Inflation Is About to Get Worse

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17:50Mark Zandi:We're back with Prof G Markets. The White House just fired its top antitrust enforcer. Last Thursday, Gail Slater was ousted as the DOJ's antitrust chief when she was confirmed last March. Slater told lawmakers she would resist any political interference in her division. Less than a year later, she was forced out for resisting settlements with companies represented by Trump-connected lobbyists. Her departure marks the end of a battle between populists who wanted tough enforcement and a pro-business wing that sides with corporate interests. Here to break down what all of this means, why she was fired, we're speaking with Liz Hoffman, business and finance editor at Semaphore.

18:31Mark Zandi:Liz, thank you for joining us on Prof G Markets.

18:34Liz Hoffman:Thanks for having me back.

18:35Mark Zandi:So Gail Slater is out. It was a short run. How did we get to this point?

18:42Liz Hoffman:Yeah, you know, this kind of long-and-coming kind of ideological collapse inside the DOJ's antitrust division, you know, finally came to a head last week. Gail Slater, as you said, is out. It happened a couple days after her top deputy left. And there had been these flashpoints, mostly over a handful of large mergers that had been brewing almost since the early days of the Trump administration. And the simplest version of the story, which I actually have some doubts about, but that there were these big corporate mergers. You might remember HP Enterprise trying to buy Juniper Networks. There was a large merger of two real estate brokerages where the consensus was that the DOJ had some questions and were skeptical that those mergers would result in sort of a lessening of competition in those markets.

19:30Liz Hoffman:and that the companies hired a bunch of lobbyists and went over their heads to the White House, to Trump officials at DOJ, and they kind of got waved through. And there's a little bit of truth to that. I think it's probably a little overblown, and there's some other reasons that this was kind of never going to work, but that the tensions just sort of boiled over. And, you know, Gail Slater served at the pleasure of the president, and that ran out.

19:52Mark Zandi:So you've been reporting on this. A few weeks ago, you wrote, quote, companies whose mergers have been challenged or investigated by Slater's office have won favorable settlements by going around her to lobby Trump DOJ officials. You also pointed out that one of her deputies, Roger Alford, that he said the decisions are made, quote, depending on whether the request or information comes from a MAGA friend. That guy was later pushed out. So he gets pushed out. Now Gail Slater gets pushed out. This has been building for a while. This seems to me to be the big story that no one is talking about, this idea that Gail Slater and her team actually tried antitrust enforcement.

20:35Mark Zandi:But then if a friend of the president or a friend of the administration comes along, they can just go around her and they don't have to deal with the enforcement, which seems kind of like corruption, at least to me, is it not?

20:48Liz Hoffman:Look, the Trump administration has a lot of channels that don't exist in other administrations, and companies are using those to their advantage. That said, the Department of Justice is run by the attorney general who's appointed by the president, and it is not crazy to say that he wants people in those seats who share his politics and his ideology. And what's interesting about all of this is that coming into the Trump administration, there was a sense that we were going to have this sort of MAGA populist. There's a strain of MAGA that is almost very progressive in its dislike of big corporations and its skepticism of mergers and corporate power.

21:29Liz Hoffman:and, you know, people talk about kind of the horseshoe theory of politics, where the kind of Bernie bros and the Steve Bannons of the world share a lot, have a lot in common on this particular issue. You know, they were sort of jokingly called conservatives. You know, these are Republicans who liked what Lena Kahn, the Biden antitrust cop, was doing in sort of really aggressively swatting away these mergers and challenging monopoly business models. And so there's a sense coming in that you were going to see sort of an interesting tension. And like, it's just so obvious to me that the populace have lost that fight.

22:01Liz Hoffman:You can argue about, you know, to what extent Gail Slater was ever really inclined to pursue it. But that, you know, I think the simplest explanation is that it was never real, that really what we were seeing was a dislike, like visceral dislike inside the White House and the Trump campaign and then administration of big tech for mostly personal culture war reasons, right? That getting thrown off these platforms was like an incredibly searing, formative experience for a lot of these guys, and it's a grudge that they have really nursed, and that the platform's bigness allowed antitrust to be kind of the way that that got enforced and talked about, but that that problem has sort of solved itself, right, as Mark Zuckerberg has pivoted meta away from, you know, content, policing content, and Elon Musk's ex is like sort of undeniably back and like relevant in a way.

22:51Liz Hoffman:And so those fights have just sort of lost their edge, which means that the sort of usefulness of antitrust enforcement as a way to express those views just kind of went away. So I think this is just sort of the inevitable collapse of like an ideological coalition that we all kind of wanted to be there because it was interesting and strange bedfellows are fun politics, but I'm not sure it was ever real.

23:13Mark Zandi:Yeah, it's becoming clearer than ever that it was never actually about antitrust. It was never about monopolization. It was about wokeness and censorship. And that's what we saw with Netflix as well, right?

23:25Liz Hoffman:For sure. I mean, there's lots of mergers that would never sort of get to, you know, your radar or mine, but that like the DOJ's sort of day-to-day job is challenging those because they are anti-competitive in smaller markets. And we didn't see any of that either. It's not like, you know, Gail Slater was bringing cases left and right over like the consolidation of some dental practices in Arizona. I mean, that wasn't, you know, I think if you were looking for signs that there was like a real appetite to continue really what the Biden administration's policy had been, which is deterring consolidation, we never really saw that.

23:59Mark Zandi:Yeah, it's really interesting because, you know, on this show, we're kind of pro-antitrust regulation or antitrust enforcement. I think this is something we've been talking about for a long time, at least at Prof G, which is the just continued consolidation of big tech and this feeling that there's maybe we want some level of antitrust enforcement, but it's never actually going to happen. I think the best example was what happened with Google last year, where it was decided, it was agreed, yes, they were operating an illegal monopoly, but then when it came to figuring out what the remedies were going to be, they decided actually we're not going to issue a remedy because AI is now happening and it's a different time now and it doesn't really make sense anymore.

24:40Mark Zandi:We thought that Gail Slater was going to be sort of the champion or not maybe not the champion, but she was sort of the sleeper pick who was actually going to crack down on antitrust. And it was one of these people that I was like, OK, maybe Trump's actually picked someone decent here. We then spoke with Jonathan Cantor, who was the former head of the antitrust division at the DOJ. I asked him what he thought about Gail Slater. Here's what he had to say about her. I know Gail. She's extremely talented. She's very well qualified.

25:11Liz Hoffman:She's level headed. This is not somebody who's on the fringe. It's not somebody who comes in without any experience. It's not a made for TV job posting like perhaps in some other areas. This is somebody who's a serious, dedicated antitrust lawyer. And I think it's well respected, is well respected in the antitrust community.

25:28Mark Zandi:I guess my question would be, would you agree with that characterization? and is it not kind of a shame that someone who both sides of the aisle seemed to agree was pretty good is now out, I guess, because she didn't do whatever Pam Bondi told her to do?

25:46Liz Hoffman:I mean, that is the reality of this administration, right? Yeah. A plurality or a majority of people who've come through it kind of come out worse on the other side. But, yeah, I'm curious, when did you talk to Jonathan? Was that on the way in when Slater was...

25:59Mark Zandi:That was right after the nomination, yeah.

26:01Liz Hoffman:Yeah. I mean, I think that really did capture the hope that sort of both progressives like Jonathan and sort of MAGA populists like Steve Bannon. And by the way, like J.D. Vance, who had very nice things to say over the years about Lena Khan and thought that companies were too big. You know, there was a sense that there was some sort of political realignment happening around this issue. And it just like obviously did not happen. Yeah. And people who, you know, would like to see more robust antitrust enforcement are like very disappointed. And I spent a little time in some of the MAGA group chats last week.

26:40Liz Hoffman:I'm like, people are really, really upset about this. But I think as always kind of the simplest explanation is the right one, which is that like it was never real.

26:49Mark Zandi:Yeah. All right. Liz Hoffman, thank you for your time.

26:51Liz Hoffman:Thanks, Ed.

26:57Mark Zandi:as you've probably seen tech stocks are being taken to the woodshed in the past month software stocks have fallen 16 on average big tech stocks have fallen as well google's lost seven percent microsoft has lost 14 but one of the biggest big tech losers so far is indeed indeed Amazon. Amazon is down 17%. In fact, it fell for nine straight days last week, which was its longest losing streak since 2006. So why has this destruction happened? Well, as we've discussed before, it's all because of AI. A few weeks ago, OpenAI and Anthropic released new AI tools. Those tools went viral. They showed they can pretty much do everything that a white-collar worker is supposed to do.

27:43Mark Zandi:And since that happened, roughly$2 trillion in market value has been erased. And the idea behind this sell-off is that AI is going to make legacy tech companies irrelevant. Why would you pay for traditional software if you can just vibe code your own software with Claude? This applies to Amazon too. Why invest in a legacy e-commerce company when AI might upend online shopping altogether? Now, I have laid out before why I don't think this sell-off makes much sense. I don't think these legacy software companies are going to get nearly as hard as the markets seem to think. I think that for various reasons, such as enterprise security and switching costs, lots more reasons which you can read about on my sub stack.

28:26Mark Zandi:I run through the whole thing. But when it comes to Amazon, there is another very big and not very talked about reason why this sell-off really doesn't make any sense at all. And I'm going to tell you what it is. But before I do that, let me first just remind you how badly Amazon is getting punished right now. So Amazon has historically traded at 57 times earnings. It is currently trading at 28 times earnings. Just to put that in perspective, Walmart, whose revenue grew less than 6 % last quarter, year over year, Walmart is trading at 47 times earnings. Costco, which has practically no digital footprint at all, is trading at 55 times earnings.

29:12Mark Zandi:Meanwhile, Amazon, whose growth rate is nearly twice as high, is trading at a multiple that is nearly twice as low as those companies. So Wall Street hates Amazon right now. And the reason they hate it is, again, because of AI, because of the disruption that AI companies like Anthropic, like OpenAI, could levy on their business. Okay, now I'm going to tell you why this sell-off is stupid. And it's quite simple. The reason it is stupid is because Amazon owns nearly a fifth of Anthropic. In fact, Amazon is one of Anthropic's largest and earliest investors. They have invested roughly $8 billion in Anthropic going back as far as 2023 before most investors even knew what this company was.

29:59Mark Zandi:So what that means is that any success that is achieved by Anthropic will also be achieved by Amazon and by Amazon shareholders. Why? Because they literally own the business. Now, some investors know all about this. But as someone who spends most of their time talking about these companies, what I can tell you is that it is shocking how many people don't know about it. It is rarely acknowledged in research notes. It's almost never discussed in analyst calls. It's not even treated as a footnote. It's treated as something even smaller. It's almost as if this investment doesn't even exist. So why is no one talking about it?

30:37Mark Zandi:Why is no one talking about the fact that Amazon owns nearly a fifth of Anthropic? Well, I've thought about it, and the answer is now clear to me. The reason no one is talking about it is because Amazon isn't talking about it. In fact, Amazon doesn't really talk about it at all. Supposedly, their Anthropic stake is now worth more than$60 billion, which would imply that they own more than 16 % of the company. But that is based on an internal review of their balance sheet, which is based on an internal valuation of Anthropic, and it actually has nothing to do with the current market price of Anthropic based on its most recent funding round.

31:15Mark Zandi:So what that basically means is we actually don't know how much of Anthropic Amazon actually owns. We can make assumptions, and based on our assumptions, it is more than 16%. But it could be even higher than that. We actually don't know why, because they haven't told us. Amazon has given us almost nothing. So this is an open letter to Andy Jassy and to the Amazon executive team. Your stock has fallen 17 % in the past month. You don't have a business problem. your business is tearing right now, you have a multiple problem. You have a valuation problem. Investors don't like the story you're telling about your company.

31:57Mark Zandi:They specifically don't like the story you're telling about AI. And that is because you're omitting one of the most important elements of the story, which is that you are one of the largest and earliest investors in the hottest AI company in the world. That is a very big deal. And it needs to be communicated. So my message to Andy Jassy is the following. Tell us about it. Tell us exactly what the terms are with Anthropic. Tell us exactly what your stake is. Tell your shareholders how much they have to gain here. Make this part of the story. By the way, I would also add that Microsoft should be doing the exact same thing.

32:35Mark Zandi:Microsoft owns nearly a third of OpenAI. And again, not enough people are talking about it. Now, I can understand the hesitation from Amazon. Anthropic is a private company. They're issuing convertible notes. there are possibly some antitrust concerns, etc., etc. But let's also acknowledge that the AI narrative is now reaching an inflection point. We are witnessing a fundamental re-rating of the tech industry. Wall Street is picking its winners, and it's picking its losers. And they have decided that you, Amazon, are a loser. I and many others know that you're not. So if you want to improve the multiple, you have to improve the story.

33:16Mark Zandi:And right now, your story is missing a giant chapter that investors want to hear about. And that chapter is indeed anthropic.

33:31Mark Zandi:Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss, edited by Joel Patterson, and engineered by Benjamin Spencer. Our research team is Dan Chalon, Isabella Kinsel, Chris O'Donoghue, and Mia Silverio. Thank you for listening to Prof G Markets from Prof G Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.

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