When A.I. Spending Starts Slowing, Start Worrying About Recession — Wolf Richter

[00:00:00] Speaker 1: It's this huge amount of corporate money that's getting spent, that's getting drawn in globally, and that's getting spent in the U.S. economy. When that starts declining, that's when I start seeing a recession on the horizon. [00:00:23] Speaker 2: Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. Welcome you here for a long overdue return discussion with Wolf Richter, publisher of WolfStreet.com, very famous not just for his macro and market research, but for the charts that he creates there. Wolf, it's been way too long. Thanks so much for coming back on the program. [00:00:43] Speaker 1: Thanks for having me, Adam. [00:00:45] Speaker 2: Well, look, we caught up before we turned the camera on, but I just want to say once again, I was just back in your home city of San Francisco 24 hours ago. And despite some of the problems the city is still dealing with, it is still overall one of the most beautiful cities in the world. So congratulations on living there. [00:01:07] Speaker 1: I have nothing to do with that. [00:01:09] Speaker 2: And I will remind people that Wolf is one of those crazy people that walks down and goes swimming in the bay there, which is so cold. But I'm sure that, you know, you were hip on cold plunges before they became the hot thing to do. [00:01:30] Speaker 1: Well, you know, the cold plunges where they sit in ice water in the bathtub. And I can't do that. When I get into cold water, I need to move when I get very cold. So I need to swim hard to stay warm or not get too cold too quickly. But these people are, I look at them, you know, they say, this is nuts to sit in ice water like that. I need to swim. [00:01:57] Speaker 2: I get it. Although it's hard not to look at you swimmers as nuts. I was on a, there's an old boat, the Balclutha, you may know, Wolf, that's kind of moored down there off the bay or on one of the docks. And I think it's like fourth grade is when in the Bay Area schools, kids go and spend a night there. So you're living like the old sailors did back in the 1800s. And so I was a chaperone on that. It was cold. I mean, this was winter San Francisco time. And you're up all night. And I remember at like 3.45 in the morning, 4 a.m., I started seeing these little blinking lights in the black water. And it was these little LEDs that the swimmers had on their swim caps there. So they're swimming in the pitch black, freezing cold, shark infested water. I just don't get it. But I've got a lot of respect for you guys. All right. Well, look, beyond that, let's get to the matter at hand here. So it's been a good while. So I should probably just open up with, Wolf, kind of what's your overall outlook on the economy and markets these days. You sent me some notes of how you see the world. But why don't we start there and then we'll start drilling into some specifics. [00:03:08] Speaker 1: Yeah, so the markets, you know, I'm just writing this article about AI bonds right now. And there's a lot of hand-wringing about that. But the bond market is still in la-la land. I mean, the yields are back where they used to be before QE. The spreads have widened a little between treasuries and corporate debt. But they're still at historically narrow levels. And so we've got that. And the stock market, of course, you know, it's broken in two. But the AI and tech, the AI-related tech companies, they're on an extreme valuation binge. I mean, it's just incredible what's happening there. And so you have other stocks that have plunged and the overall indices are near their all-time highs. And so you can see that the markets are still in boom territory overall. And though, sure, when you look at thousands of stocks, you can find probably a couple of thousand in that group that are 80% or more off their highs. But the big stocks that are carrying the day, they're at all-time highs. And they have extreme valuations of trillions of dollars. And so that carries the index. Then in terms of the overall economy, so we've got the AI spending boom that's throwing maybe a trillion dollars in corporate money and investor money at the economy. A lot of that comes from overseas because they're raising funds overseas. That gets spent, at least in part, in the United States. Then we've got government deficits of a couple of trillion dollars a year. And that's getting spent. And the consumers, you know, they're working. We have full employment. Wages are up. You know, this is a hopping economy. The economy is running hot. In second quarter GDP, so nominal GDP without inflation. So that's the economic growth in current dollars was 8.5%. And then we also had, so that's annualized. And then we also had about 6.4% GDP inflation. So that's inflation in the overall economy, not just consumers, but businesses and governments. So that's 6.4%. That's a lot of inflation. And it's a lot of economic growth. That's the definition of an economy running hot. And the administration has come out to favor that. And the Fed's still talking about 2% inflation target, but they're really on the bandwagon, too. And that's the way to deal with this huge debt that we have is to let the economy run hot. We're going to have inflation. We already have inflation. It's quite a bit of inflation. It's going to stay up there in that range. And so if you're looking at economic problems, it's inflation. And in terms of economic growth, especially nominal economic growth, it is very strong. People spending, companies are spending, governments are spending, everybody's spending, and money flying out left and right. And we see that and we can document it with everything points in that direction. And, you know, and lots of consumers are wealthy because of their investments in stocks. A lot of retirees, 100% invested in stocks. They're, you know, they're spending this money. So, and young people, I'm surrounded by young people that make enormous amounts of money here in San Francisco. And so we have this economy that is really running hot. It's my definition of our current situation. It means that we have a lot of nominal economic growth and a lot of inflation. [00:06:52] Speaker 2: So this running hot economy, you know, obviously, robust economic growth can make up for a lot of other problems. Do you see this as sowing the seeds of its own ending? Or do you see this as laying groundwork for even more sustained, robust economic growth ahead over the coming years? [00:07:18] Speaker 1: Well, maybe, let me shift this around a little bit. Maybe neither or both. But I think the real benefit of this is that it is a way and maybe the best way to deal with this otherwise unmanageable federal government debt. And that's the overwhelming problem this country has. This is $40 trillion in debt that's hanging over us from the federal government. And there is no way taxes can be raised enough and spending can be cut enough in this Congress or in any Congress the United States will ever have to get this really under control. And the way to do this is with higher nominal economic growth and much higher inflation. So we're talking much higher, not hyperinflation, but two to three to five percent per year instead of two percent. And I think that's a pretty good solution to the debt problem that we have. Yeah, that it's what the White House decided that we'll do. And that's what they're doing. And the Fed is going along with it. That's that's how I see it. Now, this economic growth. [00:08:33] Speaker 2: I just want to make sure folks are following. You think it's it's beneficial because the higher the faster you grow the economy, if you're growing it faster than the debt issuance, your debt to GDP ratio starts coming down. So that makes the debt more bearable. And then the positive element of inflation, inflation has other negative elements, but the positive element of inflation regarding debt is it is it is inflating away the the burden of debt service. So you're kind of getting a double benefit there from the higher GDP and the higher inflation. Correct. Is that how you see it? [00:09:10] Speaker 1: So you can just sort of eliminate the factor of inflation from this discussion here. We're looking at nominal economic growth. That's really what matters is that eight and a half percent nominal GDP growth we had in Q2. So the economy in current dollars grew by eight and a half percent and the debt grew by about eight percent, maybe a little less. So debt is measured in nominal dollars and the GDP measured this way is nominal dollars. The interest expense is nominal dollars. So it's all apples to apples. And so when the economy outgrows the debt in current dollars, it lowers the debt to GDP ratio, but it also, GDP triggers taxes. So the tax revenues are roughly parallel to GDP growth in growth patterns and unless Congress changes something. And so the tax revenues have come up substantially and I track that on a quarterly basis and the tax revenues have shot up. [00:10:16] Speaker 2: And now we've had the tax revenues are increasing without tax, without tax percentage increases. [00:10:22] Speaker 1: So if Congress doesn't change tax policies at all and GDP growth by eight percent nominal dollars, tax revenues will roughly grow by eight percent also. And so your revenues are going up that way and so your interest expense is easier to cover because you're getting more tax revenues to do that. And so it works out and companies, I mean, countries have done that and countries have done that accidentally without wanting to and they've, you know, they've wiped out part of their debt burden that way, but that can get very rough if it gets out of hand. Say if you have 20 or 25 or 30 percent inflation, that is a catastrophic economic event, but it will reduce the burden of the debt and it will get to a point where nobody wants to lend money to the government anymore because of the investors get wiped out with this inflation. So that's that's the thing that you have to there's a fine balance so that investors are still wanting to lend money while they're still making money on the now higher yields. And at the same time, the burden of debt, the burden of the interest expense, all of that's coming down. And so that I think that's a strategy. That's what they're doing. That's what we're seeing. That's what the data shows. And obviously, back to your original question, if that ever, and it will someday, if that ever stops that nominal economic growth, if you have a recession and that thing goes down, you know, then we have a huge problem. It's magnified. So we have the normal recession problems and then we have the debt problems and all the other issues. So they're trying to avoid a recession at all costs and they're trying to keep the economy running hot and no matter what, essentially. [00:12:14] Speaker 2: All right. And I just want to be really clear right now, you are not calling for a recession while we're running this hot and who knows what might happen down the road. As you can see the road ahead. Let's use the car with the headlights analogy. You're not seeing trouble ahead in the headlights in the next couple of quarters, correct? [00:12:35] Speaker 1: No, not at all. Yeah. And I've got some indications that I'm looking at, like I said, bond market, stock market. So when the AI bubble, the investment bubble, when that starts blowing up. So that is one leg of the nominal economic growth. It's this huge amount of corporate money that's getting spent, that's getting drawn in globally and that's getting spent in the US economy. When that starts declining, that's when I start seeing a recession on the horizon. And when the stock prices overall, when they come down so hard that people slow down their spending, that would be another sign. And we've been through that during the dot-com bust. That's exactly what happened. During the dot-com bust within a year, we had a recession. But it's not a 20% decline. It takes a lot more. And it takes a big stock market decline to eviscerate corporate confidence in spending money. And so they're starting to lay off people and they're cutting expenditures and they're axing projects and they're doing all these kinds of things. And that's what causes a recession when you've got corporate spending and laid off consumers, slow their spending. When that's happening, that's when we see the recessionary effects. And it took one year during the dot-com bust from the beginning of the sell-off in March 2000, a year later, the recession began. And I'm not seeing that yet. I'm not seeing the stock market collapsing. I'm not seeing the bond market collapsing. The consumers employed. I mean, I don't see any of those signs yet. So no, I don't see any recession on the horizon. [00:14:17] Speaker 2: Okay. If we do have a recession in the next couple of years, is a slowdown in AI right now your current sort of leading horse candidate of what you think would cause it? [00:14:29] Speaker 1: Yeah. So slowdown in AI spending combined with a sharp sell-off. I'm talking major sell-off of these AI stocks. Yeah. And basically the slowdown in spending would probably trigger the correction in the stocks. Yeah. And we need both of those to trigger that recession. And, you know, you can have these stocks go down by 80 or 90%. And when that happens in your portfolio, you think, oh, my God. And you slow down your spending, you adjust to it. And the involved companies, they stop hiring. And maybe they're starting to lay off some people. And you've got unemployment going up in those impacted areas. And so they may not be felt in Tulsa, Oklahoma. I never felt the dot-com bus in Tulsa where I was living at that time, you know, but it was a depression here. And so, yeah, that's what I'm looking at. Major sell-off in these AI stocks. And I'm talking a lot and triggering a big decline in spending in the corporate sector. And we will have a recession. [00:15:39] Speaker 2: Okay. And the reason why I was sort of digging in on that, Wolf, is unlike the dot-com bust, you now live at ground zero for the mania that's going on. As you look around, and I know, you know, you see the extravagant amount of prosperity that's going on there, how sustainable does all this strike you? In other words, like, do you feel like, look, this is something that's, this is, it's too good to be true. This is going to end at some point in time. It might take a year or two or three, but it's going to happen. Or are you looking around saying, I don't know, maybe this is the new world order. [00:16:20] Speaker 1: Well, I've been wrong about this stuff long enough. I didn't think it would go this far. It keeps on going. It's just incredible. But then it's easy to explain. It's, you know, hundreds of billions of dollars getting raised and coming to this area and to other AI centers. It's, like, like a constant flow. Right. And it's from all over the world. Yeah, from all over the world. And, and it's, it's debt, it's equity. So you have IPOs. Okay. That sounds like an F-22 with afterburner. [00:17:01] Speaker 2: Oh, really? It's funny. We can't hear any of it. But yeah, folks. So, Fleet Week is coming up in San Francisco, which is when the Blue Angels fly over the city. It's really pretty amazing. I think they're doing some test runs above your apartment right now. [00:17:14] Speaker 1: Yeah, that wasn't the Blue Angels. They, they sound a little different, but I think it was one of their, their F-22 demonstrators that their demo fly team that they're having and they're showing off stuff. So, Blue Angels, when there are just five of them. And when they come, all the alarms will go off and we'll hear it. [00:17:33] Speaker 2: Okay. Well, just so you know, you may be able to hear it. We can't hear it yet. I'll let you know if we can. [00:17:38] Speaker 1: Okay. Yeah. Well, anyway, so yeah. The amount of money that is flowing here in these AI centers, it's just stunning. And employees at these companies, startups, and the major companies are making extraordinary amounts of money, both in cash payments and salaries and in stock compensation. And there's a whole industry here for these employees to monetize, borrow against these stocks that they have that they can't sell. And they're spending this money. We see home prices are spiking in San Francisco again. They're buying stuff, helter skelter. There is like, it doesn't really matter what something costs. It's just kind of petty cash. And around the other cities of Bay Area, that's not, that's not taking, that's not the case. You know, you've got Oakland across the bank, other cities. Home prices are down 25% in some of those places. And, but not in San Francisco. So it's only a small, relatively small number of people spending a huge amount of money. And the restaurants are full. And I mean, everybody's having a good time. And it's fun to be in a boom town like this when it's booming. And I admit that. But it's, it's, yeah, I don't know, sustainable. You know, I'm watching for this cash flow to stop or to slow down or for something to blow up and people get second thoughts and pull back. And, and that's just not happening. Or we had one IPO in Australia that, that flopped, but for obvious reasons. Um, but I don't think it was an indicator of things to come. That was just a, a botched thing. And, um, uh, so I, I, I don't really see any signs yet. [00:19:40] Speaker 2: All right. So I, I, I detect a worry and maybe a skepticism in you and correct me if that's wrong, that you think, look, at some point this is not going to end. Uh, the, the boom. [00:19:51] Speaker 1: Can you repeat that, that plane that flew by just completely knocked out your voice. [00:19:57] Speaker 2: Okay. Um, I said, I, I, despite the fact that you don't see anything ending it, you know, in the here and now, I detect sort of a, a pessimism or a skepticism in your voice that at some point the boom will turn to bust. Um, and, uh, there are a couple of questions around that I have for you. One is just, you know, a lot of this money, this is a poor way to say it, but I haven't figured a better way to say it yet. It's like balance sheet money, um, that's coming in and paying for all this infrastructure. Um, yes, it was free cashflow that the hyperscalers had, but that, that would have become retained earnings on the balance sheet. That's now getting spent. Um, and so obviously the companies that are making the infrastructure, the picks and the shovel, the chips, um, their profits are, those are real profits for them. And they're going bananas, but we don't, I know some will push back on me in this, but we don't see a lot of stories of regular corporate America saying, oh yeah, I implemented AI at scale. And look, our profits are up 30% last quarter because of it. Right. And at some point that has to happen or else people are going to start reining in their spending. And at some point the, the infrastructure spending is just going to start diminishing. And I don't think anytime soon, but at some point it will just because we'll have built the data centers. We don't need to build more. Right. Right. Or at least not the same rate. So, um, comment if you will, on, on either of those two, or if you think there's even, you know, other bigger potential challenges out there, let us know what they are. [00:21:31] Speaker 1: Well, one of the biggest problems this, this bubble has is that the revenue model for AI is completely uncertain. And who is going to pay the amount of money that it takes to justify all these investments? I mean, the consumers aren't going to pay for that. They're paying for their stuff. They're not going to pay any more whether it's AI or not. You know, they're, they're paying, uh, you know, 97%, 96% of the money that they're making that they're spending. And that doesn't change. That's a fix. And, uh, they make more money. They can spend a little more money, but they can't just suddenly spend $3 trillion. a year more, uh, because, you know, that's just not what they do. So it's not coming from consumers. They're spending a little bit on AI, maybe buying a subscription. And, you know, I've, I've got a, uh, uh, an increase from, from, uh, Google Workspace because now they include, uh, Gemini in it. And, and so that got a, a few dollars extra out of me every month. And, uh, that's about the extent of it. And companies are not really wanting to pay that much either. They're already curtailing their spending on AI. [00:22:43] Speaker 2: And, uh, or sorry, but they're, they're shifting to the free models. And so, you know, it seems like the price mod, the price models that are emerging are super deflationary, or they just keep competing. You know, it's like a race to the bottom for pricing. Right. [00:22:58] Speaker 1: And you've seen that during the dot com bus too. A lot of the, the internet technologies that people will pay for a lot essentially then became free. Right. [00:23:06] Speaker 2: And like email, we used to have to pay for email storage if you remember that. [00:23:09] Speaker 1: Yeah. And there's a lot of stuff like that. It's eventually becomes free, almost free or so cheap. It doesn't matter anymore, get rolled into something else. And, uh, so the, the revenue situation is something that everybody knows. I mean, we all know that there isn't going to be enough revenues generated to pay for all this. And, uh, and that's kind of the irrationality behind it. Companies are using AI, but, and it makes it more productive. It makes me more productive. And I, or I can do some things I couldn't do before. Like I have these donation ads that I put on my side, uh, the, the funny little vignettes that I, you know, use AI to create them. I couldn't have done that before. I would have had to hire a graphic designer to do that. And that's where maybe where the jobs impact comes in. Now I'm not hiring a graphic designer to do that. I'm doing it myself pretty easily in a few minutes. And, um, uh, so there's probably some impact on, on labor, but you know, AI is hiring. So, uh, people, companies that are implementing AI, uh, stuff they're hiring. AI goes into, uh, you know, architectural services, for example, architects are using AI. AI, uh, to curtail the workload. So that, that reduces the amount of work they have to do themselves. Um, so you have this, this kind of constant flow, uh, of hiring over here, being more efficient over there. Uh, you know, being able to do something you couldn't do before over here, and it's changing things quite a bit. Um, but you know, who's going to pay these fortunes to get this little bit of benefit out of it? And, and that's just not happening. And, um, so I think the biggest risk, then it's not really a risk. We know that, but it's been, been set many times, you know, there just isn't enough revenue out there in all likelihood to pay for all these AI investments. [00:25:08] Speaker 2: Okay. So, um, again, you, you feel like, um, at some point the worm will turn here again, key message. You're not seeing it turn anytime soon. Um, uh, I'll stay in AI for one more second. Then I want to get to another bigger issue. So I am just curious, Wolf, um, we'll have you back on if, and when this, you know, the boom starts ending to give us an update. But when this, when it does start turning away from boom, and I'm trying to avoid the word bust. Cause we don't know exactly what's going to happen. How material do you think the, the impact will be? [00:25:49] Speaker 1: Well, let's say if you live in Tulsa, maybe you won't notice. Do you think so this time? [00:25:57] Speaker 2: I mean, AI is, is these companies are like almost half the S and P market value. Okay. I mean, it's not, it's not nearly as contained as the.com was in my opinion. Yeah. [00:26:06] Speaker 1: I mean, you'll notice it in your portfolio, but in terms of the economy, in terms of the jobs in Tulsa, maybe you won't notice. Uh, yeah, I've seen Tulsa go through a depression, uh, during the oil bust in the 19th, started in 1980s and, um, lose 15% of its employment. All the oil companies that were headquartered in Tulsa, they moved to Houston, taking all the employment with them. And, uh, and that was a big event and it lasted decades. And, uh, uh, you know, a city has a very hard time coming out of that. It has Tulsa has come out of that. And recently, and, uh, you know, it, I guess it's doing okay, but it's not an AI centered economy. And, and like the dot com bust, um, there's pockets around the country that, boy, it had a huge impact. And then in the, in lots of other places, yeah, people saw it in their portfolios and they got concerned. Maybe you spend a little less, but it, it, it didn't trigger massive amounts of layoffs. And, uh, it, it didn't cause all kinds of other upheaval and it didn't change employment all that much. And I expect AI to be similar that, uh, some big pockets around the country, uh, or AI. So we call it AI, but it is really a whole tech movement and much broader than, than just AI, you know, or they're really, uh, very heavily represented. And I see if, if we see an impact there, I mean, we'll see the impact there and it will be heavy and it will be big. And then it'll start dragging down the overall national numbers, like in the GDP, even though the GDP and in Oklahoma may still be growing. At the same time, we may have negative GDP for, for other places that is so negative and so heavily negative that it will drag down the national averages. And so we'll have negative GDP and negative employment growth and, um, and, and all the ingredients that we need for a recession. [00:28:10] Speaker 2: Okay. Um, all right. So, you know, I'm, I'm going to put that under the material category and a little TBD about, um, how much more it would be than say the.com bust. Um, I might make some arguments that it might be a fair amount more, but, um, we'll, we'll leave it in the material camp for right now. [00:28:31] Speaker 1: I kind of agree with you on that. You know, I think the.com bust was bad, but there is so much going on right now. I think this is a good chance of being worse than the.com bust. [00:28:41] Speaker 2: Yeah. Well, the.com bust wasn't shoving trillions into the economy the way that this is, you know, it's, it's real money that's flooding into the economy and why it might not be in Tulsa. [00:28:53] Speaker 1: It's been in a lot of places. The.com bubble had this telecom component to it. Yep. So fiber optics, cables, uh, the, you know, the, the company, Lucent technology. I mean, he's a big telecom company. [00:29:06] Speaker 2: Global crossing. Yeah. [00:29:08] Speaker 1: And, and so it did have that infrastructure aspect to it. And, uh, uh, lots of money was spent putting down, uh, fiber optic cables across the world. And, uh, that's, that's what the internet runs on. And that happened during the.com bubble. And, uh, so, but the amounts, obviously we had lots of, uh, inflation since then, but, and the amounts were smaller, but it was a lot of spending globally on. On. On infrastructure. Uh, and, and then talking about equipment, you know, the servers and, and people started getting laptops and computers and all kinds of things and, and modems. And, and then there was profit. And at first it was dial up and then broadband brand came along. Then that triggered a huge investment wave to get everybody hooked on broadband. Uh, so it, you know, and it was significant. It was a, it was, there was a lot of money spent on physical infrastructure and technology and equipment to get the internet to do what it does today. [00:30:09] Speaker 2: Yeah. I just, um, I'll try to find it and put it up here while I'm talking, but, uh, I'm assuming you've seen that chart that's been circulating over the past week. I think it was from the wall street journal. It basically showed as a percentage of GDP, the investment of the major technology revolutions we've been through, you know, from back to before the railroads. And I think, I think up until this one, the railroad build out was the largest scale ever. Um, you know, larger than the.com boom. Um, this one, AI is eclipsing all the rest. Um, so while it is concentrated in a lot of, you know, in a smaller number of companies and, um, uh, it's not everywhere in the country, as you said, maybe not the Telsas. Um, it just, it's hard for me to think that the biggest thing, if it ever were to really materially go south, wouldn't drag a lot down with it. [00:31:05] Speaker 1: Yeah. Well, I mean, obviously the, the data center build out is spread across the economy. Yeah. And the equipment that goes into them. So a lot of that is imported, but the other equipment, like the power generators, power, uh, the electrical equipment, uh, power generators for onsite power generation. So you're talking about gas turbines, that kind of stuff, uh, that's manufactured in, in many parts of the United States. We've seen, uh, durable goods orders for that kind of equipment skyrocket. Yeah. And, uh, uh, so, yeah, so that, that's broad base. That's everywhere. Uh, so we'll have that impact, uh, in, in, in terms of those, those manufacturing companies, construction companies, uh, you know, companies that build roads and, uh, put up, uh, power lines. And, and I mean, there's just all kinds of stuff happening right now, uh, that won't be happening when, when, when the boom stops. Okay. [00:32:08] Speaker 2: So, um, again, just to summarize, uh, in the near term, you don't see a lot of immediate reasons for worry. You do have longer term worries that you'll get more concerned about when, and if you start to see signs that the boom is beginning to peter out here. Okay. Okay. So let me, let me trundle over using AI as the bridge to some higher level questions. So, you know, you said, um, certainly about where you live, but, but where you live is sort of pulling up the averages nationally. Um, you know, it, it's a boom. It's kind of exciting. It's fun. It's, but it's a relatively small number of players that are reaping the vast majority of the benefits, right? So when we look at the S and P, um, it is hitting all time highs, as we're talking, um, this week, uh, or the past couple of weeks. Um, but if you look at, you know, all the other sectors besides tech, many of them have been struggling a lot recently, right? So tech is pulling the average up. If you look at retail spending, um, it's really the top echelon that is carrying the spending. They're doing so well, they're spending big. That is, um, covering over the weakness of, of the, the larger majority that is, is, you know, increasingly struggling. Um, and you, I'm sure you've heard of this term, the K-shaped economy, right? So, um, uh, I guess my question is, is even as the boom continues, let's, let's forget for a second about the AI bust stumbling. If the boom continues and the policy is to run things hot and to, to have a manageable level of inflation so that, um, we're inflating away the, the, the, trying to relieve the weight of the national debt. But there's a big majority that is not participating in that party. And they're increasingly feeling the increase in the cost of living from the inflation and maybe just a little bit of, um, you know, anger and jealousy to boot. Right. You AI bastards are, are taking all the glory and all the, all the profits and my electricity bills going up and I'm afraid of my job getting replaced by technology and my cost of living's going higher. And I don't have a bunch of assets like you do to benefit from all this. How concerned are you about, you know, a breaking point that's, that's maybe more of a social one than an economic or financial one first? [00:34:37] Speaker 1: Well, so, I mean, you wouldn't have me on your show without me at least contradicting you once. [00:34:43] Speaker 2: Oh, please contradict me as often as you want. Yeah. [00:34:47] Speaker 1: So, uh, the K shaped economy. So the K, the K is one arm goes up, one leg goes up, the other leg goes down. And that's a misnomer. That's not the problem this economy has. So even at the lower level, so the lower half, the lower 70% of you want to carve that out. That's not going down. It's going up, but it's going up more slowly than the upper leg. So we need a letter from another alphabet where you have two legs. One of them is going up at a slower rate than the other. And, um, so, and that I think depicts this economy. And, and so you see, you make more money, but you see your neighbors. You may see some people make a lot more money, a lot more quickly. You know, that's the effect that has. And, um, so, um, the. [00:35:44] Speaker 2: I want you to just square this for me. So people have, you know, been hearing, and I think many experiencing a crisis of affordability over the past number of years. Um, so, so square that with your sense that everybody's getting better just at different rates. [00:36:01] Speaker 1: So let me just point this out. There's a lot of data on this. The typical, the median married couple household income is $128,000 in the United States. That's median? [00:36:14] Speaker 2: Median. [00:36:15] Speaker 1: That's median. Okay. So half make more, half make less. That's married couple. So when you look at the median household income per se, that has a lot of singles and widows and widows in it and people starting out and students living on their own. And so that brings down the median for the overall households. But the, the, the, the married couple household, that's a figure that really, we want to look at it because it's not, it's not so confusing with all these other things. So if somebody, you know, having had middle income career and, um, retired now owns his own home and lives on social security makes, you know, makes $20,000 a year in social security. And so that's income, but also has a 401k and that's not income and owns the house and that's not income. And that personal, and so only the, um, the interest income they might earn counts as income. And, and so when we look at, at median incomes on that level, the retirees, you know, they're, they're the, they live on social security and have a little bit of interest income. Um, you know, they're at the very low level, but, uh, they also own their own home and they have assets. They have a retirement account, et cetera. And, uh, we're looking at, uh, widows with very little money living by themselves, you know, and, uh, we're looking at students that are included in that group. Um, it's household. So it's an address, you know, it goes by address, whoever lives at this address. And then it's car and it's not survey based. It goes by address and it's, it's, uh, uh, it's from the census bureau. And, uh, so they, they capture all these different types of households. One household is one address, no matter who lives there. And, uh, so we need to look at the households that are really spending the most money. And those are the ones that are settled. Uh, married couple households is, is kind of the core of it, but that could be roommates. It could be other people. And, uh, and they make lots of money to make a lot more in California. You know, the American couple income in California is a lot higher and they make less in, in, uh, low income states. And that's the reality of this economy. You know, we've got states where big people make a lot more money than in other states. So you have that, but then the cost of living is a lot lower in these other states. So if you take your California income to Oklahoma, you know, you, you, you living great. And, um, uh, but that's, you know, that that's the economy we have people making lots of money. And it's widespread. And if you're in your career for 10 years, you know, you, you, you're making pretty good money. Uh, unemployment is very low. Uh, you know, I layoffs are low, despite all the talk. I mean, there's, I, I can gripe about these layoff announcements all the time, because this is a way for corporate America to bash down wages. You know, they're, they're trying to, to browbeat the employees into not leaving and into not asking for raises. And so they announced all these layoffs and they're hiring on the other side. And I've looked at the employment at Google and Amazon, all those, uh, that they have announced announcements, you know, and they're hiring and they're announcing, they're, they're laying off people, but they're also hiring. And so it's not a sign of economic weakness, but of shifting things around and trying to save money and so forth. So, um, yeah, I think the, the economy in that respect gives kind of a confusing picture because we have, we have a pretty tight labor market. And, uh, we have companies that are looking for, for people. Um, wages are going up. Americans make lots of money and, uh, and they're spending it. And you can see that you can see it in the credit card, uh, uh, figures that the, the, the banks are coming out with their credit cards are spending. They're not a borrowing method, but they're, they're a spending method. That's people universally pay for stuff with their credit cards and, you know, then they pay off the balance every month. And, and, uh, we, we don't write checks anymore. Very few people pay cash. You just pull out, you pay electronically, you know, and, and even if you use your smartphone, there's a credit card behind that. So the credit card gets charged to, to your account. And when the statement comes out and, and you go on. So, uh, you, you look at the money that flows through these credit cards. Uh, it's $7 trillion a year or something. And, uh, almost none of it gets hung up as, as interest bearing debt. Most of it gets paid off. And, uh, and all the credit card companies are saying consumers are spending, you know, they're out there spending. And, um, they're paying off their credit cards and they're spending. And so, you know, it, I just don't, you know, there's, this is a clickbait situation. You put a K shaped in the title and people click on it because it suits the narrative. And, uh, but people who have been pounding on this, they've been wrong about the economy for years because the economy is running hot. You know, it is running hot. You know, it is running hot. There's a lot of inflation and people hate inflation and they're pissed off about inflation. Uh, and rightfully so. And Americans are really, really hate inflation. And, and that's good. And that's the thing that keeps a lid on inflation because people are fighting it. And that's what it takes. Uh, and that's where the bad sentiment comes from. At the same time, they're making money. They're making more money and, and they're participating in that economy. And I don't, I don't see that as a weakness. [00:41:54] Speaker 2: So I don't have the latest data in front of me, but I mean, I know I've seen relatively recently that kind of all types of consumer debts are seeing, um, rises in, um, delinquency. And I think even in default, um, we've got the whole rise of buy now, pay later, you know, people are shifting from credit cards to that. Um, I'm not, I'm not like disagreeing with you, Wolf, but I'm just saying, does, does any of that give you a sense that there's maybe a little bit more household stress? Cause kind of what you just said was sort of like, everybody's doing great, but you know, we, we have this whole. Sweep of, of democrat socialist candidates here, because I think people are in large part railing against the perception of, um, you know, reduced prosperity. And, um, it just seems to be counter to, to some of what you're saying here. Yeah. [00:42:49] Speaker 1: So I'm just looking at, um, my own articles about this because I may be the only one out there. That spends a lot of time actually diving into this. [00:43:02] Speaker 2: Right. And that's what I said at the beginning. I'd love having you on cause you, you're the chart master. [00:43:07] Speaker 1: So, uh, in terms of credit card, and this is federal reserve data in 2025, people use their credit cards to buy $7 trillion worth of goods. And that's just, it's a payment method. And, uh, the total credit card, uh, balance is outstanding, uh, are roughly 1.3 trillion. And those are statement balances. So that's the amount that's due at the, at the, when the statement comes out and, uh, almost a very small portion. A very small portion of that gets hung up as interest sparing debt. So people are out there spending with their credit cards and they're paying them off. And the interest sparing debt on a credit card is small. It's, it's, it's half a trillion dollars. It's 500 billion roughly. You know, we don't really track it that much. We don't really track it that much. We see it's very small. Out of the seven, uh, the $7 trillion they spend, only the growth in the interest sparing debt would be an additional amount, uh, that gets hung up as interest sparing debt. So when in, in 2025, maybe interest sparing debt was 500, 500 billion. And then in, in, uh, 2026, it's maybe 520 billion interest sparing debt. So it's only 20 billion higher in that case, but we spent $7 trillion on our credit cards. So it's almost none. It's, it's just minimal. And, uh, so we look at the default rates on credit on the delinquency rates on credit cards. And, um, so the prime rate, the prime for, for credit cards with a prime credit rating. So these are, uh, you know, people with a credit rating of 700 and better. And, uh, it is minuscule. It's, it's 0.8%. It's minuscule. It's been minuscule. It's at historic lows. The only time it was ever lower, uh, was during, during the pandemic when everybody got their free money and people couldn't spend, uh, funds anymore on travel, those kinds of things. And, uh, so that, that's super low. The overall delinquency rate, uh, so during the financial crisis, it went to 6.5%. And, uh, now we're at just below, like 2.8%. That has come up from the pandemic. And that's what everybody's talking about, how he rose. But during the pandemic, you know, people couldn't use their credit cards because of the lockdowns. They couldn't travel. They couldn't spend money. They couldn't go to restaurants. And they got all this free money. So they're, you know, they, they, they spend less on their credit cards. And they use some of their free money to pay down their credit cards. And the delinquency rates plunged to never before seen levels. And it went down to, to 1.5% for all credit cards combined. And, uh, has risen from that. We're now at 2.8%. That was a roughly, that was a little bit higher than it was before the pandemic. Before the pandemic, it had historic lows. So when you look at my chart on this, you see that, yeah, it has come up from the near zero levels during the pandemic, but it is now relatively low. And, uh, when you look at the years before the financial crisis or going back to 2000, it was over 4%. So, uh, the credit card delinquencies are low. They're, they're not a problem. And, uh, they're, you know, and you gotta remember, it's not poor people. You know, poor people cannot get credit cards. And if they get credit cards, they have very minuscule, uh, credit limits, and they can't really do that. It is people with higher incomes, uh, that cost the, the, the delinquent balances to rise. And the example I always use, it's a classic example. It's the young dentist that makes suddenly a lot of money and has a lot of debt for his practice. And they've got to buy this nice house and nice cars and start spending, buying this stuff on his credit card to have it. And he gets in over his head and he starts being delinquent on some of this stuff. And, uh, then, you know, shakes him up a little bit and he cuts back. And then a year later, he's out of it, you know, and he became subprime during that time. So now he's a, he's part of the subprime universe with a subprime credit rating and he's going to get out of it. You know, he's going to, uh, cure his delinquencies by paying them off. And, uh, uh, he's going to reestablish his credit and it's going to be prime. And then it's going to be super prime a few years down the road. And that's how subprime works. People fall into it and then they come back out. And the people that have the most debt are the high income people. And they're the ones that move the needle. And, uh, a lot of low income people can't get credit cards. They have to use debit cards. They do, they have, you know, they, they have that credit to some extent because they default on the rent and on the medical bills and on the utility bills, but not on their credit cards. And, and so when you look at the delinquency rates and credit cards and auto loans, it's the higher income people, uh, that we're seeing doing that. And, uh, we're in pretty good shape. You know, you, you look at, uh, at, at all this stuff and, and you think, okay, it's up from near zero during the pandemic, but that were a special condition. But you look at historically and, uh, you know, it looks good. Foreclosure is the same that we had foreclosure bands during the pandemic. You couldn't foreclose. And so foreclosures fell to near zero. So they have exploded from near zero, but there's still a lot below where they were in 2019. And the same with, with auto loans. You know, we've had, uh, a subprime auto loan issue because several subprime auto lenders blew up, uh, last year, including, uh, uh, Tricolor and some others. And there's some fraud involved and all kinds of things. And that happens with subprime. Subprime is high risk. This has a lot of, of iffy stuff in it. And, um, and again, these are not low income people. Uh, these are people that have income and, uh, but they're, they have a subprime credit rating for whatever reason. And so the bar money, the, the company that sold them the car and that they make the payments to goes out of business. And guess what? They stopped making payments. And so subprime delinquencies exploded when these companies went out of business and then eventually they got it all sorted out. And, and so they're starting to make payments again. And now subprime delinquencies are coming down. And that's a subprime is a minuscule part of the used vehicle market. You know, it's plays almost no role in the new vehicle market. It's about 15% of the borrowing that goes on in the used vehicle market. Used vehicles about half is cash deals, you know, and the other half is finance. And about 15% of those finance deals are subprime. And, uh, it's, it's small. And, uh, so I look at the stuff day after day after day. And then I hear you see these headlines about the K shaped economy. You know, it's just like, wait a minute, that's not the economy we have. You know, that that's the, our problem is inflation. Yeah. Our problem is not, uh, consumers being left behind that kind of thing. Yeah. Our problem is inflation and consumers being pissed off about inflation and they should be. And, uh, we have a demand problem, a lot of demand out there now from, from this AI sector that's spreading all over. And, um, so I, I don't, you know, I don't buy into that, um, that K shaped economy. And the New York, the New York federal, a series of articles about it. And I reached out to them and, and I told them, you know, you need a different letter. This isn't what the economy we have, your own charts. Don't show K, your own charts show that one going up faster than the other. But both going up. And, uh, so yeah, that's why I sit. That's what I look at. Okay. [00:51:20] Speaker 2: So I'm going to, I'm going to ask you, um, to sort of step out of your zone of, of expertise. You know, you're, uh, you're a, you're a economy markets guy. Um, we've got a midterm election coming up here and the, the administration is sort of telling a story recently saying folks, Hey, the economy is actually better than you think it is. Right. Um, which I don't always think is a winning, uh, message to try to tell people what they believe isn't true. But I guess my question to you Wolf is my opinion is, is that, um, unless people are feeling fantastic. Um, they generally, when they go into the voting booth and they pull the lever, um, they're pulling it based upon how they feel financially, economically. And, um, a lot of people are expecting the, uh, Democrats to do really well in the midterms because a lot of people are really not feeling great about what's being called the affordability crisis. Are you, are, are you maybe leaning more towards like, it might not be as bad as folks think because actually most people are doing okay. [00:52:30] Speaker ?: Yeah. [00:52:31] Speaker 1: Yeah. So I don't, I think there's a discrepancy here, uh, between how people think other people are feeling and how they themselves are doing. And, uh, a lot of these consumer sentiment surveys are just, just political hogwash. Like the, the universe of Michigan, uh, consumer sentiment survey, you know, you split it up by Democrat leaning or Republican leaning and they're, they're going in opposite. They're going in opposite directions, which tells you it's a political survey, not, uh, an economic survey. And, uh, you know, so, um, you know, consumers think maybe that everybody's feeling bad, but they're themselves are doing pretty good. Um, well, we can tell, I mean, and, you know, affordability crisis, there is an affordability crisis, but it's in housing. It's in home purchases, you know, houses, home prices exploded in the United States in over a two year time span. You know, the solution to that is lower home prices. Yeah. That's the affordability problem that we have is home prices exploded. And, uh, but nobody wants to own an affordable home. Oh, nobody wants the home to become more affordable. You know, that's the thing. Governments don't want homes to become more affordable because that shrinks the tax revenues. And so we've had, we have that whole issue. And in many markets, home prices have come down sharply in others. They have not. And then San Francisco that they did come down sharply for a while. And now they're coming up again, but that's the affordability problem. That's the issue. We have a high home prices trigger high homeowners insurance, high property taxes, high maintenance and repairs and high home fees. And, um, so the housing sector of that, the housing part of, of your, uh, of your spending. That's, that's, that's painful. And then we have healthcare part, you know, so I don't know. Uh, it depends how people are insured. And if you're on, on Medicare, you're, you're in pretty good shape. But if, if you're 50, 55 and you have to pay for your own insurance rather than getting insurance or a corporate, uh, uh, corporate insurance, uh, you have a real problem. Yeah. You may be paying $2,000 a month in health insurance. And I mean, this is an affordability problem that we have, but it's not the goods and services that we buy every day. I mean, this is stuff that's structural in our economy and, um, and the solution to high home prices, uh, is to let them, to let them go where they need to go. And, and so that, uh, and you know, you have home prices being stable or going down and you have wages going up, eventually affordability reestablishes that way. It takes a long time. You don't have to have a housing crash to do that. You can just have flat to downward trending home prices for long enough and upward trending wages. And eventually housing becomes affordable, but that can, that can take a decade or two. For that to happen. And that's a real issue that people are pissed off about that young people, but you know, homeowners are not pissed off about that. 65% of the households own their own homes. You know, they love it. They're watching silver every day, how their home becomes more, becomes more valuable. And, um, you know, so, you know, where are, where's the majority that, that complaints about that? The majority owns homes in the United States. 65% of the household own homes. And, um, so, you know, the renters, we have renters of choice, like in San Francisco that could buy anyone. They're spending $8,000 a month in rent and they rent because they don't want to own a home and they don't want to live out in the, in the suburbs. And, um, yeah, they don't really feel bad about that. So, you know, the, yeah, the hope, the 65% of the households that own their own homes, they don't really feel bad about the affordability crisis in housing. Yeah. So when you go to the voting booth, uh, you know, that's in your own mind, maybe your kids are having trouble buying a house, you know, and, and so you worry about that. Uh, and you see the issues, but I don't think it really would influence your vote. I mean, there's a lot of good reasons to, to, to, to decide how to vote. And, and I don't think feeling in a, in an economy that's running hot, you know, feeling, uh, somehow bad about the economy is going to have a big impact when there's a lot of, lot of, lot of issues, uh, that have nothing to do with the economy that people are going to make decisions on. And, um, uh, you know, and then I, I, I'm not a political analyst and so I don't speculate on that and, and I, I let that be, but, um, you know, I don't think the economy is the issue in, in this election, you know, and I, I know I agree that it's probably a silly thing to say, but the economy is fine. Uh, uh, don't worry about it. Uh, in terms of politicians saying that, I mean, it's like Biden saying inflation is zero, you know, in the summer of 2022 or whenever he said that. And I mean, this is like pissed everybody off. Inflation wasn't zero. We had one month to month reading that was zero and, um, it's not that inflation is zero. So it, it doesn't make sense for politicians to, to make those kinds of statements, let people decide how they feel about the economy. And, and I think politicians need to do the homework and, and, and, and run this place like they should. It. [00:58:21] Speaker 2: Okay. We're, we've just run over the hour. So I got to leave that part there. Last major question. Then we'll wrap it up. Wolf. Um, so, okay. Wrap all this up in, in the sense of, uh, from an, you know, are there any investing themes that come out of this for you? Is it just learn to love the AI bubble and ride it until we see signs of cracking? Um, are there other assets that you either think will do particularly well, you know, at least in the next couple of quarters or ones that you'd want to stay away from? We haven't talked much about rising rates. So what, what, what, what, what major themes are you looking at? Yeah. [00:58:54] Speaker 1: So I'm at a point and I participated in the.com bubble fully leveraged with margin loans. That's the whole thing, you know, and so that was a lot of fun. And so if you're young and like doing that, you know, fine. I've seen lots of people get completely wiped out during the.com bust. And, uh, but if you're young, you know, it doesn't matter. Start over. And, uh, where I see it is, you know, we did T-bill and chill when our past discussions, we talked about that and T-bill and chill, uh, the purpose was to get through a period or it was, you know, hard to put money in places that are not super speculative. [00:59:45] Speaker 2: Yeah. [00:59:46] Speaker 1: Uh, I consider the stock market incredibly, uh, speculative right now. And, uh, so for me personally, I, you know, I, I'm not doing it. And, uh, so anyway, T-bill and chill. What do you do with the high rates? [01:00:02] Speaker 2: Are you T-noting and chill now? [01:00:04] Speaker 1: Yeah. Well, I'm, I'm, but that's what I was going to say. You know, I'm unwinding my T-bill and chill and I've started buying, uh, uh, tips. I participated in the 10-year note auction, uh, day before yesterday. And, uh, uh, I think these, these, you know, these yields, I haven't, I, I, I like bonds. And I've always liked bonds. And, uh, but there really wasn't anything worth buying in the last 20 years because the yields were too low. Right. You had to take big risks. The risk, you know, now that's changed and, and, uh, uh, you know, the, the, they're, you know, it's, it's moderately attractive out there now in, in bond land. And, um, the, the, the spreads are till too low for me to buy corporate bonds. I'm not doing that. I'm staying a hundred miles away from AI bonds. Uh, but I think, uh, treasuries are start. So longer term treasuries are starting to, to look, uh, uh, just mildly appealing. And rather than being toxic, they were toxic for a long time. You know, you bought, if you bought a 30 year bond in, in the summer of 2020, uh, in, in market trading today, you're down about 50%. So, I mean, this is, this, this is the toxic environment, uh, uh, uh, bond investors were looking at. And, uh, we had a 40 year bond bull market, meaning bond prices kept rising and yields kept falling and that led to talk to, to bonds being completely toxic. So we finally come out of that. And, and so bonds are now a, uh, I think a, a valid investment option that they haven't been in 20 years. And, uh, so I'm starting to shift a little bit that way. [01:01:58] Speaker 2: Okay, great. Um, so general equities, you're kind of, it sounds like you're doing a pretty big shift from, um, well, I don't know what your equity exposure was beforehand, but your, whatever, whatever it was, you have less equity exposure now and more bond exposure and more on the sort of tips. Yeah. [01:02:17] Speaker 1: And you know, when, when, when the bus comes, you know, we don't know. We don't know. [01:02:24] Speaker ?: Yeah. [01:02:24] Speaker 1: So, so stocks will go down 15 or 20% and people say, well, that went down 15 or 20% before. And I'll just hang on. And they'll go up and say, I'm glad I hung on. I hung on. And then that's what happened to the dot com bust, you know, and then they go down another 20%. And, you know, and, and it, and, and your own stocks. And so that's the indices. So your own stocks may go down 80 or 90% or advantage. So at this point, I, I just think stocks are not for me. I'm out of it completely. And, um, that's very bearish and people accuse me of it. And, uh, and I take that, uh, at the same time. Um, I think that there, there's a good alternative now in the bond market. And, uh, and if the bus, if, and when the bus comes, you know, uh, people that are sitting on bonds can smile through it. [01:03:28] Speaker 2: Um, all right. And what about other, um, safe havens, you know, like say gold, um, you know, as real yields get better, it, it makes gold look less, uh, attractive relatively. But do you have a, do you have a strong opinion one way or the other on the direction of the precious metals over the next year or two or in this environment at least? [01:03:51] Speaker 1: Yeah. So, I mean, gold, when you look at it is a buy low, sell high investment. And, uh, it is, it's come down, but it's still very high and, uh, silver same, you know, and, and I had some and, and I sold it. And, um, you know, it, it, if you buy gold when it's low and you never sell and you let your heirs worry about it, you know, that that's a good strategy, you know, and just buy it and not ever sell and not worry about it and not look at the price and let your heirs worry about it. Yeah. They get it and let them see what they want to do with it. And I'm all for that. And, um, uh, you know, but if you're, if you're trading, if you're trying to make a profit on gold, um, I think it's still very high. I think it's still vulnerable. Same with silver. And, um, and I, I would not be at this point at this price. Uh, I would not, it's, it's not in my range to buy. It would have to, I would buy, but, but not at that price. Okay. [01:05:01] Speaker 2: Uh, we'll have to leave it there. Um, so wolf, as things change, please let me know if they change enough that your, your timeline and your opinions start changing. We'll bring it back on the program, whether that's the AI bust, whether it's gold, whether it's yields, whether it's something else. Um, but thanks so much for coming on and doing all this for folks that would like to follow you and your work in between now and then where should they go? Wolfstreet.com. [01:05:25] Speaker 1: That's the only place where I am. All right. [01:05:29] Speaker 2: And Wolf, I will, uh, put the URL up on the screen here when I edit this so that folks know exactly where to go. Folks, the, um, the link will be in the description below the video as well. Um, all right. Uh, and, um, join me folks, please. First, I'm thanking Wolf for coming on and being so detailed with his analysis and, um, his market outlook. Please thank him by hitting the like button and then by clicking on the subscribe button below as well as that little bell icon right next to it. As always, if you'd like to get some help from a professional, um, financial advisor on, um, how to perhaps act on any of the insights that Wolf shared here or just questions that you have about how to navigate, uh, the current markets that we're in. Um, if you fill out the very short form at thoughtful money.com, you'll get a free consultation with one of the firms that thoughtful money endorses. These are the companies you see with me on this channel weekend and week out. Um, and the companies will be in touch with you. As soon as you fill out the form, there's no cost to these discussions. You'll get personalized, uh, you know, their personalized feedback to your specific situation. There's no commitments involved. It's just a service they offer to help as many regular investors like you as possible. And lastly, when this video launches. We should, I think just be a day or two away from the thoughtful money fall online conference on Saturday, October 17th. If you haven't bought your ticket yet, you only have hours left. So run, don't walk to thoughtful money.com slash conference. And I look forward to seeing you at the conference. Wolf. It's great to see you again, buddy. I hope we have you on a lot sooner next time. Thank you, Adam. All right. Thanks so much for everything and everybody else. Thanks so much for watching.