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OpenAI's Viability, UAE to Exit OPEC, and Climbing Consumer Costs 4/28/26
00:43:52
Renewed concerns over OpenAI's massive spending following a Wall Street Journal report, but journalist and author Sebastian Mallaby raised that issue back in January. He lays out the four problems he sees facing the company. OPEC set to lose one of its members after nearly 60 years. Plus, with gas prices hitting 2022 levels, a look at where else costs could climb as the Iran war continues.
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to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Landsford for this information packed daily market Preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe@schwab.com Market Update podcast or find Schwab Market Update. Wherever you get your podcasts, you can
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you're listening to the Exchange. Here's today's show. Scott thank you very much and welcome to the Exchange. I'm Kelly Evans and OpenAI is in the hot seat on two fronts today, in a courtroom in Oakland and on Wall street where its publicly traded ecosystem is selling off. Today, the Wall street journal reporting that OpenAI missed key internal growth targets, raising questions over its massive AI spending and whether it can meet its obligations. And that down the broader AI trade today, from the chips to the memory names to the energy and cooling plays that all go into massive data centers for customers like OpenAI. The NASDAQ is down nearly 1.2% after record highs yesterday. Also yesterday, Roger McNamee on this show called OpenAI not a real company and said it looked like more of a bubble. Before that and before the Wall Street Journal's report, there was Sebastian Malaby. Back in January, he wrote an explosive op ed in the New York times predicting that OpenAI would run out of money. He's written a new book on the AI race called the Infinity Machine. He's a senior fellow at the Council on Foreign Relations and he joins us in our opening exchange today. Sebastian, welcome to the program. It's great to have you here.
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B
Great to be with you.
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C
What tells you that this company is genuinely going to have a hard time meeting all of its obligations?
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B
So it's partly the burn rate, right? They had an internal document which leaked back in January which talked about 660 billion of burn between now and 2030. That's just an incredible amount. No amount of record breaking fundraising by Sam Altman could Get you to that number. So they can cut some of the costs. They can pull out of the investment agreements that they've made. They've already cut sora, the video generation model, so maybe they can control the burn. But then you get to the second thing, which is valuation. Right. The announced paper valuation is way above the secondary market price when secondary stocks are trading in the private market, which tells us that private investors just don't believe the company is worth what it pretends to be worth. And so if it were to go public, or even if it tried to raise more money in a private round, it would probably be a down round. And that is very damaging to the morale of the existing investors, the existing employees who have stock options. And once you start to pop that bubble of kind of forward momentum, then I think the writing is on the wall.
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C
And to broaden it out, the question for the markets this year, Sebastian, has been what to do about the shortage of compute. There's literally not enough data centers, there's not enough compute to meet all of the capex obligations and all of the build out that these major chat bots want to pursue. Does this call that into question? Because OpenAI has two choices now. They can pull back on those plans in order to conserve capital, or they can double down and hope that it pays off. If they double down, that means huge demand for the ecosystem. What happens if they pull back?
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B
Yeah, I mean, my view is that there's an open air bubble, but not an air bubble. Right. And what I Mean is that OpenAI has an A plus technology but a C minus business model. It's got a basically a kind of consumer focused chat bot which is a little bit of a commodity when you compare it to Gemini or to the anthropic competitor. So it's tough to make people pay. And indeed we see that only 5% of the ChatGPT customers actually do pay. So I think they've got a problem. But I think the broader ecosystem, as you say, is short on compute. So if you are in hardware and you're selling compute, you're in a great position. And I think that the fact that anthropic, one of the reasons why it was happy to restrict the release of Mythos is because it didn't have enough compute to actually deliver the model to everybody at the same time. And there were safety reasons too, but that was another one. And so I think there is so much pent up demand for semiconductors that the semiconductor stocks should not be selling off.
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C
Right.
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B
I just think it's Open Air that's in trouble.
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C
And that would probably extend then to some of the names we showed earlier like a Lumentum which makes photonics that go into data centers or you know, the memory names, as you said, the cooling names. Vertiv is down 8% today. It's been one of the best performers of the past couple of years. So if that's correct, is there anyone, and I don't know if you know the answer to this, anyone who's locked in to the open air ecosystem who would be more directly affected by their binary choice at this point point to either pull back on their spending plans or to double down and hope that they can stay profitable long enough to justify it?
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B
No, I think the people who are affected are simply the Equity investors in OpenAI People like Masayoshi Son and, and others who have put real money and there's a lot of their commitments to Open Air which actually conditional they're in the future. That's like if you go public then we give you some more money. But the ones who have really handed over actual cash, those are the people who are going to lose.
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C
Understood. They also have the retail public that they're potentially going to court and market to. And listen, we've been pressing them to go public more quickly. It'd be nice if a lot of these growthy companies would do that and give us all a chance to get a piece of that for better or for worse. But now the timing comes at an incredibly awkward moment. You've written that you think they ultimately will end up being acquired by the likes of Microsoft. Could something substantial like that happen that forestalls the ipo?
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B
Well, these are two different kinds of exit. One is the ipo and I think there the threat to the IPO is simply that, you know, this negative news is leaking out. There was a long New Yorker article attacking the character of Sam Altman. There's this public trial with Elon Musk which started just yesterday. So there's a lot of, you know, negative sentiment, sentiment in the media about Sam Altman and OpenAI. That's not good. If you're trying to go public, then the other kind of exit is you, you know, you sell to another acquirer. I think that's more likely it would happen at a discount. But in terms of compute demand, that's fine, right? I mean the same team of scientists might be suddenly working for Microsoft or for Amazon or someone and they would still be building models, they'd still need compute. And so the rest of the ecosystem would be Fine.
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C
The rest. So let's go back then to those strategic options that you, that you wrote about. And with Google, its big competitor who came out, you know, we used to have a couple of us in the household paying for chatbots. We didn't need to once Gemini was a viable option. I'm sure there's lots of others who have made that switch over. Google has an entire business, you know, variety of businesses that, that it can pursue. So could OpenAI should OpenAI at this point be looking to a strategic partner instead of an ipo?
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B
Yeah, I mean, I think the other problem they have made is not to do what Anthropic did is to. Anthropic is targeting enterprise customers who actually pay real money for the product. So Anthropic shows us that there is a path for an independent player which doesn't have a deep pocketed parent to make it because I think Anthropic probably will go public. Okay. But if you compound the strategic error of targeting the retail side, which tends not to pay, and you get over your skis in terms of your valuation and you have an implausible burn rate and you have a public relations problem because there's a New York article attacking your CEO, you know, I think that's, that's, that's when you're in trouble, perhaps,
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C
or, or perhaps the broader public would still be happy. So I don't know if there, if there's a point of view, if you're this company, if one is better than the other, if it is better to double down and push for the ipo, even if it's a down round, it's still going to be a big valuation. I'm sure they still think they have a bright future and you're going to kind of come up with something in terms of the business model. I don't know if they can, if they should just say, listen, you know, this is still one of the most innovative new technologies. We were synonymous with AI until the likes of Anthropic and Gemini came along. And maybe that'll be enough for them to, for the IPO at least to go over decently.
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E
Yeah, right.
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B
That's why my prediction back in January in the New York Times was that there was a 50% chance of open Air failing by the time we get to the summer of 2027. I do think there's a 50% chance they make it because, you know, Sam Altman is a brilliant fundraiser. The public retail investors may have an appetite for the stock because they just want a piece of the future. You know, that's all one, one set of possibilities. And if by the time you go public then you can suddenly issue more bonds, you can do rights issues, you've got a bunch of ways of raising capital and maybe you can deal with the big capital expenditures. So I don't rule it out. I just think that there is a 50% chance that it doesn't work and you know, they need to be absorbed by a more deep pocketed hyperscaler.
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C
And finally those companies, and I can name a few, for instance Microsoft, for instance Apple, I don't know if you would agree with those or suggest any others. Should they try to be. I mean look, this is still a massive valuation even for multitrillion dollar companies. We're talking about spending 7, 8, $900 billion. I don't know what the number is. Should they wait to see if this implodes or do they try to do something strategic now? Because it might work, but this could be a moment to get their hands on something, especially if they've been, you know, Microsoft was its partner. Apple doesn't really have something specific like this. They could more easily fold it into Siri and whatnot. Should they seize a window that might close if they don't act now?
- [10:52]
B
You know, it's super interesting because I think if you'd asked the question a couple of years ago, the answer would have been, you know, there'd be a strategic buyer in a flash. You know, when Sam Altman was temporarily defenestrated at the end of 2023, remember he was fired for about four days. Satya Nadella at Microsoft made an offer to all of the OpenAI researchers who wanted to come over to Microsoft. You know, you all have a job. He said, you know, I'll take Sam, I'll take any of you want to come. And so there was just this enormous appetite to kind of acquire or sometimes acqui hire teams like that. I think today the market is a bit more discriminating because some of these acqui hires haven't worked out all that well. And I think, you know, there could be a case for the hyperscalers kind of hanging back, letting the secondary price drop more for open air, getting at a slightly cheaper price or maybe just picking off the individual scientists who look to be good. Because the big thing in this whole game is, you know, the internal staff have stock in my, in open air once the stock starts to fall in the secondary market and then maybe there's a down round which kind of, you know, vindicates that fall in the secondary market, then you're going to have people who are working at OpenAI and saying, Gee, you know, my stock's not worth so much, maybe I'm open to an offer elsewhere. And then you get a bidding war for the individual talent as opposed to the purchase of the entire group.
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C
Right. And then what's left behind obviously faces the challenge of what, you know, what to do when the stars begin to leave. Sebastian, thanks. We really appreciate you making the time to join us with this update on what may be going on behind closed doors. Appreciate it very much.
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B
My pleasure.
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C
Sebastian Mallaby, let's talk about the market impact. With four of the Mag 7 reporting results tomorrow, what happens if we're going through an open air bubble, as Sebastian just put it? Joining me now is Chris Heisey. He's the Chief Investment Officer at Merrill and B of a private bank. Chris, it's great to have you here. And there are probably implications more directly for the likes of Nvidia, Microsoft. I'm just trying to think through this if OpenAI does stumble here or have to pull back at all on some of its investment plans.
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F
Yeah, I think, you know, the way I like to describe this is, is every time there's a parabolic move or even just a sharp move in any one corner of the market, let alone the AI train, there's a wedge that comes in. We saw that with Deep seq, we saw that with some aspects of the data security and where disintermediation turned into potential exaggeration on what's going to get disintermediated. Now you're talking about potential sales growth slowing at a very important component of that. If you put that all together, Kelly, it's, it's like going to the beach. You're ready, you're excited about it. The weather forecast is there and a thunderstorm comes and it moves everybody off the beach. But you stated out, you stuck it out and you enjoyed the rest of the day. We've seen this time and time again in the build out and I think this is giving investors an opportunity to reassess their portfolios and leg into some of the names that are falling with this particular item we're showing in video
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C
on the screen, which you know has finally had more momentum lately. It's down 3 or so percent now. It's obviously in Nvidia's interest to make sure that there are healthy competitors to Gemini, which is powered by Google's own chips. But for Nvidia, perhaps that partner can be anthropic it doesn't necessarily have to be OpenAI. So as long as there is some viable competition to Gemini, it seems like they can still kind of sit pretty here.
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F
Yeah, you were talking about this before. In terms of the race for compute, that's still going to happen regardless. There's enough, more than enough to go around. It's one of the reasons why capex is, is still running at a very aggressive clip, looking out next year and then the year after that. And there's always going to be these stories that kind of poke into that argument that gives investors an opportunity to come back in and buy on some weakness. But it's the race for compute that is still essential to this build out. And that's where all the chips stack plus software does come into, into play together. It's not just one or the other. It's actually working in partnership with each other. And obviously we didn't even talk about power generation, some other, other components that are needed as well. It's a race for the supply. That's, that's the best way to put that.
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C
Would your advice, Chris, be for clients to stick with the whole AI build out amid that shortage no matter what ends up, no matter what the fate of OpenAI in particular ends up being?
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F
Yeah, I think, I don't want to go too far back in time here, but if 20 years ago was all about demand, trying to ignite demand, whether it's because of Federal Reserve policy or just trying to ignite global demand in general because there was so much supply, now it's the opposite. You have very little supply. You don't have to worry about demand. You're trying to increase supply to match the demand. And that is a very healthy marketplace. So when you get corrections like this, the cyclical end of the business outside of tech starts to work. Well, you're starting to see some of the financials come back. So there's changing in leadership by the day or by the week. But the one big story that's still undersupplied, it's the air train.
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C
All right, it sounds like you're sticking with everything in that ecosystem. You said you remain overweight equities. Does Iran war possible? You know, people say the market tests. The new Fed chair. Does all of that move to the back burner then for you mid term year?
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F
It kind of does move to the back burner, but it's always in the front of your mind. And it's because there is more likely volatility coming. We know that that's what history has told us about midterm elections in general, we haven't even put that at the top of the list of investor concerns yet. It's still about the military campaign and conflict in the Middle east because potentially an oil shock, and I don't want to use the word shock, but some component of a shock could be down the pike, which might create some stories about whether or not the consumer can actually pay for that potential shock that's likely to come as well. There'll be some excuses through the summer, but this equity bull wants to run. It's taking a breather from time to time. As long as profits continue to move forward at a particularly healthy clip like we expect this bull momentum run is still intact.
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C
All right, Chris, thanks for joining us. Making time by the way then for you for this big Wednesday with all the big tech names reporting and whatnot. What is at stake for you in that earnings period?
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F
I think what's at stake is what we've said from, from quarters past, etc. If you get one big miss, it's going to call into question the entire chain of it. That one big miss is natural. It's normal, it can happen. It's a reset. These companies are ginormous, but they could still change their business models and we've seen that time and time again. So we would use that weakness if it should happen as a buying opportunity across a diversified set of other areas as well, not just within tech which were neutral. But tech is a big weight in the s and P500. So being neutral, you're still heavily exposed.
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C
And where else then do you feel higher conviction about sector wise industrials?
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F
Industrials is an area that actually gives you very good bookends of what the data center guts are to all the way over to aerospace and defense. And then financials should benefit from, simply put, stability of rates. And that's a, that's a key component to large diversified financials.
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C
All right, Chris, really appreciate it. Thank you for joining us today. Chris Heisey with Merrill and B of a private bank. Coming up, big announcement, the UAE saying it will exit OPEC this Friday after nearly six decades with the group. What does it mean for oil prices and for global production? That's next. Plus consumer confidence inching higher this month to its highest reading of the year. That's despite higher gasoline prices and the war with Iran. What's behind the optimism? We'll get into that when the exchange returns.
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think big to accomplish big things. Julia Boorstin hosts CNBC Changemakers and Power Players. New episodes every Tuesday, wherever you get your podcasts. The United Arab Emirates says it will exit OPEC at the end of this week. They didn't explicitly state why, but the move comes after weeks of missile and drone attacks by fellow OPEC member Iran. The UAE has been part of the group since 1967 and was its third largest producer as of February. So for more on the impact to the markets, let's bring in Denton Cinque Grana, the chief oil analyst at OPUS Denton. Great to see you and what are your thoughts?
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J
Likewise and thanks for having me back. Yeah, when I woke up this morning was not expecting to see that headline and you know, no two weeks notice just said hey by we're out on Friday.
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C
You think they should give two weeks notice? As if they're, you know, joking about that. I'm teasing you as well but so explain to us the historical significance of their membership. They are a very large producer. Have they given any reason for leaving and what does that mean for the future of OPEC now?
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J
Yeah, no reason that that I've particularly seen. However, you know when you dig into the numbers a little bit, you could see UAE were pretty frustrated so they've been asking for production quota increase over the last several years now that quote is up to 3.5 million barrels a day. But they're produced, they pre war were producing about 4.7, 4.8 million barrels a day and in 2027 have plans to go up to 5 million barrels a day. Yet when you look at it that way, it's hard to justify that investment when you're only when you're being capped by those other members of your group. So I think that's when they said, hey, you know what, we're leaving. We want to produce, you know, up to 5 million barrels, maybe even more if we could get up there. So they're playing. To me it seems like the market share game versus the kind of control supply and demand and keep it balanced. I think that's their long term goals. But again this is not something that's having an impact on the market today. But it could come down the line once obviously everything clears up. In the Middle east that we're currently
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C
dealing with, oil prices are on the rise today. WTI is up 4% to 100 Brent. Two and a half percent is higher than that. So could it be a positive if unexpected outcome that the war in Iran has caused the UAE to leave OPEC because it wants to produce more oil? More oil means the oil price globally should ultimately come down once this passes. Right?
- [22:47]
J
Yeah, no, I think that's a, that's a great way. Kind of a line of a chain of events that you would think would happen with the UAE becoming a non OPEC member now along with the United States and Canada, Brazil, Guyana, you name them that are all non OPEC members, they are now part of that crew. They are not adhering to any sort of production quota. They can produce as much as they want. And it's like I said before, I think this is them trying to go after more market share at the end of the day.
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C
So who is left in opec? And if Iran's a member but is at odds with its Gulf neighbors, what is the future of this alliance likely to be?
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J
Yeah, this certainly weakens OPEC with, as you mentioned, one of the larger producers within the group leaving as of Friday, certainly weakens the group's ability to kind of manage supply and demand. Spare capacity, a phrase we're all quite familiar with when you follow opec. And the UAE was one of the countries that was doing a lot of the heavy lifting on the spare capacity side. So now it's really just the Saudis with significant spare capacity to step in should there be some sort of emergency. Now granted, we are in a bit of an emergency right now. However, with production being limited in those Persian Gulf countries, even with the price being what it is, the Saudis would not be able to raise production too much anyway.
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C
Could OPEC collapse entirely now?
- [24:16]
J
You know it's not that far fetched anymore, especially with one of the strongest long term members really just walking away.
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C
Fascinating. And finally Denton, do you know what proportion of global oil supply is now coming from non OPEC versus OPEC members?
- [24:34]
J
Yeah, it's the scales are really tilting more towards the non OPEC side of things. And again, even before the war you still had a heavier percentage of barrels coming from non OPEC sources rather than OPEC sources. So again, with OPEC production being shut in, particularly in the Persian Gulf, that scale is going to tilt more towards the non OPEC producer.
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C
And for now we know production is still heavily affected, but this gives you a glimpse of what we could be looking at as it hopefully clears. Denton, thanks very much. Appreciate it.
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J
Absolutely. Thanks for having me.
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C
Denton Cingo with OPUS Coming up, we're tracking the fallout of The Wall Street Journal's report that OpenAI missed internal user growth and revenue targets. What impact will that ultimately have on data center spend? We will dive into that next.
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This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Join host Keith Landsford for this information packed daily market Preview delivered in 10 minutes or less, including projected stock updates, monetary policy decisions and key results and statistics that may impact your trading. Download the latest episode and subscribe@schwab.com Market Update podcast or find Schwab Market Update. Wherever you get your podcasts, the Jack
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blooms at 1-800-FLOWERS.com/SXM that's 1-800FLOWERS.com/sXM. Welcome back to the Exchange. Slight retreat for the S and P. A little bit more so for the Nasdaq from yesterday's record highs. Again the Nasdaq weighed down by the data center trade. The Dow is about flat a little bit in the green today. Centene is leading the S and P after beating earnings estimates and raising its full year profit guidance by 13%. These shares are hitting a 10 month high and are on track for a four day win streak. They're up 25% in that time and Coca Cola is leading the Dow, perhaps helping it stay in the green after its earnings beat, reiterating organic sales for the year but raising its full year EPS forecast. The shares are on pace for their best day since 2020. They're up five and a half percent today and they're up 14% since the start of the year, outperforming the consumer staples XLP ETF nearly 2 to 1. On the flip side, Oracle trading lower today after that Wall street journal report on OpenAI missing user growth and revenue targets. Oracle has a contract to provide $300 billion in compute for OpenAI over roughly five years and that accounts for the majority of Oracle's huge cloud computing backlog. It's not the only stock on the move from this report either. Christina Parts the nebulous has more Christina
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K
well Kelly, chips are the other sector really getting hit after this Wall Street Journal reported opening. I CFO is worried about paying future compute bills and so that's what's hitting the sector. Nvidia AMD down about 3%. Broadcom also selling off. You can see just a sea of red today but investors are saying there's nothing genuinely new here. Semis were up roughly 40% month to date before this news came out. The group just really needed a reason to pull back and this is the reason. And remember to OpenAI just raised $122 billion, the largest funding round in Silicon Valley history. So the bulls will say there's cash there for them to spend. There is important context on the exposure though. OpenAI is on the hook for roughly $1.4 trillion and infrastructure commitment across Oracle. Kelly, you just mentioned the 300 billion, Microsoft potentially 100 billion with Nvidia, Broadcom, Amazon. Corey, the list continues. But most of these are letters of intent or milestone based, not actual signed take or pay contracts AKA they're not going to be paid out Full term right away. You know in the revenue line for OpenAI the two companies most directly tied to opening are actually pushing back a little bit. Oracle telling CNBC quote it's incredibly excited about the partnership focused on delivering the the capacity OpenAI needs. Core Weave making a little bit of a different argument that OpenAI is a quote terrific partner but not its only one pointing to a diverse customer base including Metta, Google and saying demand continues to exceed supply across the ecosystem. And that's possibly the part the bears are missing missing. The entire ecosystem is short on Compute Theory ventures noting Nvidia GPU rental prices surged over 100% in just six weeks. That just speaks to the level of demand for these chips. Intel they just had in their earnings report last week that they are keeping the hiking prices of their CPUs, their central processing units. Memory demand keeps exceeding supply which is why companies are willing to sign on with these one to three year deals and tomorrow every hyperscaler reports and the base case is they just all talk up capex so the demand picture doesn't appear to be breaking. It's just the soaring AI hardware sector that maybe needs a reason to breathe.
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C
Kelly, I'm so glad you showed those rental prices that in some ways is the central data point for the entire markets right now. I don't know if we can get a daily or hourly update on that. Oh you can.
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K
There's websites that track all this and that is also a very, very big bullish point for neoclouds, especially Corey because these prices go up. Corey was renting these GPUs as a service and it just also speaks to how desperately companies need these chips, even Intel. The fact that they were able to get rid of chips that they thought were end of life, they are really, they were just going to be gone with it and all of a sudden they're selling older chips because people are so desperate to get that compute they need.
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C
Amazing story Christina. Thank you. Thank you Christina Parsonevolis. Let's get to Leslie Picker now for the CNBC news update. Leslie.
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H
Hey Kelly. Ukraine is threatening sanctions on Israel after Russian ships with what Ukraine calls stolen grain arrived at the port of Haifa in Israel. The grain reportedly came from Russia occupied territory. Israel's foreign minister responded by accusing Ukraine of conducting diplomacy via social media and not offering evidence of their claims. Federal agents in Minnesota fanned out across Minneapolis today with nearly two dozen search warrants as part of a fraud investigation. State investigators also participated. Governor Tim Wall said that he welcomed the cooperation, saying, quote we catch criminals when state and federal agencies share information. And former NBA player and assistant coach Damon Jones became the first person to plead guilty in a basket basketball gambling scandal that led to the arrest of more than 30 people. Jones pleaded guilty to one count of conspiracy to commit wire fraud and admitted to defrauding sports betting companies by using insider information to gain an advantage. I'll send it back to you, Cal.
- [32:16]
C
Another day, another problem on that front, Leslie, thank you very much, Leslie Picker. Coming up, gasoline prices soaring to their highest level since August of the 2022, $4.18 on average nationwide. And while that didn't deter consumers in April, gasoline may not be the only thing people have to pay more for. We'll dig into all of that next on the Exchange. Welcome back. Households are spending more on gasoline these days. The median lower income household spent 4.2% of income on gas in March according to bank of America. That's up from 3.9% a year earlier, although it's still a point or so below 2022 levels. And the cost of other oil derived consumer products is going up too, like plastics and other things. Pippa Stevens is here now with that story. Hi, Pippa.
- [33:09]
A
Hey, Kelly. So prices at the pump are the most obvious place where consumers are feeling the impact of higher oil prices. But byproducts of oil and gas themselves are actually ingredients in more than 6,000 consumer products. Thank you. Plastic, everything from band aids, crayons, keyboards, exercise leggings, condoms and more. And their key inputs are propane and ethane, which are produced alongside oil and gas. And for the most part, they're priced globally. Prices for polyethylene, which is the most common plastic, have doubled since the start of the war, which feeds directly into end goods. The American Apparel and Footwear association noting that raw materials account for 70 to 80% of product costs costs, calling the current pressures significant, David Navasio, CEO of medical manufacturer Genteel, said, quote, we are without a doubt seeing prices going up due to the effect of the war, adding that many of their products, components are made with petrochemicals. Last week, Procter and Gamble warning that oil at $100 per barrel translates to an annual pre tax impact of $1.3 billion. And of course, Kelly, the rate at which companies pass this along to consumers can vary. But the bottom line here is that their input costs are going up.
- [34:19]
C
These costs, though, like the cost of band aids, is so insignificant that while it may appear throughout the consumer ecosystem, look at Coca Cola today, those shares are up five and a half percent. So I just wonder if it's not yet the cumulative impact of anything like what we went through in terms of size and scale, you know, back in 2022.
- [34:37]
K
Yeah.
- [34:38]
A
So certainly a small individual purchase maybe. But then when you compare, when you compound all of that and the sense that it's gas prices and it's everything that feeds into all these plastics, all these consumer goods, if it all is going up at the same time, that does then start to have consumers feel the burn from that. Especially since prices didn't necessarily come down from the highs they experienced a few years ago. Once these prices go up, they can be very sticky. And so then you're adding on to the inflation we were already seeing. And then it's not just the end products, but it's also transporting that. So the US exports a lot of propane and ethane, it's going to Asia, then it's coming back. And so you think about the transport, it's double whammy. It's the product itself, plus the transportation there and back. And that all feeds into higher costs.
- [35:18]
C
Yeah, I know for a lot of people it feels like kind of the straw that breaks the camel's back, that idea. Pippa, thanks. Appreciate it. Pippa Stevens. In spite of all of that, consumer confidence actually rose in April, although there is rising concern about the impact of the Iran war. Steve Odlin is president and CEO of the Conference Board. Steve, it's great to have you back. What are consumers saying?
- [35:39]
E
Yeah, Kelly, the Conference Board's consumer confidence index was up just a hair. It's really flat and it's been bouncing around sideways since 2022. People are really worried about inflation, but the Consumer Confidence index is more impacted by jobs and their confidence that their jobs are safe. And so we're in a low fire, low hire environment. And so you don't see the big layoffs that we've seen in other cycles. And as a result of that, consumers are feeling pretty good. Their spending is pretty constant. Consumer debt levels are very high, which helps to fuel that. And so, you know, they're feeling okay, but not great. They're worried about food prices or worry about gas prices. And as we just heard, 6,000 items are impacted by oil in some fashion. So inflation is really the key thing. And so therefore, you've got the Fed pretty much stuck in neutral. And the Conference Board is predicting that there will be no movement in Fed rates for the balance of this year. And then you get to the CEOs, and the CEOs are really uncertain. They don't know what their input costs are going to be. Oil, everything else, the inflation. They don't know what their borrowing rate is going to be, what's the interest rate. And, and so that disproportionately impacts the front end of any analysis. Right. The early years. And so they're not investing, they're not firing, they're not hiring, they're just sort of stuck. And that's where we sit.
- [37:04]
C
And yet this is remarkable. We've had a 72% increase in the price of oil. It's $4.18 a gallon. Admittedly, your survey was slightly before this. And what did we learn from your survey? The consumer confidence edged up by a half point to 92.8. Their perception of employment conditions improved slightly, which is often a leading indicator for the labor market. So that's a good sign. Perceptions of labor market and household income six months from now edged up. Who would have expected. I guess it shows you that the oil and gasoline impact is not as significant as we all on paper would have thought it would be.
- [37:45]
E
Well, it's, it's coupled with do I have a consistent, reliable stream of income through my job? And as long, remember, you've got, you know, a huge number of households in America that live paycheck to paycheck. So they're used to this. They adjust based on the paycheck. More gas going in the car that's a little more out. You adjust other things. You know, you eat hamburger instead of steak. Look, the issue is as long as my job feels good, as long as I'm not getting laid off, I've got that stream. I can, can feed my family, I can get to. People can get to school. You know, they're not going to change their, their consumer confidence. If there's any hiccup in jobs, you start to see any layoffs, then bar the door because that, that will really drive it. You know, the key thing here, as we keep saying, is you've got to get the Strait of Hormuz open, plain and simple. It doesn't really matter what goes on on, on land. You've got to get the flow of shipping that will then normalize over the course of many months. So it's going to take a while. Even if there was an agreement today.
- [38:46]
C
Let's finally go back to your point about CEO confidence. If hiring, as always, is the predominant factor here, put it, give us some historical conference, some historical context around the conference board's reading. How does CEO confidence right now compare with what's normal. And is it? I see there's a slight downtick, but is it enough to be worrisome?
- [39:07]
E
Well, it's sitting in neutral. Sitting right around 50 ish, which is between 0 and 100 is neither good nor bad because they don't, you know, what, what is it? Every, every day there's another agreement going on. So the good news is they're not, they're not firing. And this was a lesson that CEOs learned during COVID They did. They acted really quickly in Covid. There were millions of layoffs and then they lost the talent and they couldn't get it back. When they did, it cost them twice as much. So they said, okay, we're not doing that anymore. We're going to talent bank. We're not going to layoffs. That's where we sit. They're not. Yes, there are some layoffs, there's some cost. You know, it's the normal stuff, though. And you're at relatively full employment. You got baby boomers retiring at a very high rate. So that's the supply levels coming down at the same time. So it's, it's neutralized with that. So CEOs are just sitting here waiting to have some sort of normalcy in the global trade situation.
- [40:00]
C
All right, at least things are not falling apart. The sky is not falling, at least for right now, when we'll take that, Steve. Really appreciate it. Thanks.
- [40:08]
B
Thank you.
- [40:08]
C
Steve Odland with the conference board. Up next, we'll go to the California courthouse where opening statements in the Musk vs OpenAI trial are underway. The latest. And the mega cap tech company that Musk is also accusing of wrongdoing. That's next on the Exchange. Attorneys are delivering their opening statements in the Elon Musk versus Sam Altman trial. Kate Rooney is at the courthouse with those details. Kate?
- [40:50]
I
Hi, Kelly. So Musk's team kicked off those opening statements. His team boiled this down essentially to theft. He focused, the lawyer, I should say focused, on OpenAI's beginnings as a nonprofit was not meant to be for the benefit of Sam Altman, as he put it, and the other defendants. One of the quotes he said, no one should be allowed to steal a charity. To steal a charity is absolutely wrong, as he put it, would ask the jury to put an end to what he called this outrageous conduct. The claims right now, breach of charitable trust. That's the big one. Unjust enrichment. And then Microsoft is also a co defendant. They accused the company of aiding and abetting that breach of charitable trust. Altman in Terms of some of the color from inside the courtroom. He has his arms crossed, does look concerned at times, and then Musk looking angry at times, resting his head on his hands, does appear to be intently listening to both sides. Greg Brockman also in the room, the president of OpenAI, Altman's lawyer, though on the other side, is now giving his opening statements and arguments. He's saying essentially that Musk is now a competitor just looking to take down OpenAI says, quote, what he cares about is Elon Musk being on top. We are here, he says, because Musk did not get his way at OpenAI because he's now a competitor. They say he does everything he can to attack OpenAI, calls it a pageant of hypocrisy and then argues that Musk has attempted, did attempt to make this a for profit when he was actually there, at one point tried to merge the company with Tesla. When they refused, he said they said that Musk picked up his marbles and left the company to start a competitor. They also justify some of the reasoning that Open needed to become a for profit. It is expensive, as we've learned in the past decade to build out.
- [42:28]
C
KELLY and what did you say was the other company, Kate, that Musk is now targeting?
- [42:34]
I
Microsoft is a co defendant here, one of OpenAI's biggest investors. Although one of the things that just came out of opening statements, we've got our team inside the courtroom. I'm sort of reading along here. They said the lawyers argued that Musk knew about the Microsoft investment and actually supported it. So we're hearing evidence obviously on, on both sides. But Microsoft is the other big tech name in the room that we're hearing a ton about. We're also expected to hear from Satya Nadelli, CEO of that company.
- [43:00]
C
Even as, as Microsoft, correct me if I'm wrong, has effectively have they fully wound down this partnership.
- [43:05]
I
Now, it's interesting we were talking about this over the last even five years when we look at the Microsoft announcement. Right before this trial kicked off, we had news that that that agreement has actually been restructured. Not completely wound down, but changing significantly. Revenue share is changing. They're sort of moving away from each other while Open Air opens up to other cloud providers and diversifies a bit.
- [43:27]
C
All right, Kate, thank you very much for now. Kate Rooney.
- [43:30]
I
Thanks, Kel.
- [43:31]
C
Coming up, we heard the economy is accelerating from Piper Sandler's Nancy Lazar yesterday, but the latest CNBC survey paints a different picture ahead of tomorrow's Fed decision. Those results, when the exchange comes right back. Fed Chair Powell said the economy was showing, quote, quote, solid growth at his press conference last month. But that was only a little more than two weeks into the Iran war. Steve Liesman has a read on what top money managers, strategists and economists are expecting now with the results from the latest CNBC Fed survey. Hi, Steve.
- [44:18]
G
Hey, Kelly. Yeah, a little bit of a change. Growth expectations in the CNBC Fed survey coming down for a second straight month while the inflation and unemployment outlooks have gotten a bit worse here. 1.9% is the number now for GDP average forecast for 2026. That's down from 2.1% in the prior survey and 2.4% in January for a pretty decent drop there. Two one, though, comes back for next year to right around trend or potential here. The unemployment rate ticking up by just 0.2. So that's not really that bad a deal if we get out of this what we're going through with just a 210 increase from the current rate of 4.3%. Mark Zandi, chief economist over at Moody's, saying that the economy is growing, but it is a fragile growth and the longer the Iran war drags on, the greater the already considerable recession risk. There are 33% in our survey now, the inflation outlook, as you might expect, ticking up as well, 3.1% up from 2.9% in March. 2.6% though, comes back down next year. Yesterday's close on the S&P 71, 73. So we're looking for kind of flattish. This group is for 2026, but a better acceleration to 2027. Respondents just barely baking in one rate cut. This year, 58% of the respondents have one cut or more. The rest see none at all or even a hike. So Warsh will have some convincing to do to markets if he intends Kelly to cut interest rates. And by the way, that is exactly where it's a little bit more dovish, but pretty much where the futures market is priced as well for rate cuts this year.
- [45:46]
C
We just spoke with Steve Odlin as well about how consumer confidence actually rose in April. You know, labor market perceptions improved a little bit. You know, household expectations improved a little bit. Steve, this is a very resilient consumer and economy to a historic oil and gasoline price shock.
- [46:07]
G
I think that's right. I guess the question I have is the extent to which the price is one thing, but I'm just worried about the inventories and the flows if there's more, more or worse to come. I was on the call today with somebody about the issue of fertilizers and the impact there and the impact on food prices down the road. The consumer is resilient and the consumer will see his or her way through a temporary spike. But if this lingers on longer, that's I think when you might expect some change in consumer behavior that would have more of an impact on earnings and the economy.
- [46:38]
C
Right. Or he was saying, you know, keep an eye on CEO confidence, which is, and again he said, and the CEOs are saying, you know, we need the strait to be reopened. But the markets, the markets are at all time highs. WTI is at 100. It doesn't even matter. It's crazy.
- [46:54]
G
I think that's right. I mean, the stock market I think is trading very much on what's happening with AI, both the initial capital investment and the potential impact of it. But you'll notice where rates are, Kelly, interest rates have not returned to their pre war level. They remain in 4.4.3. And I'm talking with people that thinks they might want to be quite a bit higher than they are right now. So that's something to watch out for. Good news is the economy is resilient, has seen its way through several shocks and it might just see its way through this one as well.
- [47:26]
C
All right, Steve, thanks for now. Steve Liesman, Appreciate it and thanks for watching the Exchange. I'll join Brian Sullivan for Power Lunch. We'll pick things up right after this quick break. You've been listening to the Exchange. Make sure you're subscribed to get each episode every day, same time, same place.
- [47:50]
B
Men are struggling with their mental health at some of the highest rates we've ever seen, but most aren't getting the support they need. And that needs to change. I'm Dr. Guy Winch, your host for season three of the Visibility Gap, presented by Cigna Healthcare. This season we're focusing on men's mental health, bringing together real stories and expert insight to explore the pressures men face
- [48:12]
D
every day and why opening up can feel so difficult.
- [48:16]
B
Join us for the new season wherever you stream your podcasts.