5: more tech earnings on the way as Apple will post
21:43
Speaker 5: its earnings. I'm Tucker Silvan.
21:45
Speaker 1: That is Wall Street.
21:46
Speaker 2: Watch, Mike, what other thoughts we want to clean up
21:51
Speaker 2: as it relates to J. Powell and the Fed and inflation.
21:56
Speaker 3: Well, the votes themselves were interesting, right, We had four
22:00
Speaker 3: separate members of the voting committee disagree with different parts
22:05
Speaker 3: of the decision on interest rates. Now, we had Myron obviously,
22:09
Speaker 3: who has dissented in each of the meetings that he
22:12
Speaker 3: has has he descended in every single one? I think
22:15
Speaker 3: I think he.
22:15
Speaker 2: Probably during one. This is the one this month where
22:22
Speaker 2: honestly you look at and you're like, my man.
22:25
Speaker 3: Yeah, you're fundamentally one serious person.
22:28
Speaker 4: What are you actually doing here?
22:30
Speaker 2: You've got prices literally moving up as we speak. The
22:34
Speaker 2: economic data otherwise has been improving. You know, the labor
22:38
Speaker 2: market's showing more strength right now. I don't know that
22:42
Speaker 2: there's any justifiable reason to cut right now. I think
22:45
Speaker 2: there's not necessarily a huge impetus to hike either. But
22:49
Speaker 2: I think it's perfectly fine just to be like, hey,
22:51
Speaker 2: let's sit this one out and just do nothing. I
22:54
Speaker 2: don't think you can really look at this and be like,
22:55
Speaker 2: this is an opportune time to start cutting rates.
22:58
Speaker 3: Frankly, he's proving himself to be an unserious person when
23:01
Speaker 3: it comes to the Federal Reserve, and in my view,
23:04
Speaker 3: just should not be confirmed by the Senate if he's
23:07
Speaker 3: reappointed to a future role. But nonetheless it's not important
23:11
Speaker 3: right now. The other three descents were interesting because they
23:14
Speaker 3: were all not saying that rates should be hiked at
23:18
Speaker 3: this specific meeting, but they were all having issues with
23:22
Speaker 3: statements that were in the official release from the FED
23:26
Speaker 3: that's still insinuated that a rate cut would likely be
23:29
Speaker 3: the next move, and these three said, no, we think
23:32
Speaker 3: that should be taken out because we effectively think it's
23:34
Speaker 3: equally likely that it could be a rate hike that
23:36
Speaker 3: is necessary and that's now being priced in to markets
23:39
Speaker 3: when you take a look at the CME futures, and
23:42
Speaker 3: it was not two days ago but you now have
23:45
Speaker 3: by that December meeting about a seven and a half
23:47
Speaker 3: percent chance of a rate hike by your end.
23:51
Speaker 2: So I think that what's interesting there was poking around
23:56
Speaker 2: just to try to figure out, hey, like, have you
23:58
Speaker 2: seen anything So I'm Malari in the past, and you've
24:01
Speaker 2: had a couple instances, like in the twenty tens in
24:03
Speaker 2: two thousands, so it's it's not like this is something
24:05
Speaker 2: that never happens. Quite honestly, I think that more than
24:11
Speaker 2: anything about this particular meeting, I suspect that's a signal
24:16
Speaker 2: to Kevin Worsh in terms of, hey, just so you know,
24:21
Speaker 2: we're willing to talk to you, but don't.
24:23
Speaker 4: Think that we're just gonna roll over and do whatever
24:25
Speaker 4: you want us to do.
24:26
Speaker 2: And I think that's kind of how it comes off,
24:29
Speaker 2: more than anything else. And so ultimately, look, the next
24:35
Speaker 2: FED meeting is on June seventeenth. Again, it's great that
24:38
Speaker 2: these are every six weeks, like you, We're gonna get
24:41
Speaker 2: right into it. Worsh will have been chair for about
24:45
Speaker 2: five weeks when that meeting happens, assuming that he is,
24:47
Speaker 2: you know, confirmed, which now that he's clear, the Senate
24:50
Speaker 2: Banking Committee looks like a formality. So it basically is,
24:54
Speaker 2: you know, Worsh should be running the place as of
24:56
Speaker 2: that meeting, and I think it'll be really interesting. Look,
25:00
Speaker 2: it's it's been a while since we've had a new
25:03
Speaker 2: FED chair now, yeah, I mean Trump's first term.
25:08
Speaker 4: Yeah.
25:08
Speaker 2: At the risk of just you know, reducing this to
25:11
Speaker 2: like very simple, you know topics, it's been eight years
25:13
Speaker 2: since we've had new FED chair. Yeah, And so this
25:17
Speaker 2: is something where we're gonna have to get used to
25:20
Speaker 2: Kevin Worsh's style of speaking, and not just speaking, how
25:24
Speaker 2: does he change, you know, how they present different items.
25:28
Speaker 2: As an example, Jay Powell was asked here today. Look, Jay,
25:31
Speaker 2: when you came on board, the FED chair only gave
25:34
Speaker 2: press conferences after the Summary of Economic Projections was released,
25:38
Speaker 2: not at the meetings in between. You decided to give
25:41
Speaker 2: press conferences at every meeting.
25:44
Speaker 4: Why did you do that?
25:45
Speaker 2: Does Kevin Worsh maintain that It's not like it's required
25:48
Speaker 2: of the FED to do that. Fed's not required to
25:51
Speaker 2: put out the step either. So I think these are
25:53
Speaker 2: things that are going to be interesting just to think
25:55
Speaker 2: about in terms of, Hey, what is the communication policy
25:59
Speaker 2: of the FED under Walsh and how may that impact
26:04
Speaker 2: how markets receive and transmit that data as well. It's again,
26:09
Speaker 2: this is not a good or bad thing, like we
26:11
Speaker 2: just don't know. We're gonna have to see, you know,
26:13
Speaker 2: exactly how a warsh FED manages those communications, and I
26:17
Speaker 2: think that's going to be really interesting to see, you know,
26:21
Speaker 2: in addition just to the you know what, what ends
26:25
Speaker 2: up being pushed from a dubbish or hawkish perspective as well.
26:29
Speaker 2: It's again, this is this is a big change, and
26:33
Speaker 2: so I think it's important to note that, you know,
26:37
Speaker 2: Worsh has not been Worsh has not served at the
26:39
Speaker 2: FED in quite a while now, whereas Powell moved you know,
26:42
Speaker 2: pretty much directly into his seat from you know, already
26:46
Speaker 2: being at the FED again. Walsh has been previously, but
26:49
Speaker 2: it's been a while since he's been there, and so
26:52
Speaker 2: I think this is going to be really interesting to
26:54
Speaker 2: see how this is navigated by both markets and by
26:57
Speaker 2: other members of the FED. It's it's a big and
27:00
Speaker 2: it's gonna be, I really hope, really cool to see. Again,
27:05
Speaker 2: Like polyste you know, came out and was like, look,
27:08
Speaker 2: Kevin is absolutely qualified to be here. He's qualified to
27:10
Speaker 2: do this. And I know he'll do a great job.
27:12
Speaker 2: So I want to make sure, like what I'm saying
27:15
Speaker 2: is not that Worsh is going to be great or horrible,
27:18
Speaker 2: but more, Hey, it's gonna be something new, and we're
27:22
Speaker 2: gonna it's gonna be really interesting to see how that
27:24
Speaker 2: plays out.
27:25
Speaker 3: Well. I mean, prior to the confirmation hearing, we hadn't
27:28
Speaker 3: really heard from Worsh since prior to the breakout in
27:31
Speaker 3: war in Iran, and frankly, during the confirmation hearing, you
27:34
Speaker 3: did not hear him echoing the same dubvish statements that
27:37
Speaker 3: he was echoing throughout the time that he was, you know,
27:40
Speaker 3: a contender for the job, But he was not exactly
27:44
Speaker 3: in that confirmation hearing saying you know, we're gonna go
27:49
Speaker 3: in there and build consensus. Right, he's quoted during the
27:52
Speaker 3: confirmation saying that he's planning to shake it up. He's
27:55
Speaker 3: expecting messier meetings, a good family fight quote, and so
28:00
Speaker 3: it is going to be different. And you're right. I
28:03
Speaker 3: think those FED members, the three of them that dissented
28:05
Speaker 3: towards the upside, uh, we're you know, I think sending
28:10
Speaker 3: that exact message that they're kind of prepared for that
28:13
Speaker 3: quote mess your meeting and family fight.
28:16
Speaker 2: Just take a quick break. We got a bunch of
28:19
Speaker 2: major earnings to get through. We'll start walking through them next.
28:24
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30:10
Speaker 2: Mike, So, we had a bunch of four major corporate
30:13
Speaker 2: earnings after the bell yesterday. We had Microsoft who is
30:17
Speaker 2: now down five percent, Amazon who's down one percent, Meta
30:22
Speaker 2: who's down ten, and Google who's up five.
30:26
Speaker 3: So the ugly or the good? Where do we go?
30:29
Speaker 4: It's I consider it's kind of a one to two
30:31
Speaker 4: to one record.
30:32
Speaker 2: You know, Amazon, if you're down one percent is Amazon
30:34
Speaker 2: after earnings? Like that's basically a tie? Sure, you know,
30:37
Speaker 2: like it's fine. The other piece that's interesting to me.
30:40
Speaker 2: In Vidia after these down four percent, but the broader
30:43
Speaker 2: semiconductor index up point three percent. So takeaways from this
30:48
Speaker 2: number one, uh total capex projections for this year from
30:52
Speaker 2: these big four companies now seven hundred and ten billion.
30:55
Speaker 3: Dollars sets six hundred billion three months ago.
30:59
Speaker 4: So it's the inference that we get.
31:02
Speaker 2: So, you know, I used an AI related word to
31:05
Speaker 2: you know, to talk about AI. The inference that we get,
31:09
Speaker 2: I think it was from Meta. They were asked, hey,
31:11
Speaker 2: like the increase that you guided on, is that like
31:15
Speaker 2: buying more stuff or did the price just go up?
31:17
Speaker 3: And they basically said the price went up. So that
31:20
Speaker 3: was confirmed by others too. I think Microsoft spoke to
31:23
Speaker 3: their one hundred and ninety billion dollars and the CFO
31:26
Speaker 3: was asked, you know, hey, that's a twenty five billion
31:28
Speaker 3: dollar increase of that. You know a lot of it
31:33
Speaker 3: higher component and hardware prices.
31:35
Speaker 2: So I think you look at this and the takeaways
31:39
Speaker 2: that I have, and again this is looking at like
31:41
Speaker 2: the overall AI hyperscaler, you know, complex and everything is
31:47
Speaker 2: these companies are still going to spend a boload of
31:49
Speaker 2: money this year. They aren't planning on changing course to
31:52
Speaker 2: the downside. Google did indicate next year they may change
31:55
Speaker 2: course to the upside in terms of their scaling. But
32:00
Speaker 2: the piece that is tough on this is it's clear
32:03
Speaker 2: that they see where the puck is going. But as
32:05
Speaker 2: I talked about yesterday, I don't know how you make
32:08
Speaker 2: the math makes sense because the people that are using
32:12
Speaker 2: these systems in earnest right now, like the coders that
32:14
Speaker 2: have like you know, the high end enterprise, you know
32:17
Speaker 2: platforms where they're you know, their companies are paying hundreds
32:20
Speaker 2: of thousands of dollars for all the usage that each
32:23
Speaker 2: one of them gets. They can't get enough in terms
32:27
Speaker 2: of compute compute capacity, like they just they can't get enough.
32:31
Speaker 2: And so despite that, you still don't have enough revenue
32:34
Speaker 2: coming in to get anywhere near covering these costs. And
32:38
Speaker 2: so I guess my question is it's kind of like
32:40
Speaker 2: what we're seeing in oil, which is you need more
32:43
Speaker 2: compute in order to fill all of the demand, but
32:47
Speaker 2: you need to raise prices a lot in order to
32:49
Speaker 2: pay for the compute, which might reduce the overall demand.
32:53
Speaker 2: Once it's no longer as cost as efficient from a
32:56
Speaker 2: cost perspective as it initially appeared to be.
33:00
Speaker 3: Yeah, Look, I have massive questions about precisely that the
33:04
Speaker 3: monetization of this and how it pays for itself. Look,
33:08
Speaker 3: there was some commentary I know Alphabet, for instance, PITCHAI
33:13
Speaker 3: spoke to you know, these advancements that they had made
33:19
Speaker 3: in AI, you know, driving their response costs down a
33:23
Speaker 3: little bit, and so you know, some of that is
33:27
Speaker 3: beccoming more efficient, it seems here and there. But by
33:30
Speaker 3: and large, yeah, it's all about the massive spend and
33:34
Speaker 3: where it's going to go from here. It seems the
33:36
Speaker 3: biggest winners, or at least not the biggest losers, came
33:39
Speaker 3: from companies that had a broader suite of ways to
33:43
Speaker 3: make money off of the AI build out, right. I mean,
33:46
Speaker 3: Alphabet and Amazon are the two that you can at
33:49
Speaker 3: least point to not being losers in all of this.
33:51
Speaker 3: And what they spoke to is, hey, we have ways
33:53
Speaker 3: of making money on the cloud, we have ways of
33:55
Speaker 3: making money on our own proprietary chips, and we're also
33:58
Speaker 3: trying to build our own models and use AI in
34:01
Speaker 3: our businesses. Whereas Meta's message, I think more than just
34:06
Speaker 3: the CAPEC spend, was the I think kind of seeming
34:11
Speaker 3: confusion about how the AI spend is going to pay
34:14
Speaker 3: off for them, And Zuckerberg was pretty candid during the call.
34:18
Speaker 3: He said, you know, we don't really have a fixed
34:21
Speaker 3: roadmap for how every AI product is going to scale
34:25
Speaker 3: and grow and be part of our real operations, and
34:29
Speaker 3: investors might be saying, well, you had similar concerns with
34:33
Speaker 3: things like the metaverse that you poured bootloads of money into,
34:35
Speaker 3: and this is on a completely different scale. We need
34:38
Speaker 3: that roadmap.
34:40
Speaker 4: Yeah.
34:40
Speaker 2: The other piece that I think is also interesting to
34:44
Speaker 2: watch on this is remember in video has been you know,
34:47
Speaker 2: kind of the main beneficiary because they were you know,
34:49
Speaker 2: the first out with their chips. But when you look
34:53
Speaker 2: at the buildouts from Google and Amazon, just as an example,
34:58
Speaker 2: they're not necessarily using video hardware rights. You know, Google's
35:03
Speaker 2: using their Yeah, Google's using their internally designed where they
35:07
Speaker 2: the TPUs. Amazon has their Trainium chips, and so it's
35:11
Speaker 2: something where even within semiconductors, could you see something where
35:17
Speaker 2: there's a pivot in a rotation, even within the sector
35:21
Speaker 2: where okay, and video you know, starts sliding a little
35:24
Speaker 2: bit and the memory guys you know, keep moving and
35:28
Speaker 2: a MD and Broadcom pick up a bit of space
35:30
Speaker 2: and somehow Intel. You know, like there's a world in
35:33
Speaker 2: which the overall you know, growth happens in different places
35:39
Speaker 2: from where it's happened for the first couple of years
35:41
Speaker 2: of the AI cycle as well. So it's not saying
35:44
Speaker 2: that that will or won't happen, but this is just
35:46
Speaker 2: kind of interesting watching this this post earnings move here,
35:50
Speaker 2: because it's clear that, as you noted, the companies that
35:56
Speaker 2: are just trying to like figure out, hey, like, let's
35:58
Speaker 2: just make money on AI like that, they're not quite
36:00
Speaker 2: sure how they're going to make the math math, which
36:03
Speaker 2: is something that we've been saying, but they're also still
36:06
Speaker 2: pouring the money in and at some point something has
36:09
Speaker 2: to change there just because again that depreciation starts to build.
36:13
Speaker 2: If you keep throwing seven hundred billion dollars a year
36:16
Speaker 2: in capex or eight hundred next year, nine hundred the
36:18
Speaker 2: year after, eventually it gets to a point where it's like, guys,
36:22
Speaker 2: this is affecting our earnings quality.
36:23
Speaker 3: Well. I think it's important to remind people why these
36:27
Speaker 3: companies are as massive market cap wise as they are.
36:31
Speaker 3: It's not because they have more revenue than any other
36:34
Speaker 3: company in the world. It's because they are these massive
36:37
Speaker 3: institutions that have huge profit margins, right, they run capital
36:42
Speaker 3: unintensive businesses. It's not like building a Boeing jet, and
36:47
Speaker 3: they are change very rapidly changing from that. They are
36:51
Speaker 3: spending that profit on this build out, seemingly with no
36:56
Speaker 3: end in sight, and investors are trying to interpret what
36:59
Speaker 3: that means for companies that, you know, previously we're posting
37:03
Speaker 3: massive double digit profit margins and uh, you know, it's
37:08
Speaker 3: it's not unlike the early days of Amazon, right when
37:10
Speaker 3: they were losing money, losing money, losing money, and then
37:13
Speaker 3: got to a scale and we're able to turn that
37:15
Speaker 3: into a massive profit. But what does that roadmap look like?
37:20
Speaker 3: Because I just don't know how much tolerance investors are
37:23
Speaker 3: going to have for these capital light businesses to suddenly
37:28
Speaker 3: become extremely capital intensive.
37:31
Speaker 2: Yeah, it's it's the big question. And the thing is,
37:35
Speaker 2: it's like, until they decide that they're going to change course,
37:42
Speaker 2: it's kind of hard to see the entire AI industrial
37:46
Speaker 2: complex exploding. Agreed, you know it's and again, if you
37:53
Speaker 2: go back a year ago, we were having very different
37:56
Speaker 2: conversations about AI uses a year ago than we are today.
37:59
Speaker 2: With AI agents, who knows what they're seeing on their
38:03
Speaker 2: internal frontier and kind of what might be the next
38:06
Speaker 2: thing next year. That's the big thing. So I try
38:10
Speaker 2: to keep an open mind on this, even though I
38:12
Speaker 2: have questions about the overall profitability. Let's take a quick break.
38:16
Speaker 2: We've got our two coming up in just a bit