Investors Question Kevin Warsh’s Credibility & People Are Talking Less?

0:01Good morning, Brew Daily Show. I'm Neal Freyman. And I'm Toby Howell. Today, Wall Street staged a revolt after the Fed beating.

0:07Neal Freyman:Then a meta in Microsoft reported earnings and they're still spending on AI like they stole their parents' credit card. It's Thursday, July 30th. Let's ride.

0:26One of the most bizarre business stories of the past few years has reached a resolution. This week, eBay agreed to a$56 million settlement with two Massachusetts journalists who had been harassed in stocks by company security personnel in 2019. The TLDR is back then eBay was catching heat from an activist investor and this couple, the Steiners, who ran the website e-commerce bites, were posting unflattering articles about the company. Then the freaky mail started showing up. For a period, the Steiners began to receive packages of live cockroaches, a bloody pig mask, a funeral wreath, and a book on surviving the loss of a spouse.

1:04Turns out this campaign was all orchestrated by some eBay executives to get the couple to shut up. eBay has apologized, saying what the Steiners were subjected to by former eBay employees in 2018 was wrong, reprehensible, and should never have happened.

1:19Neal Freyman:I remember covering this story when I first joined The Brew five or six years ago. It was crazy then and it's still crazy now. It also got me thinking though, we talk a lot about companies on this podcast. Who's going to send us live cockroaches and a bloody pig Halloween mask? The only answer I could come up with was Chipotle, not because of what we say about them, but because of how many times I've mispronounced it. Chipotle, Chipotle, Chipotle. If any Chipotle execs are listening to this, a carnitas burrito instead of a bloody pig Halloween mask, please. Which now that I think about it are actually kind of the same thing.

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2:33Neal Freyman:So if you've got your own hard questions about AI, head to claude.ai slash mbd to submit it to Anthropic and explore how they are answering them. That's C-L-A-U-D-E dot A-I slash mbd. The Fed held its meeting yesterday to decide what to do with interest rates, and it feels like we're in a situation ship with Kevin Warsh given how deliberately bad at communicating he's been about his plans to tame inflation. Markets expected the Fed to do absolutely nothing and hold rates steady, but there was still a roughly one in three chance of a surprise rate hike. In the normally predictable world of central banking, it made for an exciting lead-in.

3:09Neal Freyman:In the end, the Fed voted 9-3 to keep rates the same, but that three is the headline. Three officials wanted a quarter-point hike, the first time since 2016 that three policymakers have dissented in the same direction. You can understand why there's a split. Data shows that the economy is still growing at a solid pace, the labor market remains stable, and recent inflation readings have cooled slightly. But inflation has also been above the Fed's 2 % target for more than five years now, while tariffs and higher energy prices from the war in the Middle East are a constant inflationary threat. For new Fed chair Kevin Warsh, the split Fed also puts his communication experiment to the test.

3:48Neal Freyman:He's been very vocal about not being vocal, deliberately trying to wean markets off the Fed's traditional forward guidance, and yesterday was no different. The statement the committee put out was much shorter than traditional Fed statements. It was almost identical to the one released after last month's meeting, frustrating some who wanted clearer commitments he would hike if conditions warranted. Neil, with so much uncertainty swirling heading into the meeting, the Fed ended up sticking to the status quo. But it only feels like a matter of time before they're forced to Troy Bolton it and break free of this holding pattern.

4:19Just two meetings in, Kevin Warsh already has a credibility problem. Wall Street doesn't believe he's going to do what he says he's going to do. He says he wants to bring inflation down to 2%, but when asked why they didn't raise interest rates to do that, he really didn't have any explanation. And there was a bit of a revolt in the markets yesterday. The 30-year bond yield climbed 10 basis points after this Fed meeting, and they didn't do anything. The Fed just held interest rates steady, but you saw a huge reaction in the bond market. The 30-year yield, which is a proxy for long-term borrowing costs across the U.S.

4:54economy, rose to its highest level in 19 years, above 5.2%. So we're talking financial crisis levels from the bond market. So this was investors and Wall Street saying, look, we don't believe you. You're saying you're going to bring down inflation by raising interest rates. But look, you gave us no reason to think that you're actually going to do that.

5:14Neal Freyman:But Warsh is pointing to that bond movement and basically saying, this is exactly what I want. I want the market to actually set interest rates or set borrowing costs more so than the Fed. This is something that he has been vocal about. He doesn't want the Fed's move to kind of inform which way the economy is going and how markets are reacting. So the fact that rates essentially got higher, effectively got higher, if you are trying to buy a house right now or you're trying to pay off credit card bills, those rates are determined more by the bonds, even more so than what the Fed is setting. So the bond market may be calling its bluff or Warsh would argue it's doing exactly what he wants it to.

5:55Neal Freyman:But a lot of people are frustrated because Warsh could have given a good argument about holding rates steady. He could have pointed to the fact that we had a better than expected June inflation report. He could have pointed to the fact that maybe U.S.-Iran hostilities are thawing. These are all things that he could have said, hey, we're looking at this data and we think it all is pointing towards a hold. Instead, he didn't really say much of anything, which is why you mentioned it. He has a little bit of a credibility problem right now. So looking forward, I mean, inflation, the question facing Fed and Warsh is, is this inflation going to be a one-off shock or is there going to be a persistent problem here?

6:37And there are maybe three things that are driving inflation higher. One, which is kind of new, is the AI boom. We're about to talk about this in the next couple of stories, but companies are spending so much money on AI infrastructure, and that is inflationary at the moment. We've already seen consumer gadgets like iPads and Xboxes all rise because of the memory crunch. And then the other two things are we saw President Trump institute new 10 percent tariffs on the rest of the world. That is also inflationary. And then the final thing is this war. And you mentioned that tensions were thawing, but actually, no, they're going in the opposite direction.

7:13Iran launched a surprise attack on U.S. forces in Jordan earlier this week. And then overnight, Trump pledged to retaliate. And they're doing so. Oil prices are back up. And as we know, higher oil prices filter across the global economy in the form of greater inflation. So this just got a lot harder for Kevin Washington. Right now, the markets don't really believe he's going to do what he says he's going to do.

7:35Neal Freyman:I mean, we've talked about the bond market, but we might as well mention the equity market as well. The NASDAQ 100, which is a tech focus index, is now down 11 % from its June record. It's now in correction territory. We're on pace for the worst July on record. So no matter what, we're going to be the dog of the week tomorrow. I know, I know. And we're actually going to talk about this a little later as well. All right, moving on. And Meta reported earnings yesterday, and it might lose its membership card to the Magnificent Seven if it keeps this up. The biggest question going into this report was how much money is it spending on its AI buildout?

8:12Neal Freyman:And the answer made investors queasy. Total costs and expenses were up 55 % year over year, bringing its free cash flow to$784 million, down from$8.5 billion a year ago. Good for a cool 91 % decline. Its advertising unit is still one of the greatest money-making machines in the world, bringing in$59.3 billion and beating expectations. But Meta has committed to the AI race at this point, which means spending on data centers will continue until morale improves. It now has three big data center projects underway. A$9 billion one in Canada, a recently announced$14 billion venture with BlackRock in El Paso, and a monster data center in rural Louisiana that will cost more than$50 billion.

8:59Neal Freyman:Neil, we saw Alphabet go cashflow negative for the first time in two decades this past quarter, but Alphabet has a growing cloud business, something Meta does not, which is part of the reason why the market is so much more critical of its spending compared to the rest of big tech. Shares tumbled 9 % after hours as investors cast doubts on Zuck's grand plans. I think everyone was asking, why don't we have more of a concrete plan? That that's actually not me saying it. That's a direct quote from Brent Thill, who's a tech analyst at Jeffries Meta spending so much money along the lines of Microsoft and Google and Amazon, as we'll see who's reporting later today.

9:35But they don't have this cloud unit to monetize. So right now, how do they monetize? It's through advertising and WhatsApp and Instagram and things like that. But they're building all this compute capacity by building huge data center projects. And investors don't think that they need all of that capacity to run Instagram and Facebook and do all the AI on those particular apps. And they don't exactly have a plan to sell that to other companies. Zuckerberg did mention it on the call. He said, look, we think we're going to have some left over and we have a few customers in the pipeline. He didn't really mention that or any specifics, but investors will want to hear more specifics if Meta's stock wants to get a bump.

10:12Neal Freyman:Yeah. One of the issues is they did get specific in one category that people didn't really want to hear about, which is their 2026 CapEx guidance. They previously had a range of$125 billion to$145 billion. There was a little wiggle room there. Now they've revised it upwards to$130 billion to$145 billion. And so they are narrowing in on record spending. And that's not what the market wants to hear right now, especially because you're right. Meta has maybe the most tenuous story to tell when it comes to their AI. Because, again, if you are a Microsoft or if you are a Google, you have a cloud business that you can service other customers with.

10:53Neal Freyman:And Meta is dipping their toe into that. But they're years behind, decades behind when it comes to building out a cloud business. So they're burning cash with not exactly a great story to tell to investors of how that cash is going to pay off. Microsoft, on the other hand, is keeping its Mag7 membership card for now. It also reported earnings yesterday. And like Meta, the big news is that it is spending a lot. It dropped$41 billion on capital expenditures last quarter, up nearly 70 % from a year ago, as it continues its own build out of data centers. It expects to spend roughly$190 billion on CapEx this year.

11:29Neal Freyman:But Microsoft is actually turning it into a business. Microsoft now has 30 million paid subscribers to its co-pilot AI assistant, up from 20 million just one quarter ago and well ahead of what analysts expected. It also has a rip-snorting cloud division. Azure revenue grew 43 % with the unit topping$100 billion in annual revenue for the first time. Microsoft is also sitting on a staggering$678 billion backlog of revenue it hasn't yet recognized. which sounds sweet until you realize that a lot of it comes from contracts with open ai the company it owns 27 of new investors punish meta because it's spending billions on ai without a cloud business to directly monetize that investment microsoft is almost the perfect counter example it is spending even more aggressively but azure is accelerating copilot is expanding and the company is still cash flow positive and stock grows eight percent after hours which in this market is a huge win.

12:27It's a mirror image of Betta's earnings call. Microsoft's cloud unit Azure grew the fastest pace in four years and even topped expectations, 43 % versus 40%. If the question from investors to these executives like Mark Zuckerberg and Satya Nadell, the CEO of Microsoft is, are you making money from AI? Are you making money from spending$190 billion a year to justify all of that investment? Metta could not answer that question. And Microsoft absolutely did because they're saying, hey, look, oh, you got a lot of workers, employees using Copilot now because that's our AI service. And we have a bunch of companies paying us for server space because they're using our cloud offering.

13:06So they have a much more compelling story to tell of how they're making money from all these AI spending.

13:12Neal Freyman:Still, despite this good earnings report from Microsoft, the stock is still down around 17 % this year. And I just want to zoom out for a second. The Magnificent Seven has been the force that has powered the market to all-time highs over the last decade or so. But now that narrative is cracking a little bit. The equal-weighted S &P 500, where every company gets the same weight, that has rallied to an all-time high, which shows that the market is broadening a little bit. It's not just the Magnificent Seven in everyone else. And we're actually seeing that in this latest crop of earnings reports.

13:45Neal Freyman:Yesterday, outside of big tech, Starbucks and Chipotle reported great earnings and raised their guidance. They say they're seeing broad-based gains across all incomes and all consumer age groups. So consumers are being resilient right now and investors are shifting their attention to these consumer stocks, honestly, and away from big tech because like while you guys are doing your AI thing, these companies are just servicing people who want coffee and burritos. So maybe that's the next story that we'll be talking about is how big tech is no longer the thing. Magnificent Seven is no longer the narrative.

14:19Neal Freyman:It's about the other players in the market right now. All right, we're going to take a quick break and come back with Neil's numbers right after this. Finding the right shoe is no small feat. Enough with the foot size jokes. That wasn't a joke, but Ultra's running shoes are designed to give you room for your toes for comfort, balance, and strength. Ultra has more room for your toes so they can spread out and your feet can stay in a natural position. Ultra does actually make shoes shaped like feet. What a concept. Use promo code MorningBrew10 for 10 % off your first pair of ultra running shoes at ultrarunning.com slash morningbrew.

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15:45Neal Freyman:Toby, have your biceps been getting bigger? Yeah, I think it's these Ultra Pouches I started using. They give me a nice energy boost for my gymcess without the vasoconstriction that comes with nicotine. Ultra Pouches also help you focus thanks to clinically proven nootropics and adaptogens. Ultra is the ultimate guilt-free pouch delivering instant focus and mental clarity without nicotine or caffeine. New customers can use code MBD to get 15 % off at TakeUltra.com. That's takeultra.com for 15 % off with code MBD After you purchase, they'll ask you where you heard about them Please support our show and tell them we sent you Welcome to Neil's Numbers, the segment where I share three stats in the week's news that will have you talking, and you'll see what I mean in a bit For my first number, the skies are busier than a Trader Joe's on a Sunday afternoon According to FlightRadar24, last Thursday was the busiest ever day for commercial aviation with 153 ,359 flights tracked.

16:46Imagine telling someone this in the spring of 2020 when airports were ghost towns. They'd think you were crazy. It's not a coincidence that the record-setting day happened in the summer. During the warm months in the Northern Hemisphere, airlines jack up the number of flights to accommodate the increase in vacationers, like Toby going to all of his weddings. But the record was not a given. High fuel costs from the war in Iran, lower consumer confidence, and questions around spending made for an uncertain summer travel season. From the looks of it, though, overhead bin space is more precious than ever.

17:15Neal Freyman:When you count all aviation, so not just commercial aviation, the number is even more absurd. On July 23rd, Flightradar tracked 287 ,000 flights because when you factor in military and private aircraft as well, that's what makes the number higher. There was also a big aviation events taking place across the country, one in Farnborough and then one in Oshkos. sorry yeah Farnborough is in England Oshkosh is in Wisconsin which meant a lot of planes were just up in the air and flight radar only surpassed 200 ,000 total flights on June 29th 2025 now we are getting closer to 300 ,000 flights so a lot more planes are taking off these days yeah and I want to focus on one plane actually because another record was set in aviation this week Qantas, an Airbus A350-1000ULR, which is a modified Airbus A350, just completed what is believed to be the longest ever commercial flight.

18:18It took off from Melbourne, Australia and landed in Toulouse, France on Tuesday. And I mentioned that because that is a far distance, but it took this plane 24 hours and 24 minutes to make this journey. It purposely went the wrong way across the Atlantic and Pacific. And this is Qantas testing its Project Sunrise, which is coming next year. And they're launching long flights, very long flights from Australia to England. So this is part of the testing phase. But yes, these pilots, there's nobody on board. There are no passengers on board. But this plane was in the air for over 24 hours.

18:57Neal Freyman:Oh my goodness. I hope whoever gets on a 24-hour flight. I hope the person in front of you does not recline their seat. Alright, for my second number, next time someone asks you for a light, it's probably for a joint instead of a cigarette. More Americans now use marijuana on a daily or near-daily basis than cigarettes for the first time ever. The data, which come from the Substance Abuse and Mental Health Services Administration, found that 21.4 million Americans age 12 or over use marijuana every day in 2025. That's more than the 19.9 million who smoke cigarettes regularly and the 17.2 million who frequently drink alcohol.

19:34This changing of the guard was inevitable. If you looked at the trend lines, daily pot use has surged 21 % since 2021, while tobacco and alcohol use is down 28 % and 24 % respectively. To be clear, overall, far more Americans drink than use cannabis, 129 million per month compared to 43.8 million. But when it comes to regular daily or near daily use, popping a gummy after clocking out of work is more popular than grabbing a beer.

20:00Neal Freyman:What I found interesting is that at the same time that marijuana is becoming broadly more popular, teen marijuana use is falling. And the reason why the number is going up and teen use is going down is that more adults, 26 and older, are using into their 30s, 40s, and 50. Cannabis is now a daily or near daily thing for them. And that is actually a big win for proponents of legalization because a lot of critics of legalization said that this is going to mean more kids are going to be smoking weed. And in reality, it's actually adults that are smoking more. So maybe a win for the broader legalization, the federal legalization movement.

20:40But opponents of that movement will also point to the data I just mentioned and say, this is a problem because we're talking about daily use here. And even the CDC says it's estimated that people who use cannabis have about a 30 % likelihood of becoming addicted. So they say that marijuana addiction is real. So we're looking at these numbers and like, well, actually alcohol, people who drink alcohol, they don't drink it that much. They drink it a few times a month. But the users of marijuana actually do so every day or almost every day. And there's a big fight right now over whether we should be rescheduling marijuana as a much less dangerous drug.

21:17And the DEA actually just finished its public hearing on the matter in July 15th. So we'll find out a decision soon. For my final number, people are speaking way less than they used to. Writing in The Atlantic, Olga Kazin details a recent study that found participants spoke about 338 fewer words per day than they did the previous year. Over the experiment's span from 2005 to 2019, the decline in speaking was 28%. She chalks it up to two trends. One, people are spending more time alone, so naturally, they are speaking to others less. Another paper found that the portion of free time Americans spent by themselves rose from 44 % to 49 % from 2003 to 2019.

21:58The other factor is, unsurprisingly, digital communications replacing in-person conversation. Think about how you used to make a restaurant reservation. You stopped by and chatted with the host, or you picked up the phone and called them. Now you use resi in silence. And that's just interacting with strangers. Text messages and group chats have also revolutionized the way we keep up with friends and family, prioritizing written over verbal communication. Kazin says, less time talking to people is a worrying development, stunting social skills, harming mental health, and neglecting parts of your brain that need exercise.