We Need to Talk About Kevin (Warsh)

0:06Hello, and welcome to Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon of Bloomberg with Elizabeth Spiers of the New York Times. Hello. With Emily Peck of Axios. Hello, hello. And we are going to talk about Kevin. It's going to happen, people. We're going to talk about Kevin Walsh, who is the incoming chair of the Federal Reserve and how he is going to fare in his new job. We are going to talk about China, where Donald Trump just spent a few days palling around with President Xi and whether that is going to amount to anything and especially whether that might even help put an end to the Iran war.

0:44We are going to talk about semiconductors and why they are all of the new hotness right now. We have a Slate Plus segment on subscriptions, which you can only listen to if you have bought a subscription to Slate Plus. Whoa, it's recursive. It's all coming up on Slate Money.

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3:31Okay, so the Senate confirmed Kevin Walsh as the new Fed chair, to no one's surprise. It was held up a little bit until Janine Pirro dropped her case against the Fed. But she's like, I can reopen it at any time. So Jay Powell was like, yeah, in that case, I'm just going to stick around. So now we're going to have a pretty unprecedented situation where the replacement Fed chair is going to be in these meetings with Jay Powell, his predecessor. And Powell has all of the years of gravitas and experience and respect and all the rest of it. And Kevin Walsh, not so much. He's coming in brand new, fresh.

4:08He's been in zero FOMC meetings in his entire life. So, Emily, as the expert here on sort of workplace dynamics, is this going to be a little bit awkward?

4:19Felix Salmon: I feel like it's almost the least of Kevin's problems. And I was thinking, this is how it works in corporate America now, right? We just talked about Tim Apple, or I guess Tim Cook is his real name. I was thinking that this is the executive chairman role, only even more hands on. And it can be really awkward if you remember what happened at Disney when Bob Iger stopped being the CEO for a minute and was on the board and then just like couldn't stop meddling and actually engineered the ouster of his handpicked successor. So, I mean, it can get awkward. I do feel with the Federal Reserve, yeah, like I said, Kevin has a lot of other problems.

4:57Felix Salmon: But I know the president is not happy about Jerome Powell staying on the board. But I think the board has already signaled that Kevin Walsh is going to have problems irrespective of Jerome Powell. in its last vote, there was like an unprecedented number of dissents, making it clear that these people do not want to cut rates. And that is what Walsh has basically been chosen for and what the president wants him to do. So like that tension is already there, absent even the Powell thing.

5:23Elizabeth Spiers: I think Powell staying on may counterintuitively be good for Walsh because it gives him a scapegoat when he can't get rates lowered. He can just point to Powell and whine to Trump that Powell still there and therefore a problem.

5:35Felix Salmon: And Powell gives more credibility to the Federal Reserve by staying there. And that's good for markets more broadly. Walsh has said that he wants more fights at the FOMC. I think he has to say this because he's going to get them whether he wants them or not. But I do get the vibe from him that for the first time ever in the history of Fed chair press conferences, which are relatively new phenomenon, I think we're going to get the Fed chair coming out and actually directly attacking fellow FOMC voters and members and saying, I wanted to cut rates and they said no. And so that's why they're not cut.

6:11Elizabeth Spiers: I think Marin would do that. Walsh may be a little more restrained than that. I think that Walsh is going to treat the FOMC press conferences as though they have an audience of one, which is how all Trump appointees treat all press conferences, basically, which is just like, I know there's only one person I'm speaking to here and I want him to know that I'm loyal and I'm doing what he wants. If the markets respond badly to that, though, what do you think he does? I don't. I mean, that's an interesting question, but it's worth sort of interrogating the presumption, right, which is would the markets react badly to that?

6:45I'm not sure.

6:47Felix Salmon: I think it would be such a sharp turn from what we've become accustomed to in these many years with Powell, who is sort of, for all his flaws, and we can argue about the transitory inflation situation. He's known for being really clear for a Federal Reserve chair, speaking pretty plainly and addressing Americans broadly. Like there was an interview, Claudia Sam, who used to work at the Federal Reserve, had a post out on Friday, just sort of like about Jerome Powell's legacy, whatever. And she really emphasized how good he was at being a communicator. And she pointed to a video from the start of the pandemic in 2020, when he was just very calm and empathetic and like this is going to cause a lot of pain for a lot of people.

7:26Felix Salmon: And we know that. But if Congress can do things to help people who lose jobs, and if the health policy people can do their thing, it's going to be fine. Very reassuring. And talking to a big audience of people, as opposed to what Felix is saying, talking to the one guy, it's kind of like a mind blowing turn and probably not good for democracy. Yeah.

7:46Elizabeth Spiers: So the Wall Street Journal had a piece, an editorial about Powell, where they applauded him in some respects, but they did have a paragraph suggesting that his tenure overall was a failure because he said that inflation was transitory and it wasn't. That seems like a very high bar for success during his entire tenure. That's something he screwed up on. Are people going to hold Kevin Warsh to the same standards? Yes, I think absolutely. There's only one standard that central bank governors and central bank presidents get held to, and that's do you keep inflation at its target? Like the maximum employment thing, there is a dual standard.

8:24Technically, the Fed chair does need to care about maximum employment as well as stable prices. But the stable prices is the one thing that gets reported every month because they have an explicit target of 2%. If you hit that target, you have succeeded. If you consistently fail to hit that target, then you have basically on some level failed. So yes, I think that is the minute you set a numerical target, that is the standard to which you are going to be held?

8:49Felix Salmon: I mean, the Wall Street Journal, I read their piece, and I think, honestly, they're saying kind of the conventional wisdom, which was even for Powell fans, everyone, and even Powell himself said we waited too long to raise rates to deal with inflation, and, like, everyone's criticized him for saying the transitory thing, and yeah.

9:06Elizabeth Spiers: That's true, but would you consider him a failed Fed president as a result?

9:10Felix Salmon: No. I don't think it's conventional wisdom to call him a failed Fed president at all, But the criticism of the transitory thing and the failure to raise rates is something he's definitely criticized for. We haven't had a failed Fed chair basically since the 70s. What was it? Arthur Burns, I think, was probably the last one who everyone just more or less thinks that there was a failure there. And then Paul Volcker had to come in and clean up the mess. since then in that era of central bank independence that basically you can trace back to volcker all of the fed shares have been reasonably well admired at the time ex post there are a lot of criticisms of greenspan and i think that a lot of people nowadays think of greenspan as being the guy who inflated asset bubbles and credit bubbles in in a way that was unnecessary and dangerous But again, like just keeping him to the single criterion of did you keep inflation under control?

10:06He succeeded in that.

10:08Felix Salmon: Actually, I always thought of Greenspan as the guy who was in charge right before the economy crashed, blah, blah, blah. Like what you just said. But lately, a lot of things I've been reading are like talk about how Greenspan didn't really react during the Internet boom. He wasn't worried about inflation because he thought productivity would rise because of the Internet. So he is now getting a lot of credit for this. Like I have read at least five pieces that are like an Alan Greenspan, blah, blah, blah. I've seen a couple of things along those lines. And I feel like that's, it's like people have forgotten that was the thing that he was criticized for, right?

10:44So on the one hand, he was right that he could keep rates below what everyone thought Nairu was. This is the non-accelerating inflation rate of unemployment. Like unemployment was very low. And he's even if unemployment is very low, I can keep rates low and we won't have inflation. Inflation won't accelerate because we're getting all of these productivity gains from the Internet. And he was right about that. That's why he was called the maestros, because everyone kind of worried if he kept rates so low, then we would have inflation. And it turns out that partly because of Internet and partly because of China and partly because of other things, we didn't have inflation.

11:22And so he was credited with getting astonishingly strong growth that you get when you keep interest rates low and low inflation at the same time. And that's like the dream, right? The problem is that the other thing that caused was the asset price bubble and the credit bubble. And then that wound up contributing to the housing crash and the global financial crisis.

11:42Felix Salmon: But no one mentions that when they talk about, they only are now talking about the first half because there's a debate now about will AI be the same? Will it improve productivity, but it won't raise inflation?

11:52Elizabeth Spiers: Well, it's coming up now because Warsh has insinuated previously that there was a parallel there. And so I think people are kind of going back and examining Greenspan's record. Right. And it is very convenient for Warsh, and it might even be true, for him to be able to say, I can pull a Greenspan here and cut rates and not worry about inflation because all of the productivity gains from tech are going to wind up bringing inflation down anyway. So we don't need to worry about inflation. I don't think that he has anything like the ability that Greenspan had to bring the rest of the FOMC along with him in that logic.

12:30I think Greenspan was respected enough within the building that he would be like, listen, let's keep rates low and raise them like if and when we see inflation. But let's not worry about inflation until it arrives. In this situation, it's very different because we already have inflation. The inflation is already here and it is going up. And so WASH can't do what Greenspan did, which is like, let's cross that bridge when we come to it, because we have already come to that bridge. And a bunch of FOMC members are saying, like, we're going to need to raise rates because inflation is not only too high, it is also rising.

13:02Elizabeth Spiers: Also, Greenspan was not dealing with a president in the executive office who is a bit of a chaos monkey. So if he's being evaluated based on price stability and a big source of the instability is coming from the Oval Office, he can't unilaterally correct that. That's not something that the Fed can do. So he's in a tougher position generally. Yeah, when we had Austin Goolsbee on this show, we asked him that question. It was basically like, he's been at the Fed, he's been at the White House, and he's like, clearly, you have way more control over what happens in the economy when you're at the White House than you do when you're at the Fed.

13:38Walsh knows that. I think that Trump either doesn't believe that or like, it's convenient for him to say that he doesn't believe that. He's happy sort of blaming the Fed for things that are his own fault. But it is pretty clear that Trump is not worried about inflation. Trump does not consider inflation to be a major problem. And he just wants lower interest rates for a whole host of reasons. And if that creates higher inflation, then so be it. Walsh, I think, does care a bit more about inflation. And now he has to because that's literally his mandate. And so it's going to be hard for him to cut rates in the face of inflation being where it is right now.

14:17Felix Salmon: And like mechanically, from what I understand, even if the Fed somehow cuts rates, even as inflation is rising, which I think would be really hard, really hard for Kevin Warsh to convince the other people on the committee to do that. But even if he did, long term rates, yields on 20, 30 year bonds, they're not controlled. There's a premium for that. Those rates are still going to go up. Like you see if the rate on 30 year treasury right now is over 5 percent for the first time since 2007. And that is on some level, it's very hard to be sure about this, but on some level, perhaps that is the bond market beginning to price in the idea that the Fed does not have a grip on inflation.

14:59Yeah, that's right. And the long-term inflation expectations, which have been very constrained for a long time, are now beginning to go up. And they look at Kevin Walsh coming in and they're like, I don't care who you are, but especially if you don't have real control over the FOMC, how can we really trust that over the long term the Fed is going to keep inflation low? So one of the interesting things that you wrote about, Emily, this week is the sort of divergence between the bond market and the stock market and how the bond market is looking particularly kind of pessimistic and worried about inflation in the way that the stock market is not.

15:30And I think I've mentioned this on the show in the past, but the way I square that circle is by saying that what we're really doing here in the markets is pricing in some kind of financial repression, pricing in the idea that inflation is going to inflate corporate profits. And so that means higher stock prices.

15:48Elizabeth Spiers: They may be just taking Trump at his word because he said explicitly he doesn't really care if inflation goes higher. And so far, 40 % of the increase in inflation that we've seen recently has come from the energy shock due to the war in Iran. But that means that 60 % hasn't, right? I mean, even if you ignore that 40 % of the oil shock, which I don't think you should, But even if you do, the core inflation, the stuff that the Fed really worries about, you know, excluding food and energy, is still looking really bad.

16:18Felix Salmon: And that's what happened in the 70s. There were two spikes in inflation. There was like one, it went down, everyone was like, cool, mission accomplished. And then it went back up. Is that what's happening now? I do think that Kevin Walsh has one little clever trick up his sleeve that he can play, perhaps.

16:35Elizabeth Spiers: Hypnotizing Trump? No, I don't think Trump matters. I think it's very easy to overestimate the degree to which Trump is going to control Walsh or Trump even comes up in these conversations at the FOMC. No, I mean keeping Trump from doing something else like bombing Iran that would make inflation worse.

16:51Felix Salmon: He has done a lot to make it worse.

16:53Elizabeth Spiers: It's really interesting. Like, does he have persuasive power over Trump? The thing that I think Kevin Walsh might be able to do, depending on how sort of clubbable he is within the room and how much he can sort of persuade other FOMC members, is that He is really keen to reduce the Fed's balance sheet. This is his bugbear. He's like, the Fed owns way too many bonds and way too many agency bonds. And what we need to do is reduce the size of the Fed's balance sheet, like basically sell those bonds that we own. Remember that when the Fed buys bonds, that's called quantitative easing. It's like pushing money into the markets.

17:32And that effectively brings down, it's a form of easing. it's tantamount to cutting rates. It's equivalent to cutting rates, right? Which means that if the Fed sells bonds and takes money out of the market, then that's kind of the same as raising rates. So I can perhaps see a world in which Walsh basically says either we don't need to raise or we can possibly even cut a little if we also sell a lot of our balance sheet into the market, because those two will sort of counteract each other and will wind up keeping monetary policy overall will remain tight while rates are staying lower.

18:11Felix Salmon: It's like a stealth way to raise rates, basically.

18:14Elizabeth Spiers: How do you think, though, that the demand side of that is working in the current geopolitical environment? Are we going to have the same buyers we usually have if he sells off? That's a question. Well, I mean, the Treasury market is the biggest and deepest market in the world, right? So, like, in a way, it doesn't really matter who buys it. It will show up in rates, right? The rates will probably go up, but that is kind of the point, right? If you're raising rates, then rates go up. That's the idea.

18:39Felix Salmon: There is this intriguing story. I feel like we talked about it already with my romantic comedy thing, but there are like little signs people that are whispering about there's not as much buying interest in treasuries as there used to be. People are buying other things like gold. The new hotness is credit rather than rates, as you saw when you were at the Milken conference. Yeah, corporate bonds are really big. Like we have this very, normally when rates go up, like they are doing right now, spreads go up as well. But right now we have this very interesting situation where rates are going up and spreads are super tight.

19:13Felix Salmon: Yeah, because there's interest in other stuff, right? That's why? Right. Yeah, I think that's interesting. And then I guess the question I have, and I think I put in the newsletter, I honestly don't remember. You should read it every day like Felix so that you can remember what I write and tell me. But the question that I have is, if the stock market stops being so frothy and starts falling and people look for a safe haven, will they still look to treasuries or not? And my guess is absolutely yes, especially if treasury is yielding 5%, like what's not to like? Yeah, it does seem good, right? If the stocks are falling and you're like, oh, this is a good deal.

19:48Felix Salmon: That does help Kevin longer term. Then he could cut, theoretically. I don't know. I'm just spiraling now. Stop me. Stop me. So let's stop you now and allow Elizabeth to do some more talking about Trump, which is the thing she likes to do the most. Is it? Yeah.

20:01Elizabeth Spiers: I just don't think that you can take Trump out of the equation. Well, I think you can. I mean, I honestly think you can. Like, obviously, when it comes to, like, where is inflation going to be, as Austin Goolsbee has said, and we all agree, like, that is not entirely a function of monetary policy. Like, obviously, economic policy and fiscal policy has more of an effect on that than monetary policy does. So I am not for a minute trying to predict where inflation is going to be based on what Kevin Walsh does. It's more the other way around. Given where inflation is, what does Walsh do? Does he raise or does he cut?

20:37And let's just have a quick round robin here, you know, which is when Kevin Walsh's Fed changes interest rates for the first time, did they go up or did they go down? Emily?

20:49Elizabeth Spiers: Up. Elizabeth? I think he stays neutral longer than people want because if shrinking the balance sheet is an option, he'll go for that. But eventually he's going to make some kind of a change. And that first time he makes a change, is it a hike or a cut? Well, you're asking me to predict what's going to happen with inflation, but I think it's going to go up, so a cut. You're going to say a cut? Yeah. I don't think he's Mirren. I think he's a different animal. No, no, I don't think he's Mirren at all. But I think if he was, then it would be a cut. But he's not. And Neil Irwin always calls him Myron.

21:21So I don't know. Myron. It is. Anyway, Stephen Myron is the shortest lived FOMC member. He came in and now he's leaving. So, you know, he made absolutely no impact on the Fed, as far as I can tell, whatsoever. All of that Senate confirmation meshuggahs for nothing. Yeah, I am with Emily. I think the first move is going to be a hike.

21:39Felix Salmon: Now I feel like I'm wrong. I wish I could take it back. I wish I could take it back because part of me thinks we're just going to have a big crash slash slowdown in the economy and then he'll have covered a cut. Like I also think that. I don't know.

21:52Elizabeth Spiers: I only think it's going to be a cut because I think inflation is going to get a lot worse. Yeah, it does seem like. It'll get bad enough.

21:59Felix Salmon: Inflation really does seem bad because I remember after the pandemic, not after it ended, but towards the end when I like went and did something for the first time. I think I went to a carnival and I bought this waffle with ice cream in it for one of the kids. And it was like$12. And I was like, what the hell? It just felt so much more expensive than I expected, even given that carnival food is expensive. And I had that same feeling recently at the supermarket also where I bought three things and it was like$17 for like bread, eggs and something basic like that. And I was like, something bad is happening.

22:33Felix Salmon: It's happening again. Like at the beginning of a horror movie. Yeah, like at the beginning of a horror movie when you're like, it felt like that. That's how it feels now to buy stuff. And then go fill your car up with gas and it's so much more money than it used to be two months ago. It's giving me the shivers.

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26:20So, if we want gas prices to come down, obviously we need to reopen the Strait of Hormuz. If we're going to reopen the Strait of Hormuz, we need Iran and the United States to come to some kind of an understanding. Pakistan is doing its best to broker a deal, but its best does not seem to be good enough. So the question in the wake of Trump's visit to Beijing this week is, do we think the Chinese can help here? And I think probably maybe yes.

26:49Felix Salmon: You're not alone in thinking that. I think I spoke to someone recently who was like, former Biden official who was like, but China has a lot of sway with Iran because China buys a lot of Iran's oil and they're friendly and actually might be the one to be able to broker or a deal between the U.S. and Iran. And then I said, well, if they do that, are we in some kind of reverse Suez moment where the U.S. started a bunch of trouble that it couldn't solve, so a different superpower had to come in and fix the problem, thus elevating its reputation on a global scale like it's long sought to do? And is this a key pivotal moment that we'll look back on in 20 years and be like, that's when the decline started or whatever, you know.

27:28The question which you raise, which I think is interesting, is if China does end up helping to reopen the Straits of Hormuz and get energy flowing again and generally like do this nice thing for the planet, does it do that in a very sort of visible way in which it then wants to take credit for it? Or does it quietly do it like in a sort of back channel way? Does she want to be the sort of global statesman who solved this impasse? Or does he just want to solve the impasse?

27:57Felix Salmon: That's a good question. I don't know the answer to. And so far, like when we're taping on Friday, it doesn't look like that much happened at the summit with Trump. But it does seem like Xi overall does want to have a nice relationship a little bit with the U.S. so that he can sell stuff to the world and continue having a good economy and growing his economy. We just had 10 Chinese companies are now allowed to buy the NVIDIA H200 chips. And so, like, it seems as though there is something of a detente after all of the China bashing that we saw in the first Trump administration and indeed at the beginning of the second Trump administration.

28:35There's maybe less of that of late.

28:39Elizabeth Spiers: China has always wanted some level of interdependency and the sort of China hawks really initiated a lot of this. And so I think China wants a sort of return to the status quo in terms of U.S.-China relations and is just trying to deescalate Trump. But Trump is also a guy who saber rattles a lot on social media and in public speaking. But then whenever he's in the room with Xi, he says he talks about him as his good friend. They seem to have a decent relationship. You know, and I think Trump thinks that everybody understands that these are two separate things. But they don't, especially not the people around Trump.

29:10Felix Salmon: One thing I thought was interesting, speaking of appeasing Xi or whatever, making nice with Xi, the one thing that they were saying didn't come up at this two-day summit was tariffs. The saber rattling that Elizabeth was talking about with tariffs just appears to be like so last year. It's so over. No one seems to even care about tariffs anymore. Trump isn't threatening China anymore. She knows that he lost the Supreme Court case. It's just like we're not doing that anymore. There's like bigger fish to fry. The AI question has become like everything right now. We're letting NVIDIA sell these chips, but we're also talking about the rising threat of China when it comes to AI.

29:49Felix Salmon: Like Amthropic had a post out this week that was like, we can't let China get the technology. It's just like advanced past a lot of that. Yeah, it strikes me that like large language models are the new like nuclear weapons, right? That we're literally fighting a war right now ostensibly because we don't want Iran to have nuclear weapons. But there was always this idea for many, many decades after the Second World War that certain countries could be trusted with the technology to make a nuclear weapon. And then any other country had to be slapped down very aggressively were it to acquire that technology.

30:21We are now in a world 75 years later where anyone who wants to build one more or less can, even North Korea. North Korea probably has a more advanced nuclear program than Iran does. and at some point the technology as all knowledge does just becomes universal and over time it's inevitable there is this weird idea right now that we can keep certain types of ai technology and semiconductors and that kind of stuff within our sort of friend group and not allow china to have them and then that way america has open ai and anthropic and maybe france has mistral and England has DeepMind, I don't know.

31:01And it's all fine because it's us in the West. And the Chinese, we can prevent them from having sophisticated AI technology. And come on, like, it's obviously impossible. It's never going to happen. We saw that with DeepSeek. And we've seen it with the just astonishing amount of investment that China is making in its research universities, which it dwarfs the amount of research going on in the United States now. All of the most interesting science is happening in China now rather than America. Whatever happens in AI is going to wind up happening globally. I don't think you can quarantine it, no matter how much the Americans might want to.

31:38Elizabeth Spiers: I think if they get ahead of us in AI, this is something we brought on ourselves because the sort of interdependency of research and development internationally, the chip manufacturing and distribution system has kind of created a little bit of stability. I mean, This is sort of like a liberal economic theory, but it really sort of has. And now that Trump tried to tariff China, even if he can't do it anymore, it's given all these other countries that are competitors incentives to find ways to work around the U.S. And once they find those ways, they don't necessarily have incentives to go back to partnering with U.S.

32:13Elizabeth Spiers: companies if everything that Trump does gets reversed. Because if they've made it work without the U.S., why would you need to? There's no evidence that they can do that totally. Right now, the bigger companies are partnering with Huawei, but the chips that they make are not close to NVIDIA's top line product. They keep trying to smash some of their not as good chips together to kind of get to the place, get to enough compute for whatever their needs are. But they're not there yet. But given all these incentives to just work around the American industry, how does that benefit us in the long run?

32:44Elizabeth Spiers: I think it doesn't. Well, I mean, it does in a zero-sum world where what's good for America is bad for China. But yeah, I...

32:52Felix Salmon: That's never been the world, you know? Exactly. I'm a sort of globalist neoliberal. And I'm still much more of a panda hugger than most people. I'm like, yeah, let's do trade with China. And I do understand that China is a rival superpower. And I do understand that for all of the terrible things that the current Trump administration is doing, this sort of level of authoritarianism that exists in China is much, much worse. And no, I do not want to live in that world. And I would love to see China moving in a different direction. But ultimately, I think that a rising China is good, not bad for America.

33:29It certainly was going back to the previous segment in the age of Alan Greenspan. And I don't see why it couldn't be again.

33:35Felix Salmon: Also, it's so early in the AI competition. I mean, technology competitions, I think, are always good for technology, right? If you go back to the space race or whatever, like more competition is good, more stuff gets invented. And it's clear, and I think if I'm remembering correctly, I wrote about this also this week, we still do need China to do AI. Yeah, they don't make the fanciest chips and the GPUs at the top of the stack, but they make a lot of the workhorse chips at the bottom. And of course, they do the rare earths. We don't do the rare earths. We have the rare earths, but we can't mine the rare.

34:07Felix Salmon: We've talked about the rare earths enough. But we need them is the point. We both need each other. We need each other. And the most interesting effect to me of the Iran war is the degree to which it has accelerated renewable energy technologies kind of around the world. This is effectively the carbon tax that all of the Republicans hated so much, and now they brought it on themselves. And you're like, this is hilarious, right? But the thing that all renewable technologies have in common, pretty much, they need batteries. There are four, like, four-letter acronym companies in the world that just have these incredible monopolies, and we have no way of operating without them.

34:46One is ASML in the Netherlands, which makes the machines that make the chips. One is TSMC in Taiwan, which makes the chips. And one is CATL in China, which makes batteries. And no one can compete with the Chinese when it comes to making batteries. And that's just how it's always going to be. I cannot imagine a world where the U.S. makes batteries, which are like commodity cheap things, and they are astonishingly cheap now.

35:12Elizabeth Spiers: This is also why Elon hopped a ride. Yeah, all of Elon's Teslas are powered by CATL batteries.

35:18Felix Salmon: We're still at the stage where we're all talking about the infrastructure, the components, the chips, the batteries, the metals, the earths. But we aren't yet at the stage really where we're talking about the iPhone, the apps, like the cool shit that we're all going to do with this technology that's supposedly going to change the world. That's still really early stages. And that's, I don't know, I still kind of, I'm a patriot. And I still bet on the Americans to come up with the clever things that make the most money on the new technology.

35:46Elizabeth Spiers: You know what I mean? Well, I think that's a good example of this. Because, by the way, Tim Apple was in China, too. And Trump has also allowed for carve-outs for companies like Apple that need to get components from China. And partly for political reasons. I mean, if everybody has to start paying$5 ,000 for their iPhones, there will be a little bit of a revolt. That would be inflation. Yes.

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38:17We should talk about the chips in particular. this is like the perfect segue because these are the things that are driving the stonks we had the s &p 500 hit 7500 this week yet another all-time high if you have a 401k congratulations it's probably looking sparkly right now and the thing that is doing that is nvidia is hitting all-time highs and a bunch of other chip makers are hitting all-time highs and it's not just the existing ones we had a massive ipo this week which raised what 80 billion dollars at a something like that

38:51Felix Salmon: stock price doubled i think cerebrus is the name of the company cerebrus not to be confused with cerberus but yeah it makes these enormous chips which they're the size of a dinner plate basically and they just they have 44 gigabytes of something on them it's kind of amazing what they do and everyone's just like yeah here's this brand new company which by the way sam altman has a massive mistaken good for him and everyone's like yeah chips chips for the future chips of what we need and emily you quoted the chap from one chronos in your piece basically saying holy shit no one expected this but the price of compute is going up like the one thing that we know about chips the one thing that we know about moore's law and everything is that yesterday's chips are garbage and they're worthless and everyone kind of expected like the h100 chips that nvidia was making three years ago to be worthless by today they're not they're worth as much as they ever were people are still fighting over access to them the demand for compute is off the chain yeah and it's every company that is that makes chips whether they're whether it's nvidia with the fanciest ones or like i don't know hynix or samsung or intel intel stock has done i think triple digit percent growth over the past i don't know month or two like it's or from last year Admittedly from a very low base.

40:11Felix Salmon: It's up a lot. All the chips are chipping. ARM, yeah, they're all doing real well. And I think the Wall Street Journal had data this week that hedge funds have massively increased their exposure to semiconductors from 5 % to 20 % on average. I don't know where they get their numbers. And have had the best year ever since 1999 or something because they're all in, they put all their chips on chips. You know what I mean? And semis are like, what, 15 % of the S &P 500 now? Something insane? Yes, yes. When did that happen? I don't know, man. But it's gotten pretty wild. And there's shortages. And a lot of what you're seeing in the stock market right now is just people getting really excited about chips and semiconductors.

40:51Felix Salmon: And I guess the question is, is it a boom or is it real? And a lot of people think it's real because in the past, like when we were coming out of the pandemic, I think we all, I'll just speak for myself. I never thought about chips at all until the pandemic when we ran low on them. And then we couldn't get a new PlayStation for like two years. People couldn't buy cars. And there were no cars because they couldn't get the dumb little chips. And then all of a sudden, everyone was like, oh, yeah, chips. They're in your coffee maker. They're in your car. And I was like, what? So then in response to that.

41:20Also, they're in your vaccine.

41:21Felix Salmon: Everywhere. Oh, right. That builds basically is in a chip in my arm right now. But then in response to that, there was like a big glut of chips on the market. And like the whole shortage became a glut. and then the price went blah. And that's like what happens with chips. The economy does well or whatever demand goes up and then demand falls when the economy shrinks. But people now are saying that this isn't going to happen because the chip buying now is these like more long-term contracts and built into the infrastructure. So we're not going to have the same kind of like boom-bust cycle. But whenever anyone says it's not going to be a boom-bust cycle, I'm like, okay.

41:54Elizabeth Spiers: Your spidey sense goes off? Well, I mean, everything comes down. There are two things that I think are also driving it besides overall demand. One is that some of these chip makers, including Cerebrus, they do custom chips that do a specific thing in the sort of AI production chain. And theirs do inference, speeding up the time between you asking the AI a question or giving it a prompt and figuring out what to spit back out. And that requires less compute than the chips you use to do training, which is what NVIDIA sells. But another thing is, if you take the hyperscalers out of the equation, A lot of these smaller AI companies that are going into data centers or putting money into building them are collateralizing their debt with chips.

42:33Elizabeth Spiers: So sometimes they're buying chips that are just kind of on the shelf as collateral, and they're not even being used yet in AI technology. So the chip demand is coming from not just needing compute to run these AI systems, but anticipating custom builds and just stockpiling chips for reasons that have to do with the smaller companies needing to have something for collateral.

42:55Felix Salmon: That's actually to go back to our earlier conversation, why I think that like the Greenspan analogy kind of falls short. Because when we were doing Internet boom, it was pretty cheap, as we've discussed. The cost of scale for an Internet company is low. one customer, a million customers, kind of the same? I mean, in 1999, it wasn't that cheap. It's not as expensive as what we're seeing now. But no, it was nothing. Like the amount of money that people spent building out the internet in the late 90s seemed enormous at the time. The entire country got crisscrossed with fiber and all of that kind of stuff.

43:29And Cisco was making billions of dollars selling routers to everyone. And everyone's like, wow, we've never seen so much investment in our lives. Like by the standards of the investment that we're seeing right now, it was tiny. But it was big at the time. It seemed like a large number at the time.

43:44Felix Salmon: You saw the GDP number. Was it this week? It's something like half of the growth or more than half of the growth in spending was AI spending for GDP. Like eclipsing what consumers spent. Well, it's not. No, no, no. This is America. It's the growth. So like consumers still account for 70 % of GDP. Yeah. But the growth is coming from AI. And I don't think it was like that with the internet. I'm always a little bit mistrustful of this percent of the growth is coming from that because I want to look at the actual numbers rather than the first derivatives. But especially when some things are negative and some things are positive, you know, then you could say like 300 percent of the growth is coming from this.

44:20And you're like, eh.

44:21Felix Salmon: OK, but the point is there's a lot of money getting spent and shortages and like physical needs to bolster this technology transition. And that is inflationary at the moment, probably. It is. Yeah, and coming back to Kevin, you're like, he has to worry about that. And so do I. Because you don't like inflation. Do you? Emily, you're like our avatar of middle America. You're like the person who goes to the gas station and worries about the$4.50 gasoline that you're putting in your gasoline guzzling cart.

44:54Elizabeth Spiers: It's over$5 where I live. Does this make you feel like it's more Trump-like in that inflation doesn't matter? Yeah, I don't think about it.

45:02Felix Salmon: Is that the quote from Felix? I don't think about it. Yeah, there was the question is, what do you think about all of the pain that you're inflicting on Americans? Is there? I don't think about it. Not really.

45:12Elizabeth Spiers: I can buy anything I want. It doesn't bother me.

45:15Felix Salmon: I mean, it was in the contest of negotiating with Iran. It wasn't just like a flat out, I don't think. It was just in the context of, just to be fair. It was in the context. He's like, I'm not going to let a bunch of unhappy, what's it called? Like ICE, you know, ICE has in immigration, but I say it's an internal combustion engine people. Most American households own one, two, sometimes even three internal combustion engines. And these things need gasoline to power them. And people are not happy about this. It's over$5 a gallon where I live. It's over six in California. Before the war, it was under three.

45:51Felix Salmon: That's crazy inflation in a very short period of time. And it's the most salient price in the economy. And it does make people unhappy. It's extremely salient. And so, yeah, it makes Trump less popular politically. But on some level, I feel he doesn't really care about that because he's a lame duck anyway. And he's just like, I want to prosecute my agenda, whatever that is. He wants to do what he wants to do. He's getting rich. He cares about the politics.

46:19Elizabeth Spiers: I don't think inflation has ever affected him personally. And he has trouble caring about things that he has not experienced. But not having high interest rates has affected him. And so he wants low interest rates. That makes sense to me.

46:31Felix Salmon: Yeah, I guess if you're really rich, inflation is not that big of a deal. If anything, it's good. I don't know. I don't want to talk about it. Well, I wouldn't say it's good. But you do want low interest rates for a very reason. I wouldn't say. But like you don't, Trump doesn't go to the grocery store like I do and have to buy his bread and is like, wait, what? Why is it so expensive? Exactly. He's probably never lived in a world where like he needs to do a sort of household budget and be like, we can't afford this because we need to pay for that. Or like literally he's not buying things for himself.

47:00Felix Salmon: Like no president. Remember when like George H.W. Bush bought things at the supermarket and he didn't know about the scanner? The scanner, yeah. Yeah, it's just like they don't mess with that. Maybe Obama did it.

47:21I think we should have a numbers round. Emily, do you have a number?

47:25Felix Salmon: Yeah, I do. Cool. My number is 4.4. That is the increase in hours per week that college-educated fathers spend doing child care or housework at home from 2022 to 2024 compared with the period before the pandemic, 2017 to 2019. This is a study from the American Institute for Boys and Men. They looked at census data that tracks time use, and they found that dads are spending more time doing child care and housework, dads of young children, now in the post-pandemic period than they were doing before. This is a little bit because more of them are working from home, the college-educated dads, but it's also because they had the experience.

48:11Felix Salmon: This is the hypothesis. They had the experience of being at home in 2020 and 2021, and they were like, this is nice, and I want to spend more time with my kids, perhaps. And I thought it was a refreshing study to read, given a lot of the other news, if you're very online, that you might be reading about men and this new movement where they don't want women to vote and blah, blah, blah. They're changing diapers, people. They're doing it. In the real world, those online phenomenon, I think, are pretty small compared to the real lived experiences of families. My number is 60. That's a percentage.

48:48It's 60%. And I'm going to go back here and say that there were 18 ,000 home sales in New York in the first half of 2025, which is the last time that we have good data for this, over a million dollars. And more than just over 60 % of those were all cash transactions. Wow. And there's a plan. This is like a plan being hatched between Zoran Mamdani and Kathy Hochul to tax all cash, seven figure all cash transactions at 1%. Just like if you're paying in cash, you have to pay a 1 % tax. And this is a way of raising some money for the budget. And I kind of love this. I kind of love the idea that like, you know, we don't want to make it too hard to buy a home.

49:34But obviously, if you have more than a million dollars in cash, then do we actually worry about you too much? Probably not. So yeah, pay 1%. And that's, it's not enough to like make people incentivized to go through the whole palaver of getting a mortgage necessary. But it's, I feel like it's an elegant tax, but 60 % of transit. And in Manhattan, if you look at the big transactions over$3 million, 90 % of them are all cash. Elizabeth, what's your number?

50:02Elizabeth Spiers: My number is$15 million, and that's dollars. And that is how much it costs to make the original Top Gun movie, which turns 40 this week. And it made$357 million worldwide in the box office and had the best-selling soundtrack of 1986 and an Oscar-winning song, Take My Breath Away by Berlin. But you can see it in theaters for a week because they're bringing it back.

50:24Felix Salmon: I thought that song was from Top Gun. That's what you're talking about. Oh, I thought you said Naked Gun. Oh, my gosh. Top Gun, Naked Gun, like one of those gun movies. I just watched the sequel, the Naked Gun reboot or sequel, whatever. So funny. I really recommend it. It's so good. Yeah, let's go to the movies, people, and watch Top Naked Gun. Okay, I think on which note, like I'm off to the cinema because it's been a minute since I've been to the cinema. Thank you for listening. Thank you for emailing us on sleepmoneyatsleep.com. Thank you to Jessamyn Molly for producing. And we will be back next week with even more Sleep Money.

51:04Sleep Money is brought to you by Charles Schwab.

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