Speaker 1: And hello, how are you doing on this Tuesday. Today's
the twelfth day of May, Year of Our Lord, twenty
twenty six. My name is Tom Sullivan. And well, we
have we have a lot to talk about today. We've
got some economic indicators like inflation. The inflation numbers came
out this morning for the month of April. We've got China.
Everybody's talking about China. The President is on his way
to China and he will arrive tomorrow because well, China
is twelve hours ahead of of East Coast time, Eastern time,
so it's he's on his way for that. It'll be
that's that's going to be the focus of everything. We've
got yunis Jun from Beijing talking about what's going on
over there. We've also got the war and what's going
on with the war. And all of a sudden, it's like,
what war. I don't know anything about war? Is there
a war going on? Because the President is out of town?
You know, nothing's good? Well, I don't know for sure,
but you would think nothing is going to happen, No
decisions are being made, nothing, I mean. The President responded
yesterday to the Iranian proposal, saying it was a bunch
of garbage, and and what they just said, No, no,
I didn't like it. It was a bunch of garbage. There
was no like we're now going to start our military campaign,
none of that. So that's all still up in the air.
Let's start with China and check in with Eunice Yun
in Beijing.
Speaker 2: Thanks Timo Well.
Speaker 3: China is on a charm offensive playing up its US
business ties ahead of President Trump's visit here. The Foreign
Ministry today put out a video that highlights Apple as
well as Tesla as good examples of businesses here. Of course,
those two companies on a list on the invite list
for those CEOs to join President Trump when he travels here.
That list features companies that benefit such as Apple, but
also companies that have suffered because of the competition and
de deterioration of.
Speaker 2: US China ties.
Speaker 3: Micron and Alumina, for example, both targets of Chinese retaliation.
Visa and city historically restricted from market access. Qualcom is
the latest to confirm that it is going to be joining.
Cisco says that as CEO won't join, Nvidia is not
on that list.
Speaker 2: Despite the concerns over.
Speaker 3: Iran, the primary focus is very likely going to be
about business deals and trade shoes.
Speaker 2: A lot of that.
Speaker 3: The expectation is about Chinese purchases of boeings as well
as big agricultural purchases. But what is unclear is whether
or not this summit is going to address some of
the other long standing issues and some of the newer
ones that the business community is worried about. In fact,
on the eve of President Trump's visit, the US Chamber
of Commerce flagged a report that they are very concerned
about China's next phase of industrial policy, which they say
could be even more pernicious, and what they describe as
the industrial policy of everything, embedding China in global supply
chains and having a lot of different dangers and risks
to industry as well as jobs back home.
Speaker 1: Guys. So, the way she describes it is this is
not I mean, like I said, what war. It's not
about Iran, It's not about China's relationship with Iran. It's
about business deals. This is a business meeting, and she
is interesting. She mentioned both Citibank and also Visa have
been not allowed to do business in China, but both
the CEOs of both Visa and City are going on
this trip, So it's all about business. According to unis.
Speaker 3: Well, I think that the Chinese would have to see
that it's within their interest to support Iran. So of
course the immediate interest is yes, they would want to
have stability in horror Mus because of the trade. Also
there is some impact when it comes to their energy security.
Speaker 2: But longer term, when they look at.
Speaker 3: The remaking of the order in the Middle East, it's
within their longer term interest, not necessarily to help the
US and to make sure that the US is kind
of burdened with different problems. So longer term it's not
necessarily within their interest, and that's really the big question
for them. Well, in terms of the official Chinese response,
there's been no common or inside there, but definitely a
lot of Chinese people like you, have been very curious
about why Jensen Wong wasn't included. And we had already
been hearing from Jensen Wang to Jim Kramer when he
had said that it would be his great honor, and
this was.
Speaker 2: More recently to be joining.
Speaker 3: The list of CEOs if he were in fact invited.
Speaker 2: He wasn't invited.
Speaker 3: And so the way that that's being understood here is
that perhaps US policy towards advanced ships hasn't changed. And
the other signal that it's sending here is that Nvidia
might not get the sales that it needs and its
recovery in this market might necessarily be there.
Speaker 1: Yes, you mentioned Jensen Wong. That is the CEO of Nvidia,
so he is not on this trip as far as
Wall Street is concerned. Gil Lauria with Dr Davidson Da
Davidson on Wall Street has these observations.
Speaker 4: Well, Chaka is very important Apple, and Apple has been
incredibly resilient in this market. Apple still gets substantial amount
of its revenue, more than fifteen percent from China. It
still owns the high end market within China, and a
lot of the credit goes to CEO Tim Cook, who
is stepping down but will retain policymaking responsibilities as chairman
of the board. And this is a big reason he
has had so much success navigating the US China conflict
and maintaining Apple's presence in China. That's not to take
away from Jensen Wang. Jensen Wang is a supremely good diplomat.
It's just that that episode is played out. We are
unlikely to sell advanced ship and advanced ship equipment into
China because of the AI competition, and so my sense
is there's no reason for him to go to China again.
He goes to China on his own, he doesn't need
the President to go there, and it's unlikely that he's
going to get a positive resolution. China is unlikely to
be a major market for Nvidia, and so that ship
has sailed. There's other items on the agenda's units was describing.
Speaker 1: So again, this isn't about Roan, This isn't about any
of the geopolitics. This is about business. And China wants
desperately to find out more about AI because we are
miles ahead of them and they desperately want to catch up.
Speaker 4: So I think we need to make our relationship with
China is very complicated, and we're going to know a
lot more about the time President Trump flies back. But
what we do know is that in AI we are competitors.
We are not going to collaborate in the race to AI,
and the US has decided that we're not going to
provide China the resources to compete. China has advantages in
this race. They have a lot more power and electricity,
They have a lot more talent, and the US has
the chips, and so we're not going to sell them
chips because we're in competition. We want our model companies
to succeed. We want our frontier models to be the
best for a lot of reasons, including the fact that
it has a lot of cybersecurity implications, so that ship
is saled. To your point, the only point of cooperation
with China may be around putting some guardrails and some
agreement on avoiding direct conflict with China around our models
attacking them and vice versa. But in terms of the
environment of coopetition versus competition, we are competing with China. Yeah,
Taiwan is a big part of that geopolitical puzzle, right
It's Iran, Russia and Taiwan are the pieces we want
China to de escalate tensions around the world. China has
an incentive to keep Taiwan as part of their long
term plan. As Unis was pointing out, part of the
way they do that is by keeping US preoccupied with Iran.
So the US wants to go there, de escalate Iran,
hopefully get some progress towards solving the issues in Russia.
Let's not forget President Putin is visiting China next week
and Taiwan will be on the agenda. That may be
part of the sensitivity.
Speaker 1: So if AI isn't going anywhere because we're not going
to help them with AI, are they going to buy
our memory chips?
Speaker 4: So memory has not been as much of an issue
in terms of the AI competition, in spite of the
fact that, as we've discussed, memory has huge exposure to AI,
which is why Micron, Sandists and others have done tremendously well.
China is building its own memory capacity, so there's going
to be some level of decoupling in memory as well.
They're building that infrastructure. For now, there's some selling into China.
Chinese memory chips do sell into the West increasingly, and
that will happen increasingly. There's more likely to be decoupling there.
Maybe they'll try to settle some short term issues around
back and forth, but those are not necessarily as critical
to the AI buildout. So it's a different, different interaction
than around GPUs.
Speaker 1: This is why I get concerned when the pointy heads
under the Dome in Washington decide they want to regulate
and clamp down on Google and Oracle and Meta and Microsoft,
and the list goes on. We're in competition with China.
They want to catch up with us. We are ahead
of them, and so that's what this meeting is all about.
The President of the US and the President of China
are going to be talking tech more than they are
talking about Iran. So let's get caught up on what
is going on with the war. It is on pause.
Brett McGirk, the advisor to for presidents on Middle East policy, says,
we're in a stalemate.
Speaker 5: Comes down to the straight up our moves and we're
in a stalemate. I mean that is the bottom lines.
The stalemate of the strait and diplomacy is deadlocked. Iran
has asymmetrical advantage. They can basically shoot a drone at
any ships and those ships will go through. And we
have our blockade which is increasing economic pressure on Iran.
But that's basically where we are. And in a stalemate
you have three very difficult options. Number One, you can
endure and have a test of wills, and the economic
pressure will compound on Iran, but they don't really care
about that, the decision makers and the guards, and the
economic pressure will compound in the global economy. So you
can endure test of wills, you can concede. President Trump
can decide I'm going to concede to Iran's demands and
accept their new sovereignty over the strait, which Iran is
now calling it in their media. I think that'd be
a very bad outcome. Or you can fight and try
to impose military conditions that allows ships to pass. That
is extremely extremely difficult, and they're looking at that. But
that's a difficult proposition. That's where we are. The asterisk
is a trip to China and whether whether she Ji
in Pin can try to break this open, I doubt it.
I also think that would be a bad outcome because
Jesi in Pin would like to be the peace broker.
He understands power, he knows President Trump has something that
he might want opening the strait. It's also in China's interest.
But for China to kind of broke her something here first,
I think is unlikely. Second, I also don't think that
would be a great outcome. So stalemate very difficult.
Speaker 1: So there are a number of Middle East analysts, middle
East consultants, middle East experts, and they always break things
down into well, you can do this or this or this.
They break things down into threes. So there's Brett McGirt
breaking it down into threes, not with great choices. But
what about the whole process of the president meeting in Beijing.
What's it going to look like, what's going to happen?
Speaker 5: I think pageantry. I think you'll have a lot of
kind of already pre cooked announcements on substance. I'm trying
to think through.
Speaker 1: Step back.
Speaker 5: Ideally, what the United States of America should be doing
in this situation is going to our comparative advantage which
we have which China does not have, and that is
rallying allies and building a coalition calling on Ran to
open the strait. That would be a military coalition and
a diplomatic coalition. Right now, are very isolated, and China
knows that. In a normal world, you would try to
say to xesiin Ping in the Chinese China gets about
fifteen percent of its oil from Iran. Most of Iran's
exports go to China. China has an interest here, so
work with us to get back to that status quo
in the Strait. But I think chesiin Ping would want
something in return for that very transactional so it's hard
to see that. I don't see the legwork being done
for that outcome in the next seventy two hours.
Speaker 1: But what about the war, Yeah, the one that we
have temporarily forgotten about. Will missiles fly? Will we start
a military attack in Iran while the president is in China?
Speaker 5: I doubt it. I think I think this will play
out over the course of this week. I don't see
the urgency. The Iranians could also launch a military operation.
They can always launch a missile or drone or something.
I also think they'll try to play a cool as
this bilateral summit happens. So no, I think this week
you'll see diplomacy, you'll see the pageantry, But then we're
going to be where we are at the end of
this week, will be where we were at the end
of last week and the week before, in a stalemate
in the straight up. Our moves compound the economic pressure
and really no way out. And then you come back
to those three options you endure. You can concede the demands,
or you can try to pursue a military operation to
try to put increased pressure on Iran. Very difficult, difficult options.
I would try to build that international coalition though I
think that's important Human Security Council resolution. What Iron is
doing in the Strait is totally illegal international law by
any standard measure. There's a classic international Human Security Council issue.
But you need the Chinese and the Russian for that
because they can veto. So you could see some diplomacy
coming together. I hope, I hope we do that. But
right now against stalemate and the straight that's where we are, all.
Speaker 1: Right, So stalemate is the word of the week. Sounds
like probably longer. The National Security advisor in Trump one
point zero was General H. R. McMaster and he weighs
in this shouldn't be.
Speaker 6: A surprise to anybody, I don't think. I mean, the
Irani regime remains in tragigen. Look at how many off
wraps they drove past, you know, under Ayatola Homine now
under his son. And so I think we're up against
is the intrajugence of a regime that retains this permanent
hostility you know to the Great Satan, you know, the
United States, you know, the Little Satan Israel and it's
Arab neighbors, and and I think with this demonstrates is
there can't be peace in the region. Or security, sadly
for the Iranian people, until there's a fundamental change in
the nature of this regime.
Speaker 1: Well, now he's singing my song, which is change the regime,
and I mean not just move the deck chairs around,
take out the people that are running at least the IRGC.
Speaker 6: Well, I don't know if we can change it. The
Iranic people can change it, but what we can do
is continue to go after their capability to project power
outside of its borders. And this is of course having
to do with their missile drone strike complex. This is
their ability to affect the straight of Hormuves and the
Persian Gulf. And yes, I believe that isn't our capability.
Does it come without cost or risk?
Speaker 1: Heck no.
Speaker 6: But you know, I still think cost and risk of
inaction in this latest phase of a forty seven year
war would have far exceeded the cost and risks of
this ongoing operation because what they were doing is clear.
They were building this arsenal of missiles and drones really
a conventional shield behind which they could develop a nuclear weapon.
And so I think, you know, the stakes are high,
But I'll say there's also been Anderson a big disparity
I think between the you know, the massive damage that
has been done to this regime, its military capabilities, and
the portrayal like of Iran having some kind of an advantage.
I mean, I think Iran really isn't a desperate situation.
You see this with golliboss message, right, Golliball thinks that
we just don't have the backbone, you know, to see
this thing through. You know, they've been conditioned to believe
this regime has in a way that they just detest,
you know, the United States, that we are weak, we're decadent,
we're divided, and our Achilles Heel is really our national will.
I think the advantage that was it for over four decades,
we never acted like we knew what the return address
was for all the damage, harm, loss of life that
they inflicted on on United State dates citizens, you know,
for going back to the Beabiru bombings in nineteen eighty three. Heck,
go back to the hostage taking it in nineteen seventy nine.
The massive amounts of kidnappings and murders or I go
over one hundred and twenty murders in Europe, you know,
for example, the Transnational terrorist Network, the bombing of a
Jewish community center in Argentina.
Speaker 1: So he goes on talking about how bad we tend
to forget just how evil the Iranian leaders are and
how many people they have killed, including Americans. Admiral James
Gravita's former NATO commander.
Speaker 7: He also weighs in, and you had my good friend
hr McMaster on earlier. I think the Iranians have a
lot of capacity to absorb paid. They're like the Russians, correct,
and they're degraded, but they still have capacity. And think
one day in the life of Ivan Denisovich the Russian
souls who need some book. Like Russians, Iranians can take
a lot of pace. And I think the president needs
to factor that into his thinking of two clocks ticking.
The clock over President Trump justifiably and correctly, are the
midterms deeply unpopular, war gas prices. He has to respond
to that the clock over the Iranians maybe moving a
little slower because your point, they don't care about their people.
Oh my gosh, do you think possibly they're reading Politico
every day? Yeah, they definitely are. They know this is
coming and they will use that to their advantage. He
has three options. One is kind of a throwaway. But
he could simply walk away and he could say we've
degraded their military. I'm satisfied, will monitor the nuclear material.
I'm walking away from this. I don't think he'll do that.
Bad option number two, he can go back to massive strikes.
That's a bad option because it's expensive, it's unclear how
fast that'll actually work, and it is again accelerating a
deeply unpopular war. So door number three, where he's probably
going to land, is continue the blockade, try to put
economic pressure on the Iranians. But the problem with that
is what we've been discussing. They can take a lot
of pain. Their clock is moving slower than our clock.
Speaker 1: So there you go. You got the three options again.
They always break it down into three. So we wait
and we see what happens. Probably nothing this week, but
it's worth obviously keeping an eye on. As far as
the economy today, we got the Consumer Price Index the CPI,
that is inflation for the month of April, and it
was three point eight percent. That is the highest in
three years. The core rate when you take out food
and energy and people go, what are you taking that
up for? Well, you have to eat and you have
to either heat or cool your home. So you take
that out to see what are all the other things
going up as well, and the answer is yes, they
are two point eight percent, which is forty percent above
the target rate. And when you look at some of
the areas that are the highest from the Bureau of
Labor Statistics, gasoline obviously, let me go down the BLS
chart because there's a lot of plus threes, plus fours,
minus twos, minus threes, all that, and then all of
a sudden, there's a big standout here. Gasoline all types
up twenty eight percent just in the month of April.
Fuel oil up fifty four percent just in the month
of April, electricity up six point one percent. I mean,
these are big, big numbers. Transportation services of four point
three percent just in the month of a These aren't annually,
it's this is the month of April. So you look
the top three are gas, airfares, and an interesting third category,
fresh fruit and vegetables. They're way up. All of them
are way up because well, fresh fruit and vegetables is
because they have to be transported from the farm to
the grocery store. So it was not surprising. But we're
back to that problem of inflation is now running hotter
than wage growth, so your wages are not keeping up
with inflation. The home buying selling business, real estate business.
April existing home prices up of sales, I should say,
up one percent, that's it. This is usually very strong
in the spring selling season, with the sales up only one.
Mark Sandy, who is the chief economist over at Moodies,
reacted this way.
Speaker 8: Well, it's increasingly broad based sea. I mean, obviously the
energy prices are up and that's flowing through in terms
of airfares, and you're starting seat in terms of grocery
prices because of the cost of transporting food from the
court or the farm to the sore shelf. But you're right,
it does feel like the inflationary effects are broadening out
and will impact the prices more broadly. Core good inflation
was up strongly as well. And it's not just about
the war and Iran and the higher energy prices, but
it's also about the tariff and the pass through there
that continues. So yeah, inflation obviously is high and the
direction of travel feels disconcerting. Well for the fact it's
you know, obviously very difficult. You know, what do they
do do they respond to the to the effects on
the economy and on jobs, you know, the weakened economy
because of the effects of the higher energy prices on
consumer spending and the economy more broadly.
Speaker 5: That would argue for lower rates.
Speaker 8: Or do they focus on the higher inflation and the
fact that inflation expectations feel like they're drifting higher as well,
that would argue for higher rates. So you know, they're
kind of stuck in between, and it's just reinforcing the
same dynamics that are resulting from the higher terraces, which
are also weighing on economic growth and raising inflation. So
you know, at this point, I suspect they just to
stay on hold. That's the widespread expectation. I think that's
the right expectation, but you know, obviously a lot of
risk around that. I will say that I think the
deciding factor for the FED will be inflation expectations if
they do continue to with hire, and you know, there's
different ways of measuring that. My favorite is looking at
break evens. They're on the high side of where they've
been historically. If they break out any further, I think
at that point then the FED will likely focus on
the inflation start raising interest rates as opposed to cutting them.
And at this point, Fild and investors are expecting that.
Speaker 1: No, they aren't. But he's not the first one to
talk about the fact that the Fed may not be
lowering but instead be hiking interest rates within not the
near future, but in the foreseeable future because of the
fact that inflation is drifting higher, and even though it's
centered on gasoline and airfares and transportation of food and
vegetables to the store, it's spreading out into a lot
of other categories as well. And that is the concern
that will lead to the Fed hiking interest rates. And
can you imagine if Kevin Warsh gets in, there's the
new FED chairman, and starts, well, he doesn't lower interest rates.
In fact, the President will be apoplectic if he starts
raising interest rates because the President wants them to go down,
which would be a big mistake in the based on
where the economy is right now, we've got inflationary pressures
drifting higher. So what about the Joneses. How are they doing? Yeah,
your neighbors, your family, your friends, all of that, how
are they doing well? Bank of America they have a
lady runs this program that they have where they basically
go through without looking at names. They go through and
see where the income is growing, where the spending is going,
where the credit card charges are coming from, all of that.
Her name is Liz Kreesberg. They have seventy million consumer
bank accounts that they can check. Listen to some of
the observations that she makes from the month of April.
Speaker 9: You know, one of the things that I think people
are going to think is it's only strong because of
gas prices, right, And if you strip out gas, you
still saw spend and grow by four percent, which was
an acceleration over the three point six percent x gas
in March and in February. So it wasn't just strength
because higher prices at the pump. That being said, the
resilience is uneven. It's being driven by higher income consumers,
and we are starting to see preliminary signs of the
lower and the middle income consumer getting squeezed.
Speaker 2: What kind of signs.
Speaker 9: So the easiest way I think to think about it
is if you look at where spending is. So higher
income consumers their spending growth was around five percent. Lower
income consumers they went up three point one Okay, Now,
compare that to how much money they have coming in
because we look at the wage data too. Higher income consumers, Remember,
they're spending five Their wages were up six percent. That's
the highest growth we've seen in years. But their wages
are outpacing they're spending. Now, let's look at the lower
income consumer. Their wages increased, but they went from one
to one and a half percent, so that's less than
half of where their spending is. So they are getting
squeezed because their wages aren't keeping up with what's going on.
Speaker 1: We talk about the K shaped economy where the upper
income people are doing all the buying.
Speaker 7: No, the.
Speaker 1: Lower and middle income people are also spending. The problem
is is their wages are not going up as fast
as they're spending. The wealthier incomes, their wages are going
up faster than they're spending.
Speaker 2: A couple of things.
Speaker 9: One from a spending perspective, they're pulling back on discretionary
so we're not seeing that overall, but within the lower
income consumer, they are pulling back on their discretionary spending.
And they do have buffers to help kind of bridge
this gap right now, and they've got them in a
couple of different places. They've got deposits, they've got savings, right,
they've got tax refunds which we can really drill into,
and then they also have, you know, potentially credit. And
when we look at credit overall and the aggregate credit
card utilization, it's kind of at the same level it's
been since the kind of twenty tens, since before the pandemic.
But for the lower income consumer and for the consumer
that's not paying off their bill every month right the revolver,
you are seeing their credit utilization take up. So that's
one way that they're funding it. It's not at dangerous levels,
but it is higher than the aggregate. The other thing
to think about in terms offers is tax refunds, were
you know, just finished up April, so most people have
gotten their tax refunds. What we have seen so far
is only about twenty percent of the tax refunds went
to spending fifty percent. Just about fifty percent went to
increase savings, so that is something that can help support this.
And then about a quarter a little over a quarter
was used to pay down debt, so we haven't that
that buffer, that catalyst from tax refunds isn't totally gone,
but it is something that is not is not going
to infitt it, says.
Speaker 1: I love these numbers because that really we hear all
the anecdotal stories. But twenty percent of the tax refunds
were spent by the lower income folks. They used it
to buy things, but fifty percent went to their savings accounts,
and then twenty five percent went to pay down debt,
which again she says, credit card usage is up, but
it's not at dangerous levels. The big item was the
big beautiful bill that was passed last year. It did
lead to much larger tax refunds, but the problem with
that is, like she said, that was mostly people have
their tax returns filed by April fifteenth. Some people go
on extension, but the refunds have come in and again
most of half of it went to savings. So this
is it just shows how resilient the consumer is based
on these seventy million accounts at Bank of America. So
even though the inflation report wasn't wasn't terrible, but inflation
not Like I said, the CPI three point eight percent,
that's the highest in three years. That goes back to
the second year of Joe Biden's era. We're back, not
as high as it went then, but were the highest
since three point eight percent. You got to go back
to two thousand in twenty two. But I'll tell you
who did not like it was Wall Street. The market today, Well,
look what we've got to chew on. We've got the
President on his way to China. We haven't we don't
yet know yet how that's going to go. Probably a
bunch of ceremony. We've got the war on a stalemate,
and we've got the inflation report showing that inflation is
drifting higher. So Wall Street today mostly drifted lower, not
the Dow. The Dow is up fifty six to forty
nine thousand and seven sixty. The S and P fell twelve,
the Nasdaq fell one hundred and eighty five, Gold fell
seven dollars plus down to forty seven twenty one, and
the price of oil continues to go higher. This is
West Texas Intermediate, up three dollars, back above one hundred
dollars at one two and some change. So that's it
for today. Thank you for coming by. We will be
back again tomorrow. Hope to see you there then