DOJ Drops Powell Probe, Smoothing Path for Warsh to Lead Fed

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1:59Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern. On Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts. Or watch us live on YouTube. The Department of Justice has dropped its investigation into J-PAL and the Federal Reserve regarding its building cost overrun. Let's bring in Michael McKee, our chief international economics and policy correspondent. Mike, this is something that should smooth the path for Kevin Warsh, President Trump's nominee for the Federal Reserve chair, to become Fed chair, doesn't it?

2:45It smooths the path, but whether the path gets taken or not, we don't know yet, because we don't know whether the agreement to have the inspector general continue a probe into the buildings. And we don't know whether that includes Powell, which Pirro had included. But we don't know whether that's enough for Tom Tillis to say, OK, let's have a vote. He has not commented, and everybody's madly watching his Twitter feed and et cetera to see what he thinks. That would be step one. And then step two is getting the nomination to a vote in committee and getting it out to the floor. There isn't a lot of legislative days left, but they can make things happen if they want to.

3:29So odds are a little better now, shall we say. We were talking in the studio to Elliot Stein. He's a litigation analyst for Bloomberg Intelligence. He's a lawyer. He said if he were advising Chairman Jay Powell, he would say you need to get an immunity agreement. Yeah. I mean, that's that's that's a big move. That's been my thought all along, because Inspector General's reports and they were talking about also the Banking Committee may be doing an investigation. Congressional investigations, both of those can lead to criminal referrals to the Justice Department. So the question is, obviously, they could find that Jay Powell had his hand in the cookie jar, which I very, very much doubt.

4:10But there could be just some pretext in the IG's report that Janine Pirro would seize on again once Kevin Warsh is in as chair and then go after Powell because Trump wants revenge. Yep. So I think that it's not going to satisfy the Fed chair unless he has some kind of immunity agreement. Mike, dumb question. How does this change the FOMC meeting, the deliberations next week? They begin on Tuesday and they come out with their decision Wednesday at 2 p.m. You will be, of course, announcing it for us here on Bloomberg Television, Bloomberg Radio. And then J-PAL takes the lectern at 2.30 p.m. to hold this news conference.

4:50I don't think it changes much at all. It's not going to be a factor in the decision making in terms of interest rates, in terms of the Fed's. There is no new economic outlook or dot plot at this meeting. So it was going to be pretty much a quiet meeting, and that leaves the vacuum to be filled by questions about and to Jay Powell, which I think is what we still get. But it doesn't change the way the markets are going to react to this because it's not going to really involve interest rate policy. It'll start to, as we move forward, once Kevin Warsh gets finally confirmed, then we'll maybe see some reaction to what people think he might do.

5:34But in this press conference next Wednesday, which you'll be attending in Washington, don't you think Mr. Powell have to have a definitive statement one way or the other, as opposed to kind of we'll see how it develops? I'm not sure he has to. He's getting close to the time when he's not chair anymore. And that would be, in theory, when you would make a resignation announcement. That's mid-May or end of May? May 15th. Okay. And so maybe he said something. But again, as we were talking about the idea of an immunity grant, he may be waiting for something like that. It's just not at all clear. He also may want to stay on because he wants to see how things develop.

6:20But that's not the norm, right? That doesn't usually happen. It's not the way it's been done in the past. There's only been one Fed chair who stayed on as a governor. and that was in the late 1940s, early 1950s. And so that's not likely to happen again. I would think that Jay Powell would end up leaving, but he could end up staying for a couple of months. Stuart Paul from Bloomberg Economics was saying, you know, his hands are kind of tied to Kevin Warsh. He can't go out there and start just slashing short-term rates because that's going to really stoke inflation and you'd see rates go up on the back end of the curve and all that.

6:56I mean, there's not much he can really do. Kenny? No, and I think it's going to take a while for people really to internalize that because the markets are all hoping so much for rate cuts. But when you look at what's happening with the war, with the oil prices, with the economy in general, the fact that we've seen inflation rising, it can't come in the door and start cutting rates. So it'll take a while before anybody's going to be able to point to the Fed and say, well, that was Kevin Warsh pushing them to do that because they're not going to do that right away. And there won't be any kind of decision about other reforms immediately, but he could work on things like communications.

7:34He doesn't like the dot plot. Maybe they get rid of that. Those things might even come before any rate. Stay with us. More from Bloomberg Intelligence coming up after this. For years, the conversation around Bitcoin was the same. Is it real? And does it belong in a portfolio. While others debated, CoinShares got to work. In 2015, they launched the world's first Bitcoin EDP, regulated, listed, and built for institutional investors. Long before the U.S. market caught up. Today, they manage over$6 billion in assets and have remained profitable through every market cycle, including the 2022 downturn.

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10:08Thank you. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Want to talk tech? We talked to Dan Ives, Global Head of Technology Research at Wedbush Securities. Dan, I'm guessing the conversations you're having with your clients over the last several weeks are a lot different than what they were kind of late last year as it relates to tech. How do you frame it out for us?

10:45Dan Ives:Look, Paul, I think right now it's really about, okay, CapEx, but where's the monetization? Are you starting to see it? Is it starting to actually spread out beyond just big tech? And I think you're starting to see that, obviously, with Intel, Cisco, and others. Look, and obviously, it's been a huge debate, right, relative to the Anthropics software, Ghost Trade. We saw what happened this week in terms of ServiceNow and others. So I think I would call it a huge debate. And that's why it all leads to next week really being like huge pieces to the puzzle of the tech trade. What is the market sentiment like right now when it comes to CapEx?

11:26Because for a while, if companies reported ended up saying that CapEx would be more than they had forecast, it was seen as OK and then it was seen as negative. How are investors feeling right now?

11:37Dan Ives:Yeah, it's sort of, that's been a hot and cold situation, right, relative to the CapEx. I think now there's almost a consensus view where it's like, okay, CapEx is going to be reiterated by big tech. No big tech company is going to slow down CapEx going to next week. If they did, stock would be down because that would ultimately be a negative in this arms race. I think the big question is going to be with the hyperscalers, specifically Microsoft, Google, Amazon, on, do you see acceleration beats when it comes to cloud growth? That's important in terms of capacity. Look, what it really means is the CapEx is now starting to bear fruit.

12:16Dan Ives:The monetization is happening. You're seeing it on the software and the hyperscaler side. And look, that's the big piece. That's really the beat. Do you start to see monetization? I think we start to see it next week. And I think Meta is another one we'll see on the advertising side. Dan, I know you initiated coverage of Oracle. Talk to us about that company, how you see it participating in this tech stack here going forward. Yeah. And Paul, I covered it for many years. And the reason I like reinitiate on it here is just because I believe the street is way miscalculating this name. I mean, look, I get the worries about the debt and what they're taking on given OpenAI and what they're going for in terms of the$600,$700 billion that they're going after and the$50 billion of debt.

13:07Dan Ives:I think Oracle is going to be a tremendously bigger company the next two, three, four years than it is today. I think investors are way discounting their ability to monetize what's going to be this backlog and really, you know, as more and more companies move to the AI revolution with Oracle. And that's our whole call. I mean,$2.25 is a price target, but this stock ultimately that could double as they monetize AI over the coming years, I think way, way oversold. I mean, the thing with Oracle is that it needs to borrow so much money that it's got to tap the public markets and the private markets kind of everywhere in order to be able to fund this build out.

13:49And we've heard from Moody's warning that private credit funds with a lot of exposure to software and tech face a lot of refinancing risks because there's a bunch of debt that matures starting in 2028. How do you think about that in terms of what that means for these big tech companies needs to borrow?

14:08Dan Ives:Yeah, I think it's a great point. It's a huge debate. When you get things like Tama Bravo and Medallion and some other things, you can paint them all with the same brush. When you look at Oracle, you're talking about a company that the amount of debt that they'll take on is still pretty small relative to their cash flow generation and the overall, what I believe, structure of the business. I think they'll be able to raise, and they've already sort of laid out the$45 to$50 billion, how they're going to do that. Now, is it ideal? Because companies, obviously, free cash flow. You don't want to see software companies take on debt.

14:45Dan Ives:But, Scott, my view is to take on$50 billion of debt to go after$700,$800 billion, that to me is a bet that I want to see them take. Hey, Dan, this is Switch Gears to Tesla. They made some news just yesterday kind of talking about CapEx and they're boosting their CapEx to$25 billion for AI and for their robot business. Put that in context for us. How do you think that is that a good move for this company? I think it's exactly what they need to do. I mean, we've always talked about a lot. It's like the future is about autonomous robotics. I mean, this is a company from a physical perspective. I view NVIDIA and Tesla, the two best physical AI plays in the market.

15:33Dan Ives:I want to see them do this step by step, build it, because that's really the next five, 10 years. That's what Tesla, Tesla is an AI company going forward. This is not an auto company. Yeah, that's been made very clear. I mean, certainly Elon Musk has been pushing that narrative for a long time now. I'm curious, and this might be a really basic question, but how does the war in Iran and the uncertainty there affect these big tech companies as they report? I mean, do we expect any kind of mention of the uncertainty, the fog of war affecting their decision making, their planning in any way? I mean, like ServiceNow hit it a bit, right, in terms of some of the Middle East deals.

16:16Dan Ives:Look, I think when you think in terms of a lot of the build outs outside the U.S., some of the bigger data center, big AI build outs are in UAE, Saudi. But I don't really think that that's something that's going to be a huge thing on the conference call. I think that's much more year and a half from now, two years from now. Now, I think the big question is supply, helium, especially through the street. We were just in Asia for two weeks. I continue to think unless this stale me last past Memorial Day into June, July, like for now, I think it's pretty contained. But look, I think I think investors want to understand what the demand environment looks like in these companies.

17:02Dan Ives:They're not slowing things down in any way because of the geopolitical. Stay with us. More from Bloomberg Intelligence coming up after this. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios. One of these tools is called Generated Assets. It allows you to turn your ideas into investable indexes. So let's say you're interested in something specific like biotech companies with high R &D spend, small cap stocks with improving operating margins or the S &P 500 minus high debt companies.

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19:28Terms and conditions apply. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. We often talked about the restaurant industry because we think it's a really good way to get a sense of how the consumer is faring out there because there's so many different strata within the, or so many tiers within the restaurant industry. gives you a good view of the consumer. One of the key cost issues for the restaurant industry is labor.

20:04It's usually, can I get enough labor at the right price? So we want to delve into that a little bit. Chad Moutray, chief economist for the National Restaurant Association. Chad, talk to us about the labor component of the restaurant industry in this country. We've got labor participation, pretty low levels, I think the lowest in the last four or five years. We've got immigration reform, which has choked off a source of labor here. How's that impacting the restaurant industry? Well, the good news is that only 22 % of restaurants told us last year that they were understaffed. So that was the lowest we've seen since the pandemic.

20:39Yet you still continue to see restaurants struggling with managers, chefs, really highly skilled workers. You've seen even stories about dishwashers being a challenge. I think the immigration story certainly is also very challenging for a lot of restaurants in terms of their ability to retain workers, to get workers to show up, right? Certainly that affects sales as well. In general, I think it's easier to hire today than it was, say, two or three years ago, but it's still a challenge. There's a lot of turnover in the sector and the ability to fill those jobs can be pretty challenging. And I imagine the ability to fill those jobs in certain markets is harder than in other markets as well.

21:20How does that change the landscape of the restaurant industry in this country? Well, I think, you know, certainly I think restaurants have had to look at ways that they can fill those jobs quicker, right? So technology is certainly one of those enablers that really gets you to speed up that hiring process. The last thing you want, if you're a restaurant, keep in mind we're in the hospitality business, is to be understaffed. That can affect sales. That can affect overall employee morale. And so we've seen through a lot of investments in technology, the ability to speed that up from weeks to days.

21:52So I think you've seen a lot of restaurants certainly adopt that overall model, maybe doing some multi-training of their staff so they can perform other roles. But as we said earlier, overall wage growth is up at least 35 percent since the pandemic. And when I talk to operators, labor costs, even more than food costs, are really one of the bigger challenges that they're facing right now. Well, usually for a lot of people, including myself, the restaurant industry is kind of an entry level into the workforce. Is that how those trends changing, if at all? That's still very true, Paul. You know, the reality is half of all Americans got their first job in a restaurant, including me.

22:34And if you include everyone who's had any experience in a restaurant, that's two thirds of all Americans. And so we are often that training ground for people, even if you don't stay in the restaurant sector, you're that training ground to learn some of those key skills of how you work with people, how you continue to get things done and work under pressure. And I think one of the challenges is that given where the participation rate is now, you're seeing a lot of young men, a lot of younger folks who are not getting some of those early skills before they go out of the workforce that they would have gotten in a restaurant sector or restaurant setting had they taken some of those jobs in their team years.

23:11Although certain policies might make the jobs more attractive now to people, including the no tax on tips. Right. So I'm wondering how that is showing up in hiring for restaurants. Is that something that has marked a sea change? Well, when I talk to operators, many of them are saying that that is a huge selling point. The fact that, you know, the first twenty five thousand dollars of your tips are not taxed. Right. You also have no tax on overtime. And both of those kind of working in tandem, I think, can help that overall recruitment and retention story. Again, not everyone in the restaurant is is is is getting tips.

23:49But, you know, to the extent that folks are being those tips are being shared, I think it certainly can be a huge recruitment tool for getting some of those workers in the door. So, Chad, on the policy front, are there other policies that would be helpful to the restaurant industry here, particularly on the labor front? Well, I think one of the things that we need to keep in mind is that overall restaurant, the restaurant business is very challenging. We know that the typical profit margin for a restaurant is just 2.8 percent. That's for full time for a full service restaurant. That's well below where it would have been before the pandemic.

24:24We've seen those overall profits continue to be squeezed. And I think one of the stats that came out in our state of the industry report in February that really was the most telling was that 42 percent of restaurants were not profitable. last year, right? So profitability is a real challenge. And I think it's incumbent, I think, really on policymakers to recognize just how difficult the math is for restaurants to try not to add additional burdens to them in terms of regulatory burdens, etc. And I think that's really, I think, one of the more eye-opening numbers that I look at. For a limited service restaurant, the typical profit margin is 4%.