The Compound and Friends - Neil Dutta & Skanda on Why the Recession Signals Are All Wrong

Episode Date: June 5, 2026

On episode 245 of The Compound and Friends, ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Michael Batnick⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Downtown Josh Brown⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ are joined by Neil Dutta and Skanda Amarnath⁠⁠⁠⁠⁠⁠⁠ to discuss: the AI investment boom, the state of the labor market, inflation risks, consumer spending, Fed policy, market breadth, whether this cycle is as unusual as it feels, and much more! This episode is sponsored by Nuveen and ClearBridge Investments.  Learn more about Nuveen’s comprehensive private markets platform at https://www.nuveen.com/en-us/insights/alternatives. Rising geopolitical tensions, continued market uncertainty, stocks backed by can offer more predictable cash flows as volatility increases. To learn more, go to https://www.clearbridge.com/ Sign up for The Compound Newsletter and never miss out: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠thecompoundnews.com/subscribe⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices

How the hell did you get on that flight? Like, what was the deal? So, um, 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 go to them.

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 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 Knicks flyaway experience, basically. So my wife and I were able to go. They put us in a chartered plane, like a commercial like Delta plane.

They flew us to San Antonio. They fed us. It was all Knicks fans? All Knicks fans. Unbelievable. Meet and greet. I met Clyde, John Starks. King Henrik was there.

Amazing. On your flight? Yeah. And, you know, they all spoke. Then we went to the game. And the Knicks put you on their Instagram. That was a, yeah, that was like a main moment for me. Your wife and your wife.

Look at this handsome devil. Look at this cute couple. What a freaking photo. Yeah, that was great. No, I mean, yeah. Did you show your kids yet? Oh, yeah, they saw. I mean, they were, we were all, I was, this is like better than going on Bloomberg or CNBC.

Oh, yeah. Not as fun as going on this podcast, though. That's right. But, yeah, no. And then, you know, we watched the, the hope and joy and dreams just evaporate out of that building. How'd that feel? Wonderful. Like, it was just, you know, 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 Jaylin for granted. but watching him every day. 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 in 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 109, Road 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 don't remember speaking about this. I would not have been cool with selling game four to the finals. At least I don't think I, I don't think I said that. All right, so the situation that we're in now, the tickets, they 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 my tickets. Round one was $3.80. Then it went to like $5.50, $1,350, $1,000 for the finals for each ticket. So $13.50. We sold them for $4,500. You can't get into the building for less than $7,000. The Super Bowl getting in price 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, could I get $15,000 for the tickets? Perhaps. So where we are now is we're working with my ticket broker to basically, like, have games three and four and break even.

So basically whatever our tickets would have cost, $13.50 apiece, 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 having drinks with Matt Middleton and Chris Cherry from Futureproof.

They went to the watch party with me. So even 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 diehard fans. It was so loud. So they released the tickets and in two minutes they're gone. Like, I was number $3,000 in line. So $10 tickets. I bought it on ticket mask or a tick pick for like $60, whatever. Well worth it to get in there. It was such a great experience.

So we're at dinner, having drinks. And Matt was like, oh, I didn't know you had season tickets. 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 mother-fibre, give it back.

I want it back. I'm cancel the transaction. How crazy is that? Out of all the... What a small world. So, Matt Middleton bought my tickets. Very cool. For well below what I could have sold them for.

Yeah. 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, economic justification? Do you think this is like... This is 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 basically the story, right? We've got... We've got World Cup tickets that are obviously selling for... I mean, not as much to me if people wants, but we just have, like, so much. Discretionary spending is actually a pretty solid.

Maybe it's for the upper income is part of the distribution, but it's still like 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 Nix tickets, right? I think that the higher end or the bigger shape of the K is like a very big. It's big. because how is they get in price $7,000? I don't understand.

Like literally, are people just throwing on their credit cards and saying like whatever? Well, New York City is in real life. I mean, it's, so I think... Yeah, but 7,000 to get in? It does feel kind of ironic that you have to say, 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 still what's overwhelming why you have New York Knicks fans taking over San Antonio, but you probably won't have Spurs fans. There's this research about, like, you know, economists talk about the wealth decumulation puzzle, right? Like, 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 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. Wait, where is it? I thought it was in Philly. No, there's games in Atlanta as well.

Wait a minute. There's games in New York, too. Well, then New York, New Jersey. I don't, obviously, I don't follow soccer. It travels. It's in a bunch of sites. The World Cup's everywhere. It's like North America's hosting.

Toronto, Boston, Foxborough. But even tickets in San Antonio. So I just bought tickets for Game 5 and they're not cheap. Like, the getting price right now is $1,700 for Game 5. For Game 2, it's sinking, like Stone. It's like 700 now, 600. It was like $1,000 a couple days ago. Unbelievable.

All right. 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.

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in the securities discussed in this podcast. 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.

And I'm so excited to have you guys here today. So, fan of the show, friends of the show, fan favorite of the show, that's what I meant to say. I hope you're a fan of the show, but you're a fan favorite. definitely a fan. All right. Neil Dudd, everybody. Neil is the head of economics at Renaissance

macro-research. Neil leads macroeconomic research efforts with an emphasis on analyzing the U.S. economy, federal reserve, global trends and cross-market investment themes. Neil is considered a stock market economist. Stock market economist? Market economist? Business economist? Okay. 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, Skanda Amernath. Skanda is the co-founder. and executive director of Employee America, leaning the firm's economic policy advocacy. Employer America runs regular analyses of price and job's 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. We are going to talk about how.

how AI is impacting the economy. 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 that the economy is doing? What's your read? Scanna, go ahead. Yeah, so the distribution of risks has shifted from where it was, call it six, nine, 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 may 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 Strait of Ramos. 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 sectors that have been soggy for a long time. So the labor market's not at the left tail and the inflation stuff

is closer to the right tail. That's a little bit of a 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 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, it's an ugly word, but maybe the right word to describe it. Neil, you're, you're feeling a little soggy these days. I get the truth that you're not as optimistic as you were. 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. So that's been, you know, a shift for me.

I would tend to agree with most of what, what Scandis said. I mean, you know, look, I mean, I will point out, though, that right before all this Iran stuff started, 10-year yields were at 3.93 percent, right? I mean, we're kind of right there for additional cuts for this year. So, you know, I think since then a couple things have changed, obviously. To Scandus point, the distribution of risks around inflation have changed. But the labor markets aren't as, 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 obviously important.

The one thing I would say that has continued is income growth continues to slide. So, you know, at least the growth in total wages and salaries remains pretty sluggish. And in the context of 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. And I do think there's probably a limit to how much people can spend by drawing down savings and so forth. So that to me is my concern. It's really around the outlook for consumer spending, which I don't think is particularly good. Are you guys surprised that the economy has stayed as strong, the sagginess notwithstanding,

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. And some of that's obviously a 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. 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. 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 horrible. 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 growing for another two years before. I mean, it didn't matter in the end, but you had to wait a while. 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 and the savings rate doesn't look as low as people think. I mean, it's just one of the savings rate. I mean, it's just one of the savings.

of the things that happens in the data. But, you know, it's like anything at 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 the savings rate that Scand is talking about, which is really just, I think you would agree, like an income statement residual. And then, you know, all they're doing is taking income less spending over income. What about like something that is a maybe like, maybe like, a better timing signal. Construction permits.

Like, Warren Pius 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. Yeah, I mean, I don't know. Like, the Ed Limer thing is, like, was something that people were talking about for years,

right? Like, Ed Limer was the guy that wrote the paper, like, housing is the business cycle, right? Like, normally I would agree with them. Was? Yeah. Yeah. I mean, that's the thing.

It's sort of, it's competing for seat resources with the AI thing, right? 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 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 that are still under pressure. Like, 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. But you just have, I mean, I think we're probably going to talk about this. AI boom is quite spectacular in how much it's, I think, helping lift growth. Enough, enough clearing of the throat setting at the table. Scanned, in preparation for this, I was looking at... I think I Googled your name, LinkedIn. 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. So the first result, somebody tweeted, expenditures on AI is about to surpass the peak spending on housing at its 2005 peak spend. And then they quote you, at close to 7% of the economy at the end of 2025, it's plausible that the AI boom would be on par with the share of the U.S. 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 shit. So we were talking about this piece that you wrote back in January, 2025. And you wrote at the time, I think you were on with Joe and Tracy. 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, that's one thing that's aged quite well, I'd say. I think we're clearly seeing, we've ripped past 7%.

So we've ripped past the peak for housing investment in the 2000s, so the housing bubble and the residential investment that's happening there is 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 the peak of the 2000s boom. It's past the peak of the, very well past the peak of the 90s tech boom, the dot-com boom, the telecom structures boom. So we're at a point where this is this very investment-intensive

of the expansion. That is to your point about also the saving rate going down, you see this 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 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. I, I, um, 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... Why? Because they're looking at the wrong things.

They have no common sense. 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, six, seven percent of GDP? 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 leakage? What do you call it? Import leakage. Import leakage. Okay. Is that a new... It's new to me. Is that a thing that's been in the economist lexicon or...

Go ahead. You want to take it? Yeah. So it's basically... So there's all a spending happening domestically. But that spending could be for products that are produced outside of the U.S. And so you think about, like, what S.K. Hinex produces or what, like, all sorts of Japanese and Korean manufacturers are producing for all your tech hardware or the energy

systems behind it. That's all stuff that's coming... That's value ad. That's GDP. That's really not show... Like, it's not a U.S. GDP. but it is U.S. 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 a sense, I mean, just because the dollars don't show up in GDP, 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 kind of linkages to other areas of the economy that are not neatly captured, I would say, by GDP, like simple GDP accounting identity.

Like NICS tickets. Like NICS tickets. It's like consumer spending, like municipal government finances, right? Like the California Legislative Office talks about how over half the growth and 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. It's probably, it's juicing, obviously, global growth. 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 account. accounting identity. So it's almost like saying, yeah, I mean, residential investment, six or seven percent of US GDP, but not really because we import all the drywall and lumber from Canada. Like 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 actually like this whole like, ah, it's not really counting the GDP because its 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 of a recession, we're not really talking about GDP. We're talking about where 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 in terms of a lot of the big 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 are driven by the labor market. And of course, the equity market dub. 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, spending pulls back, and it's just going to happen when it's going to happen. There will be very little warning.

People have been looking for warning signs just for the last 15 years. It's true. I mean, we always have to look behind your shoulder for something. But I think if you look back to the dot-com 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 or Intel? You had a lot of these sort of events through 2000. Depends to you ask. I mean, there's a lot of vibes, too, right? Yeah, there's a lot of vibes, but it's like, I don't think I could point to aha, it was housing starts turned in 1999 or 2000 and that caused the cyclical slowdown.

I was like, 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 Barron's article that came out of one weekend and the next week the stock market killed and then it just started to unravel. Like, was it the article that caused the stuff? I mean, it was obviously going to burst either way. It was a bunch of spending that got pulled forward in terms of IT systems, Y2K, a lot of that And then you keep spending, you keep spending. And it's like every exponential curve is always underestimated in real time. At some point, there isn't as correct to it.

I mean, the other thing, of course, is that the Fed was hiking and the, but the stock market was still going up concurrently as the Fed was hiking. So it wasn't necessarily, I mean, this whole notion that like, oh, the Fed should step in and, like, hike to blow this whole thing up. I mean, first of all I'm not sure that they really can. But all you'd be doing at that point is exacerbating the stretches in the areas of the economy that you were just talking about, like housing, like some of these credit-sensitive areas. is. And the key distinction between now and then is that the labor markets were genuinely

overheating back then. There's really no evidence that, I mean, we could talk about, you know, things getting more stable relative to where they were six months ago. But it's not like you're seeing like broad-based wage pressure. Are you guys worried about credit card delinquency? That's been a topic that's come up recently. Not yet. I would say there's probably some signs that the household sector will eventually face stresses if like the job market isn't good. Right now we're seeing signs the opposite, but if we are, like, this is still not yet a point to me where the household sector is pretty flush in terms of liquidity. It may be disproportionate in terms of distribution. So 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 beige book 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 very low. But if you're a bank, I would probably want to provision for more loan losses over the next year.

If you're thinking about the like the 90s 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 of the left-tail stuff again. But can that be good that it's not as 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 straightforward moves. So if you think about airfares are a lot higher now and big part of the jet fuel. If you think about AI boom, it's impact on basically if you want to go buy a laptop now, you can see the price, right? It's not what it used to be. And there's all sorts of computer hardware, memory shortage having its impacts. And so this is all a lot of sectoral stuff. It stinks. It's kind of like the 2000s in a lot of ways. If you remember, like a lot of random inflation that kind of creeped up around then. So that's not great for the consumer, right?

The consumer's got to pay the bill on that. It means they're either enjoying not as much of a standard of living improvement or in some cases the standard of living reduction. So that's the downside here. So we have like not as good on the labor market, harsher era on the inflation side this time around relative to what was the 90s, which was kind of nirvana in terms of labor market being pretty strong, but inflation not really nearing its head. Josh and I talk a lot on the show about the wealth effect and what drives people to spend more money.

And I've mostly rejected the idea that people spend money based on how much I 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 all. overconfidence. I mean, it just does. You can take money out of your investment account, pay for 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, Nvidia fell two-thirds, like legitimately lost a lot of money. And people didn't stop spending, at least as far as- No, because we had income growth. Okay. Yeah.

That's the key difference between now and then. So if we- And we had a lot of pandemic savings. Yeah, so I know. It's not apples to apples at all. But so you're saying that if what would it take for the spending to slow down, would it be the stock market or the labor market? or both are, who knows?

Well, I think, so there's a couple of things. I mean, I think right now we're sort of, for us, I think for economists, it's like, is it linear or non-linear? Which part? 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. If you start to see layoffs in any meaningful extent, not that we have outside of technology. That'll probably hurt consumer spending pretty quickly. That's one option. The other way would be you get a market correction of some kind. If you just assume like savings are stable,

consumption will probably naturally slow a little bit anyway because income growth is so sluggish. But doesn't matter... That doesn't mean it's going to like fall off of a cliff. You know what I mean? Like it's just, okay, 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,

or spend these $700 billion of CAPEX, doesn't matter if the consumer pulls back a little bit? A little bit is not enough, right? Consumption is generally pretty smooth anyway. So really, when you think about, people say, oh, the U.S. consumer is the economy. But investment's 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 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 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? So what's interesting about this is that because typically, If you look at it, I mean, equipment, like non-residential business investment, CAP-X, that actually follows growth. 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. What's unusual about this cycle is that it's not like growth expectations are really taking off in any material extent, 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 vol in terms of GDP, in terms of why we're getting the outcomes we're getting in stock market, too, right? So we don't have, like, a leading indicator for the tech outside of, like, if you're really locked in on some particular name. and maybe certain orders for this tech supply chain, maybe then you can have a read into the indicators of this dynamic. But it's really just about like business fix investment that's all tied to AI. 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 change so fast. And people act like what's happening today has been in place forever. Like nobody wanted the Mag 7 stocks in the first. These things were getting destroyed. Oracle got, Oracle fell by 60% because people were like, there's no way that Sam Altman is going to be able to pay that five year, $300 billion contract. There's no way.

And all of a sudden, it's hot again. And people are like, I'll bubble. So the way that I see the world today is 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 agenic AI stuff. Like, 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 the shortage of compute. So to suggest or to. to think or to use the framework that it's late or getting long on the tooth, I kind of think it's just starting. It's really hard to know in real time.

It's impossible. 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 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, I'm sure there is a point where exponential curves become S curves, but that's point not right now. I love that you said that because all we could observe is... Is that the lines going up? What's happening today? I guess one thing I was thinking about, and I really enjoyed your conversation with Denise last week. You know, she's great. This whole notion of like, it's early, it's not a bubble because the earnings 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 think that there's a little bit of that going on on the street. The other thing I would say 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 Scanda was talking about software,

laptops, it's actually going up. Like, you pull up those charts in the 90s or 2000s. It was deflating month after month after month. sometimes at accelerating rates. You go back to that period too. Again, very strong productivity growth. You know what 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. 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?

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 gasoline is much higher than it was in Q1, price of all sorts of energy, airfares. You have a lot of other shortages and other shocks that are materializing to. 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, 25. But doesn't the, whose productivity? That's right. The macro data stats that the Fed might look at, their productivity, I do think is 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.

I'm just using it. I mean, I know our listeners probably are like, you know, you guys are, but in the real world? Yeah. There's limits, even in terms of large corporations. I mean, we use it. Of course you do. 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.

If you're a larger company, there's all sorts of walls. You can only use coal pilot. You can only use these types of tools. We can't use those because they might ultimately present security risks. And so actually adoption may not, I think it's a clearly a long way to go. There's also a measurement thing with this. I mean, like, everyone's, like, looking at the ramp index. And, like, how, like, I mean, like, I like,

what is that even telling me, right? It's like, oh, look, open AI 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 ultimate, estimates are going out.

Ultimately, costs need to come down to households. All right, so we'll talk about in the second. I just want to end the topic with this. So, Neil, you said, we ran a one-year daily return correlation between every S&P 500 name and the semiconductor ETF, SMH. 15 non-tech S&P 500 companies collectively worth $2 trillion market cap, now move with semis at correlations of 0.5 or higher. 12 of these 15 are industrials, names like Vertev, Eden, Caterpillar, Cummins,

Hugh Bell, Hubell, Hubbell, Humble, Comfort systems. I don't even know a lot of these companies. Whatever, you go on. You say these are not tech stocks. They trade like semis because their orderbrooks have become AI Cappex orderbooks. Caterpillar generator sets and engines into hyperscalor data centers, Veritiv sells cooling and power management. Eden sells electrical components and GEVernova sells gas turbines for data center power.

This kind of interesting. The Gick sector classification has not cut up with the economic. exposure. It sounds so good when you sound. It's good. When you read it back to me, yeah. It's good stuff. Buy that guy's research.

But inside the stock market, I was looking, I was talking to Char Kid and Sean today. So, healthcare is breaking out. It's been stuck in the mud for a while. Industrials look awesome. That's 20% of the S&P. So for as much like people talking about, oh, it's just a Mac 7, Daniel chart,

throw chart 12 on. This surprised me. And I look at the market pretty damn closely. And I don't think I knew this. probably because they diverged very recently. But the Mag 7 are up 7.3% year-to-date. 7.3% year-to-date for the Mac 7. Not bad.

But the 493 are up 12.6%. Huh? Did you guys know that? Well, I knew about it because... It's a big spread. You mentioned it, I think, last week, right? I forgot about it. I have other things in my mind. I do listen.

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. Sure is. Right? Like, I think I was reading that Generac is doing better now because of the data center build out to build back up, you know, power for these facilities. So that's why I say, like, just because, I mean, is the equal weight, like, historically we look at that as a sign of, like, market broadening. But if the AI tech KAPX boom is touching lots of industrial names as an example, and lots of freight, right? Like that 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 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 in 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 meant corporate profits. So, go ahead.

I mean, it just seems like the breadth and the boom go together, too, right? It's just that there is, you see companies like what, Ford is kind of trying to sell batteries now. Ford's an AI company now. Ford's trying to provide batteries to support this sort of power boom, right? So we have, it's just become, it sort of touches so many other sectors and even beyond whatever rational, logical 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 if it's an environment where investment appetite is particularly solid, that's one in which 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, discretionary is underperforming consumer staples. Which discretionary stocks? Equal weight. Like, he's been pointing that. I mean, restaurants don't look good.

I mean, you can say that's all because of, like, people taking the fat shot. I will say that. Unironically. I think that it's, I mean, it's not like their same store. are doing particularly well. Or, you know, you mentioned health care. 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 mean, maybe the market is like, it's, you know, is the market pricing in some slowdown? No. So tell me what. No. Okay. So I'm looking at the equal weight discretionary over Staples. And it's still in an uptremp of 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, Kava is like the poster trial. A lot of these names came public sort of recently. We're in vogue.

The valuations were stupid. The slowdown happened. Consumer preference changed. Shake-shack. Nobody wants to eat a fucking burger for lunch anymore. 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... It's 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 slow than. I think it's sort of hard to say that. Maybe the PE is coming in a little bit, which is probably healthy. Like there's a little bit of a governor on the stock market. But 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 again, there's obviously energy. It's also like food prices. If you think about 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 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 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 competitive, like competitive landscape? Yeah, 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 Tripoli's CEO, and I'm telling the analyst that it's 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 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. We're not seeing the spending in terms of food and staples

and even whatever else you get in the grocery store. But if you see it in terms of services in terms of air travel, even airfors are going up quite considerably. The actual volumes of air travel are quite robust, right? This is not something you see. Restaurants have not been as great. Restaurants have not been as great. I think restaurants are also facing a big, like, food squeeze.

So everything your costs on the food side have gone up, especially for Shake Shack. 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 that's it 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 types of food services experiences.

But you might spend it on other kinds of recreation services. You might spend it on accommodations, resorts. And I do think we'll see that story play out as well. All right. Shifting gears a little bit. Greg Ip wrote a story, the record divide between corporate profits and worker pay. And Denise was on this, Denise Chisholm was on last week talking about falling unit labor costs, being in talent for the stock market. Great for the stock market.

Pretty shitty for society. 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, while domestic corporate 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 profits share climbed to 12.1%.

The highest is 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 their fair share. And this is ripping the country. part. 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.

So when we say like, hey, given like what we're seeing the labor market being so sluggish, the consumer looks pretty good. And given these facts like, oh, okay, well, 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. Benchmarked 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 this is also about the tax system, right? The tax code has sort of created a lot of biases in a way that makes it just, you're going to be more inclined to try and stay at the margin,

steer away from W2 income towards either trying to own your own business. 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 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 not just like some big political thing. Superstar firms is probably another.

That's right. What's that? Like, just like firms that have really high margins. We have more of them in our economy. Therefore, naturally, as a result, profit share goes up. But 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 W-2, then what exactly is like, what is that, 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 pickup there, which is kind of defying all the odds and prognostications on the AI,

replacing white collar. But for blue collar, it's not necessarily all great, right? It's actually, if you look at a lot of different types of employment there, job growth has not been as fantastic. There's a lot of construction jobs tied to building data centers outside of that. Not so great. And even manufacturing,

you're maybe working for Boeing. Obviously, jobs are being created because they're ramping up production after all their snafus. Outside of that, not as impressive, I'd say. Neil, do you think that those lines, forget about converging? Do you think they stop diverging? Is there a breaking point? So I think I sent you this chart.

But basically, if you pull up a chart of like nominal GDP. Chart time, Daniel. And like sort of nominal compensation growth. Like I think it kind of speaks for itself. Right? Like nominal GDP is growing about 6% and nominal compensation, like wages and salaries mostly, is running below 4%. Has this ever happened?

I mean, I'm sure it's like, it's rare. It's weird. Like the disconnect is quite unusual. Now, there's a number. I mean, and I've said this to our clients, and I'll say it to your audience, how you feel about how this thing reconciles, well, should dictate how you feel about the trajectory of like policy,

going forward. Go on. Well, I mean, if you think, 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 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. In the next year. Forget that. I mean, they're going to go 75%

They'll take away all the insurance cuts from last year. Okay, so that's at least 75. The Fed never, I don't think, really just goes once. I mean, but if you think that we'll see that that slowing in nominal wages and salaries will pull down to some extent consumer spending from like maybe 2% to 1, 1.5. 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 weight it out.

Maybe the Fed can wait it out. And so I think that to me is the kind of conversation. So I think Scanda is a little bit more on the hawkish side of things right now than I am. It's unusual for us to be that unaligned. But that's kind of 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.

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 increase a stick if labor income isn't there. So areas, all right, Kevin Warsh.

Oh, God. Well, not your favorite. I think last time you were on here, you were not so happy about the prospects of him. Look, I mean, someone has to do 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 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, like, 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. 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? It's the harder you try to pull away, the harder you try to push for a devish case, the more you're likely to kind of stoke a reaction from the rest of the, his colleagues.

Well, because he's a hack. Well, yeah, if you make bad arguments, well, if you make bad arguments, don't be surprised when, like, the staff or your colleague just smack you down, right? And I think 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 in his career, Michael, if you've ever seen him... You know, 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 Lori Logan, like,

talking about the economic and policy outlook. is he never gave those speeches, really. If you go through his, like, record, like, most of his speeches are, like, sort of, like, very kind of, like, high-level, like, philosophical. He's, like, freaking going around talking about Emmanuel Kant and, like, these, like, people that you, like, heard

in, like, literature class, like, in your freshman in your college or something. I mean, it's very bizarre to be talking in those terms for, like, a central banker. Can't people change? 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 saw somebody. But trim me, it's just not going to work. Do you know what I mean? Which part? 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. anyway, so he's going in there to sell this golden age thesis. Basically what that means that we're on the front edge of our 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 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. Were you done? I can keep going. Scana knows that. So, Skanda, my question to you is,

how much power does he have to influence policy? Can he just say we're doing, we're cutting, we're raising? I think 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 the side of people that each got one. One person, one vote, 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. And you already saw, what, four dissents at the last Fed meeting. One of them was on the more diverse side, but three were on the hawkish side. That's a lot of dissents. And they're probably going to dissent again because they're going to say,

yeah, we should get dropped this easing bias, but we really need to be moving towards a tightening bias. We already got some of the next battle. That'll be the next battle. We're headed in that direction. I would separate what I think the Fed should do from what the Fed is. will do. So what do you think they should do? What do you think they will do?

I think they should steal themselves. In fact, there are a lot of supply shocks in the economy. And 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, which I think a big part of what got in trouble in 2021 and 22, which is that it's just a, these things can last a lot longer than you think because they take a long time to travel through the value chain, different people, different companies are moving their margins. The scale of this stuff can be a lot larger than you think in real time.

so don't go in basically underbaking these forecasts. So a dumb question. How much do you think the overnight rate impacts supply? I want us to 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 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 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 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 an interesting framing. I mean, we'll see.

I mean. But the market is pricing in a rate. High chart 13, please. So this is the implied Fed Fund's rate. We're looking at through the end of September, 27. What is this line telling us? it's kind of the cowardly compromise of saying that there is either going to be a set of hikes, right? If it'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 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 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. 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-dubbish debate.

They're not going to go once. They're going to go 75 to 100. If they start to go, don't be surprised if it's three hikes in a row. 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. Okay. Because it's basically your 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's not that strong. Well, that's... Yeah, the economy's not horrible. It's fine. It's okay. It's okay. It's not overheating to the point that it needs to be so cool.

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 lot. a while. It's a very uneven economy, I think, is a fair kind of characterization of it. But if the Fed's hiking, and it's because, like, we have this sort of, like, broad, like 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 Scanda's 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. Right. Right. Now it's like, okay, now you're going to hike because cattle prices are up. Now you're going to hike because, you know, I mean, can the Fed control the flow of oil through the strato hormones? Absolutely not. Does it have any power over the El Nino? Like, no, it does not. The one thing I wanted to come back to on Warsh was I did find it fascinating.

Like in the last week that Bernanke, 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 Warsh worked for Bernanke. and the balance sheet for whatever reason is like Kevin Warsh's hobby horse and Bernanke just took a big massive crap all over that. So I think it's kind of like emblematic of how he actually feels about him without saying it. I want to get your guys take on this.

A listener emailed us about the labor market. He said many of the distractors of this bull market, I think he 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 two-year high with 7.6 million open jobs. More interesting is that the largest jump in openings

was in professional and business services at 668,000 positions. Combined with the past two months of higher than expected non-farm payable 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 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, on a prime age employment is still fairly good. I mean, so 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 in a month.

It's fake. I mean, the data are real. The news is fake, I mean, you know, to bar from Trump. I mean, it's like anything else. You could find a different indicator, like the Indeed job postings numbers are weaker on net over the last few weeks. So I don't think the signal from that report really comes from openings, frankly. I mean, it's like openings are like the fakes thing. Oh, well, here's more tangible.

It's hires and quits that matter a lot more. Here's 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 states and motion depth thing. And they did slow down. They peaked and then they were normalized.

Are you guys surprised at the low level of initial claims? Just how like okay the labor market has been? I am surprised. 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, status 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, just respect. But it did start to show stabilization. And so we started to see that probably around the jobs report in December. You started to see signs of like, okay, things post-shutown, we're starting to like just show the kind of stability that job growth was not going to keep falling off. Cliff. And I think it's actually most interesting on, we talk about a white collar. So if you think

about there's a subset of professional 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 job growth. And so hiring is picking up there. And if you're really trying to put it together, is this because, like, what is the macro fact that's driving this is not like completely obvious? But I think if I take one step back, Look, it's been a soggy labor market for that segment for about three years. Basically, you had the sort of tech session of 2022. You had basically, okay, the Fed is hiking, so therefore we need to be on watch for a session.

We should 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 it's okay to spend. Well, also, don't you think it's just so, it would be so deeply unpopular for, or J.P. Morgan, for example, to start doing massive layoffs. Like, do you think that companies, and I know J.P. Morgan's an extreme example,

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 that play, political forces or the such? I mean, 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 letting go of someone who is a responsible. for a key system. You let it go of someone who's able to build the next 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 sort of 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 showing you something in terms of a signal, like it's over, buddy. So let's leave the audience with this. And you guys are great. Skanda, how could people find your work? So employamerica.org is a great place to go. You can

access our research. We have some public research. If you want to subscribe to, we have a few different distributions there. If you want to follow me on Twitter, right now I'm probably posting mostly about the Knicks. But I promise. after the series ends and hopefully well. We've got back at it. And we're usually breaking down a lot of data to jobs and CPI and PCE and everything the Fed's tracking.

All right. Neil, we've got a QR code. If people are watching this, they could... Yeah, you can also find me on the New York Knicks Instagram account. Hell yeah. Where else you posting? I post on LinkedIn. I like the longer form content. We've obviously post charts on Twitter as well.

I mean, X, excuse me. Speaking about an area where they cut to the bone. And you know what? 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, you know, it's still still doing its thing. All right, I want to leave people with this.

Everybody wants to know when it's going to end. I get it. Right. It's just how we're wired for better or for worse. And maybe, maybe it's tomorrow. Maybe it's in 2032. Like, I want to 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? 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 a,

more of a headwin. 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 passive tightening of policy. So those two things are kind of on my mind. That was way too smart. I don't know what you just said. Sked what are you got? 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 drawdown you want to avoid, or the big risk to your job. It sounds like you're saying credit spreads.

Maybe credit spreads. That would be my answer. Yeah, so credit spreads are a very good proxy. It's episodic, though, by the time it turns. I know, but I feel like it's like the easy. Okay, here's the thing. The during, I think it was Liberation Day. the thing that kept me like moderately comfortable with the direction of the economy is

the credit market really wasn't freaking out. Like 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.

It may be something that's, the things to me that are most likely are something that where it's the willingness to spend with part of 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, it's all part of their moat. It's part of how they're trying to make sure that they stay competitive. But for the non-tech companies, are they seeing a return on their investment? I'm sure they are seeing something, but you're obviously hearing about

token expenditures and all this stuff. So when that gets stretched, which was kind of the same, scenario we think about 2000 where it was a lot of front-loading of expenditure around Y2K, at some point just got tired of it. It's like, I don't need to keep spending more and more and more. I'll just spend the same amount. And that's itself 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 reliant on these, you know, these behemoths. All right, boys, how are we feeling for the rest of the series? Better than I did 24 hours ago, I'd say. We took their heart out yesterday. I think they're a resilient bunch. They're not the calves.

Castle's a dog. He's not going to give up. It's always Wembe. No, it's not going to come easy, but I also, I felt like the Knicks, I still do. The Knicks are the more mature team. They'll handle it. I think they needed that. The Spurs needed that game more than we did.

I think they're pretty exhausted from the previous series. Good. Wembe ran out of steam. Yeah, he ran out of steam the last three minutes. I still doesn't feel, I still can't believe this is how much. It's been, same. Same. It's been so long. I mean, it's funny. You mentioned PJ Brown. I mean, I remember. I was an 11-year-old kid when-hated that guy. When the Knicks, you know, in 94, I still remember that series. A series we should have won. That one's a little bit foggy. I was like, I was nine. So I don't remember as well as you did. We were up three, two 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 is this coming together? No, no time for citizenship.

Sorry, no time for cynicism. We're done with that. All right. 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 just really great.

Thanks, guys. We'll see you next time. Appreciate you watching. Hey, y'all. It's Kelly Clarkson with Wayfair. Ever order furniture online and wonder what if? Like, what if it doesn't hold up? That sofa was four days old.

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