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