The Most Worrying — and Reassuring — Signals in the US Economy

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. I've noticed something recently. More professional investors sound worried about how much money is being spent on artificial intelligence, with the promise that it'll pay off eventually. After the tech giants disclosed huge AI spending plans in their... Meta committing to spend$70 billion on AI this year. Microsoft reporting a nearly$35 billion AI spending spree. $35 billion in a single quarter. And it's not at all clear how that money is going to come back. There's also a chorus of concern about how concentrated the stock market is. How this record-setting run has been thanks in large part to just a handful of companies.

1:49Companies that have these sky-high valuations. Alphabet shares advanced 4.5 % in regular trading, with that company achieving a$3 trillion. NVIDIA, the main one,$5 trillion. $5 trillion is extraordinary. Apple briefly traded above a$4 trillion market cap, only the third company in history to ever do that. There's also been a string of mega deals lately and a few bankruptcies that have alarmed investors. And all this is happening against this backdrop of an economy in which there are some signs of strain. The Federal Reserve is shifting its focus to the jobs market, But inflation is still above the Fed's 2 % target.

2:27One of the great things about working at Bloomberg is at a moment like this, there are plenty of people to talk to, to call up, to email, including John Authors. He's a columnist for Bloomberg Opinion who focuses on global markets. And John is someone who has lived through and written about a fair share of bubbles and booms and busts. So let's pull back the curtain a bit. And I sent you this email yesterday and I said I had the conceit for an episode, which was, gee, it seems like things may be bad and maybe they are and maybe they're getting worse. How worried should we be? And I'd like to start with just what your reaction was to that.

3:02Oh, I mean, you're on the pulse. Don't worry. This is there is always reason to worry about whether you're worried enough. I asked John if he'd join me in the studio to tell me what Wall Street is worried about and what that means for everyone else. It's a big, big, reasonable question. And in my case, yes, I worry about things for a living. And I find there are plenty of things to worry about.

3:31I'm David Gura, and this is The Big Take from Bloomberg News. Today on the show, I sit down with Bloomberg opinion columnist and resident reader of Market Tea Leaves, John Authors, to discuss the trends he's watching in markets and the economy and where he thinks it's all headed.

3:52The first thing Bloomberg opinion columnist John Authors wanted to talk about was valuations, how expensive U.S. stocks are. The market has been on a tear. In the markets, the biggest reason for concern is valuations writ large. Ultimately, the only reason any stock can be more expensive than it normally would be is because it's going to do much better in the future, which is always unknowable. At the moment, US stocks are very, very expensive. You can then get into arguments about whether they're quite as expensive as they were in the top of 2000s. But if you're even having that discussion, you're conceding that we have a serious problem with overvaluation.

4:33Now, that doesn't mean that you can't use valuation as a timing tool at all. but for long-term investing the single most important factor in how well you do is the price at which you bought if you buy when things are too expensive you will not do as well and if you manage to buy when they're too cheap you will do excellently and plainly at the moment you have at least to think about is ai really going to do so fantastically that it's worth paying far more for the book value of these assets, far more for the projected future earnings, not the current earnings, far more for the projected future earnings of these stocks than people have ever asked in the past.

5:20So that's plainly front and center the biggest issue. Like a lot of us, John says he's been struck by how many headlines there have been recently about AI, about deals valued at tens and hundreds of billions of dollars. On Wednesday, Anthropic announced plans to spend$50 billion to build custom AI data centers across the U.S. The companies that are actually doing the build out of the infrastructure are still making more rather than less profits. So it plainly has longer to run. I'm not expecting this whole house of cards to collapse anytime soon. The sheer scale of the investment, just the sheer amount of money that's needed, copper and rare earths, we are discovering.

6:04is intense, the amount of money that will be spent on electricity is intense. We still need to be clear about exactly how much AI is really going to help us, how it's going to improve our lives. Is AI really so wonderful that it justifies the immense spending on electricity that appears to be necessary? That is the question. In the medium term to the long term, I'm very dubious as to whether this is really going to work. The great transformative technologies do all have a bubble connected to them, and the bubbles do burst. That's true of canals, railroads, cars, the internet, all of which contributed to the sum of human happiness and all of which created an investment boom followed by serious economic problems because the economy, the society, couldn't handle it at first.

7:01I think it's reasonable to expect that something like that will happen with AI. But at this moment, it doesn't seem frothy to you or bubblicious. You're not prepared to say so yet. Frothy, I'm very happy to use the word frothy. In terms of calling that it's the top of a bubble, no. I was around in 1999 and 2000 doing something quite similar to the job I'm doing now. Now, there's no one moment people can connect to explain exactly why the bubble burst when it did in the spring of 2000. It just gets to a point when it's just gone too far and people aren't prepared to pay the price anymore. And then confidence falls out from under it.

7:43I don't see any particular reason to assume that's about to happen. And there are differences in the way this bubble works compared to the other one. And what NVIDIA has done in the last two or three years was beyond compared to anything that happened in 2000. John, as I talk to investors, another area of concern I hear a lot about involves private credit. We saw the subprime auto lender tricolor holdings collapse along with the car parts manufacturer first brands. And then we had Jamie Dimon, the CEO of JP Morgan Chase, saying quite memorably now that there could be cockroaches in the economy.

8:19These could just be sort of singular events. There could be more. What did he mean by that comment? How did you interpret what Jamie Dimon said after the collapse of those two institutions? Well, first of all, to be clear what Jamie was saying, he wasn't saying tricolor is a cockroach, that these guys are these horrible six-footed insects scuttling around your kitchen. He was saying that when you see one or two, there tend to be a lot more out there, which is a valid point about the way credit markets tend to work. And his comment then got taken as being an attack on private credit rather than a point about the credit cycle.

8:54And I think both are valid. I am very struck by a point that Scott Besant made, the Treasury Secretary, a few months ago, which is that he was pointing out that there was so much more growth in private credit than there was in the banks. and he took that as meaning that the banks were being too heavily regulated and that they should be regulated as lightly as private credit. And by the same logic, it is exactly as plausible to say that that is because private credit isn't being regulated enough and should be regulated as tightly as the banks. The changes in regulations since the crisis mean that the manifestly systemically important banks that also control the payment system, They are less vulnerable, I think it's fair to say, than they were before.

9:43But we don't know exactly how systemic the big private credit issuers are and whether indirectly we will eventually get to such a point. I'm not predicting 2008 again. People will find ways to stop it before it gets as bad as it got in 2008. But that is the issue. It's reasonable to think that we ought to be close to the top of the credit cycle, and yet we're not priced for that. And that creates the risk of quite a come down. That said, since Jamie Dimon said that, there haven't been any more cockroaches. People haven't slammed their feet down and squelched any more cockroaches over the kitchen floor in the last few weeks.

10:23Plainly, if we do get a couple more, that's going to be a problem. So that's what John Authors has been watching in the markets. Up next, he turns his attention to the Federal Reserve, to its fight against high inflation and its competing concerns about the labor market. We'll also talk about vibes, how everyone is feeling about the economy. That's after the break. I'm Carol Masser. And I'm Tim Stenevec, inviting you to join us for the Bloomberg Business Week Daily Podcast. Now, every day we are bringing you reporting from the magazine that helps global leaders stay ahead. We've got insight on the people, the companies and trends that are shaping today's complex economy.

11:00That's right, Tim. We're all over global business, finance, tech news, all as it is happening in real time. And we've got complete coverage of the U.S. market close. Gotta say, basically, if it impacts financial markets, if it impacts companies, if it's impacting trends and narratives that are out there, we are on it. We also have a lot of fun doing it. Bloomberg Business Week also brings you the analysis behind the headlines through conversations with our expert guests. And we are doing this all live each weekday. And then we bring you the best analysis in our daily podcast. Search for Bloomberg Business Week on YouTube, Apple, Spotify, or anywhere else you listen.

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11:57Bloomberg opinion columnist John Authors says there are a lot of contradictions right now. Above target inflation and a record high stock market is one. For years now, the Federal Reserve has been trying to get inflation down to a target of about 2%. And while policymakers have made progress, it's still not where they want it to be. But Wall Street is convinced the Fed is going to keep cutting interest rates. In the last six months, inflation has gone up and interest rates have gone down. Both not by all that much, but it's the direction of travel that counts. That's unusual. If inflation keeps doing this for much longer, it will imperil the move to cut interest rates.

12:39Basically, I would argue that the stock market is currently priced on the assumption that the Fed is going to make a dovish mistake. In other words, it's going to cut rates when it doesn't need to. That was one of the things that contributed to the great bubble of 2000. Even as the Fed remains concerned about inflation, it's had to shift its focus more to the labor market, where cracks are starting to emerge. But John says if you look past the headline numbers, there are some bright spots, some reasons for optimism. The thing that is very positive about inflation is that services inflation does appear to be coming under control, which has of late been by far the biggest area.

13:22That's been more than half of all of inflation is inflation in services. that's driven more than anything else by people's wages services. Businesses rely far more on their wage bills as a proportion of their budget than manufacturers, retailers. Therefore, it's reasonable to hope that we're not going to get inflation to rise significantly from where it is. We're also getting a clearer picture, John says, of the effects President Trump's trade policies are having on inflation. You do see tariffs beginning to have an effect. there is a much sharper inflation of the imported goods. You do see core goods inflation is rising.

14:01It is still a very small proportion of the whole, but it's positive. And for most of the last 10, 20 years, core goods inflation has actually been negative. The things that come from China, typically have been getting cheaper over time. This is a part of the inflation mix of what we spend that we are used to actually getting cheaper over time and creates the space for us to spend more on services on iPhones. We're at this moment where there is uncertainty. We're waiting to see if the US Supreme Court will side with the White House and agree with the president that many of the tariffs he's put in place on national security grounds are legal.

14:47But it's also a moment when there is less uncertainty about the level of those tariffs. A lot of negotiations have happened, John says, and those tariff levels have settled. That's probably been the first time that's been true for a while. If you think these tariffs are only going to be at these levels for three months, and you're a company that wants to maintain a competitive advantage, you'll eat them. If it's plainly going to be there for a year, you just can't do that. It's certainly true, given that I have been one of the many people who said, if you do tariffs like this, it's going to cause inflation.

15:19And it hasn't immediately caused a sharp rise in inflation. Inflation still strikes me in the medium term as a problem, and potentially a very serious one. Companies are still putting in their measures to alleviate the impact of tariffs. And so it's probably not going to get in the way of the rosy assumptions just yet. late wednesday night president trump signed a bill that officially ended the longest government shutdown in u.s history but during that shutdown economists and investors and policymakers didn't have access to all the economic data and reports they usually do but we did get data from other sources on employment on inflation and consumer sentiment and i asked john how much that sentiment data can tell us about what's happening in the economy much less than we used to be able to Why is that?

16:08Because we're polarized. And what appears to be new is that fairly simple, straightforward questions about how are things for you are now being viewed through a political lens. In the closing months of Joe Biden, when the economy was actually growing quite nicely by any sensible measure, Republicans thought their lives were worse than they had been during the worst of the pandemic. After the election and the return of Donald Trump, Democrats, it's as though all the Democrats suddenly lost their job. The lines cross very dramatically. It's literally as though they're living in two different countries.

16:56Republicans are suddenly convinced that their lives are much better, that current conditions are great, and Democrats suddenly think everything is terrible. Not only can both be true at once, both are obviously untrue. That is a social phenomenon rather than an economic one. But it does mean you've got to be very much more careful than you ever used to be with sentiment data. Crucially, John says, the way people think about the economy, how they feel about the economy is important because it can have real impacts on the economy itself. One of the concepts I found most useful throughout my career since I've had it explained to me is from George Soros, who has this idea of reflexivity.

17:45The idea that markets can create their own reality. So if people think rates are going down, they're more likely to go down and so on. The reflexivity once people start having really extreme views of the present and of the immediate future is very difficult to gauge. None of this really helps you say when the top of the market is in. If we wake up tomorrow to discover meta platforms has gone bust or something, that's probably the top of the market. That isn't going to happen. But I don't see anything at the moment that says this is the top. Get out. I see plenty of reasons to think this is more overblown, more positive than it should be.

18:33And there are reasons for caution in the medium term. But maybe I'm just too old.

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