Chapter 1: What is the main topic discussed in this episode?
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Bloomberg Tech is live from coast to coast. with Caroline Hyde in New York and Ed Ludlow in San Francisco.
This is Bloomberg Tech. Coming up, President Trump picks Kevin Walsh to be the next chair of the Federal Reserve. We discuss how tech markets are reacting. Plus, Apple delivers record quarterly sales, but the looming threat of rising memory prices, it's worrying investors. And SpaceX is considering a merger with Tesla or with XAI. We'll discuss what we know so far.
Some extraordinary reporting from you and the team. And let's dig into what the macro picture is today, because it is a macro story that dictates these moves. The next Fed chair, is he going to be hawkish? That's the way the market currently thinks. A little bit more, we're seeing the NASDAQ 100 off by 6%. Look, we're up on the month.
And in fact, we're having the best month since October for the NASDAQ 100 and the S&P 500. But on the day, we temper some of our risk on sentiment. We're certainly seeing Bitcoin still not feeling any love. We're now at just 82,000 level at the moment, Ed. dropped by 1.9%. We are down for four straight months, the longest losing streak for this asset class since 2019. And gold and silver today?
Well, you've seen the volatility, and it is all about the macro picture. Yeah, a little underperformance in tech. Let's get to it with Bloomberg International Economics and Policy Editor, Mike McKee. What is the Kevin Walsh school of monetary policy and economics that the world of technology needs to know about?
Well, Warsh is going to be someone who upsets the apple cart, which is perhaps a little bit of his training out in Silicon Valley. He graduated from Stanford and is still a visiting lecturer there and a fellow at the Hoover Institution. He believes that inflation is the Fed's only job, and that's why he gets this hawkish reputation.
And he also is concerned with some of what happened with Silicon Valley Bank and the way the Fed regulates banks. So look for some changes there. The big question, though, is how low should interest rates go? And the president obviously wants very low rates. How do you get there? AI is what Kevin says.
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Chapter 2: How is Kevin Warsh's nomination impacting the tech markets?
He says that AI, along with the big heavy tech investments we've seen and the president's deregulatory agenda, will move things forward. AI will be a significant disinflationary force, increasing productivity significantly.
and bolstering american competitiveness productivity improvements should drive significant increases in real take-home wages a one percent point increase in an annual product productivity growth would double standards of living within a single generation so he's putting a lot of his for a forecast on what silicon valley can accomplish in terms of ai and uh the tech world
What's interesting is what he thinks about labor and how that will be impacted. We heard Fed Chair Powell, the current Fed Chair, just speak on Wednesday about how they see AI making significant impact on labor and indeed more broadly the economy as well. Mike McKee, I wish you could ask more questions. We so appreciate you being here.
But let's talk about how tech is currently underperforming, the dollar pushing higher.
Chapter 3: What are the implications of rising memory costs on Apple's sales?
Here to discuss how Trump's Fed pick, Kevin Walsh, could impact the tech markets. Margi Patel, All Spring Global Investment Senior Portfolio Manager and Head of Capital Allocation. Margi, how do you think the market should interpret this announcement?
Well, I think the market maybe is focusing too much on his interest rate policy and not enough of the other positive aspects that he's indicated. For example, better regulation of the banks.
And also, you can see in the past, one of the things that the Fed did, which I don't think he'll do, was be extremely activist and pro-cyclical, really causing a lot of the up and downs in the economy and the financial markets. Silicon Valley is a great bank, is a great example.
Chapter 4: What are the details surrounding SpaceX's potential merger with Tesla or xAI?
The Fed tightening so quickly that the bank simply didn't have time to adjust its investments to get in line with those much harder short rates. So, I think that a less activist Fed looking at better regulation will actually be very positive for the market and for the economy.
Do you align yourself with the deflationary impact of AI in that respect? Do you agree with Kevin Walsh in that perspective?
I think the jury is out on how much deflation we're seeing because really when you look around in the real world, it really looks as if we are on a track for inflation being higher for longer. Your last segment was about the price of antique cars skyrocketing, gold and silver skyrocketing, even industrial metals, real estate, fine art.
All those things look more what you would think if we were in an inflationary position. backdrop. So that's really what I think we are. I think interest rates at three and a half, three quarters on the funds rate is really quite easy when you look at the financial markets and these other tangible asset markets.
Margie, it's good to see you. It's Ed here in SF. Later in the program, we're going to hear from an interview that I did with the PG&E CEO, Patti Poppe, California's largest utility. And like Mr. Walsh, she argues that all the data centers that are being built will drive down electricity prices, right?
And therefore inflation, just like Mr. Walsh has kind of just been the argument outlined by Mike McKee. I don't understand that. I don't have a degree in economics. But as someone in the markets, would you just give me your interpretation of how that would work?
I don't really follow that line of reasoning either. Clearly, we have a demand for baseload electric generation capacity, and that suggests to me that the price of electricity will gradually go up, even notwithstanding the data centers. So if the data centers carve out arrangements with their providers so that it doesn't feed over into the retail market, the the industrial market.
I think that would be a neutral. But really, I think the real price of electricity is going to go up simply because the cost of building, strengthening the grid, the cost of even building new gas-fired plants is really going to be on the upswing. So it's pretty hard for me to see how the price of electricity could come down.
And I don't think it's closely related to the data centers, which are a big source, 10%, 15% increase in demand over the next few years. is really going to be a deflationary factor when you're dealing with real assets like a generator.
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Chapter 5: What monetary policy changes can we expect from Kevin Warsh?
Apple has had the best supply chain in the world for years. They have $200 billion of product COGS. This quarter, gross margins went up year on year and sequentially, and they're guiding to an excellent gross margin and implied product gross margin next quarter.
Now, when we get later into the year, if they face significant increases in memory cost, they have one lever that they can pull, which is they can raise prices on the devices, or they can raise prices when you get the higher memory spec variant of the product and offset some of those higher supply chain prices. One other thing that I think people should pay attention to
is the way that Apple has vendor non-trade receivables. They've funded production equipment at their suppliers so that they have that superior supply chain. And I think that puts them in a comparatively much better position than everyone else in the tech hardware space. Let's go to the product. iPhone sales were about $4 billion above consensus, 9% beyond consensus.
Even the top end of the range that I saw was about $81 billion. This iPhone 17 generation has been a success, has it not? Yeah. Well, I think there's two things about that you need to appreciate. One is the company is saying they are still considerably supply-constrained. And the day that that supply-demand balance kicks in, they can rebuild channel inventories.
And four weeks of channel inventory is another $15 billion of iPhone sales just to get back to normal distribution and to have warehouses full. So they have a long runway to realize what is now, obviously, this last quarter, 23% growth in iPhone implied in the guidance. We were at 14%. The street was at 8%. Their 13 to 16 implies another 20% growth quarter for iPhone.
And they're telling you there's still supply constraint. So, that to me tells you that you have, again, a much longer runway with this product cycle than otherwise. And obviously, demand is off the charts. And really, it's a concern for everyone else in the smartphone space just how much market share Apple is poised to take. Richard, demand was off the charts in China. 38% growth. What happened?
Well, I mean, some of that, if you look back, was a relatively easy comp. But equally, if you go back to last April or May, you know, we had to buy on the stock and we had to battle all the people saying, oh, Apple is going to get kicked out of China. They're dead there. They'll never sell any more phones. You've got Huawei and Honor and Xiaomi and Oppo Vivo.
And there was this huge negativity about their China position, largely because of geopolitical elements as well. But Apple has shown that they have a huge installed base there. When they come out with a highly attractive product portfolio, consumers flop to it. And they're also seeing good growth in some of the other products there, Macs, iPads, wearables.
and those tend to be first-time Apple customers. Now, they under-index in the China market in services, because there's some services that aren't available there. But, you know, clearly those who were writing Apple's obituary in China was a little bit premature. Apple intelligence isn't available there. I mean, for what it's worth, no one's really raved about it, of course, Richard.
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Chapter 6: How is AI expected to influence inflation and productivity?
And right now they only have about 450 or 500 million of their 1.3 billion installed base of iPhones with AI-capable devices, so the 15 Pro or later. And Apple is now reaching that point where half or more of their base can be the addressable market for a new Siri or AI services.
And I think over time they'll monetize it by getting people to buy better devices, but also adding five bucks to the Apple One bundle for some advanced Siri features. Richard Kramer, fascinating. Thanks for being with us today. I wrote research. Let's talk about JP Morgan.
It's among the banks that have begun selling down a highly anticipated $20 billion debt financing, backing the acquisition of Electronic Arts. Now, the biggest leverage buyer on record, remember? Sources are saying Middle Eastern, Asian, smaller European banks are piling into a term loan A of as much as $3 billion for the video game maker.
Okay, coming up, SpaceX is considering a merger with Tesla or with XAI. We have the Bloomberg reporting next. This is Bloomberg Tech.
spacex is considering a potential merger with tesla or an alternative combination with ai firm xai that's all according to sources bloomberg's lauren grush who covers space kyle porter who's on the transportation beat and both of you involved in in the breaking this story last night uh join us now Carl, I'm going to come to you. What we know, two distinct proposed ideas, scenarios, transactions.
My understanding from sources is that SpaceX investors are particularly pushing this idea of a combination with Tesla. Either way, highly unusual because we thought that SpaceX was on track for an IPO mid-year. What do we need to know? Well, they still may IPO this year. There seems to be a lot of ideas kicking around at the corporate table.
It's certainly faster to do a combination between an existing public company than it is to do an IPO. It's cheaper. You don't have to have a bank come in and underwrite. You don't have to do a roadshow. But you also have real drawbacks to this. You don't get to roll the pitch. You could have a sudden share sell-off where people don't like what they see.
You're building a conglomerate, which historically people have not enjoyed investing in. People don't feel that they can get enough visibility on the existing businesses. So there's a real debate to be had, even within the companies, on whether this is a good idea or not. Lauren?
Talk to why, for example, it might be a good idea for SpaceX and Tesla to grow closer in their interaction, because they already have a relationship, a strong one.
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Chapter 7: What is Apple's strategy to handle memory chip price increases?
It actually doesn't add any value to the product. So what we're doing is we're consolidating where it makes sense and then where we see opportunities to innovate and design new technologies, we're doing that, such as in our additive manufacturing. But then that alone doesn't solve the problem. Right, Kevin. Materials, yeah. Well, what's the reality here on your exposure to China then?
You know, we just have 60 seconds or less, but you're on showing the manufacturing. You can't get it to zero, right, when it comes to China?
Chapter 8: What factors contributed to Apple's record sales despite supply constraints?
That's correct. Yeah, not immediately. There are titanium deposits in the U.S. and there are folks working on that. But there's also a lot of material in circulation and our technology will allow for refining and recycling of that and putting that back into circular supply chain. And that's why that Redwood expertise really comes into play.
Kevin Kasichert, great to have you on, CEO of Vulcan Forms. Congratulations on the round. Now let's turn a little bit more to politics. California Governor Gavin Newsom spoke with Bloomberg about regulating AI and addressing the wealth gap that some see as being intertwined with tech.
California, as you know, is the first state to lead in terms of doing regulations for frontier models, large language models. We worked through that over a two-year process. It's become, we think, I don't want to overstate it, but Kathy Hochul mirrored a lot of what we did. She made it her own in New York. In some ways, it may have the tenets of becoming a national model.
We take it very seriously. Truth, trust, peril, promise. but I don't see it in binary terms. I'm not an accelerist, nor am I a doomer in this respect. And maybe it's because I spend too much time with all of the flavors of perspectives on this so I can see the contours, but I also know this, we don't know what we don't know.
but I do see the need for us to address the issue of anxiety in a deep and profound way, and that's why we've been leading an effort which we hope to unveil very shortly on UBC, not universal basic income, minkum, the old construct, but this notion of universal basic capital. A lot of folks talking about sovereign wealth funds, more challenging than it appears to do that.
I've been working to try to figure a version of that out, but universal basic capital, is important pre-distribution strategies not just redistribution strategies uh tenants and aspects for the california economy your question that we're trying to shape uh more on that we hope in may and june of this year as as we lay out some tracks for resolving some of that anxiety
That was California Governor Gavin Newsom. And you can check out the full Bloomberg Newsmakers interview on Bloomberg.com or on YouTube. Now, coming up, U.S. law enforcement has been investigating allegations that Meta staff can access WhatsApp messages. More on that next. This is Bloomberg Tech. U.S.
law enforcement has been investigating allegations that Meta staff can access WhatsApp messages. It's according to interviews and an agent's report. Those claims, made by former contractors, run counter to the company's statements that the chat service is private and it's encrypted. Now, a Meta spokesperson called those claims, quote, impossible.
Let's bring in Bloomberg's Jake Breiberg, who's been reporting this story. So where do these impossible claims exactly come from and the data that would show people are reading them at Meta? Thank you for having me. The claims come from people who did contract work for Meta and were employed by the big management consulting firm, Accenture.
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