00:00As we see these ISM manufacturing numbers roll in, I think a lot of people expected,
00:06and we'll find out still this week, job market weakness is looking a little bit better than
00:11anticipated, but inflation is also higher than we may have expected.
00:15Right, so wages aren't keeping up with inflation. I don't see any data that shows me that inflation
00:21is moderating or even slowing down or even moderating, so that's going to persist.
00:26But the economy is going to be doing well. I don't know where we're going to get 5%,
00:32like Hassett talks about, but it's doing well because the high end is spending. The low end
00:38doesn't account for that much of spending, and you've got incredible capex, so it's doing well.
00:45I never thought that unemployment would be that much worse because of AI, and I use the precedent
00:52when it is e-commerce. So in 2000, you had less than 1% of retail sales in e-commerce,
00:59and you had over a million retail employees. You had basically a million retail employees
01:05at 18% e-commerce, same customer-facing employees. So that was never a part of my
01:12thought process. So I was worried about jobs at the lower end as people cut back, but people have
01:19not cut back that much. Yet. Yet. I mean, what you do see at the lower end, people are cutting
01:25back
01:25on groceries to be able to put gas in their tank to get to work. And you saw that. That
01:31probably was
01:32a bigger driver for Walmart because they're 60% grocery. And it's not a big driver for a dollar
01:37tree that reported last week because they're less grocery. But when Dollar General reports,
01:43they're more grocery. So you'll see it there.
01:44You know, I was just thinking, because I was having a conversation with the private capital
01:47executives, and I'm heading to Super Return next week. So I've been talking a lot about
01:50what are people investing in? And it seems to be in two buckets. One is obviously AI data center
01:55build out. But within that, it seems this acknowledgement that all of the tech things,
01:59especially software, look risky now. So what people want to invest in are like HVAC roll-ups,
02:05dental clinics, pet care clinics, various things that are very much so in the real world.
02:11Is there almost, because of the investment flow- And recession-proof.
02:14And recession-proof too. But to me, that suggests that's a lot of investment in this economy.
02:19That's actually kind of a wider breadth of jobs than software companies that maybe didn't have
02:23a lot of cash flow and didn't have like hard things and real things. Is there almost this,
02:26you know, counterintuitive move with AI that the real world stuff becomes more attractive and
02:31that's actually healthy for the economy and maybe a wider breadth than in a world where
02:35like software and tech was kind of the only game in town?
02:38Well, AI is data centers. And there are a lot of services that are around data centers,
02:42HVACs, et cetera. Those are great cash flow businesses. So I'm not surprised private credits,
02:47private equity and credits going into them because they're always attracted to cash flow rich businesses.
02:51And the medical roll-up has been going on for several years. So I think they're AI adjacent things
02:59that are real world. Look at electricity companies, utilities. You know, those have been great.
03:06And there's this enormous wealth effect created by AI too, which give more people a ton of money to
03:12invest in a giant HVAC for their giant McMansion. I mean, look at the Ford Motor Company. You know,
03:20since the end of April, it was trading at 11 bucks a share and now it's up to 17 just
03:26because they're
03:27going to use the giant batteries that they were going to make for EVs that no one wants to buy
03:31anymore for hyperscaler data centers. So how much does this broaden out? Do you think it's still
03:38too narrow, too concentrated for the kind of gains that we've seen in this market? Or is it really
03:44broadening out to so many different sectors and affecting so many different Americans that it's
03:48going to lift the economy? I think it definitely lifts the economy, but, you know, it lifts the
03:54economy more for the higher end people. So there'll be jobs. But, you know, a lot of the AI companies
04:00talk about, oh, well, there are going to be so many electricians needed and there'll be so many
04:04plumbers needed. But it takes a long time to get to a master electrician level where you're making a
04:10good wage. So, you know, we're heading in the right direction, but we're not there yet.
04:17Can I just ask, what difference does it make to be undergoing all these investments in this
04:21project to building things out if rates are staying high? Does it make any, I mean, obviously it feels
04:26to make no impact anymore, but money isn't cheap anymore. Cash isn't free. Does it make a difference
04:31if rates aren't coming in as we continue all the spending and debt markets just see huge amounts
04:36of issuance? Yeah, it's interesting because a lot of, so many companies are offloading the capital
04:42investment and renting, you know, they're basically doing, like, you know, renting from other,
04:49you know, they're outsourcing the debt issuance. So it doesn't matter for some of them. And then I
04:54wonder with the people that are, with the, with the companies that are putting on so much debt,
04:57I mean, Meta is putting on a massive amount of debt, but their, their bet is they can now grow
05:03it.
05:04So, you know, on a, like on a long-term basis, yes, rates are higher than they were in 2020,
05:10but they're still not prohibitive. What do you think about the circular economy
05:15that we talked about for so long with NVIDIA and OpenAI? I noticed last week,
05:19I think Apollo and Blackstone are selling $35 billion or thereabouts in debt,
05:27but Broadcom is going to backstop that debt so that it can be used to buy the Google chips that
05:33Broadcom makes.
05:34I mean, this is exactly what I'm talking about. So, so it's, they'll backstop it, but they never,
05:39I'm sure they're not intending, like in their mind, they're not thinking that they're going to have
05:42to backstop it. And theoretically, you know, I don't know the cost of debt for Broadcom, but
05:47the cost of debt for the guys who are issuing debt is, is, is good. And, and, and they are
05:55also
05:56frequent issuers. So the market knows them well. So those deals will go better, theoretically go
06:01better than, you know, a less frequent issuer. We were having this conversation with Stuart Kaiser,
06:05and I thought he made an interesting point that credit markets are starting to look more like
06:08equity markets and that they're becoming more concentrated around tech because before it was
06:12financial institutions were the big issuers. Now you're starting to have a lot of the tech
06:16companies, the mega caps, the hyperscalers issue just crazy amounts of bonds and all over in all
06:21different geographies at all different tenures. What is it, what difference does it make if you have
06:26something, an index for credit that starts to look a lot more like the S and P 500 and you
06:31start to
06:32have concentration issues in that? Well, you've had concentration issues in the past in the debt
06:35markets, famously TMT. And then you worry about, you know, there was a massive, the last time I can
06:41remember, obviously this is, you know, dwarfs that, but in the nineties you had massive investment in
06:47building all the, all the cable and some was overbuilt, but there was, there was a huge concentration
06:54in TMT and famously JP Morgan took $5 billion write-off, which was a lot back, back then. So it's
07:01a
07:01question of who's holding the debt. We're talking about two separate classes here, right, Meredith? On the
07:06one hand, you've got the top tier consumer, as well as the top tier companies that have no problem
07:12issuing just an endless amount of debt. And there's so much cash that it makes sense. On the other hand,
07:17you've got the bottom almost 50% of consumers that are struggling to cover credit card debt with rates
07:23that are like 20, 25%, right? Um, how does that work out in the end, especially for an economy that's
07:32so consumer driven? Well, it doesn't. I, I think that the bot, so 45% of households make less than
07:3950,000 a year and the same households are qualified as less than prime or subprime. And they're being
07:46cut. They're being basically, um, not issued credit, not issued credit. So where they go is into the
07:51shadow banking market, which are all private companies. So it's not easy to find numbers for
07:57them. So people don't, people don't focus on them, but they're really bad. So, um, it, I, you know,
08:02a group of, uh, lower income, uh, income employees, um, is accessing daily, uh, wage access. Uh, so
08:11they're not living paycheck to paycheck. They're living payday to payday. And the growth in that industry
08:15is, um, upwards of a hundred percent per annum. Um, and people aren't using that once a year.
08:21They're using, it's doing it once or twice a month. Um, and the other thing that's growing,
08:26uh, dramatically is, uh, pawn loans. So if you can't, so, so the regulated, uh, bank banks and
08:33credit card companies, they're not lending to, um, a big swath of Americans. So it makes it much more
08:40expensive. So when you owe money, when you owe, when you have debt, that's really expensive,
08:44you're burying, burning yourself into a deeper, digging yourself into a deeper hole.
08:48Meredith, does that also mean, because whenever we listen to the big banking executives or look
08:51at their earnings, we, you know, say, oh, we're getting a read on the consumer. They all say
08:55consumer is healthy, that the credit, the health of credit looks really good, that it's resilient,
09:00but is it less of a measure now just because of what you're talking about?
09:03It's a great point. It is not a measure. If you look at the banks anymore, and it had been
09:07in
09:08every prior cycle. So, uh, the Wall Street Journal ran with a story that there were 13 plus percent
09:14delinquencies, 90 day plus delinquencies, um, with consumers. And that doesn't comport with what the
09:20banks are, um, showing at all. And the banks are the big credit card issuers. So, um, you know,
09:24JP Morgan's 90 day plus delinquency is 1.1% in the first quarter. A credit quality is pristine
09:31because 45% of households don't have it. It's the very, very high end. So I just don't think
09:36it's a leading indicator. Bank, bank credit is not a leading indicator anymore.
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