Is the Economy Really a Priority in Washington?

I am now the Chief Markets Strategist at Clearnomics, which is a markets and insights tech platform, and we serve financial advisors and asset managers, Chris.

[00:00:36] Chris Versace: You know what, Lindsey? I think that is wonderful, because all it means is that more folks are going to be hearing some of the smarts and insights that you bring to the listeners of the What Does It Mean podcast. I am thrilled for you, my friend. That is fantastic. Even if you have to travel and go into an office in the big city, that's right, New York, New York.

[00:00:58] Lindsey Bell: That's right, we're headquartered in New York, so I'll be between New York and Charlotte.

[00:01:02] Chris Versace: Oh, boy. Yeah. Well, who is that? Is that u, uh, I was going to say USAir, but that airline isn't around anymore. What's that, United?

[00:01:09] Lindsey Bell: Well, American is the big hub in Charlotte, but Delta flies between New York and Charlotte as well.

[00:01:15] Chris Versace: Oh. Well, that's a lose lose since I'm a big United Airlines person, but that's neither here nor there. So, Lindsey, let's, I, I know you're getting acclimated in the new role, and again, I think, I think it's going to be great. Let's share what we're going to talk about today and then get to it. So, in the, what does it mean podcast, we really like to break down three key topics, share our insights, share our thoughts on those things. And in this episode, those are going to be trade and tariffs. Tech earnings and that massive AI spending budget for 2025. And then on the monetary policy front, because you know we got to touch on the Fed at some point, Powell speaks.

That's right. The Fed chair has two days of back to back testimony. What is he likely to say? What could disrupt what he's saying as he says it in front of, uh, some of our elected officials who candidly may not know what the heck he is talking about. All that and much more when we come back. All right, Lindsey Bell, let's kick this thing off. Um, you know, on our, uh, three topics that we're going to break down, the first one is trade and tariffs. And I know that you were kind of putting some notes together on this, so I'll let you kick it off, but I, I will say this. Are you surprised at the level of uncertainty that we're seeing out of the White House?

Maybe I will put more tariffs on. Maybe I won't. They'll have to wait and see. Um, you know, tariffs are coming. It's just very much like, you look left, or you look right, ping pong. I, you know, confusing. Lindsey, help me out.

[00:02:45] Lindsey Bell: Yeah, Chris, I think we're just getting reacclimated to Trump and this is Trump 2.0, right? So what you have seen with, with these tariff headlines is it's just really been a key contributor to the volatility that we're seeing in 2025. I agree, like, I think a lot of us that are trying to make sense of the markets and do this for a living.

We are just as confused as the everyday person, right? We're all having trouble tracking what tariffs are being implemented, which ones are on hold. What the actual meaning is going to be for the economic impact. So, I think really we're all in a very, very similar place. So first of all, don't feel like you're, you're the only one, right.

But I will say it's an important topic. So it's nothing to be scoffed at. And I think the market investors, um, interpret it different ways on different days, right? Like Monday we came in and we heard about the 25 percent tariffs on steel and aluminum and the market was still up on the day, right? And so I think that it's, it's going to be a ping pong back and forth, but it is an important topic because, if we just take Canada, Mexico and China and put them together, they count for about 42 percent of the total US trade, which is about two trillion dollars. So this is an important topic. But in, in Trump 1.0, he used a lot of these tariffs as negotiating tactics. That was very key in his first term because he was at that point in time was really focused on protecting our industries that we have here in the US. He wanted us to become more competitive in the international markets. Um, but now we're hearing about, is this a tactic to raise, revenue, um, for the government, maybe instead of using our traditional tax revenue, because we also know that's the other part of the strategy.

So, I mean, I think there's a lot to take into consideration. I think though, where we stand right now, my my one takeaway would be is that it's, I think it's going to take time to filter through to the markets, but I do think that the markets are going to stay volatile in the near term because of this.

[00:04:46] Chris Versace: Yeah, I mean, you know, from time to time we, we tend to agree and other times we disagree. In this instance, Lindsey, I'm going to agree with you that this is only getting started. And my big concern is that when Trump announces the reciprocal tariffs that he talked about, um, last week that actually sunk the market on Friday, that we see other countries respond in kind. And we have this step function higher in tariffs. Because all that's going to do is drive prices higher, in other words rekindle inflationary pressures. Not what anybody wants to see. But there's also potential disruptions to the supply chains around the world. And that's coming out of covid when we saw that and the impact that had on inflation and the ability to get goods I don't think anybody wants to see that. So much like yourself,

I'm really mean hoping, right, that this is once again, a negotiating tool. But the point you make about the external revenue service, uh, you know, that's a valid one because how do you, how do you, um, enable Doge to go in and cut? How do you promise tax cuts if there's no offsetting balance, right? You know, so there's, there's a lot of moving pieces here and, I think we're going to learn a lot more in the coming weeks and months. But my concern is that, you know, the economy kind of gets hit on the sidelines.

[00:06:09] Lindsey Bell: Yeah, and I think what I would say is, if you look back at 2018, when a lot of us the first round of tariffs went into place, that wasn't a great year for the market. The market was down over 6%, the S& P 500 I'm referencing, and the VIX spiked up and it was volatile, um, in, in 2018. And what I'd say is different this time around is you talked about inflation.

Inflation, there wasn't a massive impact to inflation between 2018 and 19. The Fed has it pegged at about. 0. 1 to 0. 3 percent percentage points on inflation. So that could really just tick us up above 3 percent on inflation this year. But the difference is, is this time around, we just went through a massive increase in inflation and we're still grappling with it.

Consumers are still having a harder time. So that the ability for consumers to take on price increases, I think is you know is limited here. I think we've got a price conscious consumer I do on the other side of it though, I do think that companies, between COVID and their original round of tariffs, they have moved their supply chains around and they have reacted to the changes in certain, um, certain taxes on certain goods.

Um, so there is some offsetting nature there, not to say that that they won't need to do more this time around if, if tariffs do in fact go in place and get stuck in place. But the other thing too about tariffs versus like traditional inflation that's driven by The supply and demand typically of raw goods and materials is that tariffs are a one time hit. Again, not that we'll be able to absorb it, but it happens this year in 2025 and then as you cycle It disappears, right. And we saw that in 2018 and 19 too. If you look at like I was always I was looking at um, washing machines laundry machines. There was a massive increase in the price of those and then the following year it had just settled down to back to where it was.

[00:08:06] Chris Versace: Well, the, the other thing that I'm watching go sky high, not related to tariffs is cocoa. Because apparently the cost of my chocolate is going to get much higher. And I'm hearing from companies like Hershey and Mondelez, Lindsey, that they're going to continue to reduce the amount of cocoa in their chocolate products, amping cocoa butter.

[00:08:25] Lindsey Bell: See that's what companies do, and consumers. They try to replace or reduce their usage. So that's what's at risk.

[00:08:33] Chris Versace: I know. Shrinkflation as well. All right, let's move on. Um, we're coming off, you know, the latest wave of big tech earnings. You know who I'm talking about. Meta, Microsoft, Amazon, Alphabet and a host of others. And I think, Lindsey, the one thing that we can walk away from it is to say spending on AI and data center is set to just continue to climb, climb, climb in 2025.

I think some estimates are saying 315 billion. Amazon itself will be over 100 billion in CapEx for 2025. I see it as more confirmation that we are in an AI arms race, but at the same time, you're hearing not only from Microsoft, but Amazon, Meta, uh, and others that they're tapped out. They are capacity constrained right now. That's why they need to really invest the way that they are for future growth. And what's just to tie it all together, you know, there's various studies out there, but by and large, they all seem to indicate that enterprise adoption of AI is still low to mid single digits, telling us that if we see that double, maybe triple still early innings, but that's going to demand a lot of capacity.

What do you think?

[00:09:55] Lindsey Bell: No I think you're spot on. The amount that these companies are spending on AI and their infrastructure in general, whether it's for the cloud business or for AI is becoming what, what feels astronomical to, to the normal folks like us, right. And so I think that it really is just a reiteration that this is, we are in early innings of AI. Companies aren't giving up.

This isn't the metaverse that didn't work out. This isn't some of the other different cool technologies that companies have tested over the years and haven't worked out. You actually heard it on earnings calls, Chris, and not just from the tech sector, from industries outside of technology, like Starbucks talked about how they're using.

AI and algorithms to speed up their ordering. JP Morgan talked about it from a fraud perspective. Visa, Raytheon, uh, a lot of different companies across industries are starting to use AI to boost productivity and boost margins. So I think that we're really at early stages and they're using AI in this early nascent form.

And so I think as AI gets better, there's going to be more use cases. And we talked about this a few weeks ago. And so I think that the spending isn't going to stop. I think perhaps these companies have gotten actually a little bit of a, um, a break, um, from the breathing down their necks of where what's the ROI on these investments,

[00:11:21] Chris Versace: Yeah, yeah, yeah, yeah,

[00:11:23] Lindsey Bell: that.

[00:11:25] Chris Versace: Well, the one that stood out to me was, uh, McDonald's. And how they're using AI to streamline their operation. But you, you rattled off a number of different examples, but we're still, still early innings. So I, I think when I look at this as an investor, we know that capacity is going to ramp.

Uh, I would suggest folks pay attention to comments from some of the data center companies, Equinix, Digital Realty Trust, understand like where are they their capacity utilization levels at their existing facilities? When are they looking to expand, either add additional capacity on existing sites, break new grounds, I would also say, too, that the one thing that Amazon called out that not everybody else did the power, what I like to call power pain point, right? Because areas that are, that are driving capacity constraints are chips. Like we've, if you've paid attention to what NVIDIA is saying, you know that their capacity constrained until Blackwell comes out and they'll be constrained in the beginning there, but it's power as well, really electrical power. Um, you know, and that's why I think when we hear from like Dominion Power, Duke Energy, and these other electric utilities, my question is going to be, what are they doing to drive greater electrical capacity?

And then as an investor, I have to figure out how, how can I potentially benefit from it?

[00:12:50] Lindsey Bell: No, I think that's really smart, and I think you're starting to see some of those, um, those stocks sort of decouple from the, the interest rate, uh, trade that they have often been linked to. Uh, the other thing I would say that this also means is I know, you know, the Mag Seven, the tech sector in general hasn't performed so well on a year to day basis.

I know we're only like a month and a half in, um, to the year. But I also think it's not like there's the debate of is, is the mag seven or is tech dead is, are we like over exposed to the sector or these stocks given how big they've gotten? And I just, I think the trends that we're seeing is like, the reason that these companies have gotten so large is because, they are sort of the drivers of the future of our economy.

And sure, maybe earnings growth is slowing down or sales growth is starting to slow down. It's still better than the vast majority of other companies out there. And, um, and I just, I think that they have a lot of opportunity ahead of them. It's just the capacity issue is a concern. And, so I don't know how you feel about the diversification angle.

And exposure to the sector in the S& P 500 index or other ETFs to track it.

[00:14:01] Chris Versace: So if we weren't in the early innings of AI adoption, I think I would, I would be more concerned. So for me, as we go from early innings to, you know, sticking with the baseball analogy, like the 5th or the 6th inning, that's when I think I'm going to be a little more concerned about that diversification, because at that point, you know, growth starts to slow.

Are you risking over capacity, companies that were funded, is there, are there funding is running out? How does that impact, you know, overall demand? Oh, we don't need more capacity because we actually have more capacity than we thought we did because not as many companies are around using it. balanced against overall enterprise and consumer adoption.

So there's a lot of moving pieces there, but I, I'm not as worried about it today. In the meantime, I would flip it around and say this, Lindsey, where are we seeing the spending occur? As an investor, that is where I want to be. So if it's spending by electric utilities on additional capacity, how can I be there?

If it's by spending on AI data centers and chips, how can I be there? These are the questions that I have to ask, but there's also the construction side. And you, you made a, you made a, indirectly made a very good point, which is that, historically, construction and capital equipment related stuff has been more interest rate driven, totally understandable. But with the growth profile of this, you know, housing might take it on the chin. If interest rates are higher for longer, they don't come down as fast and mortgage rates are higher around six and a half, 7%. But past a certain point, that's not going to slow down non residential construction to the same extent. What do you think?

[00:15:43] Lindsey Bell: So I think you made very good points, Chris. You made some very good points there. And I do think that that's investors need to really follow the money to find the newest opportunities from this AI trend.

[00:15:54] Chris Versace: Totally agree. All right, let's move on, get to our last topic, because I am really curious on this one, Lindsey. Um, as we're taping this, we face two back to back days of testimony by Fed Chair Powell in front of, uh, Congress. And the timing is kind of interesting, right? So the first day, Tuesday, there's no fresh economic data out. Um, you know, I suspect Powell, uh, is going to say, you know, Cautious stance to rate cuts, need to see more good data, you know, the usual. Um, but, the morning before his second day of testimony, the July Consumer Price Index comes out. I think that if we see it in line with some of the other January data that we've gotten, inflation sticky, potentially moving in the wrong direction, he might have to change his tune just a little bit, or at least, maybe not his tune, but his tone.

What do you think, Lindsey?

Lindsey. Okay.

[00:16:47] Lindsey Bell: Yeah, I mean, I think he was very clear and he has been clear that they're in no rush to return to cutting rates. Um, so even if inflation is sticky tomorrow, and we've seen other indicators about expectations, consumer expectations for inflation starting to tick up too, which can, can be concerning because it becomes a self fulfilling prophecy.

Um, but I mean, the market itself is pricing in less than two 25 basis point cuts this year, right? Um, so I don't think the market is is would be completely surprised by that. Of course though inflation and we've seen inflation days the market gets pretty volatile, um depending on what the the data shows us so we will definitely have to keep an eye on that. Um, I think one of the things that surprised, not surprised me, but I was finally glad to hear pal say is he talked about like how the longer run rate, neutral rate, the neutral rate of the fed funds rate has increased.

And he said, I'm not so sure if everybody is on board with that, but it's something that I personally believe. And it's, it's finally something that he's vocalized or verbalized because I went back and in 2019 the Fed had, uh, the long run neutral rate at, um, I think it was two and a half percent. And now in the most recent dot plot in December, it's up to 3%.

And they've never really acknowledged that this number has been increasing, um, over time.

[00:18:14] Chris Versace: So you feel vindicated?

[00:18:16] Lindsey Bell: I don't, I don't know if I feel vindicated, but it's just like, I don't know, maybe the market feels a little bit more, a little more comfortable with realizing that, uh, rates are going to be higher for longer, the neutral rate is a little higher than it has been in the past.

[00:18:30] Chris Versace: Well, I will say this. This is my prediction. If the January core CPI comes in hotter than expected, if we look at the number of Fed meetings between now and June July, And the number of data points that we're going to get, I think a hot January core CPI is going to push rate cut expectations into the second half of the year. That's what I'm thinking. We will see, and you can hold me accountable if you so choose, Lindsey.

[00:19:01] Lindsey Bell: Yeah, I mean, I think it's becoming more and more clear. When does the Fed really get rate cuts significantly underway? It's usually when the economy is falling off a cliff, and, you know, I think we're not seeing that happen. Inflation is remaining elevated because the economy is chugging along in this two and a half to three percent range.

[00:19:19] Chris Versace: what I find almost laughable is when you look at the ADP employment report for January, and you actually saw a sequential increase in the year over year wage data compared to December, right. And then if you look in the employment, the January employment wages were up slightly as well, and Powell goes, Oh, wage pressure is not a significant component of inflation. How? What?

[00:19:45] Lindsey Bell: That's like the stickiest component of inflation.

[00:19:48] Chris Versace: I know. I know. I know. Well, all right, let's, uh, let's see what the data brings. And in the meantime, folks, we will be, uh, taking a short break and be sure to join us as we wrap it all up. All right, Lindsey, let's wrap this edition of the What Does It Mean podcast up. Uh, ladies, first, what in our conversation stood out to you this week?

[00:20:10] Lindsey Bell: You know what, what stood out to me is that while everybody's trying to figure out the AI trade and where to make the most money, given the runup that we've seen in the hyperscalers, I love the point that you made that, you know, we both talked about how there, there's still opportunity like Lee in the hyperscalers.

Um, but that there, okay, I talked about it. Don't gimme that face . I can see you, um, . But, but there are, there is other opportunities We're moving into

[00:20:38] Chris Versace: Oh, yeah.

[00:20:39] Lindsey Bell: Second or third phase, I don't know what you want to call it, of this investment opportunity. So there's more to the trade than just the big names that are, that are building AI and the chips and all that.

[00:20:52] Chris Versace: Totally agree. The, the math major in me from undergrad would say, the second and third derivative trades are. So I think, uh, I think that's what you're talking about. As far as me, you know, I, I kidded with you a little bit about you being vindicated, but it was the recognition of where the long end of the curve is.

Because I don't think a lot of folks really talk about that. And, um, it does have a lot of implications, you know, that that's a far less, uh, volatile part of the curve, right? Short, short term rates can be volatile. Everybody likes to focus in on, um, on that. But when we look at like mortgages and stuff, they tend to be based off, you know, deeper in the curve.

So I think you're calling that out kind of helps explain some of the things that folks should be paying attention to. And I, and I always appreciate that.

[00:21:38] Lindsey Bell: Yeah, and I think that it's a, it's an indicator of a strong economy too.

[00:21:44] Chris Versace: Well, totally agree. I mean, we, we could very well get to the point, Lindsey, why does the Fed need to cut rates at all?

[00:21:51] Lindsey Bell: Do they?

[00:21:52] Chris Versace: All right. It's a topic for another podcast, Lindsey. So between now and then folks, if you need to find me, Chris Versace, you can find me over at the, uh, the Street Pro Portfolio and Lindsey, since you got a new gig, what's the best place for them to find you?

[00:22:06] Lindsey Bell: So clearnomics.com. Check it out. Check out what we do and we're all about. Um, and as usual, you'll find my insights LinkedIn or here with Advisorpedia.

[00:22:17] CV: Awesome. Good stuff. All right, folks, till next time we will see ya.