Hall of Mirrors
Summary: The economy is strong. Consumers continue to spend, and the AI industry is becoming a macroeconomic variable. Kevin Warsh delivered a speech at Jackson Hole. Inflation pressures persist. Editor’s Note: We have made this week’s newsletter available to all subscribers. If you’re not already a premium subscriber, please consider subscribing. Share The Transcript Macro The economy is resilient “For my part, today I am impressed by the overall performance of the economy, which appears to have strengthened. One indicator of strength is how well an economy holds up to shocks. On that score, both Main Street and Wall Street have been remarkably resilient.” - Federal Reserve Chair Kevin Warsh Consumers are in solid shape “Much has been written in the media questioning the health and resilience of the consumer. However, based on what we see across our businesses every day, the economy and the customers remain in very solid shape. Job stability is real, take-home incomes are rising, and our customers continue to spend on fashion.” - Urban Outfitters ( ) CEO Dick Hayne “...overall, again, consumers are resilient, granted discerning. But when you get the right product at the right price, they show up, and it converts.” - The Gap ( ) CEO Richard Dickson “Our consumer is doing fine. You can see that in the numbers.” - Affirm Holdings ( ) CEO Max Levchin Persistent inflation is weighing on sentiment “So I would describe the consumer environment right now really is not improving. The headline for me is that consumers are still feeling quite strained with low sentiment. And that strain, a lot of it comes from those cumulative effects of inflation, which we’ve talked about before. I would add that high fuel prices have contributed further to that strain as this year has unfolded. So I think that’s a bit of the backdrop.” - Hormel Foods ( ) CEO Elect John Ghingo “Over the last few years, many households, especially moderate to lower-income families, have struggled with the higher cost of living, higher prices on essentials like groceries, rent, gas prices, et cetera...our stores that are in lower-income trade areas continue to outperform the rest of the chain.” - Burlington Stores ( ) CEO Michael O’Sullivan “...the inflationary backdrop continues to pressure all household budgets, particularly for lower-income consumers.” - Dollar Tree ( ) CEO Mike Creedon “Our core customers continue to be financially constrained with a variety of factors impacting their budget. Most notably, higher and more volatile fuel prices have forced customers to further prioritize purchases with a focus on value and affordability.” - Dollar General ( ) CEO Todd Vasos Memory prices are pushing consumer electronics prices up “We continue to see memory pricing go up and flow into our assortment in the Q2 time frame. It is very much what we expected. So you’re looking at ASP increases in the quarter on mid-teens and then you’re seeing unit declines in the high single digits.” - Best Buy Co. ( ) Chief Customer, Product, and Fulfillment Officer Jason Bonfig Fuel price increases have not been temporary “...there was a big spike in gas prices back in March because of the situation in the Middle East. But first, I think many observers thought that would be temporary, but it hasn’t turned out to be temporary. And I think that sort of adds to the general concern that consumers, especially moderate- to low-income households, are feeling stretched right now.” - Burlington Stores ( ) CEO Michael O’Sullivan “We did see a temporary reduction in fuel prices, but they later returned to the higher levels. And even as of right now, they’re at the highest level since the conflict started....So freight, logistics and fuel costs continue to present those year-over-year headwinds, and those trends are reflected in the outlook.” - Hormel Foods ( ) Interim CFO Paul Kuehneman Medium-term inflation expectations remain stable “The good news is that measures of inflation expectations in the medium term, by and large, look stable. And inflation compensation measures from the swaps market send a strong and similar message. Especially in light of recent developments, it is a credit to the Fed as an institution—and consistent with the best of the Fed’s traditions—that market prices show confidence that we will deliver price stability. And I can assure you . . . they’re right.” - Federal Reserve Chair Kevin Warsh But inflation expectations can change quickly “The thing about market measures of inflation expectations in economic history is that they tend to look strong and durable until they don’t. Those expectations are not pushed around easily, and right now they are well anchored. But they must be closely minded. It’s the Fed’s job to make sure that inflation expectations do not get unanchored.” - Federal Reserve Chair Kevin Warsh AI is a macroeconomic variable “The Fed watches all of this attentively. We recognize that AI is a new variable—potentially a new factor of production—that will have consequences for both the economy and the conduct of monetary policy.” - Federal Reserve Chair Kevin Warsh International China’s GDP growth was just 4.3% in Q1 “Macro in China remains in a gradual recovery model. China’s real GDP growth slowed down from 5% in the first quarter to 4.3% in the second quarter on the back of subdued household consumer confidence.” - FinVolution Group ( ) CFO Alexis Xu Chinese steel demand remains soft “Chinese steel demand remains subdued and benchmark price has eased towards the low 90s per ton, and yet the freight read is positive.” - C3is ( ) CEO Diamantis Andriotis Financials Warsh doesn’t want markets to be fixated on the Fed “The Fed should be humble and never naïve. The Fed plays an essential role in the economy and the markets. And our tools are powerful. We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.” - Federal Reserve Chair Kevin Warsh Forward guidance leads to slower response times “Providing forecasts to illustrate the Fed’s reaction function works better in theory than in practice, better in the lab than in the field. I’m not alone in noticing that forward guidance in 2021, to cite one example, might well have slowed the policy response to high inflation.” - Federal Reserve Chair Kevin Warsh If markets rely on the Fed, it creates a “hall of mirrors” “The economic literature has long described the distorting effects: a hall-of-mirrors problem. If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we are all more likely to be blinded to new developments . . . more likely to be caught unprepared for a turn of events . . . and more likely to commit errors in policymaking.” - Federal Reserve Chair Kevin Warsh The Fed needs clear market signals “The Fed needs clear market signals, as unfiltered as possible . . . from market internals . . . the level and change in asset prices across sectors . . . the prices and trading volumes of Treasury securities. . . the foreign exchange value of the dollar . . . the cost and availability of credit . . . and the price of a broad set of commodities. These and other indicators should inform the Fed’s near-term outlook on economic activity and inflation throughout the business cycle.” - Federal Reserve Chair Kevin Warsh Bessent seems to have an opposite philosophy to Warsh on market intervention “Judge an intervention by what it responds to. This one responded to a price, not to plumbing, which is exactly how the market read it, and why the effect evaporated within a day. You can’t buy your way out of a solvency conversation with liquidity tools. You can only postpone the conversation and raise the eventual price.” - Duquesne Capital Founder Stanley Druckenmiller Druckenmiller warned that Bessent needs to let the bond market speak “Governments defending prices against fundamentals always lose. The only variable is how much they spend before conceding. The U.S. shouldn’t put itself on the wrong side of that trade, not with the most important price in the world, and not when that price is trying to say the one thing Washington most needs to hear: Let the bond market speak.” - Duquesne Capital Founder Stanley Druckenmiller Consumer Retailers reported earnings “Total sales grew 11% on top of 10% growth last year. New stores are a major driver of this growth. In Q2, we opened 51 gross new stores. After store relocations and closures, this represents a net increase of 45 new stores.” - Burlington Stores ( ) CEO Michael O’Sullivan “Today, we are very pleased to report better-than-expected Q2 results. Our comparable sales grew 4.1% versus last year with positive comps across almost all our major product categories.” - Best Buy Co. ( ) CEO Corie Barry “The Dollar Tree team delivered robust top- and bottom-line results. Net sales growth increased 7% to $4.9 billion. Comp store sales growth increased 3.7%, exceeding our expectations.” - Dollar Tree ( ) CEO Mike Creedon “Same-store sales increased 3.5% during the quarter, driven by customer traffic growth at 2% and average basket growth of 1.5%.” - Dollar General ( ) CEO Todd Vasos Dollar Tree saw sales growth across income cohorts “Our data shows we grew sales across all income cohorts. Households we serve were up nicely year-over-year with gains skewing to the middle and higher-income households. Comp strength was broad-based across the assortment, with personal care and toys notable outperformers.” - Dollar Tree ( ) CEO Mike Creedon High-income consumers are still buying boats “...we have not seen a correlation between rising fuel prices and our retail boat sales at the upper end of the market, and usage has stayed strong. Our MBI customers are still on the water, still buying parts, still spending time at the dock, and that tells us the experience of boating with family remains the priority for our core buyer, even at a higher cost per gallon.” - Malibu Boats ( ) CEO Steven Menneto Even high-income consumers are value-focused, though “...that middle and upper middle income consumer is under, and that is usually that $100,000-plus crowd, if you will, that has been trading in the better part of a year now and has continued to trade in through Q2 and now into Q3, I would tell you, is looking for more and more value as time goes on.” - Dollar General ( ) CEO Todd Vasos “Our Q2 results did not materially change our existing commentary on the customer. Consistent with the past several quarters, we see a customer who is still spending, but is value-focused and attracted to sales moments.” - Best Buy Co. ( ) CEO Corie Barry Retailers are turning to promotions “As the quarter progressed, conditions across portions of the athletic footwear and apparel marketplace became increasingly promotional, and we took action to remain competitively priced to protect and grow our leadership position.” - DICK’S Sporting Goods ( ) CEO Lauren Hobart Technology AI demand continues to accelerate “...demand is super strong and, incredibly, it’s accelerating. You know, obviously we’re already a very large company, but to be able to grow continuously and now to accelerate our growth is pretty extraordinary.” - NVIDIA ( ) CEO Jensen Huang NVIDIA’s revenue doubled y/y and expects another double next year “Total revenue of $96 billion more than doubled year-over-year as growth accelerated for the fourth consecutive quarter... Incredibly, we are seeing demand acceleration even at our scale. Customers’ forecasts point to our growth doubling next year.” - NVIDIA ( ) CFO Colette Kress Agents require ~15–100x more compute than a single prompt “...the large language models are larger than ever because they are smarter than ever. These agents go through reasoning and planning multiple terms of tool use. The amount of compute necessary for an agent versus a human using it is probably 15 to 100 times, depending on the type of problem you are trying to solve. The amount of compute necessary is just extraordinary. That is a factor that almost everybody sees.” - NVIDIA ( )CEO Jensen Huang The frontier labs are growing faster than their balance sheets can support “The Frontier AI labs have extraordinary demand for training and inference compute, but they are growing faster than what their balance sheets and credit profiles can support. They have rapidly growing customer demand, yet still lack the decades-long infrastructure contracts and investment-grade financing capacity needed to secure the AI factory infrastructure independently.” - NVIDIA ( ) CFO Colette Kress 20 AI services companies now have revenue >$1B “Nearly 20 companies, including Cursor, owned by SpaceX, Figma, and Together AI, now exceed $1 billion in annualized run rate revenue, up from 13 companies in Q4 of last year, with vertical enterprise software logging the fastest growth” - NVIDIA ( ) CFO Colette Kress But there’s really two AI companies that matter “Now, having said that, taking a step backwards, investing in these two companies, or there are several AI labs that we have invested in. Investing in these companies are once-in-a-generation opportunity. I think the only regret that I have is that I did not invest more and sooner. Two of the companies will likely go public soon and others will follow. These will be some of the most consequential technology companies in history. I am delighted to be their friend. I am delighted to partner with them.” - NVIDIA ( ) CEO Jensen Huang The industry is compute constrained “...their growth isn’t limited by their technology or customer demand. It’s limited by compute. For these companies, more compute means more intelligence, more users, and more revenue.” - NVIDIA ( ) CFO Colette Kress The entire supply chain is challenged “I think the answer is, our entire supply chain is challenged. Everybody is really running flat out. More capacity is coming online all the time, which is one of the advantages what is going to happen this year. It is not going to come online in an instance in time, but it is going to come online every day.” - NVIDIA ( ) CEO Jensen Huang Supply constraints are expected to persist through 2028 “Although we will work to close the supply-demand gap, we expect supply to remain a bottleneck at least through the end of fiscal year 2028.” - NVIDIA ( ) CFO Colette Kress “Looking ahead to fiscal 2028, aggregate demand continues to accelerate, and our operations team is doing an outstanding job securing additional supply despite pervasive industry-wide constraints.” - Marvell Technology ( ) CEO Matthew Murphy Hyperscaler capex is expected to reach $1.3T next year “With cloud industry backlog now greater than $2 trillion, CapEx by the top five hyperscalers is expected to reach nearly $800 billion in 2026 and $1.3 trillion in 2027.” - NVIDIA ( ) CFO Colette Kress Memory tightness could persist into 2030 “There are no clear signs of a downturn, so this situation will continue through the end of 2030...Even if a downturn comes, it will be closer to a gradual decline or flat trend rather than a steep drop,. After 2030, I believe supply and demand will find balance and the entire AI industry can grow together.” - SK Hynix ( ) CEO Kwak Noh-Jung Rising memory prices are even hitting NVIDIA’s margins “Many of you have expressed concerns regarding our gross margins as component costs have risen significantly. As you are already aware, we are experiencing extreme pricing conditions in memory. The magnitude of the price increase has exceeded our prior expectations and are headed even higher into next year. As a result, we are resetting expectations today. For Q3, we expect GAAP and non-GAAP gross margins to be 74%, ±50 basis points. We expect margins to bottom in Q4 in the 71% to 72 range before settling at 72% to 73 in fiscal year 2028, as executed price increases take effect in Q1.” - NVIDIA ( ) CFO Colette Kress OpenAI is building its own custom chips “The results show a significant performance advance: Jalapeño can serve more AI work per unit of power while also returning responses more quickly. Jalapeño delivers both higher throughput and lower latency with one architecture, where existing hardware systems often have to make a tradeoff between the two. For customers, that can mean faster responses, more responsive agents, and more reliable access as demand grows...By producing more useful work from the same power and hardware, Jalapeño can help us serve more demand and lower the cost of delivering a successful result.” - OpenAI NVIDIA is confident that it will still remain dominant “Whereas many of these XPUs are inference-specific chips for one cloud or one service, NVIDIA is a platform, an entire AI factory platform that spans the entire AI life cycle that you can use in any cloud. It’s in every cloud. You can run anywhere. We’ll help you set it up anywhere. We built something very different. All of the AI services, at some point, are going to want to go around the world, and those data centers won’t necessarily be just built by them. I think they’re going to run on NVIDIA all around the world.” - NVIDIA ( ) CEO Jensen Huang Enterprises are trying to manage token spending “Listen, I think the headlines are accurate. I talk to CFOs, my peers, every single day, and all of them are talking about how do they manage their token budgets going forward. So it’s real. People are spending. Listen, Anthropic and OpenAI have huge revenue numbers. So we know that folks are spending. The question I get often is, “Is it taking away from your budget?” And I would -- and our customers spending less elsewhere as a result? And I’d say there’s probably some customers that are spending less in other areas because of their token spend.” - ServiceNow ( ) CFO Gina Mastantuono “When we think about IT infrastructure, and we think about the CIO, having the ability to help them manage cost is a big part of our selling point as well. So you get the guardrails that you’re looking for, you get the protection you need, and also you have visibility into where your AI agents are and what people are actually spending on these results. And it’s incredible. I mean, we’ve heard EAs spending $10,000 just on tokens because of the way they were using the models. And dramatically, once you understand and have visibility around that, you can dramatically cut those costs down. So it’s really a one-two punch of protection and cost management.” - CrowdStrike ( ) CEO George Kurtz AI is changing headcount “We’re keeping our headcount flat this year, and this is after absorbing M&A. How are we able to do that? Because we’re seeing $500 million worth this year alone of AI efficiencies, which allows us to not increase our headcount, right? But still growing at 23%.” - ServiceNow ( ) CFO Gina Mastantuono “And so through the use of AI, we’ve been able to go faster. And I think you’ve actually seen that when you’ve looked at WEX, right? Like headcount is down in 2026 from where it was in 2023. But yet we are innovating at an accelerated pace. We’ve announced more products in the market. So you can actually see the impact of that coming through, which we’re excited about.” - WEX ( ) CFO Jagtar Narula AI cyber-security risk concerns are rising “I think, with our posted commentary today, recent surveys we run across our customers, 81% of the CISOs that we talk to are aware right now that they are exposed with agents deployed in their enterprises where they do not yet have an adequate security platform in place.” - Okta ( ) COO Eric Kelleher “We’re seeing agents go rogue, swarming to attack and moving beyond their guardrails to autonomously harm. Agents are proving capable of data theft, permission alteration and full-on command and control at scale, leading to organizational compromise. The agent of today is both a friend and foe...I think we’re only going to see more stories around agents gone wild, and we’re going to be there to protect our customers” - CrowdStrike ( ) CEO George Kurtz Agents can move faster than organizations can respond “The problem is you’ve hit the sound barrier of actually rolling out a patch. And what that means is that companies are looking for their ability to prioritize where these exposures are because they’re not going to be able to fix everything all at once within the window of what autonomous agents can actually exploit.” - CrowdStrike ( ) CEO George Kurtz “Offensive AI capabilities are compressing the time between vulnerability discovery and weaponization. What was theoretical quarters ago is now an operational reality. Frontier models are advancing from basic vulnerability discovery to reasoning through multi-stage attack paths and executing autonomous cyberattacks.” - SentinelOne ( ) CEO Tomer Weingarten We have a narrow window to build defense “We have a limited window to strengthen cyber defenses. In the coming months, AI-enabled cyber attacks will become far more widespread and sophisticated as models around the world become increasingly capable. The companies and public services our communities depend on—from hospitals to water treatment plants to the infrastructure that powers the internet—are at risk. Today’s AI advances are already giving defenders new ways to fix weaknesses that have accumulated for years. If we act decisively, we can use the defenders’ window to make our digital world much more secure.” - OpenAI The number of transistors-per-chip continues to grow “And one unique aspect for our business is our workload is not static, okay? It is growing exponentially. If you think about the complexity of the chip design, the most complex chip these days is, call it, Blackwell or what it is, like [ 10 billion ] transistors. But it’s -- we fully expect that to grow. It’s going to grow to like 1 trillion in a matter of 5 to 6 years, okay? If you weave into complexity, it’s about 30, 40x kind of workload increase in the foreseeable future. So that will be the ultimate driver for our business.” - Cadence Design Systems ( ) VP of IR Richard Gu “...from an execution perspective, particularly on a process and also in terms of the advanced packaging, it’s going extremely well. 18A yields are progressing, beating the milestones that we’ve internally set. 14A, when you look at the defect density, is tracking better than the target curve we had for 14A, and it’s also doing better than any of the previous nodes in terms of how quickly we’re bringing down the defects.” - Intel ( ) CFO David Zinsner Healthcare Life-sciences funding has improved “The funding environment is relatively good. There’s a lot of changes with AI and science is moving ahead. So there’s a lot of priorities for the customers. And so when that happens, they can’t do all things at once, and they generally try to pick some things that they can do and that are high priority..And I think what happened is the life sciences industry has gotten used to, hey, the world is going to have a lot of moving parts. And they’re just moving forward. So I think it’s -- you’re good to point this out.” - Veeva Systems ( ) CEO Peter Gassner Industrials and Transport Fuel prices are driving freight costs higher for retailers “What is different is really this fuel -- the fuel surcharge that’s coming through is very, very meaningful. And that’s going to continue as long as the fuel prices are elevated. There is an impact from drivers. It’s not nearly as much as fuel.” - Dollar Tree ( ) CEO Mike Creedon Lower tariffs are helping to absorb fuel inflation “...we’re seeing some pressure in supply chain, of course, because of fuel. So rather than passing those costs on to the customer, we’ve taken advantage of the fact that we’re getting that lower tariff rate in and that tariff rate is absorbing inflation and helping us to maintain value across key categories. We think that’s helping our traffic.” - Dollar Tree ( ) CFO Stewart Glendinning Automotive semiconductor demand has stabilized but has not yet entered a replenishment cycle “Automotive, we talked about the stability. We have not seen a replenishment cycle nor have we seen kind of demand uptick. If you look at the SAAR overall, SAAR is kind of actually slightly down to a first order. But we expect automotive to grow about 6 or so percent year-on-year, which -- if you think about our target and the content growth that we talk about in automotive, we’ve always talked about high single digits above SAAR. So we’re already delivering on that in a stable demand environment...In automotive, as said, I think we’re shipping back to natural demand. So we’ve gotten through the inventory digestion. In some cases, automotive is still dangerously low.” - ON Semiconductor ( ) CEO Hassane El-Khoury Materials & Energy ~15GW of 2027 AI compute could remain stranded by infrastructure constraints “Consensus estimate is that ~15GW of AI compute produced in 2027 cannot be turned on in 2027. This is harder than just finding power, as you also need to build out all the transformers, wiring, liquid-cooling, (massive) chillers & complex networking.” - SpaceX ( ) O Elon Musk