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Gas Prices, Fed Credibility and the AI Cost Problem · The Financial Exchange Show

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Speaker 1: Chuck Zada and Mike Armstrong.
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Speaker 2: It's Chuck, Mike and Tucker with you on a very
1:24
Speaker 2: happy World Cup Thursday here. Oh yeah, yeah, that's right.
1:28
Speaker 2: The World Cup kicks off today at three pm Eastern
1:33
Speaker 2: with Mexico battling South Africa in Mexico City, and then
1:39
Speaker 2: ten pm you can tune in to watch the South
1:43
Speaker 2: Koreans take on the Checks and so nice little start
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Speaker 2: to things. The US team kicks things off tomorrow against
1:53
Speaker 2: Paraguay at nine pm Eastern. They're gonna be out in
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Speaker 2: LA for that game. And I gotta tell you, have
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Speaker 2: either of you seen any Scots around Boston. No, because
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Speaker 2: I don't go into Boston, but I've been hearing about
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Speaker 2: the scott They are everywhere, very excited to be here.
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Speaker 3: Oh my goodness.
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Speaker 2: Like first you've got like the Scots that are just
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Speaker 2: like going through Boston and you know, playing bagpipes and everything.
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Speaker 3: Can't understand a word they're saying.
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Speaker 2: But then the other one that I saw was it
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Speaker 2: was somewhere on the South Shore this morning some guy
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Speaker 2: woke up and heard bagpipes outside at six fifteen and
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Speaker 2: like open the front door and apparently the house across
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Speaker 2: the street from him has turned into an airbnb for
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Speaker 2: who knows how long, and it's all like he's literally
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Speaker 2: he's like the Scots arrived in the dead of night
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Speaker 2: and outside playing bagpipes at six fifteen in the morning. Yeah,
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Speaker 2: and like the house is like covered in Scottish flags
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Speaker 2: now and stuff like it's just fantastic.
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Speaker 3: Yeah.
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Speaker 2: So I don't know if you can't get a like
2:52
Speaker 2: hyped up for the World Cup because of you know,
2:54
Speaker 2: you're not a soccer fan, that's okay, I urge you
2:57
Speaker 2: to reconsider.
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Speaker 3: That's fine.
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Speaker 2: But there's just some thing about people from all over
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Speaker 2: the world coming in like just all kinds of crazy
3:05
Speaker 2: stuff happening. Is they discover America, and I think it's
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Speaker 2: it's fantastic. There's actually I hope this isn't a bit.
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Speaker 2: I hope it's real. But there's some guy, Freddy who
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Speaker 2: claims to be from Germany who has been traveling through
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Speaker 2: the southeast, like stopping at like waffle houses and like
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Speaker 2: waterfalls and stuff like that on his way from I
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Speaker 2: think North Carolina to Texas. And it's just this German
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Speaker 2: guy who's apparently just in awe of everything that he's
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Speaker 2: seeing everything from like, oh, we did like a one
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Speaker 2: am waffle house run. This is like amazing. We stopped
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Speaker 2: at a BUCkies on the way to Texas. I can't
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Speaker 2: believe we don't have these in Germany. Like it's uh,
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Speaker 2: it's pretty fantastic. Yeah, yeah, good stuff. It is exciting,
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Speaker 2: even though for those of us who are not soccer fans.
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Speaker 2: And if you do want the the real athletic competition
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Speaker 2: of tomorrow, my wife will be chaperoning a trip to
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Speaker 2: the zoo in the ninety four degree heat with a
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Speaker 2: bunch first graders.
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Speaker 3: So I think that might even be more challenging than
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Speaker 3: playing soccer. We'll see that sounds fun.
4:06
Speaker 2: Let's talk a little bit about what doesn't sound fun,
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Speaker 2: and that is what we're hearing about oil and specifically
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Speaker 2: where oil inventories are heading. This piece from the Washington
4:17
Speaker 2: Post titled oil executives warrant Whitehouse the gas prices will
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Speaker 2: get worse.
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Speaker 3: This is something if you've listened to our.
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Speaker 2: Show for you know, the spring, we've been the boy
4:27
Speaker 2: who cried, well, we've been all spring. We've been saying
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Speaker 2: this since probably early to mid April that I had
4:34
Speaker 2: originally circled the Cinco Demio day and I said, look,
4:37
Speaker 2: if things are not, you know on the mend by
4:41
Speaker 2: Cinco de Mayo, you've got real problems that are going
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Speaker 2: to show up in Q three because we're gonna start
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Speaker 2: drawing down inventories as we get towards the end of April,
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Speaker 2: and you won't have enough time for that to stop
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Speaker 2: before you get to critical levels. So for all the
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Speaker 2: non financial people, Q three starting July first, Yes, we're
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Speaker 2: closing in here. And just as an example, Bob McNally,
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Speaker 2: who was an energy advisor in the second Bush administration,
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Speaker 2: said quote, I have absolutely no doubt the White House,
5:10
Speaker 2: from the President on dam is fully aware of the
5:11
Speaker 2: near universal alarm among oil companies and analysts about the
5:14
Speaker 2: direction of travel for oil prices this summer.
5:19
Speaker 3: And here here's the deal, Like, we'll make it simple.
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Speaker 2: In order for the US oil system to work, you
5:26
Speaker 2: need somewhere between three hundred and fifty and three hundred
5:28
Speaker 2: and nine ninety million barrels of crude oil in the
5:32
Speaker 2: system in order for it to function. It's no different
5:35
Speaker 2: from how the plumbing in your house. You don't sit
5:38
Speaker 2: there and say, well, we can just like draw down
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Speaker 2: all of the water and the pipes and no like
5:44
Speaker 2: when when your hot water tank is empty. That means
5:47
Speaker 2: you have no more hot water. You can't just like
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Speaker 2: be like well like you know, no like it's it's empty,
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Speaker 2: there's no more.
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Speaker 3: It's the same thing.
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Speaker 2: If you are an oil refinery trying to run your business,
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Speaker 2: you can let your tanks get too empty. Actually it
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Speaker 2: doesn't work like that. So where we stand right now
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Speaker 2: is that at as of last Friday, the Energy Information
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Speaker 2: Administration said that US domestic crude inventories are now down
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Speaker 2: to four hundred and twenty six million barrels, and over
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Speaker 2: the last two weeks have declined seven and a half
6:22
Speaker 2: million barrels a week, Over the last four weeks have
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Speaker 2: declined six and a half and over the last six
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Speaker 2: weeks have declined five and a half million barrels a week.
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Speaker 2: So the draws are accelerating modestly as well. I did
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Speaker 2: the math so that you don't have to. It points
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Speaker 2: to us getting into that critical range sometime between. If
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Speaker 2: you want to take like the front end of that,
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Speaker 2: the three hundred and ninety million barrel range, you're coming
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Speaker 2: up on July eighth. If you want to take the
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Speaker 2: three hundred and fifty million barrel range and the slowest
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Speaker 2: draw there, you're at September tenth. Realistically, you're going to
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Speaker 2: be somewhere in the middle. Late July to early August
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Speaker 2: is probably what we're looking at, which means.
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Speaker 3: What in late July or early August.
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Speaker 2: That the United States is exporting none or a lot
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Speaker 2: less oil from our reserves. Yeah, here's what's happened. US
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Speaker 2: energy exports have increased by around two to two and
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Speaker 2: a half million barrels a day in the last six weeks.
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Speaker 2: Once you get through that excess crude inventory that we have,
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Speaker 2: we can't do that anymore, which means one of two things.
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Speaker 2: Either a you have to continue exporting crude at the
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Speaker 2: expense of domestic inventories, meaning that you would end up
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Speaker 2: with shortages domestically, or those exports need to come down
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Speaker 2: and you need to find a way to balance the
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Speaker 2: market through price. Because that's how exports come down, is
7:47
Speaker 2: the price rises, so the oil stays here instead of
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Speaker 2: being exported. So where most people who are really plugged
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Speaker 2: into this think this goes is that somewhere in late
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Speaker 2: June to mid July, gas prices need to start to rise,
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Speaker 2: and so do crude prices, because otherwise you get to
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Speaker 2: the point where you're still exporting all this because importers,
8:08
Speaker 2: like other importers of American crude, are happy to continue
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Speaker 2: to pay these prices. They will and if you don't
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Speaker 2: see prices rise to keep the barrels here, then you
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Speaker 2: can continue exporting this extra two and a half million
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Speaker 2: barrels a day. But we are not going to have
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Speaker 2: the same supply in the US. So you can have
8:26
Speaker 2: one of two things, maybe a combination, but most likely
8:30
Speaker 2: one of two things. Well, actually you probably would have
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Speaker 2: a combination of it. Here's the deal. You can either
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Speaker 2: have prices rise to match supply and demand, or you
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Speaker 2: can have shortages. That's the only way that you can
8:44
Speaker 2: you can get the math to work. Now, I realize
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Speaker 2: that most of you listening, if not all of you listening,
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Speaker 2: are probably like, Chuck.
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Speaker 3: You're a moron.
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Speaker 2: And I say thank you, but you're saying, Chuck, you're
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Speaker 2: a moron. Gas prices have come down from you know,
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Speaker 2: like if you're looking throughout the New England region, gas
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Speaker 2: prices have come down twenty to thirty cents in the
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Speaker 2: last four or five weeks. They chuck, you're a moron.
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Speaker 2: Gas prices are coming down. They're not going up, to
9:15
Speaker 2: which I say, I know I've been I've been watching
9:17
Speaker 2: them too, and I'm not gonna lie. There is a
9:22
Speaker 2: like thirty six percent part of my brain that's like,
9:27
Speaker 2: am I just missing something?
9:29
Speaker 3: Am I like?
9:30
Speaker 2: Is there something I'm missing that hopefully we can get
9:34
Speaker 2: to September and be like, yes, Chuck, you were a moron,
9:36
Speaker 2: like you miss this and here's why prices didn't go up.
9:40
Speaker 2: But the other sixty four percent of my brain is saying,
9:44
Speaker 2: we're seeing these inventory draws happening right now. They are
9:49
Speaker 2: not escapable at any time in the next four to
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Speaker 2: six weeks because even if the straight offoor moves opens today,
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Speaker 2: the oil from it doesn't get where it needs to
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Speaker 2: go for four to six weeks, and the tankers that
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Speaker 2: are in line to pick up American crude and refined product,
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Speaker 2: they're gonna continue on their way to the US because
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Speaker 2: they're not gonna turn around and be like, hey, we
10:09
Speaker 2: got a chance to maybe for more news and get
10:13
Speaker 2: stuck there if things flare up again. No, they're gonna
10:15
Speaker 2: keep going to the US. So the draws for the
10:18
Speaker 2: next four to six weeks to get us to these
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Speaker 2: you know, questionable areas are are set in stone. And
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Speaker 2: so this is why, like again, I wake up most
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Speaker 2: mornings wondering if there's something I'm missing because the math
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Speaker 2: seems so simple, and it's not like it's speculative either,
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Speaker 2: like we're seeing the draws every week. Now, is somebody
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Speaker 2: out there betting on like China being a magic unicorn
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Speaker 2: that starts exporting from their reserves or something. I can't
10:47
Speaker 2: because I'm with you, The math doesn't seem to make sense.
10:50
Speaker 2: The piece that people are writing about is how China
10:52
Speaker 2: kind of surprise the world market by curbing their consumption
10:56
Speaker 2: dramatically by about five million barrels a day, which is like,
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Speaker 2: by the way, like forty five percent of their domestic usage.
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Speaker 3: Right. It's a huge shrewage number.
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Speaker 2: And so the problem with China is, unlike the United States,
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Speaker 2: they don't exactly publish how much they've got, so nobody
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Speaker 2: has any We don't know what they're doing, how long
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Speaker 2: it's going to last. Are they just not burning oil?
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Speaker 2: Are they taking it out of their reserves?
11:19
Speaker 3: We don't know.
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Speaker 2: Well, we kind of know that they're still burning oil,
11:24
Speaker 2: but we don't know otherwise where it's coming from, certainly,
11:26
Speaker 2: and they're probably and they're probably not going to just
11:29
Speaker 2: look at this and say, ah, we could keep prices
11:32
Speaker 2: low by just suddenly selling all of our reserves on
11:35
Speaker 2: the on the public markets.
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Speaker 3: I just don't think so well.
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Speaker 2: And look, we don't know if this is something they
11:39
Speaker 2: can continue for two months or two years. Yeah, Like
11:42
Speaker 2: there's plausible explanations for both. So I I remain sixty
11:49
Speaker 2: four percent convinced that look late summer like there's something coming.
11:54
Speaker 3: But I won't lie.
11:55
Speaker 2: Like I look at the crew prices that we see
11:57
Speaker 2: every day, and I'm like, this does makes sense given
12:00
Speaker 2: what we are seeing in not just domestic inventories. By
12:04
Speaker 2: the way, like you take a look at Singapore just
12:06
Speaker 2: as an example. Singapore for those who aren't plugged into
12:10
Speaker 2: the energy world, is a massive refining hub and fuel
12:14
Speaker 2: distribution center. Jet fuel and bunker fuel for ships are
12:18
Speaker 2: the two main things that are the focus there. And
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Speaker 2: Singapore is now running like twenty two percent below its
12:26
Speaker 2: normal inventory levels and is getting to the point where
12:29
Speaker 2: in the next two to four weeks they probably start
12:32
Speaker 2: scraping tank bottoms and saying okay, like we can't make
12:35
Speaker 2: the math work either, So this is not like just
12:38
Speaker 2: a US thing. Everyone is kind of saying this, and
12:43
Speaker 2: yet prices aren't reflecting it. So I don't know why
12:45
Speaker 2: that's not the case. I'm not rooting for higher gas prices,
12:51
Speaker 2: but I see the math and I'm like, this is
12:53
Speaker 2: where it should go, and we're not seeing it. So
12:56
Speaker 2: I do wonder most days, like, is there something very
13:00
Speaker 2: very simple, an elementary that I'm missing.
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Speaker 3: Haven't found it yet. I've been talking about it for
13:05
Speaker 3: three months. I haven't found it.
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Speaker 2: And I'm at the point now where I'm like, Okay,
13:09
Speaker 2: We're just gonna see what happens over the course of
13:11
Speaker 2: the summer. And if there's something I'm missing, great, I'll
13:14
Speaker 2: be happy to be wrong in hindsight. And if there's
13:17
Speaker 2: something I'm not missing, then unfortunately we're heading for you know,
13:20
Speaker 2: gas prices rising significantly again in the second half of
13:24
Speaker 2: the summer. Let's take a quick break. When we return,
13:28
Speaker 2: let's talk a little bit about the FED, who have
13:31
Speaker 2: a They got a meeting coming up six days from now, Michael,
13:35
Speaker 2: We've got Kevin Worsh's first meeting as FED chair on
13:39
Speaker 2: the seventeenth. We'll talk about inflation and the FED when
13:43
Speaker 2: we return.
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14:40
Speaker 2: So next week we've got Kevin Worriss's first FED meeting
14:43
Speaker 2: as chair, and we got a piece here in Barons
14:45
Speaker 2: today titled the FED must stick to its two percent
14:47
Speaker 2: inflation target.
14:49
Speaker 3: It won't be easy.
14:52
Speaker 2: The question that's obviously the one to raise here is
14:57
Speaker 2: a two percent inflation target really a target when you
15:02
Speaker 2: haven't been at two percent inflation in six years.
15:06
Speaker 3: No, but yeah, talk like it is.
15:08
Speaker 2: So here's the thing, like the FED has a credibility
15:11
Speaker 2: problem that has developed. And you know, we've talked about
15:16
Speaker 2: again where the issue was, you know, kind of front
15:18
Speaker 2: and center, which was twenty twenty two in early twenty three.
15:21
Speaker 3: And we talked about how J.
15:22
Speaker 2: Powell kind of sucked at his job during that eighteen
15:25
Speaker 2: month period, didn't do very good job in recent years,
15:30
Speaker 2: you know, twenty four and twenty five, we thought he
15:33
Speaker 2: was much better because you did see inflation back down
15:35
Speaker 2: in like that two and a half percent range, and
15:37
Speaker 2: while it wasn't two, we ultimately did say, look, you
15:40
Speaker 2: can make a convincing case that you can have really
15:45
Speaker 2: good economies even when inflation is running two and a
15:47
Speaker 2: half to three percent. You just don't want to see
15:49
Speaker 2: it like bottom there. And then you know, we said
15:52
Speaker 2: going into this year, i mean, I'm sure one of
15:54
Speaker 2: our shows like you can pull the it's not tape
15:57
Speaker 2: that they keep it on, you can pull the audio,
15:59
Speaker 2: and we said, look, the problem with like a three
16:01
Speaker 2: percent in two and a half to three percent inflation
16:04
Speaker 2: level is that part of it was fueled by falling
16:08
Speaker 2: gas prices last year, and we said, hey, if gas
16:10
Speaker 2: prices reverse in twenty six, you could easily end up
16:12
Speaker 2: back at four or five percent inflation, and lo and behold,
16:15
Speaker 2: look exactly where we are. So the question is, look,
16:20
Speaker 2: is the two percent inflation target viable? And my answer
16:25
Speaker 2: is no, because historically we've basically never had inflation at
16:29
Speaker 2: two percent for long periods of time. Sure it's never
16:32
Speaker 2: been like high for long periods of time, but we've
16:35
Speaker 2: generally been somewhere in like that two and a half
16:36
Speaker 2: to three percent range. The federally came up with the
16:39
Speaker 2: two percent inflation target in the last you know, they
16:42
Speaker 2: formalized in the last fifteen years or so. I believe
16:45
Speaker 2: was under Ben Bernanke when they did it, but maybe
16:46
Speaker 2: it was the early year of early you know, ten.
16:49
Speaker 3: Year of Janet yelling.
16:50
Speaker 2: But the point that I will make is you cannot
16:55
Speaker 2: scrap the two percent target as inflation is rising through
16:59
Speaker 2: four percent. Right, So, yesterday's inflation report came in at
17:03
Speaker 2: four to two headline two nine core. We were which
17:09
Speaker 2: two eight two eight excuse me, two nine. I don't
17:12
Speaker 2: know why my screens showing two eight on this one.
17:14
Speaker 2: Maybe it has an updated Okay, in either case, you know,
17:19
Speaker 2: among well, I don't want to generally categorize, but the
17:24
Speaker 2: four point two number is a very uncomfortable number. It
17:27
Speaker 2: is pretty substantially higher than wage growth over the last
17:30
Speaker 2: twelve months, which came in at three point four percent,
17:32
Speaker 2: So that piece of it is uncomfortable for just about everybody.
17:36
Speaker 2: The actual core inflation numbers, I think, by some expectations.
17:40
Speaker 3: Were a little bit.
17:41
Speaker 2: They were in line and you know, reasonable for this
17:46
Speaker 2: moment in time, and I think that's what Kevin Warsh
17:48
Speaker 2: is going to be latching onto more than anything.
17:50
Speaker 3: But we are starting to see the inflation spread.
17:52
Speaker 2: Outside of oil, right Like I know, we'll make a
17:55
Speaker 2: point of this later, but the inflation report included, like
17:58
Speaker 2: I think it was a fourteen percent increase on computer
18:01
Speaker 2: hardware prices.
18:03
Speaker 3: And things along those lines.
18:04
Speaker 2: Yeah, I think that's a one off.
18:05
Speaker 3: I recognize that.
18:06
Speaker 2: But the concern that I have beyond oil markets is
18:12
Speaker 2: that AI spending is going to crowd out other types
18:15
Speaker 2: of spending and drive up prices for components that go
18:17
Speaker 2: into everything.
18:19
Speaker 3: And granted it's still early for that, but like you know, do.
18:23
Speaker 2: Home construction costs go up because AI spending is crowding
18:27
Speaker 2: out everything else. And you know that would be the
18:29
Speaker 2: concern that you start to get some indication of that
18:32
Speaker 2: in the in the next several inflation reports. Well see
18:36
Speaker 2: the piece that I come back to. You know, Mike mentioned, hey,
18:39
Speaker 2: in the last twelve months now, inflation is outpaced wage growth.
18:44
Speaker 2: That is rarely the case for any extended period of time. Yeah,
18:48
Speaker 2: and there's two reasons why. One of two things happens.
18:52
Speaker 2: Either a inflation can't continue to maintain that rate because
18:57
Speaker 2: wage growth is slower and so inflation ends up falling.
19:01
Speaker 2: Or companies start raising wages because people are saying, hey,
19:06
Speaker 2: like I need you know, a living wage in order
19:08
Speaker 2: to pay for this, and then wages start growing faster
19:11
Speaker 2: than inflation, which gets you into that wage price spiral.
19:15
Speaker 2: We'll see where we end up here, because again this
19:18
Speaker 2: is something where at some point energy prices are going
19:23
Speaker 2: to fall. When that is is uncertain, whether it is
19:27
Speaker 2: three months away, six months, a year, like this is
19:30
Speaker 2: the big question. Quick break here, Wall Street Watch It's next.
19:38
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Speaker 1: Street Watch tracking the stocks, the data and the headlines
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Speaker 1: driving markets so far today right here on the Financial Exchange, Radio.
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Speaker 4: Network markets the same modest gains, with oil prices in
20:03
Speaker 4: focus after President Trump threatened to again strike I Ran tonight.
20:07
Speaker 4: Investors are also digesting a hotter than expected producer Price Index,
20:12
Speaker 4: where wholesale prices climbed one point one percent in May.
20:16
Speaker 4: Right now, the Dow is up about six tenths of
20:19
Speaker 4: a percent, SMP five hundred up a third of a percent,
20:22
Speaker 4: NASDAC up over four tenths of a percent, Russell two
20:25
Speaker 4: thousand is up just over one percent higher, Tenure treas
20:28
Speaker 4: reeled down one basis point at four point five two percent,
20:33
Speaker 4: and oil mostly flat at the moment, trading right around
20:36
Speaker 4: ninety dollars a barrel. Oracle falling eleven percent after it
20:40
Speaker 4: posted a larger than expected spending related to its data
20:45
Speaker 4: center buildout. Oracle also set of plans to raise an
20:47
Speaker 4: additional twenty billion dollars in equity to pay for its
20:51
Speaker 4: AI buildout. Meanwhile, after sinking twenty eight percent yesterday, shares
20:56
Speaker 4: in super Microcomputer only up by half a percent today.
21:00
Speaker 4: A yesterday's plunge came after the company said it would
21:03
Speaker 4: raise seven billion dollars in a series of equity offerings
21:06
Speaker 4: to help satisfy growing demand for its AI components. Sticking
21:10
Speaker 4: with tech, where Intel jumping seven percent after the chip
21:14
Speaker 4: maker was double upgraded to buy from underperformed by Bank
21:18
Speaker 4: of America citing increasing demand for central processing units. And
21:22
Speaker 4: after today's closing bell, we'll see quarterly results from Adobe
21:27
Speaker 4: and Lennar. I'm Tucker Silva, and that is Wall Street.
21:31
Speaker 3: Watch, Mike.
21:33
Speaker 2: We've got three AI pieces that, in my mind are
21:40
Speaker 2: now painting a concerning picture for AI over the next
21:46
Speaker 2: couple of years.
21:47
Speaker 3: I agree, right.
21:50
Speaker 2: For the companies that build out the AI and the
21:52
Speaker 2: stock market just yes, yeah, I'm not saying that like
21:56
Speaker 2: AI is not going to be useful or anything. What
21:58
Speaker 2: I am saying is we might be seeing the first
22:02
Speaker 2: signs of the bubble popping piece Number one, Oracle falls
22:06
Speaker 2: after data center costs overshadow AI growth. So they are
22:11
Speaker 2: going to be spending seventy billion on capex this year
22:15
Speaker 2: and Galla g Wilkers Oracle doesn't have the cash to
22:20
Speaker 2: be able to actually do that, so they've got to
22:22
Speaker 2: do either an equity or debt raise. Tucker said, they're
22:24
Speaker 2: doing an equity raise. Okay, this is not, you know,
22:27
Speaker 2: particularly surprising. We've talked about this with Oracle previously, and
22:33
Speaker 2: this is.
22:34
Speaker 3: A problem for them. Can we just compare these numbers
22:36
Speaker 3: real quick ause I pulled them.
22:37
Speaker 2: So, yeah, Alphabet, Google's parent company wants to spend what
22:39
Speaker 2: like one hundred and ninety on Capex this year, I
22:42
Speaker 2: don't know exactly, somewhere in that range. They as an
22:45
Speaker 2: entity had revenue in the previous fiscally year of over
22:48
Speaker 2: four hundred billion dollars and gross profit of two.
22:51
Speaker 3: Hundred and forty billion dollars.
22:52
Speaker 2: Okay, so it's not to say that spending nearly two
22:54
Speaker 2: hundred billion most of your profit on AI Capex is
22:58
Speaker 2: not a lot. But you know they actually have the
23:02
Speaker 2: gross profit, they have the revenues to support it. You
23:05
Speaker 2: just said Oracle was talking seventy billion, Yes, okay. Their
23:09
Speaker 2: revenue in the last fix three y was fifty seven.
23:11
Speaker 3: Billion, so it's obviously more than their revenue. Their profit.
23:14
Speaker 2: Their gross profit was thirty eight billion, Yeah, and looks
23:18
Speaker 2: like double they're gross profit. Look there, they're free cash
23:21
Speaker 2: flow over the last twelve months of negative twenty four
23:23
Speaker 2: billion dollars. Like they cannot finance this out of free
23:27
Speaker 2: cash flow, and so they have to either borrow money
23:30
Speaker 2: or issue new equity in order to do this. So
23:34
Speaker 2: that's problem number one. Yeah, problem number two one that
23:38
Speaker 2: you kind of touched on a little bit. AI boom
23:40
Speaker 2: stokes inflation with memory chips, insane prices. A lot of
23:44
Speaker 2: these inflated CAPEX numbers are coming not because companies are
23:48
Speaker 2: actually saying, hey, we need to build way more than
23:50
Speaker 2: we did previously. It's because they're all competing for the
23:53
Speaker 2: same scarce resources and driving up the cost of them.
23:56
Speaker 3: Right.
23:56
Speaker 2: And finally, this is the popping piece, Tucker, Do we
24:01
Speaker 2: have a good like popping sound that.
24:03
Speaker 3: We can use?
24:04
Speaker 2: Uh? No, No, okay, that's that's fine. I don't know
24:08
Speaker 2: what would be a good popping sound as opposed to
24:10
Speaker 2: a bad one. But we have no popping sound, is
24:13
Speaker 2: what you're telling me.
24:14
Speaker 1: Correct?
24:15
Speaker 3: Okay, thank you, Michael.
24:16
Speaker 2: That was it.
24:19
Speaker 3: We do but it's still nice. Perfect.
24:24
Speaker 2: This from the Wall Street Journal Exclusive open Ai considers
24:27
Speaker 2: drastic price cuts anticipating anticipating warfare users with anthropic uh
24:32
Speaker 2: and quote here the move would be in anticipation of
24:34
Speaker 2: similar cuts the company expects at anthropic people said so
24:40
Speaker 2: here's the deal. I've talked for the last six months
24:43
Speaker 2: that when we start seeing models coming out every week
24:47
Speaker 2: and this, and that, you're getting towards the point of commoditization.
24:52
Speaker 2: And in a commoditized product, what's happened. What happens is
24:58
Speaker 2: you can't compete on pduct quality because they're all the same,
25:03
Speaker 2: and so you have to compete on the other thing
25:04
Speaker 2: that's out there.
25:05
Speaker 3: Price. And here's the problem.
25:09
Speaker 2: If you are competing on price as an AI model producer,
25:16
Speaker 2: but your input costs are going up, something is going
25:20
Speaker 2: to break there because you are not going to be
25:23
Speaker 2: able to fund that growth. At the same time, the
25:29
Speaker 2: status of this for the last few years has been
25:32
Speaker 2: that you produce the best artificial intelligence at the fastest
25:39
Speaker 2: pace you can, regardless of the cost. That has been
25:42
Speaker 2: the marching order from pretty much every industry, from users
25:46
Speaker 2: all the way down to semiconductor manufacturers. And it's led
25:51
Speaker 2: to things like Oracle stock price going through the roof,
25:54
Speaker 2: building data centers, Google Micros going through the.
25:57
Speaker 3: Roof and then coming back through the roof. Yes, it
26:00
Speaker 3: has led to.
26:02
Speaker 2: Chip designers and electricity providers and Taiwan semiconductor, semiconductor manufacturers
26:10
Speaker 2: their stock price is all getting a lift on this insatial,
26:14
Speaker 2: insatiable demand, and then even got into some areas that
26:18
Speaker 2: we've kind of laughed at, like Ford stock going through
26:20
Speaker 2: the roof because we have batteries here, maybe we can
26:23
Speaker 2: power data centers, or Toto the big toilet manufacturer, seeing
26:27
Speaker 2: their stock price go through the roof because porcelain is needed.
26:32
Speaker 2: The point that you make is the one that we've
26:35
Speaker 2: been alluding to for a while, which is, at some
26:37
Speaker 2: point price begins to matter because you can start to
26:41
Speaker 2: hire people to do stuff cheaper than you can hire
26:45
Speaker 2: an AI agent to do it. And I don't know
26:47
Speaker 2: that we're there yet, but if open ai is talking
26:49
Speaker 2: about cutting back price, then they need to go to
26:53
Speaker 2: their data center provider, who I don't know who it is,
26:56
Speaker 2: but you know, maybe it's Google, and say hey, we
26:58
Speaker 2: need you to cut back on price. Google needs to
27:01
Speaker 2: go to their own manufacturers of semiconductors because they build
27:05
Speaker 2: their own but they probably buy a bunch of Nvidia
27:06
Speaker 2: chips too, and say hey, we need you to get
27:10
Speaker 2: cheaper on price. Those semiconductor manufacturers have to go The
27:15
Speaker 2: semiconductor designers have to go to the manufacturers who have
27:18
Speaker 2: to go to the Totos of the world who are
27:20
Speaker 2: making the porcelain, and say, get it cheaper for us.
27:23
Speaker 3: And if there is a.
27:26
Speaker 2: Logical way that this bubble pops, to me, that's it.
27:31
Speaker 2: Whether or not we're seeing the early indications of that,
27:33
Speaker 2: I don't know. But this story certainly follows the same
27:37
Speaker 2: ones that we saw from Uber just last week when
27:40
Speaker 2: they said, hey, we blew through our entire AI budget
27:43
Speaker 2: in was it three or four months?
27:45
Speaker 3: So I'm with you.
27:48
Speaker 2: We are seeing more stories this last few weeks about
27:52
Speaker 2: the potential implosion here.
27:55
Speaker 3: My problem with all of this is.
27:56
Speaker 2: I have an internal bias to be looking for these stories,
28:00
Speaker 2: and for every one of these, there's a dozen about
28:02
Speaker 2: how the you know, the train isn't even slowing down.
28:07
Speaker 2: I'd like to reference something that Citadel Securities put out yesterday.
28:14
Speaker 2: I believe it was because it actually puts a little
28:16
Speaker 2: bit of data behind this, and I would like to
28:20
Speaker 2: read it into the record.
28:21
Speaker 3: If I may. Yeah, but there's no record.
28:23
Speaker 2: But yeah, this is not a court of law, it's
28:26
Speaker 2: not Oh no, that's probably good.
28:28
Speaker 3: Yeah, here we go.
28:30
Speaker 2: Economic theory tells us that prices perform three functions. They
28:33
Speaker 2: signal scarcity, create incentives for substitution and ration scarce resources
28:37
Speaker 2: towards their highest value uses.
28:40
Speaker 3: That's what prices do.
28:41
Speaker 2: If you're willing to pay more for something, then you
28:43
Speaker 2: get it because in theory, you're willing to pay more
28:46
Speaker 2: because you can produce more of whatever it is or
28:48
Speaker 2: better value with your outputs. These functions apply clearly to AI.
28:53
Speaker 2: Higher compute and infrast costs signal the scarcity of the
28:56
Speaker 2: underlying inputs. They encourage substitution away from low return excs
29:00
Speaker 2: experiments in toward more efficient models or workflows. So basically,
29:04
Speaker 2: higher prices, like if you have to pay more to
29:06
Speaker 2: use AI, if you're not getting a return on that,
29:08
Speaker 2: you're gonna say, let me use something cheaper.
29:10
Speaker 3: Right.
29:12
Speaker 2: We do not think this implies that the frontier of
29:15
Speaker 2: inference intensive AI will be abandoned, only that the frontier
29:19
Speaker 2: is likely to be concentrated amongst a narrower set of
29:22
Speaker 2: firms with a balance sheet to absorb compute cost, the
29:25
Speaker 2: research depth to deploy it effectively, and most importantly, the
29:28
Speaker 2: operating domain to scale the rewards from solving genuinely hard problems.
29:32
Speaker 2: So when I go and take a look at like
29:35
Speaker 2: my personal AI uses and things like that like me,
29:40
Speaker 2: the fact that I googled, Hey, what are the best
29:43
Speaker 2: foods to bring to a tailgate for after a game
29:46
Speaker 2: that don't spoil in the car while you're watching it.
29:49
Speaker 2: There's not a ton of value add there. Okay, when
29:53
Speaker 2: I plug into the model, hey, what are good beach
29:56
Speaker 2: party appetizers? To make an advance, it's not really generating
30:01
Speaker 2: a lot of value. Whereas someone who's like, no, I
30:03
Speaker 2: can use to replace these these and these processes gets
30:06
Speaker 2: more value out of it. They're more willing to pay
30:08
Speaker 2: more for that than I would be. So here's what
30:11
Speaker 2: we are seeing right now, and this is data that
30:14
Speaker 2: they've grabbed from Silicon Data, Bloomberg and Citadel's own internal data,
30:19
Speaker 2: and what they are seeing is that in the last
30:23
Speaker 2: few weeks, the rate of token usage a token is
30:27
Speaker 2: the base level, the base unit that goes in or
30:31
Speaker 2: out of an AI system. The rate of token usage
30:36
Speaker 2: has started to decline.
30:38
Speaker 3: That may indicate movement.
30:40
Speaker 2: Towards cheaper models. And so this was after it, you know,
30:44
Speaker 2: was growing crazily from March, April and May, and so
30:48
Speaker 2: like we're talking like two hundred percent annualized growth rates
30:53
Speaker 2: like consistently through there. So the takeaway from that data,
30:58
Speaker 2: if it continues and if it's true, is yeah, like
31:01
Speaker 2: companies were willing to experiment and say okay, like use
31:03
Speaker 2: more tokens, use more tokens, but eventually they're gonna want
31:07
Speaker 2: some return from that. Like it's at first it was, hey,
31:10
Speaker 2: just prove that we can use AI, And now it's
31:13
Speaker 2: going to be proved that your use of AI is
31:16
Speaker 2: cost efficient. And that means that AI model companies have
31:21
Speaker 2: to start competing on cost, which they've never had to do, right.
31:24
Speaker 3: And we brought this up very early on.
31:26
Speaker 2: But the reason everybody has benefited is because you didn't
31:32
Speaker 2: need the best data center, you just needed a data center.
31:35
Speaker 2: You didn't need the most efficient chip, you just needed
31:38
Speaker 2: a fast chip yesterday. If all of a sudden, all
31:42
Speaker 2: of these companies now have to compete, I can assure
31:44
Speaker 2: you that some companies have been better at building chips
31:48
Speaker 2: and data centers and models than others, and we just
31:52
Speaker 2: haven't paid attention to who's best at it because it
31:54
Speaker 2: hasn't mattered yet. Yeah, and that's where companies go out
31:57
Speaker 2: of business. Just take a quick break. When we return
32:01
Speaker 2: a little bit more AI chatter, we're talking taxes and
32:04
Speaker 2: government ownership of AI.
32:07
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32:39
Speaker 2: All right, we got a piece here from New York
32:41
Speaker 2: Times title for the second time Trump us about Americans
32:45
Speaker 2: sharing in AI wealth. Quote in the Oval Office on Wednesday,
32:49
Speaker 2: mister Trump said he would soon host a meeting with
32:50
Speaker 2: the top twelve or fifteen executives in the AI industry
32:53
Speaker 2: to discuss the idea of the company's quote giving something
32:56
Speaker 2: to the public. Yet, and if we do that, the
32:58
Speaker 2: public will become very rich, talking of out owning a
33:01
Speaker 2: portion of the companies. So here's the deal. In the
33:04
Speaker 2: United States, the way that the public generally receives any
33:08
Speaker 2: money from companies is through taxation of them. Yes, and
33:12
Speaker 2: that taxation profits. We tax capital gains of shareholders, We
33:15
Speaker 2: tax payroll tax like all kinds of stuff there that
33:19
Speaker 2: there are really clear reasons why you generally don't want
33:22
Speaker 2: the federal government to have ownership stakes in any significant
33:26
Speaker 2: number of companies, the biggest one being it restricts competition.
33:30
Speaker 3: Uh.
33:30
Speaker 2: If you are trying to get into the AI space
33:33
Speaker 2: and you see that the federal government owns stakes in
33:36
Speaker 2: you know, open air Anthropic, you're like, okay, I'm not
33:38
Speaker 2: going to go against that, like they're going to get
33:40
Speaker 2: the preferential treatment that I won't get. It restricts competition.
33:43
Speaker 2: The other piece, uh, is that when you look at
33:46
Speaker 2: the mechanics of this, assuming that the federal government would
33:50
Speaker 2: have to buy into the companies, which is you know
33:52
Speaker 2: how it typically works, they're not just going to give
33:54
Speaker 2: you the shares for free. If they did, then we've
33:57
Speaker 2: got bigger problems. That's the Bernie Sanders plan. By the way,
34:02
Speaker 2: it's just to tax the shares into ownership. So the
34:05
Speaker 2: problem that you end up with here is, Okay, let's
34:07
Speaker 2: say that you want to own open AI is the
34:10
Speaker 2: federal government. Well, the way that you do that is
34:12
Speaker 2: by issuing debt in order to buy the shares, which
34:15
Speaker 2: means that you're just taking from one side one part
34:17
Speaker 2: of the government balance sheet and moving it to a
34:21
Speaker 2: different place, like the ledger has to balance somehow, So
34:25
Speaker 2: you're not really doing anything productive. There and again in
34:31
Speaker 2: small edge cases like you know, hey, we need you know,
34:35
Speaker 2: rare earth materials, and these companies are not you know,
34:37
Speaker 2: competitive globally. How can we do this?
34:40
Speaker 3: Okay, like you can.
34:41
Speaker 2: We've talked about this and I've said, okay, you can
34:43
Speaker 2: make a case for it in some of those edge
34:44
Speaker 2: cases or otherwise it doesn't work. There is no good
34:48
Speaker 2: reason for the federal government to own a portion of
34:52
Speaker 2: open ai, anthropic or anything else.
34:54
Speaker 3: Intel.
34:55
Speaker 2: And quite honestly, we used to wait until companies failed
34:59
Speaker 2: before we bailed them out. We used to be a
35:02
Speaker 2: proper country. Now we're just gonna bail them out in advance.
35:06
Speaker 2: Like what are we doing here?
35:08
Speaker 3: That's my points.
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36:20
Speaker 2: I want to further this conversation about the ownership and
36:23
Speaker 2: all of this because, okay, so let's assume for a
36:26
Speaker 2: minute that we buy into the idea that AI is
36:28
Speaker 2: going to be this massive employment disruptor, which I'm not
36:31
Speaker 2: there by the way. You know, sure, I think maybe temporarily,
36:34
Speaker 2: but I don't think permanently. But that's that's the argument
36:37
Speaker 2: that those are making. But if you buy into that
36:39
Speaker 2: I'm really even unsure about the mechanics of how the
36:42
Speaker 2: US government owning shares in these AI companies is to
36:46
Speaker 2: the public benefit. So, I mean, effectively, what you're saying
36:50
Speaker 2: is we are going to somehow ensure that the US government,
36:54
Speaker 2: the US taxpayer, owns these disruptive AI companies in order
37:00
Speaker 2: to what sell the shares down the road to pay
37:03
Speaker 2: down the deficit, sell the shares down the road to
37:05
Speaker 2: retrain employees, provide a universal basic income. Who's making that decision,
37:10
Speaker 2: because it's probably not going to be President Trump? Sure,
37:13
Speaker 2: So are we saying, Okay, President Trump, we want you
37:15
Speaker 2: to buy these shares in order to allow future president
37:18
Speaker 2: X y Z to sell the shares in order to
37:22
Speaker 2: fund some government program.
37:24
Speaker 3: Are we.
37:26
Speaker 2: I don't think so. But are we delusional enough to
37:28
Speaker 2: think that the US government is going to be a
37:29
Speaker 2: good steward of that money and create good programs to
37:33
Speaker 2: retrain the general workforce or provide for those impacted by
37:38
Speaker 2: this problem? I probably, I'm not confident. We don't really
37:41
Speaker 2: have those facts and evidence history. Yeah, you know, what
37:44
Speaker 2: the US government has proven to be really good at
37:47
Speaker 2: historically is casting a broad net of just funding large
37:53
Speaker 2: scale R and d across a wide variety of different industries,
37:57
Speaker 2: whether you're talking in defense and healthcare, like all different areas,
38:01
Speaker 2: you can say, yeah, we kicked money out, and the
38:04
Speaker 2: expected return for the US government and the US taxpayer
38:07
Speaker 2: is Hey, if those companies are successful, then you get
38:10
Speaker 2: the taxes that come through on the back end. Right,
38:13
Speaker 2: this is the one that we think is going to
38:15
Speaker 2: be the winner. Let's bet on that. Let's take a
38:18
Speaker 2: quick break here. When we return hour two, it's coming
38:21
Speaker 2: up