AI Optimism and Macro Skepticism With Dan Ives & Neil Dutta

28:07It's chat GBT. No, it's, this is the beginning year three of an eight to 10 year build out. I hope so. I'm here for it. All right, Dan, you're the best. Thanks for doing this. I appreciate you. Thanks so much. All right, man. Be good. Okay. The great Dan Ives, everybody. What an absolute legend. Always love talking to him. All right. Next. Our friend, Neil Dutta. welcome him in. Get him in here. Neil, what's up, man? How's it going, Michael? How are you? Hanging in there. Tonight. We're going to do it. We're going to do it. Okay. I think so too. So this is a perfect day to have you here. We got some data from the government.

28:51It's been a minute, but we heard about the labor market. So how's the economy, Neil? How are we doing?

29:00um well it depends who you talk to i'm talking to you uh you know i think look i still think it's kind of the three buckets right the housing markets in recession uh i think the consumer and the labor market's getting worse um but the labor markets appear to be closing in on a recession recession-like dynamics. And you have in the background this sort of spectacular AI tech capital spending boom that's going on. So that's still sort of where we are. At the margin, I would say the labor markets are getting worse. And I think that's the big piece of it. Because a big sort of thesis for the growth bulls has been consumer spending, right?

29:43Like consumption's been doing well. But ultimately, if unemployment is going to go up, that means that worker wage growth is going to moderate. And if wages are moderating, that means that consumers don't have the money to go out and spend. And so if they can't spend, that sort of undercuts a big thesis that the bulls have been making. I know that you're a business economist by trade. You're not necessarily a stock market in the weeds observer like your partners are. But I want to ask you this. Maybe, like, do you think that the market is an accurate representation of what's actually happened?

30:19I'll be specific. If you look at a chart of Capital One Financial and Ally Financial, these are two businesses that are very much levered, not just to the American Express customer. And that's a great looking chart too. is the stock market, are these, are investors wrong? Because these stocks are basically at all time highs and not, and this can't take stock market as gossip, but you would think if there's, there's really stress in the aggregate that it would show up in these stocks. Yeah. I mean, I think, you know, look, I mean, stock markets in my view are a good discounting mechanism. They're not a perfect discounting mechanism.

30:59And that would be my only kind of retort to it. I mean, it doesn't, you know, the issue is, is that if that's going to be the anchor, then, you know, there's a risk that though, you know, it started, the train kind of leaves the station and that's like, oh, look, now the stocks are down. I mean, it's not that, you know, my, my, my view, frankly, is that the stocks tend to be a better discounting mechanism at the lows, not necessarily at the highs. And in terms of the consumer, you know, just bringing it back to the economic data that I look at, there's never been a business cycle in all of US economic cycles where consumer spending is actually turned down in front of the economic slump.

31:45So in front of an economic recession, consumption never actually declines. Sometimes it doesn't even go down during the recession. So if you look at 2001, for example, you actually had expanding consumer were spending during that period. So, huh? Because Ben keeps asking on the podcast, like what is going to slow down the consumer from spending? And I know this is sort of circular logic, but it's got to be not just a recession, like a statistical recession. I know the statistical stuff gets wonky, but it has to be like real fear of them losing their job. Otherwise, they're going to keep spending through it.

32:19A hundred percent. I mean, if you go back to, I don't even, I mean, if you look at like the nineties through the GFC, I don't think we had one quarter where consumer spending actually went down. No shit. I mean, that's, yeah, like a full quarter. Like I'd have to go back and look, but it's pretty, yeah. I mean, we had a very, very like extended period of consumer spending during that time. We don't stop. All right. I want to, so I grabbed your chart from your post, high frequency data heat map. What, so we're looking at manufacturing and output, employment, housing, inflation, and the consumer.

32:55This looks like a very mixed picture. What are some of the big takeaways on your end? Well, I mean, the manufacturing sector is clearly sluggish, and I think housing is getting worse, not better, right? So those are two sort of, that's like the linchpin of the goods producing economy, right? So like everyone's talking about the big AI data center build out, but if you have less residential construction, I mean, remember my friend Rick Palacios at John Burns has been talking about how builders are going into the new year with the most completed unsold inventory since 2010. So if they're sitting on more unsold completed units, what does that mean for employment in the residential construction industry?

33:38It seems to me like they should focus more on unwinding or getting these sort of homes off their books than actually hiring more people to break ground on new homes. So I think builders are in a more precarious spot. And, you know, historically, that's been an important tell on the outlook for the economy, like a lot of industries, I think, are kind of downstream from housing. But yeah, I mean, I would just say that, look, I mean, the risks are clearly building. I mean, here's another thing, Michael, inflation, right? Oil prices, we know where they are, it's collapsed. Home prices are slowing, right?

34:14They're contracting in many parts of the country. I mean, if home prices are declining, then the underlying asset, the cost of renting the underlying asset is also going to go down. If a home price is going down, it's not like the landlord can come up to you and be like, I'm going to charge you more. And labor cost inflation is slowing pretty clearly. I mean, if you look at quits rates, they're down. The ECI, that number was weak. Average early earnings are slowing as unemployment's going up. So when you think about like, what areas do we think about when we think about sustained inflationary pressure?

34:55It's labor, housing, and energy. And wages. Yeah, labor. Yeah, I'm sorry. Right. Those are all running south. Okay. So is the Fed, and I'm skipping ahead a bit here, but is there a policy mistake a foot? Yes, I think so. I mean, I've been saying that, you know, I think at the end, to me, the fact that we're debating whether or not they might cut in January is a bit ridiculous, given what I've just told. Okay. So we'll get to, we'll get to, we'll get to the Fed in a second. I just want to stick with, with the report today. So unemployment, try not please. So U.S. payrolls rise in November. Okay.

35:34That's good. We had a not so pretty October number. Unemployment rate not reported in October, but okay. But it's going up to the right. I'm going to assume that this is, has DOI-Bit concerned? Well, so if you go back historically, Michael, and you look at other periods where the unemployment rate has gone up for like three or four months in a row, typically a year later, it's higher than at that time, right? So the unemployment rate is inertial, Right. Like once it moves up, it tends to keep moving up. So that's why I'd be concerned about it. Right. Like where we were at four, two, four, three, four, four, five.

36:15Now we're at four, six. I mean, that's a very unusual circumstance. And then you have to really tell me, like, why is that stop? Like, why does that train stop? it's for me, it's very challenging to do. We're kind of running on one engine right now with respect to the job market. If you look at the private sector, all of the jobs growth was in the healthcare industry. It's not a particularly cyclical sector. Everything else was sluggish. I mentioned housing employment coming under pressure. Manufacturing is pointing down. You know, you look at oil prices, like, do you think it makes sense for for oil drillers to be hiring mining workers right now.

36:54New multi-year load today in crude. Daniel, let's throw this NFP chart up, please. So, all right, we've got monthly change in NFP by industry, broken down by education and health services, leading the charge. Next, construction, which I don't know, is noteworthy given what you just said, Neil. Professional and business services next. And on the other side, we've got leisure and hospitality, which I find interesting, shedding 12 ,000 jobs, trade, transportation, and utilities. What inside the report was most interesting to you? Well, I think that construction piece was interesting because it sort of speaks to this idea that Dan was probably talking about earlier.

37:32There's this massive data center build-out that's putting upward pressure on non-residential construction employment. And that's really where it's coming from. If you look at specialty trade contractors as an example, residential contractors keep going down, but there's been a meaningful offset from a full offset, frankly, from non-residential construction. Now, we'll see if that continues because we do know that the rate of growth in spending is likely to moderate next year. But that to me is interesting. And I would just say that there's probably more risk to the residential piece of that going forward because, you know, builders are frankly sitting on too many workers relative to what they're doing.

38:14I forget the exact number, but let's say this is directionally right. Artificial intelligence spend is responsible for half of GDP growth this year. Is that sustainable? Can those dynamics persist through 2026? I mean, it's really hard to see how it – I mean, I think there's a bit of a debate over how much the number is. I mean, this is sort of like a geeky, wonky kind of econ nerd fest. It's like, how much of that are we importing and how much growth would we have in the absence of AI? But yeah, I don't, I mean, I would just say, no, it's not sustainable to have an economy this imbalanced. I think that's like, that's the simplest answer.

38:55At some level, like the AI build out is probably crowding out residential investment. And to some extent, maybe consumer spending because it's putting some sort of demands on the electrical grid and that might be pushing up household utility costs, right? So, yeah, I don't think it's sustainable. What about the Atlanta Now GDP stuff? That is showing under 4%, I think, for the most recent quarter. Is that, you think that's wildly optimistic? Well, I mean, I think the latest number was like for the third quarter, right? I don't know that it's being updated yet. I mean, I have to go back and take a look.

39:33But I would just say that the main story before the government shutdown was this massive disconnect between GDP, which has been strong, and employment, which has been weak. That historically reconciles by GDP kind of going towards employment, right? Like, so if I don't think productivity is like 4%, right? Right. So there has to be you can't be growing that quickly or employment should be a lot stronger. Like that's sort of how this has to work out. You can't have the economy growing at four percent with total hours worked in the economy. Basically flat. What are clients asking you or what are you hearing or seeing from companies about their plans for labor?

40:22because the AI story and where productivity comes in, is this like more of, hey, we don't need to do as much hiring as we thought in 26, or we actually don't need as many people as we thought, let's get rid of them.

40:40It's been spotty. I mean, I think you could probably detect some modest increase in layoff announcements. If you look at corporate earnings commentary, we saw, for example, Verizon lay off a bunch of workers. you know I think was it P &G earlier in the year so I think at the margin like layoff announcements have been going up when I look at things like warn notices those are worker adjustment and retraining notifications right so these are like little slips that they have to send out if they plan to shut a factory or lay people off those have been going up so that tends to lead unemployment so I would say at the margin like the unemployment news from the corporate earnings commentary has been getting worse.

41:24You know, clearly, like, there are some industries that are, like, more at risk than others. Like, consumer packaged goods companies appear to be under more pressure, right? Like, so, you know, but I just say, like, you look at, you go back to your chart about, like, the distribution of where the employment growth is coming from, you know, like, leisure and hospitality. Like, you look at what's going on with, like, some of these, like casual dining establishments, like Chipotle and Cava and Sweetgreen and like Shake Shack. And like, they're telling you that they want to hold the line on prices.

41:56They want to let, essentially they're willing to like let their margins suffer to maintain market share, right? When you see announcements from companies like that, the slot bowl economy, how much of that is just like, don't blame young people and don't blame whatever. Like you guys got out of control. You opened, you expanded too far. Your stock prices were stupidly high and nobody wants to spend$16 for your food. Like, is that, that's where I am at versus a read through to the consumer that they're talking about. Well, it's one of the, what is that saying? It's like, um, it's like when my, when my share price is out, is up, uh, it's, uh, it's my, I'm executing my strategy and when my share price is down, it's the economy.

42:42Yeah. Yeah. I don't know. I mean, when I think about some of these companies, it's sort of I kind of think about like this is where people that work in office buildings typically go to eat lunch. And if there aren't as many people eating lunch in office buildings, then these companies are going to come under pressure. I think your point probably is well taken. I mean, you know, but I would just say that for me, the issue is with respect to employment. Right. Like so if restaurants are holding the line on price and they're allowing their margins to come under pressure, the likelihood then is that they're probably not going to be going out and hiring that many people.

43:18And so leisure and hospitality, that's a big driver for employment. Right. Like that's a big part of the private private sector economy. And at least in terms of employment, like the value add isn't the same as tech, obviously, but in terms of labor, it's important. All right. Let's let's pivot to the Fed and who's going to run it. A couple of weeks ago, Kevin Warsh was really nowhere. The prediction markets chart on, please, had Kevin Hassett way in the lead. Kevin Hassett is some sort of economic advisor to the president, famously or infamously wrote down 36 ,000 a million years ago. But Kevin Warsh, coming up the rear, what is the story?

43:51Who is Trump going to nominate? I don't know. I don't even think Trump knows yet. You know, the Waller, believe it or not, Governor Waller is moving up in the prediction markets because - That spiked this afternoon, right? It did because there was a journal article that came out that basically said that he's meeting with the president tomorrow. So, you know, we know that the president has a very sort of impulsive nature sometimes, right? And he can, you know, it's like usually like who's the last person he spoke to? And that person, you know, is maybe the one that's kind of in the lead. Is Waller, I don't know anything about Waller.

44:28I know that Hassett is not a serious person. Is Waller a grownup? I think Waller is a very serious person. He's a governor at the Fed right now. And he's been importantly, like, very early in a lot of the key calls that the Fed's been making. I mean, to me, like, if you want to be at an institution like the Fed, it's really about your power of persuasion. Like, how can you get people to think the way you're seeing things, right? So you can't just go in there like guns blazing, calling everyone like a numbskull. but but you know what's interesting about Waller like remember a couple of years ago he was the one that made the point about you know we can cut job openings without seeing much of an increase in unemployment I think he was right about that and then more recently he's been very very early in terms of advocating for rate cuts because he says the labor markets are in a much more precarious position than people think and I think he's been vindicated on that as well and now a lot of the arguments that he was making like maybe two, three, four months ago.

45:28Those are the arguments that Powell's making now. So I think that's really a tell, right? Like, so he, he's like an intellectual thought leader on the Fed. I think he'd be a great pick. And then also he'd probably get Powell to leave, right? Like that's, that's another thing, right? Powell's been very playing it very, very close to the vest. Remember Powell does not have to leave in May. He doesn't? No, He doesn't have to. His term ends in 2028. He can stay governor for two more years. So, I mean, the question is, if you put someone like Waller up, then the likelihood is that Powell will leave and then you get another seat that you can fill.

46:06So what's May? His term is up then, but he doesn't have to leave? His term as chair is up. His term as governor can go on for an additional two years, I believe. Understood. Okay. So you mentioned that - I don't think it'll be either of these people. I actually think that Trump is just buying himself time to get Scott Besson, to convince Besson of taking the seat. Okay, we'll come back to that in a second, because I want to hear your take on that. You mentioned that it is not just about being a bull in a China shop. You actually have to build persuasion. I'm sorry, you have to build consensus by persuasion.

46:34So Kevin Warsh was talking to, there was an article in Barron's. Kevin Warsh says Jerome Powell has failed inside the mind of the man who may lead the Trump Fed. So he was talking about in the article, the conversation that he had with Paul Volcker. And he said, this is Volcker saying to him, the job of the central bank is to do two things. First, to get interest rates about right. And second, and he emphasized it was at least as important as the first, is to make sure you look like you know what you're doing. Credibility is what we're talking about here. And Warsh said, quote, the Powell Fed has failed on both measures.

47:16Do you think that's true? No, I think he's saying, look, I mean, it's just really rich for Kevin Warsh to talk about credibility. I mean, my entire career, he's been hawkish. He's always been, and when he's wrong, I mean, to me, it's okay to be wrong. Like everyone's wrong, like in our business, you know that. The issue is if you're always wrong in the same direction, that to me is a problem. And he's always wrong in the same direction. He's always too hawkish. OK, so he said they believe that inflation is driven by consumers, by wages that are rising too much. He's talking about the Fed and consumers that are spending too much.

47:55I fundamentally disagree. At the core, I think inflation comes about when the government spends too much and prints too much. So the school of thought is fundamentally different at obviously odds with Powell. So you think that he's always been too afraid of inflation? He's a fiscal. I mean, he was afraid of inflation, spectacularly afraid of inflation in the 2010s when inflation was doing absolutely nothing. And then, you know, look, I mean, to me, what's interesting about him is beyond the economics is just like his. if you go through that guy's resume, Michael, like the one impressive thing on his resume is the Fed, which is an institution that he knifed right upon leaving, right?

48:39Bernanke kind of gave him this cool job to kind of be the liaison from the board of governors to Wall Street. So he talks to like bankers and so forth. You know, I mean, it probably helped him establish a lot of relationships. And how does he repay Bernanke for that? Basically, trash talks. He slept with his wife for forever. So, um, no, I mean, I just think, look, like, I think it's, it's, uh, it's a little disingenuous for him to be, uh, calling the Powell fed, like lacking of credibility. I mean, it's, I don't really put too much stock into that. Based on your comments and based on his comments, why is this, this doesn't sound like somebody that the president would want leading the Fed.

49:19He's hawkish, right? The president wants someone that can make the intellectual case for, for low for for cutting interest rates. And that's a really difficult place for Kevin Warsh to do to be because he hasn't really ever been able to make that argument because he's always been hawkish. Like, I think that's another thing, right? Like, you have to ask yourself, like, isn't a little convenient for him to be dovish now? Like, I think that's kind of interesting, right? Like, he's been a hawk his entire life. The second where the moment where it becomes like politically convenient for him to be dovish, he becomes one.

49:49Okay. As we as we wrap this conversation up, Neil, the journal had an article, Why Everyone Got Trump's Tariffs Wrong. This is a very unusual year. At least it felt to me, it felt weird 2025. So many different narratives, so many different what ifs. And obviously, you mentioned we're wrong all the time all over the place in this business, but just so many things that we thought would happen that didn't come to pass. Are you surprised? What do you think people got wrong about Trump's tariffs? Yeah, I am surprised. I mean, I was probably one of those people that was like lighting my hair on fire, like in the middle, well, I mean, in the second quarter of this year, thinking that the bottom was going to kind of fall out.

50:28And, you know, and Trump reversed himself like very quickly and kind of pulled back. But at the end of the day, I mean, we still have an effective tariff rate north of 10 % and we're collecting hundreds of billions of dollars at an annual rate. Short on, Daniel. So$200 billion. I mean, we sucked that out of the economy. It didn't seem to slow us down very much. Well, I mean, I think that remains to be seen, right? And so this is sort of my gripe is that, I mean, you're seeing it show up in employment. You're seeing it show up in certain areas of the economy. I think what we didn't maybe foresee is just how massive the AI boom has been.

51:10And, you know, that's kind of hit the economy across multiple dimensions, right? It's generated a wealth effect in the equity markets, and that supported high-end consumer spending. And it supported a fairly significant capital spending boom as, you know, you have this big data center construction build out all across the country. So, you know, we'll see. We'll see what happens. But I don't think you can raise hundreds of billions of dollars and have no blowback on the economy. So, Neil, we're at a very weird place in the economy and the market and the cycle. I don't even know where we are. But as the Fed is cutting with inflation, wages, not inflation going lower, but everything that drives sticky inflation, you would think, going in the right direction for people that don't like price increases.

51:59what would you need to see or what are you going to be looking for as a leading indicator to say, okay, things are actually not going in reverse, but maybe they're starting to bottom out and actually the economy is going to be unstable footing. Like what would, what would you look for? I mean, to me, it's really about, it comes to employment. Like you, you want to look, you want to see hours work to expand. You want to see jobs growth broaden out beyond just healthcare. there when those things happen, then I think you can, you can, you know, be a little bit more optimistic about the future, but you know, for the time being, those things aren't happening.

52:33And it's, it's hard to see why they would happen, um, you know, between now and the end of next year. How concerned are you? I was about to use a green to you've read scale traffic. I don't know why, but 10, 10, 10, 10 being major scared zero being we're great. Like, where are we? Are you Yeah, I think we're seven, eight. I mean, if, if 10 is like GFC and like, and, and, uh, you know, zero is like just, uh, like the nineties, I mean, I think I'd probably say I'm a, I'm in a seven. I mean, you know, look, I think this is, I think we have a sluggish, um, a sluggish year ahead. I would just say, I mean, you do, you do have like rising unemployment.

53:13That's going to create some issues for consumers. State and local governments are pulling back. The housing market is in recession. You know, those are some important areas of the economy that have been driving growth for a number of years. So if you lose that, you're sort of, you're on much thinner ice than you think. And, you know, look, a lot of the enthusiasm right now is just driven by like, oh, we have this, you know, bill coming where you get refunds and so forth. But, you know, historically, like tax refunds don't create like a sustainable turn in consumption, right? Like can get your refund.

53:46Maybe you spend it. Maybe you don't. I mean, it really depends on how you feel about employment at the time, right? Like if you're getting a refund, but you're worried about losing your job, are you going to really go out and spend the money or are you going to save it? So yeah, I mean, I think there's a lot to think about next year, but I feel good sort of about where our call is. And I think, you know, in terms of unemployment, I mean, it's clearly going higher. And despite that, the Fed is not doing anything. And so So, you know, look, the markets are not even priced fully for January, right?

54:19Like, so even though we just had another increase in the unemployment rate. So to me, that's a little concerning and it kind of risks them falling behind the curve. All right. That's a bad place to end it. But Neil, listen, I want to thank you for coming on. You are data dependent. It's one of the things I love most about you. You do not have a narrative and then torture the data to find it. Wherever the data goes, that's where it will take you. So I appreciate you coming on today. Thanks, Michael. Go Knicks. Go Knicks. All right. I want to thank VanEck again for sponsoring. I want to thank everybody for tuning in and watching.

54:48Dan A. Ives is the man. Thank you, Dan. All right. Josh will be back with us next week, Tuesday, live at five. Happy holidays, everybody. We'll see you soon.

55:40I'll see you next time.