Fed Chair Pick Kevin Warsh Wins Key Senate Committee Vote

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2:06Scarlet Fu:Bloomberg 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. Warsh, Fed chair nomination clears Senate panel vote. So after much delay, moving very quickly here. So we want to bring in Enda Curran, Bloomberg Fed and economics reporter. Enda, it looks like we're making some progress here or the Congress is making some progress on getting Mr. Warsh on board. Yeah, so after many months of protracted negotiations, we finally have had that committee vote now.

2:53So this moves Mr. Warsh's nomination out of the Banking Committee, and it should go on to the Senate floor for a full vote, probably at some point soon. Mr. Powell, current Fed Chair, Mr. Powell's term ends on May 15th. Whether or not Mr. Warsh gets his full vote by then or whether he's a few days over, it doesn't really matter very much because the next policy meeting after today isn't until the middle of June. So today just really cements that after that extraordinary succession drama we've had since January over the DOJ investigation and all the rest of it around, all the rest of questions around the Fed.

3:29Mr. Warsh has now cleared that critical vote and is on the way to be the next chair.

3:33Scarlet Fu:Right. The question now is what happens with Jay Powell's seat? His term as chair ends on May 15th. Do you think this is something he's going to address at the news conference at 2.30, Enda? I think it'll be hard to avoid it, Scarlett. As you say, his term as chair will end in the middle of next month, but he's entitled to remain on as a governor at the Fed until January 2028. Typically speaking, Fed chairs head off and enjoy their retirement or head into the sunset. But Mr Powell made it clear, was maybe last month, I think it was, in his press conference that he can't leave his governor role until the spectre of that DOJ investigation into him and the Fed is cleared in all finality.

4:13Now, there's a debate over whether or not what the DOJ did last week in terms of dropping their investigation does meet that threshold of finality. Because two things. A, they continue to appeal against the Fed's court win that quashed the DOJ's opinion in the first place. That's one threat on this. And the second part of it is the Inspector General investigation into the Fed, into the cost of the building renovation there, is expected to report at some point over the summer. and the DOJ made it clear they have a threat that they could renew their investigation depending on what that particular finding from the IG throws up.

4:46So from Mr. Powell's point of view, he may want to hang on until all of that's clear. Critics would say he should just move on because it risks sort of stoking political resentment and political criticism of the Fed. But he's sure to comment on it, I would imagine, at his press conference later today. Independence of the Fed, where is that discussion these days, Enda? it's become very fraught very divisive of course um you know mr president trump continues to hammer the fed over interest rates he wants them brought down quickly he's even said that he would be disappointed if mr warsh if he gets finally confirmed to share doesn't get a move on pretty quickly as well so that political pressure continues to be there we wait of course the outcome of the supreme court really on the governor cook case that's going to be very important we'll Wait and see what Mr.

5:32Powell signals about his future. That's going to be very important. But I think putting down the end of the year, there will be a lot of focus on how will Mr. Walsh respond to political criticism? Will he kind of stand up as a heat shield for the Fed? Or will he be seen as buckling under Mr. Trump's pressure on the one hand? And on the other hand, how do the rest of the policymakers react, including Mr. Powell, legs of Ms. Cook, etc. So lots of question marks still in terms of the mood music hanging around the Fed.

5:57Scarlet Fu: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. What sets them apart? They're not a crypto exchange chasing trading fees, not a company betting its balance sheet on Bitcoin, not a mining operation.

6:35Scarlet Fu:CoinShares is an asset manager with recurring fees, a fixed cost base, and a business model you can actually model. Now listed on NASDAQ under ticker CSHR. Learn more at coinsharesipo.com. Thank you.

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9:13Scarlet Fu: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. One of the issues is the growth of AI. And we've seen the market really discern winners and potential losers from AI. And one of the sectors that's come under pressure has been software, particularly software as a service sector. So we're going to break that down a little bit. We can do that with Neeraj Patel, senior software analyst at Bloomberg Intelligence.

9:46Neeraj, I know you put out a research note recently on this, but we saw earlier or late last year, earlier this year, some software stocks and particularly the software as a service stocks like ServiceNow and Salesforce really get sold off here. What's your view? Yeah, I think when we look at the AI disruption to application software, Huge market, 700 billion market, but definitely there's winners and losers. And from our view, system of record companies like Salesforce, like Workday, like SAP are in the at least not going to be structurally replaced by AI. Other companies that are in marketing application, HubSpot, Klaviyo, even some of Salesforce marketing, Adobe marketing, they have more pressure there because it's a very heavy language based, repetitive type of solution that they offer to the clients, which AI is very good at.

10:43So we think they're more suspect to being displaced.

10:47Scarlet Fu:The software market is massive. We kind of forget that sometimes because we talk about only the big players, but there's a lot of startups and they're borrowing from the private credit market as well. And I go back to some news from the previous week about a Blackstone fund cutting the value of its loan to a dental implant company. That's kind of private credit woes continued. But Blackstone also refused to extend a lifeline to a software company, Medallia. And I know that's kind of out of the purview of the big software companies that we covered that are listed. But I'm wondering whether there's any spillover to the bigger software companies from something like that.

11:27Yeah, I think it's a ripple effect. And I think you've seen this with the valuation coming down. And when we look at a couple valuation metrics, even for the big large cap companies, they're trading on par with the S &P 500. That's never happened historically. They're trading at 20 times forward earnings, and they have about an 8 % to 9 % sales growth rate and operating margin that's on par. And there is definitely spillover from these smaller companies because what that is signaling to us is the additional growth, which was an additional analytic or AI layer like Medallia was selling, like these other companies were providing, was sitting on top of a base core package.

12:06So the additional growth rate is being pulled down because AI is attacking the workflow layer, the analytic layer, the insight layer, which was an upsell and additional cross sell for these companies. What can some of these software companies do, I don't know, to protect their business, to defend against AI? What can they do? Yeah, I think they're taking the steps. We're just not seeing it in the financials and we're not going to see it for the next couple of quarters. You're going to see this steady low teens growth rate. The gross margin is going to be preserved. But under the hood, they are developing a lot of agents for their portfolios.

12:44And that's exactly what they should be doing. They're introducing agents and they're introducing them quite aggressively. they're not going to charge customers for this additional usage. They want to land that account. And maybe after mid-2027, we expect some repricing of the subscription and the outcome task-based solution. So they're definitely taking the steps that they should be in introducing agent and AI native solutions. But it's just going to be, you know, we're going to have to wait for some type of AI monetization to surface from these companies, which is going to take until mid-2027 from our view.

13:22Scarlet Fu:Neeraja, we were talking earlier about how four of the MAG7 names are reporting earnings after the close. What will you be listing for as it affects your software industry? Yeah, I think we've been trying to get a handle of, you know, when is the financial impact to the application software and as well as infrastructure software going to take place? It's not there today, as we've stated. And I think, as you're pointing out, Scarlett, But what do we look at is kind of a little gray. But what I've been focusing in on is what are the building blocks for these agents? And when I look at the building blocks, I see the coding agents, Cloud Code, Cursor, OpenAI, Codex.

14:00Are the monthly downloads increasing there? Also, some of the other ecosystem metrics like MCP, which is a standard protocol of communication. Are the downloads increasing there? are the usage for orchestrating these agents. There's some other AI native solutions like Langchain and Crew AI. Is that usage being increased? So as long as that increase is continuing, which is being utilized by these big four cap companies, then we think agents are going to come to the enterprise and it's just a matter of time and it's giving us a signal that trends underway.

14:36Scarlet Fu:This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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