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Well, this is something I've been focusing on over the course of the day. Christine, I know you have been as well. We report a lot on what is getting in and out of the Strait of Hormuz. It does seem like, according to reports that we've seen, those levels are back close to what they were before this war.
That's right. That is just pipeline from Saudi is back at capacity, maybe running even hotter than they were before the war, trying to get some of that product out to market. And it does seem like we're getting a lot of reports from industry analysts saying they don't think it's caused long-term damage to the systems, to the production there. But to me, the issue is always not just production, it's the risk factor and it's all the other pricing that goes into it. So I think I'll just say refinery.
Yeah, we'll get into that a little bit later in the show. But first we're going to go to Mike McKee. He is our international economics and policy correspondent here at Bloomberg TV. Because amid all the economic data this week, of course we've got PCE, we've got KPIs, we've got Fed. Okay, so many acronyms. But let's start with the core PCE data. Can you start high, kind of at the 30,000-foot level? Christina Ruffini will understand this level. And then you can dig into whatever really stood out to you.
Well, first let me say thank you. It's great to be here with you on Saturday morning. Mea culpa, but it's good to see both of you in the chair. This was a kind of interesting report, because the Bureau of Economic Analysis changed some of the methodology it uses in measuring some of the components of the report. And so we knew it would be revised. We knew it would be revised lower. So the question is, and the economists are fighting about this since the report came out, the question is what did it tell us about the direction of inflation? And basically, to my mind, it gives us the idea that inflation hasn't changed a whole lot. What it did was lower the levels of the inflation, of PCE inflation and core since 2021 on a year-over-year basis. But what it showed is that there was really no change in August. We saw the core PCE revised down from July to 3.4% from 3.7%, but then it was still 3.4% in August. So the Fed hawks could look at that and say, we're not really making progress. Now, some people say on a three-month basis we're at 2%. But you can also make the argument that within this report, there were signs that the services inflation is still rising. And then of course, this morning we got the news about the mortgage rates moving up quite a bit. So that's going to have an impact on housing. There's a lot in the numbers out today that don't really take us anywhere different.
I don't think at this point that mortgage rate number is depressing my co-host as well as she looks at that going. I was going to say Mike has been with us enough weekends to know that I hate talking about the fact that I'm never going to own a house, and I was going to let it go. But thank you for pressing the broader market and a more micro one as well. Mike, I pull up WARP here on the Bloomberg and I look at the odds of a cut, or rather a hike happening here at this October meeting. See that at 40% now, roughly speaking. How does this change the calculus for Fed policymakers? As you see, this is, you've been listening to a lot of Fed policymakers making the rounds. You've had an ample serving of Fed speak here over the last few days. That continues over the rest of the week.
Well, this is kind of an unusual situation because the next Fed meeting is October 28th. So it's like five days before the midterm election. So ordinarily, you would think the Fed would not want to get involved in that or mixed up in that by raising rates. But it all depends on the inflation numbers we get between now and then. We'll get CPI, we'll get PPI. And so I don't think I would trust the Fed funds futures at this point. They change all the time with the latest data. And that could easily change if we get a hot inflation report. If not, they may hold off. But you heard John Williams, the vice chair of the Open Market Committee, say yesterday he thought another raise would be justified before the end of the year. So they could do that in December. And today's numbers didn't dissuade anybody. You look at the other numbers we got today. Consumer spending was at the highest in years in August, up nine-tenths of a percent. We got a 90,000 job figure for private sector jobs from ADP. We'll see what happens on Friday with the BLS numbers. But it does seem that the economy is going strong, if not expanding. And that always adds the possibility of more inflation.
Mike, stay with us, if you would. I want to bring in Lindsay now of Stifel Financial. She's the chief economist there. Lindsay, great to speak with you, as always. And I want you to pick up on what Mike was talking about just a moment ago. And that is the evident resilience, continued resilience of the consumer in the United States. I think it's flummoxed a lot of people. And I wonder if, as you look at the kind of broader complement of data, if there is anything in there that gives you any cause for concern about the consumer's ability to withstand, yes, the uncertainty and the difficulties they've been facing here over the last few months.
Well, I think the underlying storyline, as Mike laid out, is the resilience of the U.S. consumer despite elevated energy prices. The consumer is still out in the marketplace, spending on goods and services, now doing so at a slightly slower pace. And we are seeing increased volatility in the spending patterns month to month. But overall, the growth in spending is quite impressive, well above what many economists anticipated the consumer would be able to maintain, given this upside, its upside growth in energy costs. But to your question, is there anything that gives me pause? I would say the one thing that does come to mind is the differential in the growth that we are seeing between income and consumption, consumers continuing to outpace the growth that we're seeing on the wage side. Now that has been supplemented in some degree with savings, buy now, pay later options, tapping into, for one case, with hardship withdrawals of double digits in just a short period of time. We also see an intergenerational wealth transfer. So meaning money coming down from the older generations, mom and dad, grandma and grandpa, that's been helping to fill that gap. But we won't be able to necessarily indefinitely sustain that gap. So as we continue to shoulder higher energy prices, that will put downward pressure on the consumer and, if sustained, eventually further slow and potentially choke off upside potential growth on the part of the consumer.
And so you mentioned energy prices when you talk about because some of these stressors, I am going to go back to mortgage rates because David wrote a note in here. Holy smokes. I mean, when you're looking at this, those are big factors, because unless I'm benefiting from that generational wealth transfer and inheriting a home, a lot of people this is just becoming inaccessible. What does that mean for the economy more broadly, having those rates so high because homeownership factors into so many other things and is such a huge factor in building wealth and being able to put that money then in other places.
Well, it absolutely does. And what we see, just like higher energy prices, when you're diverting more to shelter costs or simply filling up the family car, that means that you're diverting billions of dollars in spending elsewhere. So instead of making that decision to go out to dinner or take a family vacation, now you're saving a bit more to hopefully make that down payment or make that monthly purchase, that monthly mortgage payment, or again, just filling up the family car. So what we're seeing is that consumers are dramatically shifting funds away from discretionary areas into those very vital components of spending month to month.
Mike, I want to ask you about core PCE. As we've pointed out many times, trope that we lean on here, the favorite of the Federal Reserve. You're stripping out energy. You're stripping out food. And yet, in this moment, those two things are so critical to our more holistic understanding of how this economy is doing. And, you know, as this war drags on, obviously it's had a significant impact on both of those things. What should we make of that? The capacity of this number, of these data, to give us a full sense of, yes, how the economy is doing broadly, but the inflation picture as well.
Well, when we look at consumer confidence, it's cratered. And that's largely because of the inflation numbers for food and energy. So those matter to the public. I was just out in southern Illinois yesterday and gasoline, food prices, and for the farmers, diesel prices, they were the big issues out there. And that gives you some pause because you'd think that might cause people to stop spending, but it didn't. So the Fed has to balance that aspect of it. But when you look under the hood, services prices, diesel gets into that as well. Petroleum gets into that as well. And we do see some continued price pressures on the service industries. We saw core service industries, housing and energy, up by four-tenths last month, and that was up from July's one-tenth. So there are still underlying pressures. And so the hawks are still on the Fed going to have something to talk about.
Is it kind of in the same vein? I mean, we talk about consumer confidence and how people feel versus how the economy actually looks on paper. I'm wondering how you take the Fed's assessment of the economy from a few weeks ago. Does it still stand? You know, is it still solid?
Well, I do think that from the 10,000-foot view, when we talk about an economy growing over 2%, reflecting this morning's upward revision, and a consumer still spending at around 6%, that is relatively solid. That being said, the Fed did acknowledge the elevated level of inflation and the uncertainty that elevated inflation and persistent price pressures would play on undermining longer-run growth. So that really is the question. And as Mike pointed out, we have a number of different iterations of inflation to give us a better understanding of how that's going to hit the economy. Headline inflation, as I mentioned, includes those core components of food and energy, which we as consumers pay for on a day-to-day basis. But the Fed needs to often look through some of those temporary changes, some of that transitory volatility. And so they focus on the super core. So we're looking at core services excluding housing, which again, as mentioned, this continued to accelerate even with that welcome stabilization that we saw both in the headline and the core. So for the Fed, there is still a lot of price pressures not only embedded already in the economy, but still coming down the pipeline, that they're going to have to adjust monetary policy to, to fight against. So one conciliatory rate hike in September is certainly not going to be enough to rein in price pressures and return us back to price stability, which Chairman Warsh continues to say is a focus for this Fed.
Mike, I'd love it if you could give us a preview of what we can expect on Friday. So shifting to the other side of the Fed's mandate. Talked a lot about inflation when it comes to this jobs report. What are you looking for broadly, headline level, and what, at a more granular level, are you going to be paying attention to?
Well, we're not expecting a whole lot of change. It should look much the same as what we saw in the month of August, with around 100,000 jobs created and the unemployment rate, according to the Bloomberg consensus, isn't going to change at 4.1%. What will be interesting to see is if we see a change in the labor force, up or down, that's bounced back and forth, and that has an impact on the unemployment rate. So we'll take a look at that. The Fed hasn't been worried about what people are earning. Average hourly earnings on a year-over-year basis has been falling. So we'll see if that turns around. If there's a shortage of employees, then that should mean higher wages, which is inflationary. But we haven't seen that yet.
Mike, I do want to ask you about the Fed OIG report released today. They just kind of dug into what we've learned about this $2.4 billion renovation. We've been hearing about it for a long time. I mean, I know I worked in the State Department for years, and it seems like it's been under construction almost the entire time I've been in Washington. Obviously, a huge point of contention with the president in the past. Fed chair, what do we learn from this report?
Well, a year ago, the president threatened to fire Jay Powell because he said the price overruns showed complete mismanagement. Hinted at maybe there was some irregularities. And Jeanine Pirro, the U.S. attorney for Washington, D.C., tried to charge Jay Powell, and that didn't work out. And today, the IG cleared the Federal Reserve Board of any kind of criminality, saying that at no point during our evaluation did we find reasonable grounds to believe that a violation of federal criminal law had occurred. So they're not referring anything to the AG, but that doesn't mean the board is off the hook. They found a lot of mismanagement. The board didn't set an overall cost ceiling. They didn't execute a manager-at-risk contract, which would put the contractor at risk for overruns. They didn't get a guaranteed minimum price, and they didn't get a construction cost estimate until three and a half years into the project. They didn't manage it effectively on a day-to-day basis. So the IG found a lot of issues with the way the Fed managed this. And it's important to note that every other government building in Washington, a renovation like this would be handled by the Government Services Administration. And in this case, it's not, because the Federal Reserve Act gives the Fed control over its own buildings, and they apparently decided they were qualified to do it. The IG found otherwise. And today, Kevin Warsh said, we're appointing the GSA to run the rest of this renovation.
Stay with us. More from Bloomberg Businessweek Daily coming up after this. All right, let's turn now to one of the day's top conversations. We heard earlier from Pershing Square founder and CEO Bill Ackman. He says investors should stay disciplined as excitement builds around that. I bailed out, and Ackman spoke exclusively with our own Dani Burger on Bloomberg Deals.
The market is very narrowly focused, I think, on space. And that's Tropic, and on the picks and shovels that support the space. Is that a problem? Especially if Anthropic. I think we should all remind everyone. I think it was on the 22nd. You put out something basically saying, are we going to see an Anthropic S-1? Oh, by the way, there's a 10% chance we kill humanity. And that is exactly what we saw. There was a large-ish part of that prospectus that basically said, here's all the harm we might cause. But what do you make of an IPO with that sort of thing in it? And is that a company you would even buy?
So I think, I don't know, Anthropic. It's perhaps the greatest business story I've ever seen in terms of, you know, from de novo to $2 trillion. I would say significantly just the revenue ramp of the company, the quality of the product. You know, we use Claude internally. So it's clearly an amazing company. You know, query whether the frontier model companies will be able to maintain their market presence in light of the power of open source and open-weight models.
Does that mean you wouldn't buy it because you're scared of that competition?
You know, we look to buy businesses that we can predict what they're going to look like over a very long period of time, you know, kind of boring things like, you know, perhaps Microsoft or S&P Global or Visa or Mastercard, you know, things that are in our portfolio. We are less likely to be an investor in a very fast-growing business that's, you know, consuming a huge amount of capital and you're betting on kind of the lines crossing at some point in the future. Do you think it's like a super interesting business? The prospectus actually been filed? I've read, you know, it's just reports at this moment, so we have to wait with the actual language. But on the point. So, you know, interesting. I think Jensen's made this point. Well, if you're a $2 trillion company and you have a product or service that can cause enormous harm, you're going to be very careful about releasing that product to the market. I feel like you don't need, at least for the, you know, the Anthropic world. You don't need legislation or the government to protect them from doing something stupid. You would hope you wouldn't, because they're, you know, it's a bit like a pharma company. You don't release a drug into the world. You know, maybe in the case of a drug you want, you have government oversight. But there's a huge disincentive to put out a product that's going to destroy the world.
Does that mean that you're less concerned about all this? You know, worst-case scenario out there, you think they're going to self-regulate?
Okay, I'm actually less concerned about Anthropic or OpenAI being a source of the problem. I'm probably maybe more concerned about a bad actor, rogue actor who does not have the same considerations, who, you know, uses the resources of an open-source model to cause enormous harm. And I think that's still a very significant risk. I'd rather that the hope that the best labs, the best frontier labs are incredibly powerful, so they can protect us from the rogue operator using a less powerful AI.
All right, that was Pershing Square's Bill Ackman speaking exclusively with Dani on Bloomberg Deals. Let's continue this conversation. David Bond joins us now. He's the CIO at the Bond Fund Group, where he oversees more than $9 billion in client assets and leads the firm's investment strategy and portfolio management. We had a conversation over the course of the weekend with Maureen Farrell at The New York Times. She wrote this piece about data center companies postponing their IPOs, this kind of way in which the anxiety that we heard Dani and Bill Ackman talking about is kind of permeated by the AI universe more broadly. How do you think about the moment that we're in right now, where we are in this AI story, as we see that anxiety kind of creeping in more and more?
What's interesting is I felt like 2026 was the year in which that anxiety was being defined in different sectors of AI differently. And now all of a sudden, it seems to have come back to either all-in or all-out story. There was a period where the semis and the hyperscalers were trading inversely. It's become a bit more correlated of a trade lately. It's tougher with these frontier labs because I very much echo a lot of Bill's thoughts there, but they aren't publicly traded. It is very difficult to get kind of a liquid, deep market feel for things. My suspicion is that if they were all public right now, you would have a tremendous amount of volatility because I think that they are being priced in private markets as if they're all going to succeed, and they can't.
Given that, how does that define your potential appetite for these companies when in fact they do go public and are going to get these filings? That will give us some information here.
But I wouldn't touch those companies as they were going public with a ten-foot pole that was found on another galaxy. Now, the reason is that the rush to get it out in public markets is, first of all, used to be unheard of that people were making liquidity at their normal IPO moment and saying, so this is a large transfer of wealth is what you're going to be seeing when Anthropic and OpenAI go. There's a lot of people holding stock there that have massive gains. There was a lot of lockup on the spaceship. We were very early investors there. We and our clients have made a fortune. But I wouldn't pay that price in the IPO. But I was happy to pay one-tenth of the price three or four years ago. This issue here is, I actually, everything Bill just said, I thought was an outstanding interview. By the way, I watched it in my office earlier. I think the issue with Anthropic is that everyone knows the product and yet it loses more money as more people use it and pay more for it. That's a tough model.
We talk about that a lot, actually, and we've had a couple of people on our show talking about how everybody's really excited about it, but no one is quite sure how to monetize this given the expenditure that it takes. I mean, is that what concerns you most about these companies? Is it the CapEx? Is it these insane valuations, or is it just all of the above?
And so the CapEx is definitely involved in that. And that's a different part of the story. And the capital for the CapEx is ultimately what will end this whole story. And so I wrote a piece at my dividendcafe.com a few weeks ago. That's probably the most ignored part of it is that we presuppose capital markets are going to continue to cooperate, and they won't. There will come a time in which debt-equity financing of this, right now it's the biggest boom in human history. But, and capital has been very cooperative, not just the cost of capital, but just the impediments and requirements and covenants restrictions. It will tighten at some point. It will change the game substantially. And usually that ends a bubble. But bringing it back to the labs, I would say that it isn't so much when you look at how they monetize. I would say that no one knows how they will, and they're acting as if they do. I'm open to the idea that on the other side of this, I went back and I did everything I could, and I was in my early stages of my adult professional life, investing capital in the 90s, and everyone said the internet is going to be huge. And everybody was right. And not a single person made money because they were wrong on how it would make money. You could have traded it. But my point being, I'm not saying that in 1997 people said Amazon to be big. And it was. And I'm not even punishing people for what happened in 2000. I'm saying the high-level macro read of monetization was wrong, and there's nothing wrong with that. It was early and the model evolved, but what they got right was that the internet was going to be huge and world-transformative and enhance productivity and be a big commercial success. That all happened, but it didn't happen in the way anyone could have known or did know in 94, 95, 96, 97. By 98, 99, nobody cared. They were just buying stupid companies and everything blew up. I don't know why people think this will be different now when they go, Nvidia is not Pets.com. No one's saying that. The comparison would be more Nvidia with a Cisco, but even then, maybe Nvidia is not Cisco from the 90s. History rhymes, doesn't repeat. I get all that. I'm more saying not internet. Every CapEx-intensive boom in history that did work out went through a period where a whole lot of capital got set on fire before it worked out. We have not yet got to that stage.
Let me call an audible here. So we see these tech executives at the White House yesterday, the second time they've been at the White House in a week's time. And I'm curious how that conversation is clouding investors' ability to think clearly about the future prospects of these companies. They're getting infected with the imprimatur of the White House, of the federal government. How does that complicate our ability to kind of see clearly at what they are, and indeed what they could be here when they go public?
You know, it's a fair question. I don't know if people take those things seriously. I view them more as a photo op. I think that there are very serious meetings happening that we don't see on camera. I don't think that there are ones with the president in the room, but I think that with Treasury, with Commerce, with some other elements, there's back-room situations playing out. But I think that the public right now is largely of a mindset that they don't understand it and therefore don't like it, and there's just different camps as to why they don't like it. And I don't know that you can really make up, but worse PR people than these guys that are themselves the heads of the company. But when you see something like Bill getting into that, he's not referring to the Duma resigned and not even making accusations of regulatory capture and things like that, which I am sensitive to that argument. But I would just say his point that there's questions on the business model, and you look at some companies that your questions of the business model and they end up surprising you and being very rewarding. In this case, though, have you ever seen such substantial questions be accompanied by such euphoria? A $2 trillion valuation on a company that does about the same revenue that the McDonald's on Third Avenue does? I just, I don't know. And now those revenues are growing huge. But the losses are growing more than the revenues. So that's different than the early social media companies, you know, where they were just massive scale enterprises. This is a tough thing to be able to price. I'm more favorable to Bill's approach where dividend growth investors, we like to have an outlook on where business is going. I can't have it. But when I make the comment that I think it's an AI bubble, I don't think that blows up in people's faces in a week or a month or even a year. I think that I'm making a comment on history. There's never been a point, ever, where something like this did not only run into the need to purge malinvestment before it then got a cleaner slate to kind of, in a more Darwinian way, play out the way it's going to play out there.
If AI revenues are going up at the AI companies, maybe not at the McDonald's on Third. I'm not sure. I don't know if they bring the McRib back for the holidays.
There you go. You, uh, we're going to talk about that off camera.
We are at the Qatar Economic Forum, and we were talking to one of our guests about this exact thing, and he said, look, we're not at the point of irrational exuberance.
