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- [00:00]
Ed Elson
Why send your ducks and hope they land. Share a PDF space for microbet. They'll understand. A custom intro that's so clear.
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Podcast Advertiser/Announcer
An audio summary that says what they need to hear.
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Host/Interviewer
An AI assistant that makes it all
- [00:13]
Ed Elson
click so they'll understand it real good real quick. Ain't just some files on the screen. It's exactly what your clients need to see. You can do that. Do that.
- [00:24]
Podcast Advertiser/Announcer
Do that with Acrobat.
- [00:26]
Ed Elson
Learn more@adobe.com do that with Acrobat.
- [00:32]
Podcast Advertiser/Announcer
Support for the show comes from Amazon. There are the things you can plan for a first birthday party, a movie marathon, a renter friendly bathroom reno. And then there are the things you can never plan for. A surprise rainstorm, A Blu Ray player calling it quits. Stick on tiles that looked way better on the package for all things planned and unplanned, Amazon has you covered. You'll find low prices on everyday Essentials and last minute lifesavers. Shop Amazon and save on Essentials. Save the everyday
- [01:09]
Host/Interviewer
Study and play come
- [01:12]
Ed Elson
together on a Windows 11 PC and
- [01:14]
Host/Interviewer
for a limited time, college students get the best of both worlds. Get the unreal college deal everything you need to study and play with select Windows 11 PCs. Eligible students get a year of Microsoft 365 Premium and a year of Xbox game Pass ultimate with a custom color Xbox wireless controller. Learn more@windows.com studentoffer while supplies last ends June 30th terms at aka mscollegepc today's number 39. That's the percentage of Republicans who think Trump would beat them in a physical fight. That is according to a new poll from research firm YouGov. And in other news, celebrations at YouGov after winning the Pulitzer Prize for for best Survey question ever. Money Market matter If money is evil, then that building is hell. The show goes on. Welcome to Property Markets. I'm Ed elson. It is May 13th. Let's check in on yesterday's market vitals. The S and P and the Nasdaq fell after the latest inflation reading came in higher than expected. We'll talk about that shortly. Oil prices continued to rise as tensions between Iran and the US Remained elevated. Treasury yields also climbed. And finally, the Senate confirmed Kevin Walsh as Fed governor, clearing a major hurdle toward becoming Fed chair. Okay, what else is happening? Inflation soared in April, up 3.8% from a year earlier. That is the highest inflation reading in three years and even hotter than than economists had expected. Energy accounted for 40% of the month to month increase and was up 18% from a year earlier. But price pressures are spreading beyond fuel. Core inflation, which excludes food and energy prices, climbed 2.8% from a year ago. And for the first time in three years, wages are no longer keeping up with prices, which essentially means that real wages are. Are falling. So here to discuss these numbers and the state of the economy, we're speaking with our friend Justin Wolfers, professor of economics and public policy at the University of Michigan and founder of Platypus economics. His new YouTube channel, Substack and podcast. Justin, welcome back to the show. Let's get right into these numbers. Inflation up 3.8% year over year in April. Core inflation up 2.8%. This seems to me to be the worst reading we've seen in a long time. I guess the question is, how bad is it?
- [03:55]
Ed Elson
Ed, just hearing you go through those numbers caused the worry lines to itch a little deeper right now, and I was in a good mood before I started talking to you. Two things are true. This is a high inflation read. The cost of living's rising. It's rising sharply. People are finding it hard to keep up. The affordability crisis is real. The second thing's true is none of this is yet deeply problematic. So let me back up and point that out. There's two inflation measures you just pointed to, Ed. One was headline inflation. That answers a specific question. If I care about the cost of living, what happened to the cost of living? That's rose. And so if you feel like you're not keeping up, truth is, when you're paying four bucks a gallon, you're not. Second question is, what's going on with the future of inflation? And that's where economists tend to look at core inflation. We exclude food and energy. Food goes up and down with droughts and avian flu and stuff like that. Energy goes up and down with strife in the Middle East. And so neither really capture the underlying inflationary momentum or the inflationary psychology. And that, at 2.8%, is lightly uncomfortable but not miserable. And a question, and perhaps the question over the next few months is, how much will we be able to keep this as an energy crisis? Iran, temporary story. Remember, there's still some tariff business going on versus how much does it gain its own momentum, start to feed its way into inflation expectations, and become something substantially more to worry about? Because getting inflation down from 3% to 2% would require slowing the economy quite substantially.
- [05:46]
Host/Interviewer
So this gets to the heart of the problem, which seems to be that it's really. I mean, when you look at the numbers, it's mostly a Fuel problem. It's mostly an energy problem, or at least 40% of the problem was, was the cost of, of energy, which is because of the fact that the straight off Hormuz is closed because we're at war with Iran, which leads to the simple question of when will that be over? And this was asked in so many words to the President yesterday. He was asked whether the financial pressure facing Americans was going to influence his decision making in Iran. And his response was striking. I just want to play this clip and get your reaction. Not even a little bit. The only thing that matters when I'm
- [06:31]
Stacy Razgon
talking about Iran, they can't have a nuclear weapon.
- [06:34]
Host/Interviewer
I don't think about America's financial situation.
- [06:38]
Stacy Razgon
I don't think about it. But I think about one thing.
- [06:40]
Host/Interviewer
We cannot let Iran have a nuclear weapon. That's all.
- [06:45]
Stacy Razgon
That's the only thing that motivated me.
- [06:47]
Host/Interviewer
Your reactions to that clip.
- [06:48]
Ed Elson
Actually, I thought it was going to be much worse. So what a relief. Look, let me start by agreeing with the President. I think it's probably immoral to go to war in order to deliver low gas prices. I don't want him to walk around doing that. I think the stakes of war are so much larger. They're human. Gas prices is narrow, short term, small and selfish. What I noted though is the mission changed, which is originally we were going in there to free the Iranians from the yoke of oppression that all we wanted was regime change. And we did in fact get rid of Ayatollah Khomeini, which is why we now have instead Ayatollah Khomeini. I understand there's a vast difference between the two. So scoring this war is so damn difficult because the President refuses to say why we're there. Having said that, it's okay for him not to be laser focused on what this does to the cost of living for Americans. Let me come back and give the other side of that. Partly because I do think the stakes, if we're talking about the freedom of 90 million people or the possibility a crazy regime may bomb us to smithereens, those stakes are just enormous. And I'm happy to pay a little more at the pump if those are what we achieve. I want to be clear. So far we've achieved nothing. Right? So we, at the start of the war, the Strait of A mos was open. We had Ayatollah Khomeini and the Iranians had nuclear material. Strait of the military is closed. They've Ayatollah Khamenei and they still have Nuclear material. So whatever the. I don't feel any sense of why my life's better here. I think the reason people have a right to resent this is the President never tried to make the case to the American people. Here is an important and noble goal from which I'm going to ask sacrifice. He seems constitutionally incapable of asking for sacrifice. Sacrifice is a thing that populations do when they're considering war. That's an adult, grown up, mature conversation. Just like saying I'm going to start a tariff war and prices aren't going to rise is an immature lie. You might think there's a serious argument to be had about defending American manufacturing or some argument. It's not my argument. And there'll be some costs and there'll be some benefits, but I think this leads to a better world. That's a mature conversation. Not even having the conversation before putting Americans prosperity, livelihoods and in some case children at risk. It's not my way of doing things, man.
- [09:34]
Host/Interviewer
When we think about what's happening with inflation here, and you mentioned the difference between core inflation versus overall inflation, we strip out food, we strip out energy because it's volatile. It can skew the data in a lot of ways. And Trump has kind of made this argument where he says that the increase in oil prices and fuel prices is fake inflation. It's a different thing. And on the one hand you can kind of make that argument, but on the other hand, it's like we're still at war here and there's no indication that this is going to end anytime soon. And in fact, the more that they keep on telling us a deal is about to happen, we're about to get somewhere, there's going to be a ceasefire, and then suddenly it doesn't happen. It happens over and over and over again. It starts to become kind of clear, at least to me, that this is going to last for a very, very long time. And it starts to look a lot like Iraq, it starts to look a lot like Afghanistan, where they said it was going to be a couple of weeks, it was going to be a couple of months, and then it ended up being eight years or it ended up being two decades. And so it seems as though a very similar situation could play out here where we're telling ourselves that it's transitory, like we said a few years ago. We're telling ourselves, oh, it's just for now it's fake inflation. It's just for now it's just the fuel because the straight up homosexual is just blocked up for the time being, I'm not sure I believe that anymore. And it starts to seem as though the 3.8 number could be something that lasts for a very long time. And I wonder if that would have a structural effect on the economy and potentially on markets as well.
- [11:14]
Ed Elson
I have a memory that at the very start of the war, I came on your show and I said everything that economic theory and history tells me is that there's a very large risk. This takes a lot longer than four to five weeks and almost no chance. It takes less. And there's a long history of excess optimism at the beginning of wars, and that a more realistic assessment should be that it was likely to be far longer with a far greater economic cast. I take no great pleasure in being right. I just want to remind you I was the food and energy. Let me say two things about it. One, you know, we take it out for the reasons I described earlier, which is, if you want to, we leave it in for the reasons I described. If you want to describe the cost of living, it's gone up. Americans are sacrificing. If you want to know what's happening to inflationary psychology, we take it out. But there's a very real risk it spills over and becomes part of the process. And that's very much what's on the Fed's mind right now, that in our models, people shouldn't think about inflation, should think about inflation coming from energy differently from other things, from reality. They may not, particularly after several years in a row of inflation being above the Fed's target. And finally, this wasn't the question you asked, but I do want to put it in there. Food and energy is something we look through as part of a statistical exercise. I want to predict inflation. What are the most persistent aspects, blah, blah, blah. But food and energy are also a very large part of the consumption basket of the world's poor. And so the World bank and the IMF have pointed out. If you wanted to think about who's really going to be hurt by high food and energy prices, it's actually the most vulnerable in the world. And again, if we could have a mature, responsible conversation about whether or not to go to war, part of that one hopes the American conscience cares somewhat about hunger and poverty beyond our shores, and the consequences there are very large. And you and I so far have been talking about the United States economy. And it's worth remembering that the US Economy is actually much less affected than many of our allies, and that Europe and Asia are feeling much, much, much More pain than we are. And those folks, even more than the American people, weren't asked their feelings about this either.
- [13:40]
Host/Interviewer
Yeah, it seems as though this has to come back to bite us in a very real way at some point. And so far the markets have been extremely resilient.
- [13:50]
Ed Elson
I disagree with that. So let's pick that up, please. Yeah, so look, here's the glib answer. The glib answer is the stock market's at an all time high, therefore the market thinks the war is fine. That's glib because markets reflect lots of things. So let's just think about it in a more focused way. Let's say that the market's partly responding to the war, partly the AI boom, and partly other stuff. And if what you want to do is take the market's response as a vote of confidence in the war, then what you need to do is isolate the part that's due to the war. How might we do that? Well, one answer is we can. Look, every single time that the President has been more belligerent and pushed into the war, markets have fallen, literally as he speaks. Every single time he steps back and looks like he might. Taco markets rise. So that's markets saying they believe, they're acting as if they believe that Americans, large companies, will be more profitable over the longer run. If the President were to step back from the conflict, rather than stepping into the conflict, you could actually go even a step further and try and quantify this. So if only we had some index of trouble being caused by the Middle east, then what we do is we'd see how that index was correlated with the stock market. I don't have the perfect index, but I got a pretty good one, which is oil prices. All the movements up and down in oil prices are about, is there more trouble, more strife? Are we moving towards war or not? And it turns out on a day in which oil prices rise 10%, the S&P 500 falls by 0.9% on average. You can just draw a scatter plot and you'll find that you can get fancy and call it a regression coefficient. And so that tells you there's very strong statistically significant evidence that whatever it is that's driving oil prices up and down, and we know what it is, has big negative effects on US Stocks. We also know that the oil price is up about 60 or 70% over the course of the war. And so if you want to extrapolate my negative 0.9 coefficient, that says you take the 70% rise in oil prices multiplied by minus 0.9. And you can say that US stocks are about 6% lower than they would otherwise be, 6.3% as a result of this war. And then I'm just going to be conservative and round that down to 5%. So I think this analysis very back of the envelope, but we're in the middle of a war. No one's giving you strong answers. I'm not going to defend it till the day I die, but I think it's informative. This says that US stocks are 5 percentage points lower as a result of the President's aggression so far because we
- [16:30]
Host/Interviewer
have all of these other things that are buoying the economy and that we're all very excited about because earnings have been very strong. We do have the AI buildout occurring as planned. We'll see what happens. But we got a lot of other stuff going on, which is great, which is, I think a lot of the resiliency is reflected in that. But it just does seem that, I mean, we. At the same time, two thirds of the economy is consumer spending. The consumer spending has thus far been somewhat resilient. And I guess we're just playing this waiting game at this point of hoping this thing will end next week or next month. And that's essentially what we are, what we are betting on and what we're hoping for. And I don't know, you can hear it in my voice. This report makes me quite anxious. I mean, just as we wrap up here, the Senate confirmed Kevin Walsh as the Fed governor yesterday. This, obviously, all of this inflation data is going to be very important for his decision. As for what we do in terms of interest rates, will we cut them as the President has advocated for? Doesn't seem like a great idea. Now, just as we close here, what are your thoughts on Walsh's appointment and what do you think the path is going forward for the Federal Reserve?
- [17:46]
Ed Elson
So the most important question is, who is Kevin Walsh? So from 2006 to 2011, Kevin Walsh was a Fed governor. And so we know a lot about him. That was the period in which we had the global financial crisis. The global economy created, the US Economy created, unemployment soared, inflation was low, and we risked deflation. And throughout that entire recovery period, Walsh kept saying, I'm worried inflation's going to rise. I think we should have higher interest rates. So two things you could learn from that. One, that was a spectacularly bad judgment. It's almost certainly the case that the US Economy would have been better with a more aggressive response to that particular crisis. And the second is that that Kevin Walsh, the 2006-2011 Kevin Wash was an inflation hawk. He saw inflation around every rock through that period, was terrified of it, and wanted a forceful Fed response to it. Even though we were risking deflation more than inflation.
- [18:50]
Host/Interviewer
Yeah, the opposite. Yeah.
- [18:51]
Ed Elson
There's a different Kevin Walsh that Kevin Wash was at a Senate confirmation hearing and said I believe in Fed independence and was asked by Fed independence, of course, means I'm willing to serve the interests of the American people, even if it hurts the President's feelings. This Kevin Walsh was asked by Elizabeth Warren whether the president lost the 2020 election and thought it so important not to hurt the President's feelings that he evaded the question altogether. That Kevin Walsh sounds like a sock puppet. And a sock puppet who'd follow the President's desires, which would be to cut interest rates dramatically at a moment that the economy doesn't call for it. Hey man, there's two Kevin Washers. One of them wants really high interest rates, the other one wants really low interest rates. I'm glad I'm not trying to Living inside his head and we're going to find out over the next few weeks and months who Kevin Walsh is.
- [19:41]
Host/Interviewer
Justin Wolfers is a professor of economics and public policy at the University of Michigan and founder of Platypus economics, his new YouTube channel, which I encourage you to go check out. It's also a substack and a podcast. Justin, always appreciate it. Thank you.
- [19:55]
Ed Elson
Great pleasure.
- [19:56]
Host/Interviewer
Ed after the break, why Chip Stocks are on a tear and by the way, we are heading out on tour at the end of the month. So for more info and to get tickets to a show near you, head to profgemarketstour.com.
- [20:14]
Sponsor Representative
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- [22:30]
Podcast Advertiser/Announcer
support for the show comes from Amazon. There are the things you can plan for a first birthday party, a movie marathon, A renter friendly bathroom reno. And then there are the things you can never plan for. A surprise rainstorm, A Blu Ray player calling it quits. Stick on tiles that looked way better on the package for all things planned and unplanned, Amazon has you covered. You'll find low prices on everyday essentials and last minute lifesavers. Shop Amazon and save on essentials. Save the everyday foreign.
- [23:12]
Host/Interviewer
We're back with Prof. G Markets. Chip stocks just posted their biggest run on record. Over the past six weeks, S&P 500 semiconductor companies have added nearly $4 trillion in market cap. Chip stocks now account for almost a fifth of the entire S and P. And three companies, tsmc, Samsung and SK Hynix, account for more than a quarter of the entire MSCI Emerging Markets index. Meanwhile, an index of semiconductor companies hit a record high on Monday and is up 65% year to date. However, the index did fall 3% yesterday as traders took profits following all time highs. So here to help us break down what's happening in the chips market and what is driving this rally, we're speaking with Stacy Razgon, Managing Director and Senior Analyst at Bernstein Research. Stacey, thank you for joining us. It's just some unbelievable numbers here. SanDisk up 50% in the past month. Micron up 78%. Intel 80%, AMD 80%. I mean, all of these chip stocks are just tearing right now. And I guess the question is why is it happening right now as opposed to say a year ago when Nvidia was also tearing?
- [24:31]
Stacy Razgon
Yeah, to be fair, we've had a number of names over the last year or two or three move like this, but we haven't seen the whole group broadly move like this. And I think it's a few things. First, there's been a real appetite to play other names, I think in the AI supply chain. And frankly, AI is now getting so big that it's dragging everything along with it right now. It started with the GPUs and the accelerators a year or two years ago or whatever. And then one at a time, different other end markets that are more peripheral to it but important for it have come into focus. We went from the GPUs and accelerators and then we went to memory and then semicap and then optical and then power semiconductors and more recently CPUs. And so one at a time, as demand has grown and grown and grown, it's sucked a lot of these other things into it and driven unexpected upside. These were not areas that investors broadly were looking at for upside from the AI trade. So I think that's one. Secondly and maybe explain some of the recent ramp to your point. I mean, I think the SOX index, which is a broad index of semiconductor stocks, is up at least as of Friday. I'm not sure how it ends up today, but as of Friday was up 66% year to date and it was up almost 50% since the beginning of March when earnings season kicked off. Earnings estimates have actually exploded to the upside. And if you look at the interplay between earnings and multiples year to date, multiples valuations in the industry year to date are actually down slightly. All of the growth in the stocks has been explainable via growth in earnings estimates. We've actually had just a huge cycle of positive revisions in earnings across the board, probably most pronounced in memory. But we've seen earnings go up like pretty much across the board. And I think finally there's been a real scramble because not all investors maybe have been involved. And frankly, if you haven't been there, given the magnitude of the move, you're starting to get into the realm of potential career risk if you haven't been invested in these things. And so I think there is a lot more interest and attention being placed on the space now, and that may be driving some of this. And maybe a fourth thing, which at the margin probably drives volatility. I don't know how much of the upside it drives, but, I mean, you have a lot more retail involvement as well. And so that probably does drive a little more volatility and maybe more willingness to buy some of the narratives over some of the other fundamentals that are there. So I think it's a combination of all those four things that have taken the stocks up, but they've really been on a tear.
- [27:15]
Host/Interviewer
Yeah. On the one hand, it almost looks like it's just expectations, speculation, momentum. I mean, people talked about GPUs, and then suddenly CPUs are hot, and now memory chips are hot, and suddenly everyone decides, oh, we're very excited. But to your point, I mean, if the fundamentals are there, if the earnings growth is there, and if on an earnings multiple it's actually gone down for a lot of these names, then maybe it's not too much of a concern. And maybe that means that there actually is still more room to run, despite the fact that we've seen these ridiculous charts.
- [27:49]
Stacy Razgon
Yes, there's a relevant debate on how sustainable are these earnings. Let me take memory, just an example, because that's where I think we're seeing the more extreme behavior. I don't cover the memory space. It's a colleague of mine. So I will refrain from discussing investment conclusions on these. But just on a factual basis, take a company like a sandisk, they just guided to an earnings next quarter that is higher for that quarter than the entire stock price was 18 months ago
- [28:17]
Ed Elson
when they went public.
- [28:19]
Stacy Razgon
I'm gonna make up the numbers, but it was. They guided us. I can't. Something like $32 a share and it went public at like 30 bucks or whatever it was 18 months ago. So on that basis, 18 months, it was trading at like 0.25 price to forward earnings. I mean, it's just been amazing how much. And memory is its own special case. Right. But. But you have that. You've also had multiples in memories come down. Actually probably the most of everything. The multiples are probably down 20% year to date on an average basis, some more, while earnings estimates have, I don't know, quadrupled or quintupled, something crazy. And the reason is, you know, investors, you get worried when numbers go up that much. You worry that are we close to peak? Right? And if you're worried close that you're close, you're going to pay less for that, for that earnings. And so that's some of the dynamic, I think, not just in memory, but I think broadly we've been seeing, and I think that is where the debate is, are these earnings sustainable? The level of AI CapEx that we've seen from the hyperscalers, where we're getting not that far off of a trillion dollars this year, are those levels of sustainable? How much more can that grow? These are the kinds of conversations I think that investors are having as they're trying to evaluate whether or not the stock still makes sense to be in or not. But for now, the fundamentals have actually been fine. Like I said, earnings have been growing. And at least from a demand standpoint, at least within the AI space, it doesn't look like we're seeing any signs of slowing at this point. We can talk about some of the other end markets, but I mean, AI is really the driving force behind everything. And by the way, in and out of semis, if AI demand ever does roll over, like we're all screwed in semis and out of semis. It almost feels like even in the broader economy, it's the data center spending and AI spending that really is supporting everything right now.
- [30:09]
Host/Interviewer
The sustainability of earnings seems to be such an essential point here because we are seeing a lot of people pointing to the earnings saying, okay, everything's fine. But at the same time, I mean, we're witnessing what looks to be a little like a little bit of a gold rush, but for data centers. And that is the reason that all these stocks and all these or their products are in demand is because everyone's trying to build a data center right now. But I guess the question is like, are we going to be building data centers this many data centers perpetually into the future? The answer seems to be, logically speaking, just no. I mean, once you've built the data center, it's built. But what do you think?
- [30:50]
Stacy Razgon
Well, I mean, it depends on how much compute you need. And so this gets now to the usage and the return on these assets. And again, it's still early days, right? And the amount of revenue that is getting generated from these assets is still probably relatively small. Most of the spending we've seen so far has been used. They built these massive compute clusters to train these models. I don't know how much your listeners know about AI models, but you can sort of think about like a massive amount of data and parameters that have to be set to create a model that can perform a task. And so most of the compute spending so far has been to train these models. So what we need to see is these models actually get used more for something. Right. This is actually called inference. Right. And it's still early days, but we're already seeing evidence. You can take a company like an anthropic, for example, who discloses their annualized run rate of revenue, and anthropic makes something that's called claude, that's used for, you know, for agentic coding, for example. This is where you can actually use the AI model to help you code. And I mean, their revenue's gone vertical. I mean, as of the most recent announcement, which was I think a week ago, maybe there's something like 44, $45 billion of revenue annualized in April, I think they. I can't even remember. They were at 30 billion or something. And in like January they were at 14 billion, and in December they were at 9 billion. And a year ago they were, I don't know, 1 billion, maybe even less. So, I mean, and this is probably a good example of an application where customers are absolutely willing to pay for it and their revenues have gone vertical. Right. So the question of whether or not we need to keep building all this data center, either not as much or much more, comes down to how much computer are we all going to use? Like, how many tokens are people going to use? And I don't know the answer yet, but right now it's going literally vertical. So that is something I guess we'll have to see as we go forward. But as of right now, the only thing we're hearing from any of these folks is that they don't have enough compute.
- [32:57]
Host/Interviewer
Just to wrap up here, some investment conclusions. I mean, it seems to me that you shouldn't necessarily bet the farm on semis, but it doesn't seem like a good idea to not be invested in semis. I mean, whatever happens in terms of AI, I mean, what are the investment conclusions at these prices?
- [33:18]
Stacy Razgon
Like I said, semis and AI spending in general are kind of driving almost everything in the industry and kind of everything in the economy right now. And it's understandable because right now you're building out the infrastructure, and these are key components of the infrastructure. And I think you can look at the returns we've seen so far. And again, the question is, is it sustainable? If it's sustainable, I don't, I don't think that the performance that we've seen at this point has been, has been crazy. And you can decide where, where, where you want to play if you're in, in semi. Again, we've liked, you know, we've liked the, you know, the accelerator names, the Nvidias and the Broadcoms of the world. I'd like Semicap, the guys that actually make the equipment, that make semiconductors. If all of this demand is really going to be true, you know, we need more, more chips and more wafers, and that requires more equipment. So these are the kinds of things that, that I, that I've liked. And again, what is Rush? It's always the guys that are making the picks and the shovels that are making the money. So all these guys are making the picks and the shovels. And then over the long term, we'll see what the usage looks like.
- [34:18]
Host/Interviewer
Stacey Razgon, MD, and senior analyst at Bernstein Research. Stacy, really appreciate your time. Thank you.
- [34:25]
Stacy Razgon
Yeah, you bet.
- [34:29]
Host/Interviewer
The Financial Times revealed something striking yesterday about the state of AI, and that is that Amazon employees are faking their usage of AI in order to not get in trouble at work. Now, that might sound a little ridiculous, so let me explain. Earlier this year, Amazon made it its mission to adopt AI in the workplace as much as possible. Their Target was for 80% of developers to be using AI every week. And they even created an AI leaderboard which tracked who was using AI the most at the company. Now, the result was that employees did start using AI more, but as the FT reported, they weren't using it to get actual work done. Instead, they were using it for meaningless tasks, with the ultimate goal of showing their managers that they are indeed adopting AI. One employee said that workers at the company are simply using AI to, quote, unquote, maximize their token usage. And another said that it has created, quote, perverse incentives and that people are, quote, very competitive about it. By the way, a similar dynamic has cropped up at Meta, which is also using AI leaderboards. And employees are now engaging in what is known as token maxing, which essentially means using as many AI tokens as possible to rise up the ranks of the AI leaderboard and impress your boss. There is an economic term for this known as Goodhart's Law. It's named after British economist Charles Goodhart, who said that, quote, when a measure becomes a target, it ceases to be a good measure. And in this case, that measure is AI adoption in the workplace. But unlike most measures, this one has become the underpinning of the entire trajectory of the stock market. And so what these anecdotes at Meta and at Amazon are telling us is that this measure is probably no good. Yes, we are buying chips, and yes, we are using AI. But in this case, that usage isn't actually real. And if it isn't real, well, then the question becomes, is the demand for AI actually sustainable? To which the answer is maybe, probably no. Now, to be clear, does this mean that all of the AI usage is fake? Or forced or contrived?
- [36:55]
Stacy Razgon
No.
- [36:55]
Host/Interviewer
There are still hundreds of millions of people who choose to use AI every day because they do find it genuinely useful. But the question is, how much of it is fake or contrived? We don't yet know the answer to that question. But when we do, rest assured, it will either make this market or break this market. Because as we've said before, the economy and the stock market are now a giant bet on AI. Okay, that's it for today. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our video editor is Brad Williams. Our research team is Dan Shalon, Isabella Kinsel, Kristen o' Donoghue and Mia Silverio. And our social producer is Jake McPherson. Thank you for listening to Profg Markets from Prof. G Media. If you liked what you heard, give us a follow. I'm Ed Elson. I will see you tomorrow.
- [37:51]
Ed Elson
Mom, can you tell me a story?
- [37:53]
Podcast Advertiser/Announcer
Sure. Once upon a time, a mom needed a new car. Was she brave? She was tired mostly. But she went to Carvana.com and found a great car at a great price. No secret treasure map required.
- [38:03]
Host/Interviewer
Did you have to find a dragon?
- [38:04]
Podcast Advertiser/Announcer
Nope. She bought it 100% online from her bed, actually.
- [38:08]
Ed Elson
Was it scary?
- [38:09]
Podcast Advertiser/Announcer
Honey, it was as unscary as car buying could be.
- [38:11]
Ed Elson
Did the car have a sunroof?
- [38:13]
Podcast Advertiser/Announcer
It did, actually.
- [38:14]
Ed Elson
Okay, good story.
- [38:15]
Podcast Advertiser/Announcer
Car buying you'll want to tell stories about. Buy your car today on Carvana. Delivery fees may apply. Some follow the noise. Bloomberg follows the money. Because behind every headline is a bottom line. Whether it's the funds fueling AI or crypto's trillion dollar swings. There's a money side to every story. And when you see the money side, when you understand what others miss, get the money side of the story. Subscribe now@bloomberg.com.