Market Outlook: Panel highlights a solid but uneven economy with soggy wage growth and sticky inflation, noting financial conditions are supportive yet risks skew hawkish.
AI Infrastructure: Massive AI capex is now rivaling and surpassing prior housing peaks, driving current growth and margins and blurring the tech and business cycles.
Data Centers: The data-center buildout (power, cooling, turbines, generators) is pulling in wide swaths of Industrials and supporting non-residential investment despite a frozen housing market.
Semis as Driver: Semiconductors lead the cycle as many non-tech Industrials trade with SMH, broadening market participation beyond mega-cap tech and aiding equal-weight indices.
Industrial Beneficiaries: Companies like Caterpillar, Eaton, Vertiv, Hubbell, Cummins, Generac and GE Vernova are cited as beneficiaries via backup power, cooling, and grid equipment tied to hyperscaler buildouts.
Services Rotation: Spending is rotating from goods to services; air travel and accommodations remain robust (e.g., Delta, Hyatt) even as restaurant trends soften.
Consumer & Staples: Staples are pushing through higher input costs (e.g., cleaning and paper products), which may squeeze real consumption despite steady headline spending.
Key Risks: If the Fed hikes in response to supply shocks, capital markets could struggle; watch credit spreads and sustainability of non-tech AI spending for cycle turning points.
Transcript
How the hell did you get on that flight? Like what was the deal? >> So, um, uh, I called my broker and I said, >> "Is your broker's name Jason?" >> No. No. >> His name is John. Um, I'm not going to, uh, tell the firm out of respect. Uh, but anyway, um, uh, I I go to him, I'm like, I want tickets to game three, so make that happen. I know you guys can do it, so hook me up. and and he goes, "There's no way we can do that." And he's like, "Give me a minute." So, he comes back with this opportunity, which is like they call it the Nicks fly away experience basically. So, um my wife and I were able to go um they put us in a chartered plane, like a commercial like Delta plane. They flew us to San Antonio. They fed us. >> Was it all It was all Knicks fans. >> All Nick Knicks fans. >> Unbelievable. meet and greet. I met Clyde, John Starks. King Henrik was there. >> Amazing. On the on your flight. >> Yeah. >> Um and you know, they all spoke. Um then we went to the game >> and the Knicks put you on their Instagram. >> That was that was a Yeah, that was a moment for your wife and your wife. Look at Look at this handsome devil. Look at this cute couple. What a what a freaking photo. >> Um Yeah, that was great. No, I I I mean Yeah. got your kids yet? >> Oh, yeah. They saw I mean they were they were we were all I was this is like better than going on Bloomberg or CNBC, you know. Um not as fun as going on this podcast, though. >> That's right. Um >> but uh yeah. No, and then you know we watched the uh the hope and and joy and dreams just evaporate out of that building. >> How'd that feel? >> Wonderful. Like it was just you know the the best is when they know they've lost and then they all just start leaving early. That is the best feeling. I had that feeling in Philly for game three and I don't take Jaylen for granted but watching him every day. Um he he's special obviously seeing the frustration through the eyes of the opposing fans. This one guy threw his hat AND SAID HE DOESN'T MISS and it just like melted my heart to see No, it's great to see that. All right, so here's my story. I have season tickets. I share it with a friend of mine and uh 109 row 20, that's where I sit. He sent me a picture and I said with a ticket sale. I said, "What is this?" He goes, "That's a $3,000 profit for game four like we spoke about." Like, "Dude, I I don't remember speaking about this. I I would not have been cool with selling game four to the finals." At least I don't think I don't think I don't think I said that. Um All right. All right. So, the situation that we're in now, the tickets, the get in tickets for the New York City based games are higher than Super Bowl prices. The last time I checked for game four, it's like $7,000. All right. So, here's here's my tickets. Round one was 380, then it went to like 550, 750, $1350 for the finals for for each ticket. So, 1350. We sold them for $4,500. You can't get into the building for less than $7,000. The Super Bowl get in price, right, was like 35. So, it's double. Now, prices will probably come down a little bit, but the cheapest ticket in my section was listed, I just checked, for $17,000. Now, I don't know that anybody's paying $17,000, but that's literally, can I get $15,000 for the tickets? Perhaps. So, where we are now is we're using we're working with my ticket broker to basically to basically like have games three and four and break even. So, basically whatever our tickets would have cost 1350 a piece to have like worse seats. So, I'm still going to games three and four, but in worse seats than my original seat. So, we did like all of this. Now, it's not my friend's fault. Like, we couldn't have possibly known. But, here's the thing that really hurts. Last night I was uh I was uh having drinks with Matt Middleton and Chris Cherry from Future Proof. They got they went to the watch party with me. So even the wa so the watch party was a phenomenal experience. Unbelievable. 18,000 people in the garden. It was like basically like a home game, but it was so freaking loud. You know why? There was like no corporate seats. It was only dieh hard fans. It was so loud. >> So they released the tickets and in two minutes they're gone. Like I was number 330,000 in line. So $10 tickets. I bought it on Ticket Master or Tickpick for like 60 bucks, whatever. Well worth it to get in there. It was such a great experience. So we're at dinner having drinks and um Matt was like, "Oh, I didn't know you had season tickets." Uh I said, "Yeah, where do you sit?" "109." He goes, "What row?" Like row 20. He goes, "Dude, my brother-in-law bought your tickets." And I'm like, "You motherucker, GIVE IT BACK. I WANT IT BACK. I'VE CANCELLED the transaction." How crazy is that? Out of all the >> a small world. >> So Matt Middleton bought bought my tickets. >> For well below what I could have sold them for, >> man. >> Well, at least you're still going. >> At least I'm still going. So, what do you guys Do you guys think there's any like uh economic justification? Do you think this is like this like the whole story? It's like, yeah, the stock market, people are rich and they're buying tickets at any price. >> I think that's that's basically the story, right? We got we have the World Cup tickets that are obviously selling for I mean not as much as mea wants but like we just have like so much uh discretionary spending is actually a pretty solid maybe it's for the upper income part of the distribution but it's still like uh it's a go-go time in terms of consumer spending that may not be backed up by all of the sort of job market itself but it's good enough at the higher end for NYX tickets right >> I think that but the higher end or the bigger shape of the K is like a very big it's big because if how is the get in price $7,000 I don't understand like literally where is are people just throwing out their credit cards and saying like whatever like >> well New York City isn't real life I mean I it's um so >> yeah it's$7,000 to get in >> it does feel kind of ironic that you have Texas versus New York obviously the story of Texas is like it's the booming state it's the state where everything's growing but like New York City's got the wealth that's that's still what's overwhelming why you have New York Knicks take fans taking over San Antonio but you probably won't have Spurs fans >> there's this research about like you know like economists talk about the wealth de accumulation puzzle right like why why is it that like super wealthy people they don't like actually spend down their wealth over time even though everyone expects them to like now that you've finally gotten that opportunity to spend some of it down right especially because a lot of the wealth is in places like New York so I just think it's interesting I will say something about the World Cup I am taking my boys to the World Cup and we're going down to Atlanta to do it >> um >> wait where is it I thought it was in Philly >> no there's games in Atlanta as well >> there's games in New York too well then New New Jersey life. >> Obviously, I don't follow soccer. It travels. >> Toronto. >> It's in a bunch of sites. >> Oh, the World Cup's everywhere. >> Mexico City. >> It's like North America's hosting. >> Yeah. Toronto, Boston, Foxboro, not >> but even even tickets in San Antonio. So, I just bought tickets for game five and they're not cheap. Like the the get in price right now is $1,700 for game five. >> For game two, it's it's sinking like stone. It's like 700 now. 600. It was like a thousand a couple days ago. >> Unbelievable. All right. Uh, well, excited to have you guys. You know, Scanda, I asked Neil who should be in the third seat because Josh is away this week and you were the first person. I said, "Fantastic." >> Ben wanted to get you in here, so we're excited. >> Appreciate you having me. >> It's the Compound and Friends episode 245. This message is brought to you by New Private Markets are paving the way forward as future focused investors look beyond traditional markets to help their portfolios adapt to an evolving environment. With inflation, volatility, and shifting economic conditions, reshaping the investment landscape, the case for private markets has never been stronger. New's comprehensive private markets platform spans the full risk return spectrum offering strategies across real estate, credit, infrastructure, and natural capital. Designed to work alongside traditional investments and support diversified portfolio construction. Backed by decades of experience and deep asset class expertise, New brings the scale and breath needed to navigate today's complex markets. New unlocking opportunity in private markets. Visit new.com to learn more. Investing involves risk. Principal loss is possible. Private market investments may not be suitable for all investors. All right. All right. All right. I am feeling elated, boys. I am feeling really good. It has been a long time. We won a finals game. The first Finals game. Unbelievable. Um, and I'm so excited to have you guys here today. So, uh, fan of the show, friend of the show, fan favorite of the show. That's what I meant to I'm not I I hope you're a fan of the show, but you're a fan favorite. >> I'm definitely a fan. >> All right, Neil Dodd, everybody. Neil is the head of economics at Renaissance Macro Research. Neil leads macroeconomic research efforts with an emphasis on analyzing the US economy, Federal Reserve, global trends, and cross market investment themes. Neil is considered a stock market economist. Do you stock market economist? Market >> business economist. Okay. Um Neil looks at the economic data and tries to see and highlight the risks to the consensus as he sees them. and first time guest Scanda Ammerath. Scanda is the co-founder and executive director of Employee America, leading the firm's economic policy advocacy. Employee America runs regular analyses of price and jobs data, interprets and forecast market conditions, and develops new frameworks for Federal Reserve policy, strategy, and communications. Previously, he served as an analyst within the capital markets function of the research group at the Federal Reserve Bank of New York. Welcome. >> Thanks for having me. All right. Um, we are going to talk about how AI is impacting the economy. Um, but before we get into that and other topics, let's just start here, take a step back, zoom out as they say, how do you guys think the economy is doing? What's your read? Scanda, go ahead. >> Yeah. So, the distribution of risks has shifted from where it was, call it, 6, 9, 12 months ago. You had a lot of people talking about, well, there's a slowdown in the job market. Inflation's coming down. Yes, there's an AI boom, but everything else might be kind of soggy. What have we learned since then? Inflation is picking up. It's not just about oil prices, although that's obviously a big part of it in terms of the closure of straight horses. And yet, we've also seen the labor market is not signaling red right now. It's signaling something that's at least solid. Maybe there's been some pickup actually in some se sectors that have been soggy for a long time. So the labor market's not at the left tail and the inflation stuff's at closer to the right tail. That's a little bit different macro picture. The one constant has been the AI boom is continuing to boom. And that kind of tells you look financial conditions pretty supportive growth better than expected. Inflation higher than we want. That's that's a different picture than the one we were telling ourselves maybe 12 months ago. >> I've never heard the economy described as soggy. I like that. It's like a it's an ugly word, but maybe the right word to describe it. Yeah, you're you're you're feeling a little soggy these days. I I get the drift that you're not as optimistic as you were. >> Uh yeah, I'm not as optimistic. I mean, I haven't been optimistic now for it feels like what almost a year and a half. Um so that's been, you know, a shift for me. Um I would tend to agree with most of what what Scandanda said. I mean, you know, look, I mean, I will point out though that right before all this Iran stuff started, 10ear yields were at 3.93%. Right? right? I mean, we're kind of right there for um additional cuts for this year. So, um you know, I think since then, a couple things have changed. Obviously, to Scandanda's point, the distribution of risks around inflation have changed. Um but the labor markets aren't as the the labor markets aren't as bad as they were at the end of last year, right? I mean, they're not nearly as strong as they were a few years ago, but it's not nearly as bad as it was last year. And that's that's obviously important. Um the one thing I would say that has continued um is income growth continues to slide. So um you know at least the the growth in uh in total wages and salaries remains pretty sluggish. Uh and in the context of um an overnight fed funds rate where it is and price inflation where it is. I mean I do think there are stresses building for the household sector. Um, and I do think there's probably a limit uh to how much people can spend by drawing down savings and and so forth. So, uh, that to me is is is my is my concern. Um, it's really around the outlook for consumer spending, which I don't think is is particularly good. >> Are you guys surprised that the economy has stayed as strong, the soggginess notwithstanding, um, with the housing sector in an absolute ice age? Yeah, I'm very surprised that the consumer has been as strong as it has despite a housing market that's been pretty frozen for a while. I mean, we're seeing maybe some relief on inventories finally. Inventory is starting to come down and maybe you'll start to see some home price appreciation, but the labor market has been soggy for a while as you said in terms of job growth, in terms of wage growth. Those are generally slowing throughout 2024 and 2025. Um, and some of that's obviously supply side, immigration, but it's still less money earned through your paycheck, and that tends to matter for consumer spending over time. So, where are you funding this consumer spending? If you look at the personal saving rate right now, it's kind of collapsed. Um, so it tells you that on some level, consumer spending growth is just outperforming what you're earning through your paycheck. >> But don't don't I was talking about this with Ben on Animal Spirits. People pull in their savings when they're feeling optimistic. >> That is true. >> That's right. >> Right. So, it's not necessarily like, oh no, personal savings is collapsing. What's going on? >> Yeah. So, I mean, I think that there's Right. Like, so to me, it's like let's try to link like the economic data to like markets, right? >> Looking at the savings rate is an actual like it's not a good timing mechanism, right? It's it's horri I I remember back in like 2005 the savings rate was actually printing negative at the time and there was like a chorus of like bears telling you like oh my god there's no more cushion like it's about to fall over. We kept going growing for another two years before I mean it didn't matter in the end but you had to wait a while. Um and I think the other thing of course is that incomes tend to get revised up over time. So the government always like magically finds income uh and the savings rate doesn't look as low as people think. I mean it's just one of the things that happens in the data. Um but you know it's like anything in econ economics right you have like two different we have multiple ways of looking at the same concept right there's household employment and payroll employment there's CPI and PCE and that's also true for the savings rate right like there's a the savings rate that Scandanda is talking about which is really just I think you would agree like an income statement residual and then um you know all they're doing is taking income less spending over income. What about like um something that is a m maybe like a a better timing signal um construction permits like Warren P has showed a lot of that data on our show that when that starts to roll it has typically like a recession wasn't that far behind >> I mean I don't know like the Ed Lemur thing is like was something that people were talk have been talking about for years right like Ed Leur was the guy that wrote the paper like housing is the business cycle right like normally I would agree with him >> was >> yeah I mean that's the thing it's sort of it's competing for seat resources with the AI thing, right? Like so they're competing with land with AI data centers and >> yeah, housing I mean the resale market might be getting a little better. Like I don't think there's much improvement in uh in new home sales. I mean if you look at new home sales so far this year, they're down about 6 7% against the same period last year. Like there's builder margins are still under pressure. Like there's there's not a whole lot going on with respect to residential construction and I don't think that's going to happen this year. Um, but you just have I mean I think we're probably going to talk about this, but the AI boom is quite spectacular in how much it's I think helping lift uh growth. >> All right, enough enough uh clearing of the throat setting up the table. Scand in preparation for this um I was looking at I I think I googled scan I think I googled your name LinkedIn um which is a weird thing to Google but I don't know how else I got to this >> there's only one >> I don't know how else I got to this result. There she is. Um, so the first result, somebody tweeted, um, expenditures on AI is about to surpass the peak spending on housing at its 2005 peak spend. Um, and then they quote you, "At close to 7% of the economy at the end of 2025, it's plausible the AI boom would be on par with the share of the US economy. Housing investment represented at its 2005 peak." So I clicked on the link and it said, "First heard on the compound." >> That's right. >> So like, holy [ __ ] So, we were talking about this piece that you wrote back in January 2025, and you wrote at the time, I think you wrote with Joe and Tracy. Um, you either wrote or said, "We are now at the stage where the tech cycle and the business cycle are poised to blur. From recession dynamics to the Federal Reserve's debate about potential growth and the neutral rate of interest, known as our star, AI will leave its mark on the next few years of macro discussion." So, >> there you go. >> Voila. >> Boom. I I that that's one thing that's aged quite well, I'd say. Um I think we're clearly seeing we've we've ripped past 7%. Right? So we we've ripped past the the peak for housing investment in the 2000s. So the housing bubble and the residential investment that's happening there as a share of GDP. I think you can look at the relevant components now for this AI boom. So I'm talking about tech equipment, software, industrial equipment that powers all the data centers. That's all past uh the peak of the the 2000s boom. It's past the peak of the ve very well past the peak of the 90s tech boom, the dotcom boom, the telecom structures boom. So we're at a point where this very investment intensive part of the expansion that is a to your point about also the saving rate going down. You see the stuff at the peak, it's also a way of saying if this turns obviously it's going to leave a mark also on the downside. I can't tell you that that's going to happen right now, right? I don't think that's like anything that suggests that oh my god all the spending is about to stop or all the spending is about to slow down. If anything, we're just seeing more and more um financing, expenditure, issuance all tied to this boom. And that just tells you this is the go-go time and everything that is we're all wrapping every single part of markets, the economy around this big technological and investment boom. Neil, it sounds like you have a bone to pick with economists trying to properly account for the impact of AI on the economy and you're rubbing your face. So, >> you know, I I um >> Well, I mean, there's I mean, there are there's a I think a decent contingent of people on the street that think that this is having like a fairly modest effect on the economy, right? Like, so it's um >> why because they're looking at the wrong things? They have no common sense. What do you think? >> Well, no. I mean, it's sort of like GDP accounting, right? So one of the reasons why I mean it's true that information processing and software is what 6 7% of GDP. Um it's also true that a lot of the growth from AI leaks abroad in the form of import. So that actually counts against GDP. >> Hold on. All right. So I was going to say like what the hell is uh leakage? What do you call it? >> Import leakage. >> Import. Okay. Is that a is that a it's new to me. Is that a thing that's been >> in the e uh economist lexicon or Go ahead. You want to take it? >> Yeah. So, it's it's basically so there's all this spending happening domestically, but that spending could be for products that are produced outside of the US. And so, you think about like what SKHEX produces or what like all sorts of Japanese and Korean manufacturers are producing for all your tech hardware or the energy systems behind it. Um, that's all stuff that's coming that that's value ad. That's GDP. That's really not show like it's not US GDP, but it is US spending. >> So, why not just look at global GDP? Surely it must show up there. Well, I just think that there's a little bit. It does. I mean, in in a in a sense, I mean, just because the dollars don't show up in GDP, don't don't doesn't mean that it's not like it's vanished or something. You know what I mean? Like, so I think what economists miss about this is that there are lots of uh kind of um linkages to other areas of the economy that are not neatly captured, I would say, by GDP, like simple GDP accounting, >> like tickets, >> like NYX tickets, like consumer spending, like municipal government finances, right? Like the California Legislative Office talks about how over half the growth in income tax withholding is a function of all the RSUs that are vesting, right? Like it's like that's your meal ticket, right? If you're a worker in one of those big companies, um it's probably it's juicing obviously global growth. Um but more importantly, it's helping corporate earnings and that matters because it finances a wealth effect through consumer spending. And again, that's not something that is neatly captured by a simple accounting identity. So, it's almost like saying, "Yeah, I mean, residential investment 6 or 7% of US GDP, but not really because we import all the drywall and lumber from Canada." Like, it's a it's a bit I don't know. I think it's like one of these arguments. >> Neil, you're being too kind. I think I I think actually like this this whole like uh it's not really counting to GDP because it's imports totally misses the point of what a boom is all about. It's about the spending. The spending is sitting on some company's balance sheet. It's affecting their risk. It's showing their risk appetite currently and it might affect their risk appetite in the future, right? So like business cycles are risk cycles. They're about the willingness to spend to spend on labor, spend on capital, and when the spending stops, that's when you get the recession. And when we talk about recession, we're not really talking about GDP. We're talking about whether the stock market goes down a bunch and whether you lose your job. Like that's really what we're talking about. So all of this like GDP accounting stuff can really miss the point. You have a huge volume of spending relative to the size of the economy. It's going to sit on a bunch of balance sheets. They might be able to handle it. we're talking about some of the best balance sheets historically um in in terms of a lot of the the big mega mega cap tech. But it's still quite remarkable that like we've had the scale of spending. It's growing so fast and with that comes risks and also obviously just growth in the present. >> So it's all about spending which is driven by the labor market and of course the equity market. Duh. But if people have their job, they're going to spend their money. Do you think that there's anything that the average investor can look at whether it's on the economic side? Like I kind of feel like the traditional playbook is like not really useful here in terms of like what leading indicators used to say. Is it going to be like a concurrent slowdown where it's like stocks get killed um spending pulls back and it's just going to happen when it's going to happen. There will be very little warning. Feel like people have been looking for warning signs just for the last 15 years. >> It's true. I mean we you always have to look behind your your your shoulder for something. But I think if you look back to the dot boom, right? Was there like a macro signal that told you this was over or was it that earnings started to miss around April 2000 until you had a lot of these sort of events through 200? >> That's a lot of vibes too, right? >> Yeah, there's a lot of vibes but it's like I I don't think I could point to aha it was housing starts turned in 1999 or 2000 and that caused the cyclical slowdown. It's like I don't I think it's really about the stock market. It is about it's about tech. >> Some people will point to like I think there was a Baron's article that came out of it one weekend and the next week the stock market killed and then it just started to unravel. Like was it the article that causes something? I mean it was obviously going to burst either way but >> it was a bunch of spending that got pulled forward in terms of IT systems Y2K a lot of that stuff and then you keep spending and keep spending and it's like every exponential curve is always underestimated in real time and at some point there is >> I mean the other thing of course is that the Fed was hiking and and the and but the stock market was still going up concurrently as the Fed was hiking. So it wasn't ne I mean this whole notion that like oh the Fed should step in and like >> hike to blow this whole thing up. I mean, I'm not, first of all, I'm not sure that they really can. Um, but all you'd be doing at that point is exacerbating the stresses in the in the areas of the economy that you were just talking about, like housing, like some of these credit sensitive areas. And the key distinction between now and then is that the labor markets were genuinely overheating back then. Um, there's really no evidence that I mean, we could talk about, you know, things getting more stable relative to where where they were 6 months ago, but it's not like you're seeing like broad-based wage pressure. I mean, >> are you guys worried about um credit card delinquency? That's been a topic that's that's come up recently. >> Not yet. I say I would say there's probably some signs that the household sector will eventually face stresses if like the job market isn't good. Um right now we're seeing signs that the opposite, but if we are like this is still not yet at a point to me where the household sector is pretty flush in terms of liquidity. Um it may be disproportionate in terms of distribution, but >> so a lot of a lot of the spending is >> it's getting worse at the margin. I mean I agree. I mean it is getting worse. I mean even the Beebook talked about it yesterday, right? They talked about we're seeing uptick in mortgage delinquencies and credit card delinquencies and agricultural delinquencies. I mean these are I mean I guess you know the thing is like do you think it's a body in motion that stays in motion and if you do then you know you better pray that the labor markets start to accelerate because if they don't and wages continue to slow then those problems are going to just get worse. And so, yeah, I mean, I agree that it's it's very low, but if you're a bank, I would probably want to provision for more loan losses over the next year. >> If you think about the like the '9s comp or the late '90s comp, labor market's definitely not as strong as it was then. And so, there's clearly like a sense of if this labor market does not show any sort of real pickup over the next six months, we will be talking about sort of all the left tail stuff again. >> But can that be good that it's not a strong like because it's not causing wage pressure? >> It could be. The other side of it is inflation is a lot more of a problem this time than it is than it was in 1999 or 2000. And so we have inflation that's tied to tariffs, inflation that's tied to the AI boom itself. There's inflation that's tied to obviously the closure of straightfor. So if you think about airfares are a lot higher now and big part of the jet fuel. If you think about um AI boom and its impact on basically if you want to go buy a laptop now you can see the price right it's not it's not what it used to be and there's all sorts of computer hardware memory is memory shortage having its impact >> and so this is all a lot of sectoral stuff. it stinks. Kind of like the 2000s in a lot of ways. If you remember, like a lot there's a lot of random inflation that kind of creeped up around then. So that's not great for the consumer, right? Consumer's got to pay the pay the bill on that. It means they're either enjoying not as much of a standard of living improvement or in some cases a standard of living reduction. Um so that's the downside here. So, we have like not as good on the labor market, harder, harsher on the inflation side um this time around relative to what was the '9s, which was kind of nirvana in terms of labor market being pretty strong, but inflation not really rearing its head. >> Josh and I talk a lot on the show about the wealth effect and um what drives people to spend more money. And I've mostly rejected the idea that people spend money based on how they how much they think their house is worth because you don't see it on the screen. Yeah. No, it feels good. Sure, I suppose. But your investment account, it leads to overconfidence. I mean, it just does. You can take money out of your investment account, pay for a a home renovation or a toy or whatever, and in 10 days, the bucket is full again >> because the semiconductors just keep giving you free monopoly money. So, that like I think there's no there's no doubt about it that is driving a huge amount of the spending. Today, >> in 2022, the stock market did go in reverse. It was a bare market and it didn't last five years, but all of the names that everybody loved got cut in half for the most part. Like Amazon, Facebook, uh, Nvidia fell two-thirds like legitimately lost like a lot of a lot of money and people didn't stop spending at least as far as as far as I know. >> No, because we had income growth. >> Okay. >> Yeah. That's the key difference between now and then. >> So if so if we >> and we had a lot of pandemic savings. >> Yeah. I I know it's it's not apples to apples at all, but so you're saying that if what would what would it take for the spending to slow down? Would it be the stock market or the labor market or or both or who knows? >> Well, I think so there's a couple things. I mean, I think right now we're sort of for us, I think for economists, it's like, is it linear or nonlinear? >> Which part? >> The con the slowdown in consumption. Right now, you're basically in a linear I think a linear slowdown in consumer spending. Consumer spending is growing about 2%. a little below, a little above, it depends. But, you know, more or less that's where we are. Um, if you start to see layoffs in any meaningful extent, not that we have outside of technology, um, that'll probably hurt consumer spending pretty quickly. Um, that's one option. The other way would be you get a a market correction of some kind. Um, if you just assume like savings are stable, like consumption will probably naturally slow a little bit anyway because income growth is so sluggish. >> But doesn't matter. >> That that doesn't mean it's going to like fall off of a cliff. You know what I mean? Like it's just okay, we're instead of growing two, we'll grow like one to one and a half. >> In a world where these hyperscalers and others joining the party are spending $700 billion of capex, doesn't matter if the consumer pulls back a little bit. >> A little bit is not enough, right? Consumer consumption is generally pretty smooth anyways. So really when you think about people say oh the US consumer is the economy but investment is the business cycle investment is the thing that's volatile that moves with the business cycle and right now it's risk on right there's clearly a lot of capital commitments that are tied to this there's all sorts of planned spending planned additions of energy of data centers that haven't happened yet and as long as there's the belief that that this is going to keep continuing which is the case right now that's going to happen and that's what's going to drive sort of where the market goes and market sentiment and I think that's just >> what's so unusual about this is that it's like equipment investment and like um non-residential business fixed investment that's driving it and that's what's interesting I mean if you're talking about business cycle economics right like typically the investment piece that cracks is residential investment right >> right um so what's interesting about this is that because typically if you look at it I mean equipment like non-residential business investment um capex that actually follows growth it doesn't it's not a leading indicator historically right I mean basically The way it works is companies think growth it's the accelerator effect is what we call it, right? Like companies think growth is going to pick up and so they start investing more. Um what's unusual about this cycle is that it's not like growth expectations are really taking off in any material extent. Um but you have this sort of spectacular capital spending boom nonetheless. So that to me is like to your point like why are all these like traditional things not working? >> We don't think of tech as like a cyclical sector, right? we think of as housing, manufacturing, maybe some like segments of consumer spending, but like tech is the cyclical thing. It is the thing that matters for it's driving all the vault in terms of GDP, in terms of um why we're getting the outcomes we're getting in stock market too, right? So what we don't have like a leading indicator for tech outside of like if you're really locked in on some particular names and maybe certain orders for this tech supply chain, maybe then you can have a read into the leading indicators of this dynamic. But um it's really just about like business fix investment that's all tied to AI boom. >> So tech AI it's sucking everything in. We're going to get to some of the work that you've done on everything looking like a semiconductor stock. The framework that I'm that I'm working with today and by the way things changed so fast and people act like what's happening today has been in place forever. Like nobody wanted the mag seven stocks in the fall. These things were getting destroyed. Oracle got Oracle fell by 60% because people are like there's no way that Sam Alman is gonna be able to pay that 5year 300 billion dollar contract. There's no way and all of a sudden it's hot again and people are like up bubble. Um so the way the way that I see the world today is um that everything is being driven by the investment boom by the by the buildout and I don't know when the handoff happens but how much of the world is even using these tools the agentic um AI stuff like what's what's interesting about where the tenure was before the war and today is that you got the closure and the inflation picking up concurrently with the crazy boom in anthropics revenue going from like 9 to 45 and it happened at the same time. And the point is nobody's even using these things and all we're hearing about is a shortage of compute to so to suggest or to think or to use the the framework that like it's late or getting long in the tooth. I kind of think it's just starting. It's really hard to know in real time and it does seem like the best approximation is what we can see in the present. What I can see in the present is risk on right. I can see just that there is a lot of appetite. The capacity on compute is clearly very much tight as far as as far as anthropics concerned and at the same time they are seeing revenue growth. So that's all reasons to keep investing right reasons to keep being optimistic. At some point there are I I I'm sure there is a point where exponential curves become s curves but that point is not right now. I love that you said that because all we could observe is is >> is that the line's going up today? Who knows? >> So, I guess I guess one thing I was thinking about and I I really enjoyed your uh your conversation with Denise last week. Um you know, she's great. The uh this whole notion of like it's early, it's it's not a bubble because the earnings are are are so strong. And but I also would say at some level like the earnings are tied to some kind of temporary phenomenon with this at some point the data center buildout will stop and the earnings won't be there. So what are we really talking I mean just because it's not just because the PE multiple isn't like ridiculously high doesn't necessarily mean >> I agree that tells you nothing. >> Yeah. So I I think that there's a little bit of that uh going on on the street. Um the other thing I would say um is this is like a really I mean people talk about product I mean I go to client meetings it's like oh productivity boom like you know this is a very unusual productivity boom like what is the point of investment ultimately the point of investment is to raise household living standards can we say that that's what's happening with AI like if anything it's a really weird productivity boom when the prices for information technology commodities like Scandanda was talking about software laptops it's actually going up like you you pull up those charts in the 90s or 2000s it was deflating month after month after month sometimes at accelerating rates. Um you go back to that period too again very strong productivity growth we you know we also had very strong growth in real income right like there should be some relationship between stronger productivity and stronger real compensation. We just had negative real compensation growth this year. So right now all the growth is flowing to you know margins I guess. Um and I don't I mean that to me is like this is like this is why I say like is it really a productivity boom like it's not yet raising household living standards and I don't know how long that can continue. >> I honestly think for productivity a lot of what people are talking about are things that happened in the previous call it one to three years like you look at Q1 data on productivity not great. If we think about the supply shocks that are hitting because of hey prices of price of gasoline is much higher than it was in Q1 price of uh all sorts of energy airfares. You have a lot of other shortages and other shocks that are materializing too. >> Cattle prices. >> Yeah. Right. Cattle and beef all that stuff is going to feed through as well. If that's happening that's probably going to also weigh on productivity too. And so productivity growth is not actually as rosy now as it probably was in 23 24. Um, >> but doesn't doesn't the the whose productivity? >> That's right. The macro data stats that the Fed might look at that their productivity. I do think it's like even in terms of diffusion, you're right that we actually haven't seen mass adoption of AI in terms of in the real economy. >> Nobody's using it for the I mean, I know our listeners probably are like, you know, you guys are, but in the real world, >> yeah, there's there's there's limits even in terms of large scale large um corporations. >> Of course you do. If if you're a smaller company or a smaller organization, you probably can adopt these tools. You don't have to worry as much about security risks that stuff. If you're a larger company, there's all sorts of walls. You can only use co-pilot. You can only use these types of tools. You can't use those because they might um ultimately present security risks. And so actually adoption may not I think it's >> there's also a measurement there's also a measurement thing with this. Like I mean like everyone's like looking at the ramp index and like how how like I mean index >> like what is that even telling me, right? was like, "Oh, look, OpenAI is going down and everyone's using Claude now." Like, okay. I mean, I don't even know what to do with that. So, I would just say that if it's a genuine productivity boom. I mean, people, it feels like everyone assumes that like everyone's margins will expand because of this, >> but they are margins are at an all are going up, >> right? Ultimately, costs need to come down to households. >> All right. So, we'll talk about in a second. I just want to end with end this the topic with this. So Neil, you said um we ran a one-year daily return correlation between every S&P 500 name and the semiconductor ETF SMH. 15 non- techch S&P 500 companies collectively worth $2 trillion in market cap now move with semis at correlations of 0.5 or higher. 12 of these 15 are industrials. names like Verdive, Eden, Caterpillar, Cumins, Hubel, Hubel, Hubel, Hubble, um, Comfort Systems. I don't even know. I don't know these a lot of these companies. Um, whatever you go on. Uh, you say these are not tech stocks. They trade like semis because their order books have become AI capex order books. Caterpillar sells backup generator sets and engines into hyperscaler data centers. Verda sells cooling and power management. Ensal components. And Geova sells gas turbines for data center power. This is kind of interesting. The gig sector classification has not caught up with the economic exposure. >> That sounds so good when you sound good when you read it back to me. Yeah, >> it's good stuff. >> Buy that guy's research. >> But inside but inside the stock market, I was looking I was talking to Charid and Sean today. >> Um, so healthcare is breaking out. It's been stuck in the mud for a while. Industrials look awesome. That's 20% in the S&P. So for as much like people talk about, oh, it's just a MAG 7. Daniel chart uh throw chart 12 on this surprised me um and I look at the market pretty damn closely and I don't think I knew this probably because they diverged like very recently but the Mag 7 are up um two uh 7.3% year to date. 7.3% year to date for the Mag 7. Not bad. But the 493 are up 12.6%. Huh? Did you guys know that? >> Well, I knew about it. A big spread. >> You mentioned it I think uh last week, right? >> I forgot about it. I have other things in my mind. >> I I do listen. Um but I think what that analysis is showing is that >> this is going to support a lot of the equal weighted indexes because it's such a profound effect on the broader economy, right? Like Caterpillar is probably part of that S&P 493, right? Like I think I was reading that Generrack uh is doing better now because of the data center buildout to build backup uh you know um power uh for these facilities. So um that's why I say like just because I mean is is the equal weight like historically we look at that as a sign of like market broadening but if the AI tech capex boom is touching lots of industrial names uh as an example um and lots of freight right like the stuff needs to move around the country that's you know that's also probably helped by all this so is it really like a sign of breath or is it just It's a sign that things are really concentrated into one area of the economy. Like what is like how much is like traditional non-residential structures like doing? >> So when you say what area of the economy, you mean corporate profits? >> No, I mean like the tech sector, the tech boom. >> Damn it. I was trying to do a segue. >> I make corporate profits. >> So go ahead. >> I mean it just seems like the the breadth and the boom go together too, right? It's just that there is you you see companies like what Ford is kind of trying to sell batteries now. >> Ford's an AI company. >> Yeah. Ford's trying to provide batteries to support this sort of power boom, right? So, we have it's it's just become it it sort of touches so many other sectors and even beyond whatever rational logical um connection between like oh this affects power which affects like transportation. It's more like it's a risk on environment and so this is one in which transactions happen and correlations do go to one in both directions. So you actually if if it's a an environment where investment appetite is particularly solid that's one in which other other companies other sectors have a chance to participate as well. >> The other thing I was thinking I'd love to hear your thoughts on this Michael is that you know when people when clients ask me like do you think the market's pricing in a slowdown? >> See like you're looking at it like but I don't know I mean discretionary stocks don't look great right? I mean like that's what my that's what Jeff has been telling me like uh discretionaries underperforming consumer staples. >> Which discretionary stocks? >> Equal weight like he's been pointing that out. I mean restaurants don't look good. I mean you can say that's all because of like people taking the fat shot. >> I I will say that unironically. >> Um I think that it's I mean it's not like their same store sales are doing particularly well. Um or uh you know you mentioned healthcare. I mean that's not necessarily a cyclical sector but or I mean what about what's going on with like financials right I mean so when people's like I don't I mean maybe the market is like it's you know is is the market pricing in some some slowed no so tell me why >> no okay so I'm looking at the equate discretionary over staples and it's it's still in an uptrend but flattening it looks fine whatever it's sort of neither here nor there >> but I think some of the story is it's really hard to separate I don't think consumer discretionary stocks are necessarily always a reflection of the consumer and restaurants are a great example of this. A lot of these names, Cava um is like the poster child of this. A lot of these names came public sort of recently were in vogue. The valuations were stupid. The slowdown happened in uh consumer preference changed. Shake Shack. Nobody wants to eat a burger for lunch anymore. The stock the stock is getting destroyed. Is that a reflection of a slowing macro environment? I don't know. I don't even know what the dollar stores tell you anymore about the state of the like >> how many needles we're buying? >> Well, yeah, but seriously, you look at Dollar Tree and Dollar General when they're going up. Is that because that particular consumer is doing better? Is it because the middle income consumer is trading down? I have no idea. Now, obviously, you can listen to the conference calls and they'll give you a little bit more information, but I think it's really tricky. So, I don't think the market is pricing in a slowdown. I think it's sort of hard to hard to say that. Maybe the the PE is coming in a little bit. Um, which is probably healthy. Like there's a little bit of a governor on the stock market, but I don't I don't know. What do you think? >> I mean, I think the consumer is spending in total at a reasonable pace, but I think one thing that's going to be changing is they're facing more inflationary pressures and it's again there's obviously energy, but it's also like food prices. If you think about a a lot of what is being guided on the staple side, right, suggests they're going to pass through a lot of costs. So you think about all the pet chem prices that are in all your household cleaning products and your household paper products. It's basically just there is assuming okay we're going to be able to preserve our margin and that means we're going to pass it through to the retailer to the consumer. So someone's going to hit the squeeze. It might be the consumer in that case and that's really like a real consumption squeeze. So this the money can keep flowing even though we may not necessarily be getting richer. >> Let me ask you guys this. I think a lot of this is investor preference. For example, Clorox, I don't know anything about the business. I don't follow the stock but guess what? The stock looks terrible. >> Is Clorox undergoing some stress? Is there a competi like competitive landscape that I don't Yeah, I'm sure. I'm sure there is. But if you look at a stock like Hyatt, which is at an all-time high today, >> and Delta, which is at an all-time high today, I don't care what Domino's Pizza stock is doing. That's a completely idiosyncratic story that has nothing to do with the broader consumer. Now, if I'm Domino's Pizza CEO and Chipotle CEO and I'm telling uh the analyst that is a consumer macro pressure story, of course you're going to say that. But I can show you a million other examples that completely refute that story. If anything, what you're what you're pointing out is actually very real in the data about goods to services. So, we see in goods, obviously, consumer spending is kind of not as great. It's not we're not seeing the spending in terms of food and staples and even what you kind of whatever else you get in the grocery store. But if you see it in terms of like services in terms of air air travel, like air travel, even though airfares are are going up quite considerably, the actual volumes of air travel are quite robust, right? This is not something >> restaurant sales haven't been that great. >> Restaurants have not been as great. I think restaurants is also facing a big like food squeeze. So everything your costs on the food side have gone up especially for Shake Shack. So >> and I really think I completely underestimated the GLP1 story >> and it is having a material impact on areas of the economy. It really is. >> So in that sense you also get the rotation there too. If you're not going to spend as much at the grocery store, you're not going to spend as much in uh certain types of like food services experiences, but you might spend it on other kinds of recreation services. You might spend it on accommodations, resorts. Um and I do think we see this we see that story play out as well in the day. >> All right. Uh shifting gears a little bit, Greg Ip wrote uh a story, the record divide between corporate profits and worker pay. And Denise was on this uh Denise Chisum was on last week talking about um falling unit labor costs being a tailwind for the stock market. Great for the stock market, pretty shitty for society. Um so Greg said, "To understand why people are so miserable about the economy, look no further than Thursday's report on gross domestic product, not how much GDP grew, but how it was divvied up. Worker compensation, wages, and benefits grew 0.8% in the first quarter. Um, while domestic corporates profits jumped 2.7%. Daniel, charts on, please. As a result, labor share of gross domestic income sank to 51%, the lowest since records began in 1947, and profit share climbed to 12.1%, the highest since 1950. So, just go back and forth between these charts. So, this is corporate profits basically hitting all-time highs. And the flip side of this is wages just not getting not getting their fair share and this is ripping the country apart. Is this not being accounted for properly or do you think like this really is the story? >> I think it's probably two things I can think of. One is the labor market has been underperforming. Um so when we say like hey given like what we're seeing in the labor market being so sluggish consumer looks pretty good and given these facts like oh okay it's happening despite the labor market not being as good this is quite impressive but the labor market is sluggish in a lot of ways like benchmark to what we saw in the 2010s even this is slower than that and yet we're also seeing the structural trend a lot of result by the tax system right the tax the tax code has sort of created a lot of biases in a way that makes it just um you're going to be more inclined to to to try and stay ste at the margin steer away from W2 income towards either trying to own your own um business. Uh there's obviously a lot of stuff with capital versus labor. I'm not going to get too much into that, but these are all ways in which um there's going to create some bias and some of that might be real and some of that just might be classification. So it's it's not just like some big political thing. It's superstar firms is probably another argument, right? like just like firms that have really high margins and we have more of them in our economy. Therefore, naturally, as a result, profit share goes up. >> But this is this is very much impacting the political landscape and how people vote. And this is like a huge part of the story. >> Yeah. I mean, I think it's the if you aren't owning your own business, right, and you're basically relying on a W2, then what exactly is like what is that what does that labor market look like? I'd actually argue right now we're seeing a pickup in white collar employment. we're seeing a pick pick up there which is kind of defying all the odds and prognostications on the AI um replacing white collar and but for blue collar it's not necessarily all great right it's actually uh if you look at a lot of different types of uh employment there job growth has not been as fantastic um there's a lot of construction jobs tied to building data centers outside of that not so great um and even manufacturing if you're maybe working for Boeing obviously jobs are being created because they're ramping production after all their snafoos. Outside of that, not as impressive, I'd say. >> Neil, do you think that those lines um forget about converging, do you think they stop diverging? Is there a breaking point? >> So, I I think I sent you this chart, but basically, if you pull up a chart of like nominal GDP >> chart time, Daniel >> um and uh like sort of nominal compensation growth, like I think it kind of speaks for itself, right? Like nominal GDP is growing about 6% uh and nominal compensation like wages and salaries mostly is is running below 4%. >> Has that ever has this ever happened? >> I mean I'm sure it's like it's rare like like the disconnect is quite unusual. Now there's a I mean and I I I've said this to our clients and I'll say it to your audience. How you feel about how this thing reconciles will should dictate how you feel about the trajectory of like policy going forward. >> Go on. Well, I mean, if you think um if you think that all this spending is going to lead to a meaningful inflection higher in like labor income and tight job market and you know, people seeing stronger wage growth, then you should be very hawkish. Like I mean, you should you should expect, right? Like, so if the gray line converges towards the red line, then it's not like I think Scanda has a forecast for like one hike at some point. >> Yeah. >> Um in the next year, forget that. I mean, they're going to go 75 to 100. They'll they'll take away all the insurance cuts from last year. Okay, so that's at least 75. The Fed the Fed never I don't think really just goes once. I mean, um >> but if you think that we'll see that that slowing in nominal wages and salaries will p pull down to some extent consumer spending from like maybe 2% to one one and a half. Uh you continue to see this sluggish growth in residential investment. You continue to see sluggish growth in structures investment. So if that red line converges onto the gray line, well then maybe the Fed can wait it out. Maybe the Fed can wait it out. And so I think that to me is the kind of conversation like so I think Scandal is a little bit more on the hawkish side of things right now than I am. Um it's unusual for us to be that that that unaligned, but that's kind of where where the debate is right now. So, you know, for me, like in my career, I've always put more weight on labor and housing. And so, that's why I probably sit more on the dovish side of things at the moment. Um, you know, how can you, you know, as an example, like how can like apparel prices have been rising very, very rapidly over the last year, but what's happening to the real volume of clothing that's being sold? It's actually contracting. Like, how can firms make that stick, right? It's very difficult to make the price increases stick if labor income isn't there. >> Where else is so so areas? All right. Kevin Walsh. >> Oh god. >> Well, not your favorite. Um I think last time you were on here, you were you were not so happy about the prospects. >> I mean, someone has to do the the the dirty work. I mean, you can't get half the people on the street to actually say what they really think about them. So, I guess if I if one person has to do it, I guess I will. You know, that's sort of how I think about it. I mean, that's one of the benefits of working at a smaller place. You don't have to be like a diplomat. But yeah, I don't I don't know. I mean, what's the upside? >> What's the upside of what? >> Him. >> Oh, well, he's in charge now. He's the boss. >> Well, I mean, I think it's as likely that the Fed captures him than he captures the Fed, right? He's going in there talking about regime change. I think uh if I were if I were a betting man, I would say that the Fed is more likely to influence him than the other way around. >> I think actually it's a bit of like Chinese finger trap, right? the harder you try to pull away, try to the harder you try to push for a doubbish case, the hard the more you're likely to kind of stoke a reaction from the rest of the his colleagues. >> Well, yeah, if you if you make bad arguments, >> well, if you make bad arguments, don't be surprised when like the staff or your colleagues just smack you down, right? And I think that's the that's the big issue with like he's kind of trying to throw in trimmed me and I'm actually a data guy now for like >> Yeah. Look, look at his career, Michael, if you've ever seen him, you know, when when he first got when he was governor, he never gave actually speeches on the economic outlook. Like, you know, it's like, oh, here's Governor War or Lorie Logan like talking about the economic and and and policy outlook. He never gave those speeches really. Um, if you go through his like record, like most of his speeches are like sort of like very kind of like highlevel like philosophical. he's like freaking going around talking about Emanuel Kant and like these like people that you've like heard in like literature like class like in your freshman year college or something. I mean it's it's very bizarre to be talking in those terms for like a central banker. >> Can't people change? >> Um I think the change is very curious considering it happened during a period where he was actively campaigning for a job. And so to me that's like to me that's like the knock on him. I >> I saw somebody >> but for me it's just not going to work. Do you know what I like going in there and being like, "Oh, look at this trim mean measure. It's lower than everything else." Like if his job is to go in there and try to convince the people around that table that we're about we're on the precipice of a golden age. I mean, you hear them talk about this all the time like pull a Greenspan as if Greenspan didn't hike aggressively in the late 1990s. Um anyway, um so he's going in there to sell this golden age thesis. Basically, what that means that we're on the front edge of a productivity boom. That means we have a lot of spare capacity. >> So don't do anything. Yeah, we have a lot of spare capacity in our an economy. That means we actually have more room to cut rates. That's what he's going in there. That's the pretense under which he was brought in. >> So, Scanda, >> yeah. >> Oh, were you done? >> I can keep I can keep going. Uh, Scanda knows. >> So, Scanda, my question to you is um how how much power does he have to influence policy? Can he just say we're doing we're cutting, we're raising? I think I think he he he can't just snap his fingers. He's got some bully pulpit power. He's got some ability to set the agenda at a meeting. Like those are like for like a really shrewd operator. There are ways to leverage that. Well, but it's certainly not something so unitary. It's a you vote at a committee. You vote among a set of people that's uh each got one one person, one vote. Um and there's a set of members. Some of them are part of the board of governors and some of them are regional Fed presidents. Um, and you already saw what, four descents at the last uh, Fed meeting. One of them was on the more doubish side, but three were on the hawkish side. That's a lot of descents. And they're probably going to descent again because they're going to say, "Ah, yeah, we should get drop this easing bias, but we really need to be moving towards a tightening bias. Um, we already got some battle. >> That'll be the next battle." And we're headed in that direction. I'm I would separate what I think the Fed should do from what the Fed will do. >> So, what do you think they should do? What do you think they will do? >> I think they should steal themselves. the fact there are a lot of supply shocks in the economy and there there are a lot of supply shocks that are really hard to look through. The first thing you do is don't underestimate their scale and duration. Um, which is I think a big part of what got them in trouble in 2021 and 22 which is that it's just uh these things can last a lot longer than they than you think because they take a long time to travel through the value chain. Different people are move different companies are moving their margins. Um the scale of this stuff can be a lot larger than you think in real time. Um so don't go in uh basically underbaking these forecasts. So dumb question. How much how much do you think the overnight rate impacts? Like what does that have to do with supply shocks? >> It doesn't really. But the biggest issue is that the Fed has been underbaking where inflation is supposed to be by this point. And when you keep making the same error, you're liable to say, "Oh, I must be missing something really big. I must be must need to raise interest rates to keep inflation expectations anchored." And I think we're headed down this path. I mean, I'm basically being bearish about the Fed because of the reason Neil uh pointed out, which is that they are going to confuse this stuff. They're going to look at the inflation data. They're going to say, "Oh, it's it's hot. It's hot for so long. It's in too many different components because it's so broad because it's lasted so long. It therefore must be something we have to do something about." >> So, you think they should look through it, but they won't. >> So, he thinks they should do what my call is. His call is that they won't. That's why he's negative. So, I think that's it's an interesting framing. I mean, we'll see. I mean, >> but the market is pricing at a rate hike. Show chart 13, please. So, this is the implied Fed funds rate. Um, we're looking at through the end of September 2027. What is this line telling us? we've it's kind of the cowardly compromise of saying that there is either going to be a set of hikes, right? If they're Fed's going to hike once, they're going to hike multiple times, or they're just going to stand pat. I think it's going to be hard for them to steal themselves through what might be some more inflation and a a broader pickup. And at a time when financial conditions, if at a first cut, pretty supportive. The interest rate currently is roughly around neutral, modestly restrictive, and at the same the labor market's not showing the same downside risk. We're moving away from the left tail. Inflation has got some right tail properties. It I do think it's largely supply, but that's a hard when you have all these things moving in the same direction of the hawkish dovish debate. >> They're not going to go once. They're going to go 75 to 100. >> If they start if if they start to go, don't be surprised if it's three three hikes in a So Neil, you're a market economist. If you knew that they were going to go what, three times 25? >> If they're doing it for the reasons he's talking about, it would be very bad for the economy in the capital markets because because it's basically you're hiking rates, not because demand is like we're trained to think rate hikes are okay because it means that the economy is strong because demand is there and that means earnings are there. >> But the economy is not that strong. >> Well, that's Yeah, the economy is not horrible. It's it's it's okay. It's okay. >> It's not overheating to the point that >> it's very uneven. I mean, I thought the Beige book this week was very interesting. It's a I haven't seen a beige book like that in a while. It's a very uneven economy, I think, is is a is a fair kind of characterization of it. Um, >> but if the Fed's hiking and it's because like we have this sort of like broad like grow growth and labor markets are fine, like I think the markets are going to be fine with that. But if they're hiking for the reasons that Scandanda is talking about, like that is not a good outcome. like hiking. It's like, remember what? Remember what Josh was talking about last week? >> I have no idea. >> Well, he was talking about how like it makes no sense to hike because of oil prices going up. Now it's like, okay, now you're going to hike because cattle prices are up. Now you're going to hike because uh you know, I mean, can the Fed control the flow of oil through the straight of hormones? Absolutely not. Can it does it have any power over the El Nino? Like no, it does not. The one thing I wanted to come back to on Worsh was I did find it fascinating like in the last week that Bernani, what did he say about like his views on the balance sheet? He called it a meaningless statement. I thought that was really fascinating because obviously Worsh worked for for uh for Bernani and the balance sheet for whatever reason is like Kevin Worsh's hobby horse and Bernani just took a big mass of crap all over that. So I think it's kind of like emblematic of how he actually feels about him without saying it. But >> I want to get your guys' take on this. Um, an a listener emailed us about the labor market. He said, "Many of the distractors of this bull market, I think it meant detractors, often say the lack of jobs and the lack of good, high-paying jobs and knowledge services are reasons for doubt and concern. The latest report from the Bureau of Labor shared that the number of job openings is now at a 2-year high with 7.6 million open jobs. More interesting is that the largest jump in openings was in professional and business services adding 668,000 positions combined with the past two months of higher than expected non-farm payroll data. Do we think sentiment is ready to turn and finally embrace that AI is not going to eat all the jobs and is in fact helping to grow and create opportunities for workers? >> Well, first I I mean I sort of reject the premise that AI will actually eat all the jobs. I mean, you know, that's kind of like the lump of labor fallacy. I never really bought into it. It's really hard to talk about like AI taking away all the employment with, you know, the unemployment rate at 4.3%. I mean, or on a prime age employment is still fairly good. I mean, so I don't I don't really buy into that. I mean, I will say that you don't want to get too much into the indicator macro. Like, I don't really believe that professional and business services openings went up by 700,000 uh in in a month. fake postings are >> I mean I think the data are real. The news is fake. I mean you know to borrow from from Trump um I you know I mean it's like anything else you could find a different indicator like the Indeed job postings numbers are weaker uh on net over the last few weeks. So >> I don't think the signal from that report really comes um from openings frankly. I mean it's like openings are like the fakest thing. >> All right. Well here's here's a more tangible um >> it's hires and quits that matter a lot more. >> Here's a more tangible reading. initial jobless games was it last summer when they started to go up and people were getting I'm sure I know Josh said this these don't usually slow down like this is the ultimate object in motion stays in motion type thing and they did slow down they peaked and then they normalized um >> are you guys surprised at the low level of initial claims just how like okay the the labor market has been >> I am surprised that we saw such a big slowdown in job growth in 2025 and it kind of stabilized on its own right so that's something that is one of those like object motion states in motion. I think there's a lot of good reasons to take that seriously like there's a lot of information in the present is just respect. Um but it did start to show stabilization and so we started to see that probably around what was that jobs report in December you started to see signs of like okay things post shutdown were starting to to like um just just show the kind of stability that job growth was not going to keep falling off a cliff. Um and I think it's actually most interesting on when you have a white collar. So you think about there's a subset of prof professional and business services that really matters because it also includes things like temp help jobs and a lot of other things that are not exactly high wage there you are seeing a pickup you are seeing a pickup in in job growth and so it's hiring is picking up there and if you're really trying to put it together is this because um like what is the the macro fact that's driving this is not like completely obvious but I think if I take one step back it's look it's been a soggy labor market for th that segment for about three years basically you had the sort tech session of 2022, you had basically uh okay, the Fed is hiking, so therefore we need to be on watch for recession. We shouldn't we overhired during the pandemic, we need to slow down. Then it became, well, this AI stuff is so risky. Should we really be increasing headcount? But like the actual cost of capital signal has long been signaling you it's okay to spend. >> Well, also, don't you think it's it's just so it would be so deeply unpopular for JP Morgan, for example, to start doing massive layoffs? like do you think that companies and I know JP Morgan's you know an extreme example um but do you think companies in the aggregate have any sort of hesitation to do that for fear of some sort of retaliation by either their own workforce or larger forces at play political forces or or the such >> I think there's actually a lot of risk that you lose a lot of knowledge to be able to orchestrate future solutions right so you end up like lo let letting go of someone who is responsible for a key system you're letting go of someone who's able to like build the set of things that work kind of actually leverage the technology. I mean, it's not obvious to me that like who's most exposed to AI. We don't really know, right? Like we don't know which kind of jobs are actually most exposed. Oh, aha, these jobs are going to be the ones that are easily automated. It may very well be the case that's the white collar people who need to be actually executing a lot of the um sort of how how to take advantage of the technology itself. I mean, you do see specific areas in the job market that are booming right now because of AI, but I would just say that layoffs are usually like the last thing to go. I mean, >> by the time layoffs are are showing you something in terms of a signal, like it's over, buddy. >> So, let's let's leave the audience with this. Um, and you guys are great. Uh, Scandanda, how could people find your work? >> Um, so employeeamerica.org is a great place to go. Uh, you can access our research. We have some public research if you want to subscribe to. We have a few different distributions there. Um, if you want to follow me on Twitter, right now I'm probably posting mostly about the Knicks, but uh but but I promise after the the series ends and hopefully well, um, we back back at it and um, we're usually breaking down a lot of data related to jobs and CPI and PCE and everything the Fed's tracking. >> All right. Uh, Neil, we've got a QR code. If people are watching this, they could they could >> Yeah, you can also find me on the New York Knicks Instagram account. >> Hell yeah. Um, where else are you posting? >> I post on LinkedIn. I like the longer form content. We obviously post charts on Twitter as well. X, excuse me. Um, speaking about an area where uh they cut to the bone and you know, I'm actually glad that more tech people didn't follow his lead. Like there was a lot of fear about that. Like they cut everybody at Twitter and it still works. And I know to the degree that it works, but it but it did, you know, it's still still doing its thing. All right. I want to leave people with this. Um, everybody wants to know when it's going to end. I get it, right? It's just it's it's just how we're wired for better or for worse. Um and maybe maybe it's tomorrow, maybe it's in 2032 like and when I say it ends, I mean like the cycle turns. Okay. So what is like one or two things pieces of actual evidence or actual data that you guys would look to for this particular cycle because we know this is a unique one. So what are you going to be keeping an eye on? >> You want me to go first? >> Sure. Well, I would say at the end of the year, I think, you know, into next year, maybe the conditions are not as favorable as they are at the moment, right? Like, so we probably don't get as much of a fiscal push, right? Like the one big beautiful bill tailwind is going away by the end of the year, that that transitions to more of a headwind. Um, if the Fed is on hold, even as nominal compensation growth remains weak. I mean, everyone's talking about a passive easing of policy because of inflation, but for the labor market, that's a a passive tightening of policy. Um, so those two things are kind of on my mind. Um, >> that was way too smart. I don't know what you just said. >> SC. >> Yeah, business cycles are risk cycles. And so the risk and the willingness to actually spend is what we should all be caring about if we're trying to think about the big macro risk, the big draw down you want to avoid or the big um risk to your job. >> It sounds like you're you're saying credit spreads >> maybe credit spreads. >> That would be my answer. >> Yeah. So credit spreads are a very good proxy say especially episodic though by the time it turns out >> but but I feel like it's like the e here. Okay, here's the thing. Um the during I it I think it was liberation day. The the thing that kept me like moderately comfortable with the direction of the economy is the credit market really wasn't freaking out. >> It like it just it just wasn't. And so you're right by the time like it really shows it'll probably be too late. At least that's kept me on like the right side of like the positive trend. >> Yeah. To me the thing when you think about like where's the balance sheet constraint that's going to cause this, right? And so it could show up in corporate credit spreads. may be something that's the things to me that are most likely are something that where it's the willingness to spend with probably the non- tech companies on AI expenditure. That's really what we should actually be focused on because for them it's an expense and they need to see payoff on that expense at some point. Whereas if it's just spending by the hyperscalers they're it's all part of their moat. It's part of uh um how they're trying to make sure that they stay competitive. But for the non- tech companies like are they seeing a return on their investment? I'm sure they are seeing something but like you're obviously hearing about like token expenditures and all that stuff. So when that gets stretched, which is kind of this the scenario we think about 2000 where it was a lot of frontloading of expenditure around Y2K u at some point just got tired of it, right? It's like I I don't need to keep spending more and more and more. I'll just spend the same amount and that's important. >> What's nice is that Nvidia is now breaking out their revenue by hyperscaler and everybody else to give us maybe a better sense of like no, we're actually we're not just relying on these, you know, yeah, >> these behemoths. >> Um all right, boys. How are we feeling for the rest of the series? better than I did uh 24 hours ago. I'd say we took their heart out yesterday. You know, >> I think they're a resilient bunch. They're not like they're not the Cavs. Like um Castle's a dog. He's not going to give up and so is one. >> No, it's not going to come easy. But I also I mean I felt like the Knicks I still do. The Knicks are the more mature team. They'll handle it. And um I think they needed that the Spurs needed that game more than we did. >> I think they're pretty exhausted from the previous series. And >> goodbye ran out of steam. >> Yeah, he ran out of steam the last few minutes game. I I it still doesn't feel I still can't believe this is happening. It's been >> same. >> It's been so long. >> I mean, he It's funny you mentioned PJ Brown. I mean, I remember I was an 11year-old kid when when >> Hated that guy >> when uh when when the Knicks uh you know, in '94. I I still remember that series. A series we should have won. >> That one's a little bit foggy. I was like I was I was nine. >> So, I don't remember. >> We were We were up 3-2. >> Yeah. >> In the Garden. And we should have won that game. To me, I'm just more cynical after two decades of Dolan and it's like how how is this coming together? >> There's no time for citizen. >> Sorry, no time for citizen. >> We're done with that. All right. Um, thank you everybody for listening, for reaching out. You guys are awesome. This is so much fun. Scandal would love to have you back. This is really great. Thanks, guys. We'll see you next time. Appreciate you watching.
The Recession Signals Are All Wrong | TCAF 245
Summary
Transcript
How the hell did you get on that flight? Like what was the deal? >> So, um, uh, I called my broker and I said, >> "Is your broker's name Jason?" >> No. No. >> His name is John. Um, I'm not going to, uh, tell the firm out of respect. Uh, but anyway, um, uh, I I go to him, I'm like, I want tickets to game three, so make that happen. I know you guys can do it, so hook me up. and and he goes, "There's no way we can do that." And he's like, "Give me a minute." So, he comes back with this opportunity, which is like they call it the Nicks fly away experience basically. So, um my wife and I were able to go um they put us in a chartered plane, like a commercial like Delta plane. They flew us to San Antonio. They fed us. >> Was it all It was all Knicks fans. >> All Nick Knicks fans. >> Unbelievable. meet and greet. I met Clyde, John Starks. King Henrik was there. >> Amazing. On the on your flight. >> Yeah. >> Um and you know, they all spoke. Um then we went to the game >> and the Knicks put you on their Instagram. >> That was that was a Yeah, that was a moment for your wife and your wife. Look at Look at this handsome devil. Look at this cute couple. What a what a freaking photo. >> Um Yeah, that was great. No, I I I mean Yeah. got your kids yet? >> Oh, yeah. They saw I mean they were they were we were all I was this is like better than going on Bloomberg or CNBC, you know. Um not as fun as going on this podcast, though. >> That's right. Um >> but uh yeah. No, and then you know we watched the uh the hope and and joy and dreams just evaporate out of that building. >> How'd that feel? >> Wonderful. Like it was just you know the the best is when they know they've lost and then they all just start leaving early. That is the best feeling. I had that feeling in Philly for game three and I don't take Jaylen for granted but watching him every day. Um he he's special obviously seeing the frustration through the eyes of the opposing fans. This one guy threw his hat AND SAID HE DOESN'T MISS and it just like melted my heart to see No, it's great to see that. All right, so here's my story. I have season tickets. I share it with a friend of mine and uh 109 row 20, that's where I sit. He sent me a picture and I said with a ticket sale. I said, "What is this?" He goes, "That's a $3,000 profit for game four like we spoke about." Like, "Dude, I I don't remember speaking about this. I I would not have been cool with selling game four to the finals." At least I don't think I don't think I don't think I said that. Um All right. All right. So, the situation that we're in now, the tickets, the get in tickets for the New York City based games are higher than Super Bowl prices. The last time I checked for game four, it's like $7,000. All right. So, here's here's my tickets. Round one was 380, then it went to like 550, 750, $1350 for the finals for for each ticket. So, 1350. We sold them for $4,500. You can't get into the building for less than $7,000. The Super Bowl get in price, right, was like 35. So, it's double. Now, prices will probably come down a little bit, but the cheapest ticket in my section was listed, I just checked, for $17,000. Now, I don't know that anybody's paying $17,000, but that's literally, can I get $15,000 for the tickets? Perhaps. So, where we are now is we're using we're working with my ticket broker to basically to basically like have games three and four and break even. So, basically whatever our tickets would have cost 1350 a piece to have like worse seats. So, I'm still going to games three and four, but in worse seats than my original seat. So, we did like all of this. Now, it's not my friend's fault. Like, we couldn't have possibly known. But, here's the thing that really hurts. Last night I was uh I was uh having drinks with Matt Middleton and Chris Cherry from Future Proof. They got they went to the watch party with me. So even the wa so the watch party was a phenomenal experience. Unbelievable. 18,000 people in the garden. It was like basically like a home game, but it was so freaking loud. You know why? There was like no corporate seats. It was only dieh hard fans. It was so loud. >> So they released the tickets and in two minutes they're gone. Like I was number 330,000 in line. So $10 tickets. I bought it on Ticket Master or Tickpick for like 60 bucks, whatever. Well worth it to get in there. It was such a great experience. So we're at dinner having drinks and um Matt was like, "Oh, I didn't know you had season tickets." Uh I said, "Yeah, where do you sit?" "109." He goes, "What row?" Like row 20. He goes, "Dude, my brother-in-law bought your tickets." And I'm like, "You motherucker, GIVE IT BACK. I WANT IT BACK. I'VE CANCELLED the transaction." How crazy is that? Out of all the >> a small world. >> So Matt Middleton bought bought my tickets. >> For well below what I could have sold them for, >> man. >> Well, at least you're still going. >> At least I'm still going. So, what do you guys Do you guys think there's any like uh economic justification? Do you think this is like this like the whole story? It's like, yeah, the stock market, people are rich and they're buying tickets at any price. >> I think that's that's basically the story, right? We got we have the World Cup tickets that are obviously selling for I mean not as much as mea wants but like we just have like so much uh discretionary spending is actually a pretty solid maybe it's for the upper income part of the distribution but it's still like uh it's a go-go time in terms of consumer spending that may not be backed up by all of the sort of job market itself but it's good enough at the higher end for NYX tickets right >> I think that but the higher end or the bigger shape of the K is like a very big it's big because if how is the get in price $7,000 I don't understand like literally where is are people just throwing out their credit cards and saying like whatever like >> well New York City isn't real life I mean I it's um so >> yeah it's$7,000 to get in >> it does feel kind of ironic that you have Texas versus New York obviously the story of Texas is like it's the booming state it's the state where everything's growing but like New York City's got the wealth that's that's still what's overwhelming why you have New York Knicks take fans taking over San Antonio but you probably won't have Spurs fans >> there's this research about like you know like economists talk about the wealth de accumulation puzzle right like why why is it that like super wealthy people they don't like actually spend down their wealth over time even though everyone expects them to like now that you've finally gotten that opportunity to spend some of it down right especially because a lot of the wealth is in places like New York so I just think it's interesting I will say something about the World Cup I am taking my boys to the World Cup and we're going down to Atlanta to do it >> um >> wait where is it I thought it was in Philly >> no there's games in Atlanta as well >> there's games in New York too well then New New Jersey life. >> Obviously, I don't follow soccer. It travels. >> Toronto. >> It's in a bunch of sites. >> Oh, the World Cup's everywhere. >> Mexico City. >> It's like North America's hosting. >> Yeah. Toronto, Boston, Foxboro, not >> but even even tickets in San Antonio. So, I just bought tickets for game five and they're not cheap. Like the the get in price right now is $1,700 for game five. >> For game two, it's it's sinking like stone. It's like 700 now. 600. It was like a thousand a couple days ago. >> Unbelievable. All right. Uh, well, excited to have you guys. You know, Scanda, I asked Neil who should be in the third seat because Josh is away this week and you were the first person. I said, "Fantastic." >> Ben wanted to get you in here, so we're excited. >> Appreciate you having me. >> It's the Compound and Friends episode 245. This message is brought to you by New Private Markets are paving the way forward as future focused investors look beyond traditional markets to help their portfolios adapt to an evolving environment. With inflation, volatility, and shifting economic conditions, reshaping the investment landscape, the case for private markets has never been stronger. New's comprehensive private markets platform spans the full risk return spectrum offering strategies across real estate, credit, infrastructure, and natural capital. Designed to work alongside traditional investments and support diversified portfolio construction. Backed by decades of experience and deep asset class expertise, New brings the scale and breath needed to navigate today's complex markets. New unlocking opportunity in private markets. Visit new.com to learn more. Investing involves risk. Principal loss is possible. Private market investments may not be suitable for all investors. All right. All right. All right. I am feeling elated, boys. I am feeling really good. It has been a long time. We won a finals game. The first Finals game. Unbelievable. Um, and I'm so excited to have you guys here today. So, uh, fan of the show, friend of the show, fan favorite of the show. That's what I meant to I'm not I I hope you're a fan of the show, but you're a fan favorite. >> I'm definitely a fan. >> All right, Neil Dodd, everybody. Neil is the head of economics at Renaissance Macro Research. Neil leads macroeconomic research efforts with an emphasis on analyzing the US economy, Federal Reserve, global trends, and cross market investment themes. Neil is considered a stock market economist. Do you stock market economist? Market >> business economist. Okay. Um Neil looks at the economic data and tries to see and highlight the risks to the consensus as he sees them. and first time guest Scanda Ammerath. Scanda is the co-founder and executive director of Employee America, leading the firm's economic policy advocacy. Employee America runs regular analyses of price and jobs data, interprets and forecast market conditions, and develops new frameworks for Federal Reserve policy, strategy, and communications. Previously, he served as an analyst within the capital markets function of the research group at the Federal Reserve Bank of New York. Welcome. >> Thanks for having me. All right. Um, we are going to talk about how AI is impacting the economy. Um, but before we get into that and other topics, let's just start here, take a step back, zoom out as they say, how do you guys think the economy is doing? What's your read? Scanda, go ahead. >> Yeah. So, the distribution of risks has shifted from where it was, call it, 6, 9, 12 months ago. You had a lot of people talking about, well, there's a slowdown in the job market. Inflation's coming down. Yes, there's an AI boom, but everything else might be kind of soggy. What have we learned since then? Inflation is picking up. It's not just about oil prices, although that's obviously a big part of it in terms of the closure of straight horses. And yet, we've also seen the labor market is not signaling red right now. It's signaling something that's at least solid. Maybe there's been some pickup actually in some se sectors that have been soggy for a long time. So the labor market's not at the left tail and the inflation stuff's at closer to the right tail. That's a little bit different macro picture. The one constant has been the AI boom is continuing to boom. And that kind of tells you look financial conditions pretty supportive growth better than expected. Inflation higher than we want. That's that's a different picture than the one we were telling ourselves maybe 12 months ago. >> I've never heard the economy described as soggy. I like that. It's like a it's an ugly word, but maybe the right word to describe it. Yeah, you're you're you're feeling a little soggy these days. I I get the drift that you're not as optimistic as you were. >> Uh yeah, I'm not as optimistic. I mean, I haven't been optimistic now for it feels like what almost a year and a half. Um so that's been, you know, a shift for me. Um I would tend to agree with most of what what Scandanda said. I mean, you know, look, I mean, I will point out though that right before all this Iran stuff started, 10ear yields were at 3.93%. Right? right? I mean, we're kind of right there for um additional cuts for this year. So, um you know, I think since then, a couple things have changed. Obviously, to Scandanda's point, the distribution of risks around inflation have changed. Um but the labor markets aren't as the the labor markets aren't as bad as they were at the end of last year, right? I mean, they're not nearly as strong as they were a few years ago, but it's not nearly as bad as it was last year. And that's that's obviously important. Um the one thing I would say that has continued um is income growth continues to slide. So um you know at least the the growth in uh in total wages and salaries remains pretty sluggish. Uh and in the context of um an overnight fed funds rate where it is and price inflation where it is. I mean I do think there are stresses building for the household sector. Um, and I do think there's probably a limit uh to how much people can spend by drawing down savings and and so forth. So, uh, that to me is is is my is my concern. Um, it's really around the outlook for consumer spending, which I don't think is is particularly good. >> Are you guys surprised that the economy has stayed as strong, the soggginess notwithstanding, um, with the housing sector in an absolute ice age? Yeah, I'm very surprised that the consumer has been as strong as it has despite a housing market that's been pretty frozen for a while. I mean, we're seeing maybe some relief on inventories finally. Inventory is starting to come down and maybe you'll start to see some home price appreciation, but the labor market has been soggy for a while as you said in terms of job growth, in terms of wage growth. Those are generally slowing throughout 2024 and 2025. Um, and some of that's obviously supply side, immigration, but it's still less money earned through your paycheck, and that tends to matter for consumer spending over time. So, where are you funding this consumer spending? If you look at the personal saving rate right now, it's kind of collapsed. Um, so it tells you that on some level, consumer spending growth is just outperforming what you're earning through your paycheck. >> But don't don't I was talking about this with Ben on Animal Spirits. People pull in their savings when they're feeling optimistic. >> That is true. >> That's right. >> Right. So, it's not necessarily like, oh no, personal savings is collapsing. What's going on? >> Yeah. So, I mean, I think that there's Right. Like, so to me, it's like let's try to link like the economic data to like markets, right? >> Looking at the savings rate is an actual like it's not a good timing mechanism, right? It's it's horri I I remember back in like 2005 the savings rate was actually printing negative at the time and there was like a chorus of like bears telling you like oh my god there's no more cushion like it's about to fall over. We kept going growing for another two years before I mean it didn't matter in the end but you had to wait a while. Um and I think the other thing of course is that incomes tend to get revised up over time. So the government always like magically finds income uh and the savings rate doesn't look as low as people think. I mean it's just one of the things that happens in the data. Um but you know it's like anything in econ economics right you have like two different we have multiple ways of looking at the same concept right there's household employment and payroll employment there's CPI and PCE and that's also true for the savings rate right like there's a the savings rate that Scandanda is talking about which is really just I think you would agree like an income statement residual and then um you know all they're doing is taking income less spending over income. What about like um something that is a m maybe like a a better timing signal um construction permits like Warren P has showed a lot of that data on our show that when that starts to roll it has typically like a recession wasn't that far behind >> I mean I don't know like the Ed Lemur thing is like was something that people were talk have been talking about for years right like Ed Leur was the guy that wrote the paper like housing is the business cycle right like normally I would agree with him >> was >> yeah I mean that's the thing it's sort of it's competing for seat resources with the AI thing, right? Like so they're competing with land with AI data centers and >> yeah, housing I mean the resale market might be getting a little better. Like I don't think there's much improvement in uh in new home sales. I mean if you look at new home sales so far this year, they're down about 6 7% against the same period last year. Like there's builder margins are still under pressure. Like there's there's not a whole lot going on with respect to residential construction and I don't think that's going to happen this year. Um, but you just have I mean I think we're probably going to talk about this, but the AI boom is quite spectacular in how much it's I think helping lift uh growth. >> All right, enough enough uh clearing of the throat setting up the table. Scand in preparation for this um I was looking at I I think I googled scan I think I googled your name LinkedIn um which is a weird thing to Google but I don't know how else I got to this >> there's only one >> I don't know how else I got to this result. There she is. Um, so the first result, somebody tweeted, um, expenditures on AI is about to surpass the peak spending on housing at its 2005 peak spend. Um, and then they quote you, "At close to 7% of the economy at the end of 2025, it's plausible the AI boom would be on par with the share of the US economy. Housing investment represented at its 2005 peak." So I clicked on the link and it said, "First heard on the compound." >> That's right. >> So like, holy [ __ ] So, we were talking about this piece that you wrote back in January 2025, and you wrote at the time, I think you wrote with Joe and Tracy. Um, you either wrote or said, "We are now at the stage where the tech cycle and the business cycle are poised to blur. From recession dynamics to the Federal Reserve's debate about potential growth and the neutral rate of interest, known as our star, AI will leave its mark on the next few years of macro discussion." So, >> there you go. >> Voila. >> Boom. I I that that's one thing that's aged quite well, I'd say. Um I think we're clearly seeing we've we've ripped past 7%. Right? So we we've ripped past the the peak for housing investment in the 2000s. So the housing bubble and the residential investment that's happening there as a share of GDP. I think you can look at the relevant components now for this AI boom. So I'm talking about tech equipment, software, industrial equipment that powers all the data centers. That's all past uh the peak of the the 2000s boom. It's past the peak of the ve very well past the peak of the 90s tech boom, the dotcom boom, the telecom structures boom. So we're at a point where this very investment intensive part of the expansion that is a to your point about also the saving rate going down. You see the stuff at the peak, it's also a way of saying if this turns obviously it's going to leave a mark also on the downside. I can't tell you that that's going to happen right now, right? I don't think that's like anything that suggests that oh my god all the spending is about to stop or all the spending is about to slow down. If anything, we're just seeing more and more um financing, expenditure, issuance all tied to this boom. And that just tells you this is the go-go time and everything that is we're all wrapping every single part of markets, the economy around this big technological and investment boom. Neil, it sounds like you have a bone to pick with economists trying to properly account for the impact of AI on the economy and you're rubbing your face. So, >> you know, I I um >> Well, I mean, there's I mean, there are there's a I think a decent contingent of people on the street that think that this is having like a fairly modest effect on the economy, right? Like, so it's um >> why because they're looking at the wrong things? They have no common sense. What do you think? >> Well, no. I mean, it's sort of like GDP accounting, right? So one of the reasons why I mean it's true that information processing and software is what 6 7% of GDP. Um it's also true that a lot of the growth from AI leaks abroad in the form of import. So that actually counts against GDP. >> Hold on. All right. So I was going to say like what the hell is uh leakage? What do you call it? >> Import leakage. >> Import. Okay. Is that a is that a it's new to me. Is that a thing that's been >> in the e uh economist lexicon or Go ahead. You want to take it? >> Yeah. So, it's it's basically so there's all this spending happening domestically, but that spending could be for products that are produced outside of the US. And so, you think about like what SKHEX produces or what like all sorts of Japanese and Korean manufacturers are producing for all your tech hardware or the energy systems behind it. Um, that's all stuff that's coming that that's value ad. That's GDP. That's really not show like it's not US GDP, but it is US spending. >> So, why not just look at global GDP? Surely it must show up there. Well, I just think that there's a little bit. It does. I mean, in in a in a sense, I mean, just because the dollars don't show up in GDP, don't don't doesn't mean that it's not like it's vanished or something. You know what I mean? Like, so I think what economists miss about this is that there are lots of uh kind of um linkages to other areas of the economy that are not neatly captured, I would say, by GDP, like simple GDP accounting, >> like tickets, >> like NYX tickets, like consumer spending, like municipal government finances, right? Like the California Legislative Office talks about how over half the growth in income tax withholding is a function of all the RSUs that are vesting, right? Like it's like that's your meal ticket, right? If you're a worker in one of those big companies, um it's probably it's juicing obviously global growth. Um but more importantly, it's helping corporate earnings and that matters because it finances a wealth effect through consumer spending. And again, that's not something that is neatly captured by a simple accounting identity. So, it's almost like saying, "Yeah, I mean, residential investment 6 or 7% of US GDP, but not really because we import all the drywall and lumber from Canada." Like, it's a it's a bit I don't know. I think it's like one of these arguments. >> Neil, you're being too kind. I think I I think actually like this this whole like uh it's not really counting to GDP because it's imports totally misses the point of what a boom is all about. It's about the spending. The spending is sitting on some company's balance sheet. It's affecting their risk. It's showing their risk appetite currently and it might affect their risk appetite in the future, right? So like business cycles are risk cycles. They're about the willingness to spend to spend on labor, spend on capital, and when the spending stops, that's when you get the recession. And when we talk about recession, we're not really talking about GDP. We're talking about whether the stock market goes down a bunch and whether you lose your job. Like that's really what we're talking about. So all of this like GDP accounting stuff can really miss the point. You have a huge volume of spending relative to the size of the economy. It's going to sit on a bunch of balance sheets. They might be able to handle it. we're talking about some of the best balance sheets historically um in in terms of a lot of the the big mega mega cap tech. But it's still quite remarkable that like we've had the scale of spending. It's growing so fast and with that comes risks and also obviously just growth in the present. >> So it's all about spending which is driven by the labor market and of course the equity market. Duh. But if people have their job, they're going to spend their money. Do you think that there's anything that the average investor can look at whether it's on the economic side? Like I kind of feel like the traditional playbook is like not really useful here in terms of like what leading indicators used to say. Is it going to be like a concurrent slowdown where it's like stocks get killed um spending pulls back and it's just going to happen when it's going to happen. There will be very little warning. Feel like people have been looking for warning signs just for the last 15 years. >> It's true. I mean we you always have to look behind your your your shoulder for something. But I think if you look back to the dot boom, right? Was there like a macro signal that told you this was over or was it that earnings started to miss around April 2000 until you had a lot of these sort of events through 200? >> That's a lot of vibes too, right? >> Yeah, there's a lot of vibes but it's like I I don't think I could point to aha it was housing starts turned in 1999 or 2000 and that caused the cyclical slowdown. It's like I don't I think it's really about the stock market. It is about it's about tech. >> Some people will point to like I think there was a Baron's article that came out of it one weekend and the next week the stock market killed and then it just started to unravel. Like was it the article that causes something? I mean it was obviously going to burst either way but >> it was a bunch of spending that got pulled forward in terms of IT systems Y2K a lot of that stuff and then you keep spending and keep spending and it's like every exponential curve is always underestimated in real time and at some point there is >> I mean the other thing of course is that the Fed was hiking and and the and but the stock market was still going up concurrently as the Fed was hiking. So it wasn't ne I mean this whole notion that like oh the Fed should step in and like >> hike to blow this whole thing up. I mean, I'm not, first of all, I'm not sure that they really can. Um, but all you'd be doing at that point is exacerbating the stresses in the in the areas of the economy that you were just talking about, like housing, like some of these credit sensitive areas. And the key distinction between now and then is that the labor markets were genuinely overheating back then. Um, there's really no evidence that I mean, we could talk about, you know, things getting more stable relative to where where they were 6 months ago, but it's not like you're seeing like broad-based wage pressure. I mean, >> are you guys worried about um credit card delinquency? That's been a topic that's that's come up recently. >> Not yet. I say I would say there's probably some signs that the household sector will eventually face stresses if like the job market isn't good. Um right now we're seeing signs that the opposite, but if we are like this is still not yet at a point to me where the household sector is pretty flush in terms of liquidity. Um it may be disproportionate in terms of distribution, but >> so a lot of a lot of the spending is >> it's getting worse at the margin. I mean I agree. I mean it is getting worse. I mean even the Beebook talked about it yesterday, right? They talked about we're seeing uptick in mortgage delinquencies and credit card delinquencies and agricultural delinquencies. I mean these are I mean I guess you know the thing is like do you think it's a body in motion that stays in motion and if you do then you know you better pray that the labor markets start to accelerate because if they don't and wages continue to slow then those problems are going to just get worse. And so, yeah, I mean, I agree that it's it's very low, but if you're a bank, I would probably want to provision for more loan losses over the next year. >> If you think about the like the '9s comp or the late '90s comp, labor market's definitely not as strong as it was then. And so, there's clearly like a sense of if this labor market does not show any sort of real pickup over the next six months, we will be talking about sort of all the left tail stuff again. >> But can that be good that it's not a strong like because it's not causing wage pressure? >> It could be. The other side of it is inflation is a lot more of a problem this time than it is than it was in 1999 or 2000. And so we have inflation that's tied to tariffs, inflation that's tied to the AI boom itself. There's inflation that's tied to obviously the closure of straightfor. So if you think about airfares are a lot higher now and big part of the jet fuel. If you think about um AI boom and its impact on basically if you want to go buy a laptop now you can see the price right it's not it's not what it used to be and there's all sorts of computer hardware memory is memory shortage having its impact >> and so this is all a lot of sectoral stuff. it stinks. Kind of like the 2000s in a lot of ways. If you remember, like a lot there's a lot of random inflation that kind of creeped up around then. So that's not great for the consumer, right? Consumer's got to pay the pay the bill on that. It means they're either enjoying not as much of a standard of living improvement or in some cases a standard of living reduction. Um so that's the downside here. So, we have like not as good on the labor market, harder, harsher on the inflation side um this time around relative to what was the '9s, which was kind of nirvana in terms of labor market being pretty strong, but inflation not really rearing its head. >> Josh and I talk a lot on the show about the wealth effect and um what drives people to spend more money. And I've mostly rejected the idea that people spend money based on how they how much they think their house is worth because you don't see it on the screen. Yeah. No, it feels good. Sure, I suppose. But your investment account, it leads to overconfidence. I mean, it just does. You can take money out of your investment account, pay for a a home renovation or a toy or whatever, and in 10 days, the bucket is full again >> because the semiconductors just keep giving you free monopoly money. So, that like I think there's no there's no doubt about it that is driving a huge amount of the spending. Today, >> in 2022, the stock market did go in reverse. It was a bare market and it didn't last five years, but all of the names that everybody loved got cut in half for the most part. Like Amazon, Facebook, uh, Nvidia fell two-thirds like legitimately lost like a lot of a lot of money and people didn't stop spending at least as far as as far as I know. >> No, because we had income growth. >> Okay. >> Yeah. That's the key difference between now and then. >> So if so if we >> and we had a lot of pandemic savings. >> Yeah. I I know it's it's not apples to apples at all, but so you're saying that if what would what would it take for the spending to slow down? Would it be the stock market or the labor market or or both or who knows? >> Well, I think so there's a couple things. I mean, I think right now we're sort of for us, I think for economists, it's like, is it linear or nonlinear? >> Which part? >> The con the slowdown in consumption. Right now, you're basically in a linear I think a linear slowdown in consumer spending. Consumer spending is growing about 2%. a little below, a little above, it depends. But, you know, more or less that's where we are. Um, if you start to see layoffs in any meaningful extent, not that we have outside of technology, um, that'll probably hurt consumer spending pretty quickly. Um, that's one option. The other way would be you get a a market correction of some kind. Um, if you just assume like savings are stable, like consumption will probably naturally slow a little bit anyway because income growth is so sluggish. >> But doesn't matter. >> That that doesn't mean it's going to like fall off of a cliff. You know what I mean? Like it's just okay, we're instead of growing two, we'll grow like one to one and a half. >> In a world where these hyperscalers and others joining the party are spending $700 billion of capex, doesn't matter if the consumer pulls back a little bit. >> A little bit is not enough, right? Consumer consumption is generally pretty smooth anyways. So really when you think about people say oh the US consumer is the economy but investment is the business cycle investment is the thing that's volatile that moves with the business cycle and right now it's risk on right there's clearly a lot of capital commitments that are tied to this there's all sorts of planned spending planned additions of energy of data centers that haven't happened yet and as long as there's the belief that that this is going to keep continuing which is the case right now that's going to happen and that's what's going to drive sort of where the market goes and market sentiment and I think that's just >> what's so unusual about this is that it's like equipment investment and like um non-residential business fixed investment that's driving it and that's what's interesting I mean if you're talking about business cycle economics right like typically the investment piece that cracks is residential investment right >> right um so what's interesting about this is that because typically if you look at it I mean equipment like non-residential business investment um capex that actually follows growth it doesn't it's not a leading indicator historically right I mean basically The way it works is companies think growth it's the accelerator effect is what we call it, right? Like companies think growth is going to pick up and so they start investing more. Um what's unusual about this cycle is that it's not like growth expectations are really taking off in any material extent. Um but you have this sort of spectacular capital spending boom nonetheless. So that to me is like to your point like why are all these like traditional things not working? >> We don't think of tech as like a cyclical sector, right? we think of as housing, manufacturing, maybe some like segments of consumer spending, but like tech is the cyclical thing. It is the thing that matters for it's driving all the vault in terms of GDP, in terms of um why we're getting the outcomes we're getting in stock market too, right? So what we don't have like a leading indicator for tech outside of like if you're really locked in on some particular names and maybe certain orders for this tech supply chain, maybe then you can have a read into the leading indicators of this dynamic. But um it's really just about like business fix investment that's all tied to AI boom. >> So tech AI it's sucking everything in. We're going to get to some of the work that you've done on everything looking like a semiconductor stock. The framework that I'm that I'm working with today and by the way things changed so fast and people act like what's happening today has been in place forever. Like nobody wanted the mag seven stocks in the fall. These things were getting destroyed. Oracle got Oracle fell by 60% because people are like there's no way that Sam Alman is gonna be able to pay that 5year 300 billion dollar contract. There's no way and all of a sudden it's hot again and people are like up bubble. Um so the way the way that I see the world today is um that everything is being driven by the investment boom by the by the buildout and I don't know when the handoff happens but how much of the world is even using these tools the agentic um AI stuff like what's what's interesting about where the tenure was before the war and today is that you got the closure and the inflation picking up concurrently with the crazy boom in anthropics revenue going from like 9 to 45 and it happened at the same time. And the point is nobody's even using these things and all we're hearing about is a shortage of compute to so to suggest or to think or to use the the framework that like it's late or getting long in the tooth. I kind of think it's just starting. It's really hard to know in real time and it does seem like the best approximation is what we can see in the present. What I can see in the present is risk on right. I can see just that there is a lot of appetite. The capacity on compute is clearly very much tight as far as as far as anthropics concerned and at the same time they are seeing revenue growth. So that's all reasons to keep investing right reasons to keep being optimistic. At some point there are I I I'm sure there is a point where exponential curves become s curves but that point is not right now. I love that you said that because all we could observe is is >> is that the line's going up today? Who knows? >> So, I guess I guess one thing I was thinking about and I I really enjoyed your uh your conversation with Denise last week. Um you know, she's great. The uh this whole notion of like it's early, it's it's not a bubble because the earnings are are are so strong. And but I also would say at some level like the earnings are tied to some kind of temporary phenomenon with this at some point the data center buildout will stop and the earnings won't be there. So what are we really talking I mean just because it's not just because the PE multiple isn't like ridiculously high doesn't necessarily mean >> I agree that tells you nothing. >> Yeah. So I I think that there's a little bit of that uh going on on the street. Um the other thing I would say um is this is like a really I mean people talk about product I mean I go to client meetings it's like oh productivity boom like you know this is a very unusual productivity boom like what is the point of investment ultimately the point of investment is to raise household living standards can we say that that's what's happening with AI like if anything it's a really weird productivity boom when the prices for information technology commodities like Scandanda was talking about software laptops it's actually going up like you you pull up those charts in the 90s or 2000s it was deflating month after month after month sometimes at accelerating rates. Um you go back to that period too again very strong productivity growth we you know we also had very strong growth in real income right like there should be some relationship between stronger productivity and stronger real compensation. We just had negative real compensation growth this year. So right now all the growth is flowing to you know margins I guess. Um and I don't I mean that to me is like this is like this is why I say like is it really a productivity boom like it's not yet raising household living standards and I don't know how long that can continue. >> I honestly think for productivity a lot of what people are talking about are things that happened in the previous call it one to three years like you look at Q1 data on productivity not great. If we think about the supply shocks that are hitting because of hey prices of price of gasoline is much higher than it was in Q1 price of uh all sorts of energy airfares. You have a lot of other shortages and other shocks that are materializing too. >> Cattle prices. >> Yeah. Right. Cattle and beef all that stuff is going to feed through as well. If that's happening that's probably going to also weigh on productivity too. And so productivity growth is not actually as rosy now as it probably was in 23 24. Um, >> but doesn't doesn't the the whose productivity? >> That's right. The macro data stats that the Fed might look at that their productivity. I do think it's like even in terms of diffusion, you're right that we actually haven't seen mass adoption of AI in terms of in the real economy. >> Nobody's using it for the I mean, I know our listeners probably are like, you know, you guys are, but in the real world, >> yeah, there's there's there's limits even in terms of large scale large um corporations. >> Of course you do. If if you're a smaller company or a smaller organization, you probably can adopt these tools. You don't have to worry as much about security risks that stuff. If you're a larger company, there's all sorts of walls. You can only use co-pilot. You can only use these types of tools. You can't use those because they might um ultimately present security risks. And so actually adoption may not I think it's >> there's also a measurement there's also a measurement thing with this. Like I mean like everyone's like looking at the ramp index and like how how like I mean index >> like what is that even telling me, right? was like, "Oh, look, OpenAI is going down and everyone's using Claude now." Like, okay. I mean, I don't even know what to do with that. So, I would just say that if it's a genuine productivity boom. I mean, people, it feels like everyone assumes that like everyone's margins will expand because of this, >> but they are margins are at an all are going up, >> right? Ultimately, costs need to come down to households. >> All right. So, we'll talk about in a second. I just want to end with end this the topic with this. So Neil, you said um we ran a one-year daily return correlation between every S&P 500 name and the semiconductor ETF SMH. 15 non- techch S&P 500 companies collectively worth $2 trillion in market cap now move with semis at correlations of 0.5 or higher. 12 of these 15 are industrials. names like Verdive, Eden, Caterpillar, Cumins, Hubel, Hubel, Hubel, Hubble, um, Comfort Systems. I don't even know. I don't know these a lot of these companies. Um, whatever you go on. Uh, you say these are not tech stocks. They trade like semis because their order books have become AI capex order books. Caterpillar sells backup generator sets and engines into hyperscaler data centers. Verda sells cooling and power management. Ensal components. And Geova sells gas turbines for data center power. This is kind of interesting. The gig sector classification has not caught up with the economic exposure. >> That sounds so good when you sound good when you read it back to me. Yeah, >> it's good stuff. >> Buy that guy's research. >> But inside but inside the stock market, I was looking I was talking to Charid and Sean today. >> Um, so healthcare is breaking out. It's been stuck in the mud for a while. Industrials look awesome. That's 20% in the S&P. So for as much like people talk about, oh, it's just a MAG 7. Daniel chart uh throw chart 12 on this surprised me um and I look at the market pretty damn closely and I don't think I knew this probably because they diverged like very recently but the Mag 7 are up um two uh 7.3% year to date. 7.3% year to date for the Mag 7. Not bad. But the 493 are up 12.6%. Huh? Did you guys know that? >> Well, I knew about it. A big spread. >> You mentioned it I think uh last week, right? >> I forgot about it. I have other things in my mind. >> I I do listen. Um but I think what that analysis is showing is that >> this is going to support a lot of the equal weighted indexes because it's such a profound effect on the broader economy, right? Like Caterpillar is probably part of that S&P 493, right? Like I think I was reading that Generrack uh is doing better now because of the data center buildout to build backup uh you know um power uh for these facilities. So um that's why I say like just because I mean is is the equal weight like historically we look at that as a sign of like market broadening but if the AI tech capex boom is touching lots of industrial names uh as an example um and lots of freight right like the stuff needs to move around the country that's you know that's also probably helped by all this so is it really like a sign of breath or is it just It's a sign that things are really concentrated into one area of the economy. Like what is like how much is like traditional non-residential structures like doing? >> So when you say what area of the economy, you mean corporate profits? >> No, I mean like the tech sector, the tech boom. >> Damn it. I was trying to do a segue. >> I make corporate profits. >> So go ahead. >> I mean it just seems like the the breadth and the boom go together too, right? It's just that there is you you see companies like what Ford is kind of trying to sell batteries now. >> Ford's an AI company. >> Yeah. Ford's trying to provide batteries to support this sort of power boom, right? So, we have it's it's just become it it sort of touches so many other sectors and even beyond whatever rational logical um connection between like oh this affects power which affects like transportation. It's more like it's a risk on environment and so this is one in which transactions happen and correlations do go to one in both directions. So you actually if if it's a an environment where investment appetite is particularly solid that's one in which other other companies other sectors have a chance to participate as well. >> The other thing I was thinking I'd love to hear your thoughts on this Michael is that you know when people when clients ask me like do you think the market's pricing in a slowdown? >> See like you're looking at it like but I don't know I mean discretionary stocks don't look great right? I mean like that's what my that's what Jeff has been telling me like uh discretionaries underperforming consumer staples. >> Which discretionary stocks? >> Equal weight like he's been pointing that out. I mean restaurants don't look good. I mean you can say that's all because of like people taking the fat shot. >> I I will say that unironically. >> Um I think that it's I mean it's not like their same store sales are doing particularly well. Um or uh you know you mentioned healthcare. I mean that's not necessarily a cyclical sector but or I mean what about what's going on with like financials right I mean so when people's like I don't I mean maybe the market is like it's you know is is the market pricing in some some slowed no so tell me why >> no okay so I'm looking at the equate discretionary over staples and it's it's still in an uptrend but flattening it looks fine whatever it's sort of neither here nor there >> but I think some of the story is it's really hard to separate I don't think consumer discretionary stocks are necessarily always a reflection of the consumer and restaurants are a great example of this. A lot of these names, Cava um is like the poster child of this. A lot of these names came public sort of recently were in vogue. The valuations were stupid. The slowdown happened in uh consumer preference changed. Shake Shack. Nobody wants to eat a burger for lunch anymore. The stock the stock is getting destroyed. Is that a reflection of a slowing macro environment? I don't know. I don't even know what the dollar stores tell you anymore about the state of the like >> how many needles we're buying? >> Well, yeah, but seriously, you look at Dollar Tree and Dollar General when they're going up. Is that because that particular consumer is doing better? Is it because the middle income consumer is trading down? I have no idea. Now, obviously, you can listen to the conference calls and they'll give you a little bit more information, but I think it's really tricky. So, I don't think the market is pricing in a slowdown. I think it's sort of hard to hard to say that. Maybe the the PE is coming in a little bit. Um, which is probably healthy. Like there's a little bit of a governor on the stock market, but I don't I don't know. What do you think? >> I mean, I think the consumer is spending in total at a reasonable pace, but I think one thing that's going to be changing is they're facing more inflationary pressures and it's again there's obviously energy, but it's also like food prices. If you think about a a lot of what is being guided on the staple side, right, suggests they're going to pass through a lot of costs. So you think about all the pet chem prices that are in all your household cleaning products and your household paper products. It's basically just there is assuming okay we're going to be able to preserve our margin and that means we're going to pass it through to the retailer to the consumer. So someone's going to hit the squeeze. It might be the consumer in that case and that's really like a real consumption squeeze. So this the money can keep flowing even though we may not necessarily be getting richer. >> Let me ask you guys this. I think a lot of this is investor preference. For example, Clorox, I don't know anything about the business. I don't follow the stock but guess what? The stock looks terrible. >> Is Clorox undergoing some stress? Is there a competi like competitive landscape that I don't Yeah, I'm sure. I'm sure there is. But if you look at a stock like Hyatt, which is at an all-time high today, >> and Delta, which is at an all-time high today, I don't care what Domino's Pizza stock is doing. That's a completely idiosyncratic story that has nothing to do with the broader consumer. Now, if I'm Domino's Pizza CEO and Chipotle CEO and I'm telling uh the analyst that is a consumer macro pressure story, of course you're going to say that. But I can show you a million other examples that completely refute that story. If anything, what you're what you're pointing out is actually very real in the data about goods to services. So, we see in goods, obviously, consumer spending is kind of not as great. It's not we're not seeing the spending in terms of food and staples and even what you kind of whatever else you get in the grocery store. But if you see it in terms of like services in terms of air air travel, like air travel, even though airfares are are going up quite considerably, the actual volumes of air travel are quite robust, right? This is not something >> restaurant sales haven't been that great. >> Restaurants have not been as great. I think restaurants is also facing a big like food squeeze. So everything your costs on the food side have gone up especially for Shake Shack. So >> and I really think I completely underestimated the GLP1 story >> and it is having a material impact on areas of the economy. It really is. >> So in that sense you also get the rotation there too. If you're not going to spend as much at the grocery store, you're not going to spend as much in uh certain types of like food services experiences, but you might spend it on other kinds of recreation services. You might spend it on accommodations, resorts. Um and I do think we see this we see that story play out as well in the day. >> All right. Uh shifting gears a little bit, Greg Ip wrote uh a story, the record divide between corporate profits and worker pay. And Denise was on this uh Denise Chisum was on last week talking about um falling unit labor costs being a tailwind for the stock market. Great for the stock market, pretty shitty for society. Um so Greg said, "To understand why people are so miserable about the economy, look no further than Thursday's report on gross domestic product, not how much GDP grew, but how it was divvied up. Worker compensation, wages, and benefits grew 0.8% in the first quarter. Um, while domestic corporates profits jumped 2.7%. Daniel, charts on, please. As a result, labor share of gross domestic income sank to 51%, the lowest since records began in 1947, and profit share climbed to 12.1%, the highest since 1950. So, just go back and forth between these charts. So, this is corporate profits basically hitting all-time highs. And the flip side of this is wages just not getting not getting their fair share and this is ripping the country apart. Is this not being accounted for properly or do you think like this really is the story? >> I think it's probably two things I can think of. One is the labor market has been underperforming. Um so when we say like hey given like what we're seeing in the labor market being so sluggish consumer looks pretty good and given these facts like oh okay it's happening despite the labor market not being as good this is quite impressive but the labor market is sluggish in a lot of ways like benchmark to what we saw in the 2010s even this is slower than that and yet we're also seeing the structural trend a lot of result by the tax system right the tax the tax code has sort of created a lot of biases in a way that makes it just um you're going to be more inclined to to to try and stay ste at the margin steer away from W2 income towards either trying to own your own um business. Uh there's obviously a lot of stuff with capital versus labor. I'm not going to get too much into that, but these are all ways in which um there's going to create some bias and some of that might be real and some of that just might be classification. So it's it's not just like some big political thing. It's superstar firms is probably another argument, right? like just like firms that have really high margins and we have more of them in our economy. Therefore, naturally, as a result, profit share goes up. >> But this is this is very much impacting the political landscape and how people vote. And this is like a huge part of the story. >> Yeah. I mean, I think it's the if you aren't owning your own business, right, and you're basically relying on a W2, then what exactly is like what is that what does that labor market look like? I'd actually argue right now we're seeing a pickup in white collar employment. we're seeing a pick pick up there which is kind of defying all the odds and prognostications on the AI um replacing white collar and but for blue collar it's not necessarily all great right it's actually uh if you look at a lot of different types of uh employment there job growth has not been as fantastic um there's a lot of construction jobs tied to building data centers outside of that not so great um and even manufacturing if you're maybe working for Boeing obviously jobs are being created because they're ramping production after all their snafoos. Outside of that, not as impressive, I'd say. >> Neil, do you think that those lines um forget about converging, do you think they stop diverging? Is there a breaking point? >> So, I I think I sent you this chart, but basically, if you pull up a chart of like nominal GDP >> chart time, Daniel >> um and uh like sort of nominal compensation growth, like I think it kind of speaks for itself, right? Like nominal GDP is growing about 6% uh and nominal compensation like wages and salaries mostly is is running below 4%. >> Has that ever has this ever happened? >> I mean I'm sure it's like it's rare like like the disconnect is quite unusual. Now there's a I mean and I I I've said this to our clients and I'll say it to your audience. How you feel about how this thing reconciles will should dictate how you feel about the trajectory of like policy going forward. >> Go on. Well, I mean, if you think um if you think that all this spending is going to lead to a meaningful inflection higher in like labor income and tight job market and you know, people seeing stronger wage growth, then you should be very hawkish. Like I mean, you should you should expect, right? Like, so if the gray line converges towards the red line, then it's not like I think Scanda has a forecast for like one hike at some point. >> Yeah. >> Um in the next year, forget that. I mean, they're going to go 75 to 100. They'll they'll take away all the insurance cuts from last year. Okay, so that's at least 75. The Fed the Fed never I don't think really just goes once. I mean, um >> but if you think that we'll see that that slowing in nominal wages and salaries will p pull down to some extent consumer spending from like maybe 2% to one one and a half. Uh you continue to see this sluggish growth in residential investment. You continue to see sluggish growth in structures investment. So if that red line converges onto the gray line, well then maybe the Fed can wait it out. Maybe the Fed can wait it out. And so I think that to me is the kind of conversation like so I think Scandal is a little bit more on the hawkish side of things right now than I am. Um it's unusual for us to be that that that unaligned, but that's kind of where where the debate is right now. So, you know, for me, like in my career, I've always put more weight on labor and housing. And so, that's why I probably sit more on the dovish side of things at the moment. Um, you know, how can you, you know, as an example, like how can like apparel prices have been rising very, very rapidly over the last year, but what's happening to the real volume of clothing that's being sold? It's actually contracting. Like, how can firms make that stick, right? It's very difficult to make the price increases stick if labor income isn't there. >> Where else is so so areas? All right. Kevin Walsh. >> Oh god. >> Well, not your favorite. Um I think last time you were on here, you were you were not so happy about the prospects. >> I mean, someone has to do the the the dirty work. I mean, you can't get half the people on the street to actually say what they really think about them. So, I guess if I if one person has to do it, I guess I will. You know, that's sort of how I think about it. I mean, that's one of the benefits of working at a smaller place. You don't have to be like a diplomat. But yeah, I don't I don't know. I mean, what's the upside? >> What's the upside of what? >> Him. >> Oh, well, he's in charge now. He's the boss. >> Well, I mean, I think it's as likely that the Fed captures him than he captures the Fed, right? He's going in there talking about regime change. I think uh if I were if I were a betting man, I would say that the Fed is more likely to influence him than the other way around. >> I think actually it's a bit of like Chinese finger trap, right? the harder you try to pull away, try to the harder you try to push for a doubbish case, the hard the more you're likely to kind of stoke a reaction from the rest of the his colleagues. >> Well, yeah, if you if you make bad arguments, >> well, if you make bad arguments, don't be surprised when like the staff or your colleagues just smack you down, right? And I think that's the that's the big issue with like he's kind of trying to throw in trimmed me and I'm actually a data guy now for like >> Yeah. Look, look at his career, Michael, if you've ever seen him, you know, when when he first got when he was governor, he never gave actually speeches on the economic outlook. Like, you know, it's like, oh, here's Governor War or Lorie Logan like talking about the economic and and and policy outlook. He never gave those speeches really. Um, if you go through his like record, like most of his speeches are like sort of like very kind of like highlevel like philosophical. he's like freaking going around talking about Emanuel Kant and like these like people that you've like heard in like literature like class like in your freshman year college or something. I mean it's it's very bizarre to be talking in those terms for like a central banker. >> Can't people change? >> Um I think the change is very curious considering it happened during a period where he was actively campaigning for a job. And so to me that's like to me that's like the knock on him. I >> I saw somebody >> but for me it's just not going to work. Do you know what I like going in there and being like, "Oh, look at this trim mean measure. It's lower than everything else." Like if his job is to go in there and try to convince the people around that table that we're about we're on the precipice of a golden age. I mean, you hear them talk about this all the time like pull a Greenspan as if Greenspan didn't hike aggressively in the late 1990s. Um anyway, um so he's going in there to sell this golden age thesis. Basically, what that means that we're on the front edge of a productivity boom. That means we have a lot of spare capacity. >> So don't do anything. Yeah, we have a lot of spare capacity in our an economy. That means we actually have more room to cut rates. That's what he's going in there. That's the pretense under which he was brought in. >> So, Scanda, >> yeah. >> Oh, were you done? >> I can keep I can keep going. Uh, Scanda knows. >> So, Scanda, my question to you is um how how much power does he have to influence policy? Can he just say we're doing we're cutting, we're raising? I think I think he he he can't just snap his fingers. He's got some bully pulpit power. He's got some ability to set the agenda at a meeting. Like those are like for like a really shrewd operator. There are ways to leverage that. Well, but it's certainly not something so unitary. It's a you vote at a committee. You vote among a set of people that's uh each got one one person, one vote. Um and there's a set of members. Some of them are part of the board of governors and some of them are regional Fed presidents. Um, and you already saw what, four descents at the last uh, Fed meeting. One of them was on the more doubish side, but three were on the hawkish side. That's a lot of descents. And they're probably going to descent again because they're going to say, "Ah, yeah, we should get drop this easing bias, but we really need to be moving towards a tightening bias. Um, we already got some battle. >> That'll be the next battle." And we're headed in that direction. I'm I would separate what I think the Fed should do from what the Fed will do. >> So, what do you think they should do? What do you think they will do? >> I think they should steal themselves. the fact there are a lot of supply shocks in the economy and there there are a lot of supply shocks that are really hard to look through. The first thing you do is don't underestimate their scale and duration. Um, which is I think a big part of what got them in trouble in 2021 and 22 which is that it's just uh these things can last a lot longer than they than you think because they take a long time to travel through the value chain. Different people are move different companies are moving their margins. Um the scale of this stuff can be a lot larger than you think in real time. Um so don't go in uh basically underbaking these forecasts. So dumb question. How much how much do you think the overnight rate impacts? Like what does that have to do with supply shocks? >> It doesn't really. But the biggest issue is that the Fed has been underbaking where inflation is supposed to be by this point. And when you keep making the same error, you're liable to say, "Oh, I must be missing something really big. I must be must need to raise interest rates to keep inflation expectations anchored." And I think we're headed down this path. I mean, I'm basically being bearish about the Fed because of the reason Neil uh pointed out, which is that they are going to confuse this stuff. They're going to look at the inflation data. They're going to say, "Oh, it's it's hot. It's hot for so long. It's in too many different components because it's so broad because it's lasted so long. It therefore must be something we have to do something about." >> So, you think they should look through it, but they won't. >> So, he thinks they should do what my call is. His call is that they won't. That's why he's negative. So, I think that's it's an interesting framing. I mean, we'll see. I mean, >> but the market is pricing at a rate hike. Show chart 13, please. So, this is the implied Fed funds rate. Um, we're looking at through the end of September 2027. What is this line telling us? we've it's kind of the cowardly compromise of saying that there is either going to be a set of hikes, right? If they're Fed's going to hike once, they're going to hike multiple times, or they're just going to stand pat. I think it's going to be hard for them to steal themselves through what might be some more inflation and a a broader pickup. And at a time when financial conditions, if at a first cut, pretty supportive. The interest rate currently is roughly around neutral, modestly restrictive, and at the same the labor market's not showing the same downside risk. We're moving away from the left tail. Inflation has got some right tail properties. It I do think it's largely supply, but that's a hard when you have all these things moving in the same direction of the hawkish dovish debate. >> They're not going to go once. They're going to go 75 to 100. >> If they start if if they start to go, don't be surprised if it's three three hikes in a So Neil, you're a market economist. If you knew that they were going to go what, three times 25? >> If they're doing it for the reasons he's talking about, it would be very bad for the economy in the capital markets because because it's basically you're hiking rates, not because demand is like we're trained to think rate hikes are okay because it means that the economy is strong because demand is there and that means earnings are there. >> But the economy is not that strong. >> Well, that's Yeah, the economy is not horrible. It's it's it's okay. It's okay. >> It's not overheating to the point that >> it's very uneven. I mean, I thought the Beige book this week was very interesting. It's a I haven't seen a beige book like that in a while. It's a very uneven economy, I think, is is a is a fair kind of characterization of it. Um, >> but if the Fed's hiking and it's because like we have this sort of like broad like grow growth and labor markets are fine, like I think the markets are going to be fine with that. But if they're hiking for the reasons that Scandanda is talking about, like that is not a good outcome. like hiking. It's like, remember what? Remember what Josh was talking about last week? >> I have no idea. >> Well, he was talking about how like it makes no sense to hike because of oil prices going up. Now it's like, okay, now you're going to hike because cattle prices are up. Now you're going to hike because uh you know, I mean, can the Fed control the flow of oil through the straight of hormones? Absolutely not. Can it does it have any power over the El Nino? Like no, it does not. The one thing I wanted to come back to on Worsh was I did find it fascinating like in the last week that Bernani, what did he say about like his views on the balance sheet? He called it a meaningless statement. I thought that was really fascinating because obviously Worsh worked for for uh for Bernani and the balance sheet for whatever reason is like Kevin Worsh's hobby horse and Bernani just took a big mass of crap all over that. So I think it's kind of like emblematic of how he actually feels about him without saying it. But >> I want to get your guys' take on this. Um, an a listener emailed us about the labor market. He said, "Many of the distractors of this bull market, I think it meant detractors, often say the lack of jobs and the lack of good, high-paying jobs and knowledge services are reasons for doubt and concern. The latest report from the Bureau of Labor shared that the number of job openings is now at a 2-year high with 7.6 million open jobs. More interesting is that the largest jump in openings was in professional and business services adding 668,000 positions combined with the past two months of higher than expected non-farm payroll data. Do we think sentiment is ready to turn and finally embrace that AI is not going to eat all the jobs and is in fact helping to grow and create opportunities for workers? >> Well, first I I mean I sort of reject the premise that AI will actually eat all the jobs. I mean, you know, that's kind of like the lump of labor fallacy. I never really bought into it. It's really hard to talk about like AI taking away all the employment with, you know, the unemployment rate at 4.3%. I mean, or on a prime age employment is still fairly good. I mean, so I don't I don't really buy into that. I mean, I will say that you don't want to get too much into the indicator macro. Like, I don't really believe that professional and business services openings went up by 700,000 uh in in a month. fake postings are >> I mean I think the data are real. The news is fake. I mean you know to borrow from from Trump um I you know I mean it's like anything else you could find a different indicator like the Indeed job postings numbers are weaker uh on net over the last few weeks. So >> I don't think the signal from that report really comes um from openings frankly. I mean it's like openings are like the fakest thing. >> All right. Well here's here's a more tangible um >> it's hires and quits that matter a lot more. >> Here's a more tangible reading. initial jobless games was it last summer when they started to go up and people were getting I'm sure I know Josh said this these don't usually slow down like this is the ultimate object in motion stays in motion type thing and they did slow down they peaked and then they normalized um >> are you guys surprised at the low level of initial claims just how like okay the the labor market has been >> I am surprised that we saw such a big slowdown in job growth in 2025 and it kind of stabilized on its own right so that's something that is one of those like object motion states in motion. I think there's a lot of good reasons to take that seriously like there's a lot of information in the present is just respect. Um but it did start to show stabilization and so we started to see that probably around what was that jobs report in December you started to see signs of like okay things post shutdown were starting to to like um just just show the kind of stability that job growth was not going to keep falling off a cliff. Um and I think it's actually most interesting on when you have a white collar. So you think about there's a subset of prof professional and business services that really matters because it also includes things like temp help jobs and a lot of other things that are not exactly high wage there you are seeing a pickup you are seeing a pickup in in job growth and so it's hiring is picking up there and if you're really trying to put it together is this because um like what is the the macro fact that's driving this is not like completely obvious but I think if I take one step back it's look it's been a soggy labor market for th that segment for about three years basically you had the sort tech session of 2022, you had basically uh okay, the Fed is hiking, so therefore we need to be on watch for recession. We shouldn't we overhired during the pandemic, we need to slow down. Then it became, well, this AI stuff is so risky. Should we really be increasing headcount? But like the actual cost of capital signal has long been signaling you it's okay to spend. >> Well, also, don't you think it's it's just so it would be so deeply unpopular for JP Morgan, for example, to start doing massive layoffs? like do you think that companies and I know JP Morgan's you know an extreme example um but do you think companies in the aggregate have any sort of hesitation to do that for fear of some sort of retaliation by either their own workforce or larger forces at play political forces or or the such >> I think there's actually a lot of risk that you lose a lot of knowledge to be able to orchestrate future solutions right so you end up like lo let letting go of someone who is responsible for a key system you're letting go of someone who's able to like build the set of things that work kind of actually leverage the technology. I mean, it's not obvious to me that like who's most exposed to AI. We don't really know, right? Like we don't know which kind of jobs are actually most exposed. Oh, aha, these jobs are going to be the ones that are easily automated. It may very well be the case that's the white collar people who need to be actually executing a lot of the um sort of how how to take advantage of the technology itself. I mean, you do see specific areas in the job market that are booming right now because of AI, but I would just say that layoffs are usually like the last thing to go. I mean, >> by the time layoffs are are showing you something in terms of a signal, like it's over, buddy. >> So, let's let's leave the audience with this. Um, and you guys are great. Uh, Scandanda, how could people find your work? >> Um, so employeeamerica.org is a great place to go. Uh, you can access our research. We have some public research if you want to subscribe to. We have a few different distributions there. Um, if you want to follow me on Twitter, right now I'm probably posting mostly about the Knicks, but uh but but I promise after the the series ends and hopefully well, um, we back back at it and um, we're usually breaking down a lot of data related to jobs and CPI and PCE and everything the Fed's tracking. >> All right. Uh, Neil, we've got a QR code. If people are watching this, they could they could >> Yeah, you can also find me on the New York Knicks Instagram account. >> Hell yeah. Um, where else are you posting? >> I post on LinkedIn. I like the longer form content. We obviously post charts on Twitter as well. X, excuse me. Um, speaking about an area where uh they cut to the bone and you know, I'm actually glad that more tech people didn't follow his lead. Like there was a lot of fear about that. Like they cut everybody at Twitter and it still works. And I know to the degree that it works, but it but it did, you know, it's still still doing its thing. All right. I want to leave people with this. Um, everybody wants to know when it's going to end. I get it, right? It's just it's it's just how we're wired for better or for worse. Um and maybe maybe it's tomorrow, maybe it's in 2032 like and when I say it ends, I mean like the cycle turns. Okay. So what is like one or two things pieces of actual evidence or actual data that you guys would look to for this particular cycle because we know this is a unique one. So what are you going to be keeping an eye on? >> You want me to go first? >> Sure. Well, I would say at the end of the year, I think, you know, into next year, maybe the conditions are not as favorable as they are at the moment, right? Like, so we probably don't get as much of a fiscal push, right? Like the one big beautiful bill tailwind is going away by the end of the year, that that transitions to more of a headwind. Um, if the Fed is on hold, even as nominal compensation growth remains weak. I mean, everyone's talking about a passive easing of policy because of inflation, but for the labor market, that's a a passive tightening of policy. Um, so those two things are kind of on my mind. Um, >> that was way too smart. I don't know what you just said. >> SC. >> Yeah, business cycles are risk cycles. And so the risk and the willingness to actually spend is what we should all be caring about if we're trying to think about the big macro risk, the big draw down you want to avoid or the big um risk to your job. >> It sounds like you're you're saying credit spreads >> maybe credit spreads. >> That would be my answer. >> Yeah. So credit spreads are a very good proxy say especially episodic though by the time it turns out >> but but I feel like it's like the e here. Okay, here's the thing. Um the during I it I think it was liberation day. The the thing that kept me like moderately comfortable with the direction of the economy is the credit market really wasn't freaking out. >> It like it just it just wasn't. And so you're right by the time like it really shows it'll probably be too late. At least that's kept me on like the right side of like the positive trend. >> Yeah. To me the thing when you think about like where's the balance sheet constraint that's going to cause this, right? And so it could show up in corporate credit spreads. may be something that's the things to me that are most likely are something that where it's the willingness to spend with probably the non- tech companies on AI expenditure. That's really what we should actually be focused on because for them it's an expense and they need to see payoff on that expense at some point. Whereas if it's just spending by the hyperscalers they're it's all part of their moat. It's part of uh um how they're trying to make sure that they stay competitive. But for the non- tech companies like are they seeing a return on their investment? I'm sure they are seeing something but like you're obviously hearing about like token expenditures and all that stuff. So when that gets stretched, which is kind of this the scenario we think about 2000 where it was a lot of frontloading of expenditure around Y2K u at some point just got tired of it, right? It's like I I don't need to keep spending more and more and more. I'll just spend the same amount and that's important. >> What's nice is that Nvidia is now breaking out their revenue by hyperscaler and everybody else to give us maybe a better sense of like no, we're actually we're not just relying on these, you know, yeah, >> these behemoths. >> Um all right, boys. How are we feeling for the rest of the series? better than I did uh 24 hours ago. I'd say we took their heart out yesterday. You know, >> I think they're a resilient bunch. They're not like they're not the Cavs. Like um Castle's a dog. He's not going to give up and so is one. >> No, it's not going to come easy. But I also I mean I felt like the Knicks I still do. The Knicks are the more mature team. They'll handle it. And um I think they needed that the Spurs needed that game more than we did. >> I think they're pretty exhausted from the previous series. And >> goodbye ran out of steam. >> Yeah, he ran out of steam the last few minutes game. I I it still doesn't feel I still can't believe this is happening. It's been >> same. >> It's been so long. >> I mean, he It's funny you mentioned PJ Brown. I mean, I remember I was an 11year-old kid when when >> Hated that guy >> when uh when when the Knicks uh you know, in '94. I I still remember that series. A series we should have won. >> That one's a little bit foggy. I was like I was I was nine. >> So, I don't remember. >> We were We were up 3-2. >> Yeah. >> In the Garden. And we should have won that game. To me, I'm just more cynical after two decades of Dolan and it's like how how is this coming together? >> There's no time for citizen. >> Sorry, no time for citizen. >> We're done with that. All right. Um, thank you everybody for listening, for reaching out. You guys are awesome. This is so much fun. Scandal would love to have you back. This is really great. Thanks, guys. We'll see you next time. Appreciate you watching.