Macro outlook: stagflation risk, central bank patience, AI capex (with Francine Lacqua)

Asks about inflation, demand, and economy outlook given geopolitical uncertainty.

Francine Lacqua

Hugh Gimber

Directionally inflation is heading higher, but the bigger story is the growth slowdown. PMI data shows manufacturing holding up due to front-loading, but services are squeezed. Central bank tone has shifted: more acknowledgment that the longer this goes on, the bigger the hit to consumer and growth, questioning the value of rate hikes now.

Stagflation is a long way away because the economy entered this shock in good shape with strong corporate and consumer balance sheets. The US, the longer it goes, the more pain will be felt, but markets assume it will be solved because one side will back down.

Asks about central bank strategy: hike now and cut later, or wait?

Francine Lacqua

Hugh Gimber

Patience is key. Central banks are wary of fighting the last crisis. Lagarde says data will guide them. Why act now when you don't know where things will be in 2-4 weeks? This is both an inflation shock and a growth shock.

Asks about how much pain will come depending on oil price scenarios.

Francine Lacqua

Hugh Gimber

It all comes down to US consumption, which is critically linked to the labor market. As long as the labor market holds up and incomes remain steady, consumption remains at good levels. The longer it goes, the more likely the labor market slows, leading to a significant pullback in consumption. For now, it's more rotation in where consumers spend.

Asks about AI investment and whether it's only coming from that space.

Francine Lacqua

Hugh Gimber

Tesla's reaction showed that beating on earnings is not enough; you also need capex discipline. The question is how much of increased capex is due to new capacity vs. things getting more expensive (energy, semiconductors, memory). If it's cost inflation, ROI becomes harder.

Asks if there is a skew towards markets in AI spending.

Francine Lacqua

Hugh Gimber

Where you sit in the ecosystem is critical. Nvidia will deliver ~40% of this quarter's earnings growth. Tech does ~80% of the heavy lifting for the market. Semiconductor and memory names are doing well. Hyperscalers and spenders are being punished due to lack of clarity on ultimate ROI.

Asks if AI is deflationary from an economic perspective.

Francine Lacqua

Hugh Gimber

There are still significant questions about how much AI translates into real economy productivity. AI is a time saver today, but for it to be productive, that saved time must be driven back into the economy to produce more output. That test has not been passed yet; we are too early.

Asks about Kevin Warsh's stance on rates and AI.

Francine Lacqua

Hugh Gimber

Warsh wants to work on realized inflation and doesn't like the current Fed forecasting too far ahead. The message from the hearings is about additional Treasury volatility. This Fed will be less predictable; the role of the chair changes significantly. You have to demand higher risk premium due to less visibility on rates.

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