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Big Picture
💡 The Fed can only reach half of CPI, Apple's foldable finally ships, and Altman is calling for an AI freeze.
Happy almost weekend! CPI hit so waited for that…
The viewpoints this week are pretty simple and data backed. Growth is fine. Inflation is stuck in the parts of the economy that rate policy doesn’t actually touch. That last part is kind of important. You can see what I mean below in inflation section. And the consumer keeps funneling more of their marginal dollars into new categories like sports betting. Betting looks like the new lottery as per the cohort data below.
Then two other signals I think worth calling out. Apple finally launched the foldable. I like it and pretty excited as I do quite of bit on my phone and large iPad-like is my preference. What is key is that I flagged this back in 2019 as they issued a patent for something resembling this weeks announcement. That alone is a good reminder that if you pay attention to what companies are doing, saying protecting (via patents), who they are hiring, etc, you can possibly see the roadmap years before the analyst community catches up. Lastly, Sam Altman is now floating the idea of an AI freeze right after launching a frontier model, which is a loaded signal about where the buildout goes from here. Ai buildout bros may not like that.
But, then Oracle also put up a backlog number that is massive.
Let’s walk through it. (we spoke about Oura IPO on latest podcast, check it out)
[1] Growth continues in the economy.
The weekly economic index we track continues to show a healthy economy.
Latest reading is +3.27, well above the 3-year average of +2.30, and it’s been climbing for eight straight weeks.
That’s a healthy impulse. On one side it’s good for the economy. On the other side, that keeps the door open for the Fed to move rates.
[2] GDPNow is tracking Q3 at +4.42%.
On top of that, if you want a longer look, the Atlanta Fed’s GDPNow model is now tracking Q3 real GDP growth at +4.42%.
More than half of it is the consumer at +2.43 points, and inventories are adding another +1.99. Business investment is contributing +1.38. Net exports are the big drag at -1.44.
So those two data points together are congruent.
The one thing to watch is the inventory contribution. If inventories reverse in Q4 you can lose two full points of GDP quickly, so this print is a bit stronger than the underlying run-rate.
But even stripping that out, you’re still looking at growth in the mid-2s. Fine.
[3] Producer prices, rising or cooling?
We got PPI this week, which is prices at the producer level. There are two ways to look at it, so I’ll give you both.
Core PPI on a 1-month annualized basis is +1.96%, and the 3-month annualized is +3.36%. Both are the lowest reads we’ve seen in the last 12 months. That lines up with what Waller said last week, which we plugged into the newsletter, that the direction of travel is still on track.
Now if you take the headline figure, yes it looks elevated. The question is whether you look through headline energy or not for now.
[4] Critical: the Fed can only reach half of CPI.
CPI then dropped this morning, which is why I waited to post. Headline tells a similar story to PPI. August came in at +3.40% Y/Y but core at +2.45% Y/Y.
But the mix is important (VERY IMPORTANT), and it’s the thing we want to make clear. Someone send this to the Fed.
When you split CPI into the pieces the Fed’s rate policy can actually influence versus the pieces it can’t, you get a really clean divide.
The rate-sensitive basket, which is shelter, lodging, vehicles, furnishings, and apparel, is running at +2.56%. Basically at target.
The rate-insensitive basket, which is food, energy, insurance, medical, subscriptions, and wage-driven services, is running at +4.54%.
So cutting rates does nothing for your insurance premium, your streaming bundle, or your grocery bill. But it does relieve the parts of inflation that are already near target.
If you take this for what it is, the honest question becomes why cut rates at all if cutting doesn’t touch the sticky pieces, and why risk damaging the parts of the economy that are working or not working.
[5] Sports betting adoption is going vertical.
Sports season is now upon us with baseball and football both in full swing, so I wanted to look at sports betting. We’ve covered prediction market data in the past. Here’s more.
Total betting user growth is +40% since January, and first-time bettors tripled in June and July. This is becoming a material consumer data point.
[6] Frequency is getting interesting.
57% of bettors are placing bets at least once a week, and a meaningful chunk are betting daily. That's the range where I think this stops being entertainment spending and, right or wrong, becomes a fixed line item in the household budget.
[7] And it’s coming from the bottom of the income stack.
Lower-income households now make up 37% of betting activity, the largest single slice.
It's a real consumer behavior shift happening at the bottom of the income distribution, and the timing plus the growth rate says it's not going away, and becoming habitual.
We were talking about this internally at Avory and the read is that online betting has effectively become the new lottery ticket. I'd guess if you pulled the data on lottery spend by income cohort, the distribution would look very similar.
[8] Apple foldable: from patent to product, seven years later.
Something I’ve been talking about for years is how much you can learn from paying attention to patents, not just to earnings reports.
Here’s a tweet I posted back in June 2019 flagging a specific Apple foldable patent that had just been granted. This is exactly why looking into data and areas that aren’t so obvious can pay dividends over time.
And here is what it actually looks like.
Apple launched the iPhone Duo this week at their September 9 event.
Not cheap. It starts at $1,999 for 256GB and goes up to around $3,000 for the 2TB. 5.4-inch outer display, 7.6-inch inner display which is the largest iPhone screen ever, A20 Pro chip, and a new C2 modem, which is Apple’s first real move off Qualcomm. Preorders October 16, ships October 23.
The point is not the phone. The point is that seven years passed between the patent grant and the launched product. If you were paying attention in 2019, you had a data point about where Apple was heading long before any analyst had a model for it.
On the device itself, if I own Apple, which we have in the past, the question is whether this erodes iPad sales over time. I’d say yes on the margin.
[9] Oracle's backlog is big.
Oracle's remaining performance obligations sit at $664 billion as of the most recent quarter. That's up +923% since August 2023. It's quite the buildup.
The important piece is that customer prepayments are becoming a meaningful part of how Oracle is funding its AI buildout.
The company still had to fund roughly $18 billion of net CapEx in Q1, but customers effectively financed more than $11 billion of that themselves.
And on the latest $30-plus billion of AI contracts, Oracle said it needs no incremental increase to its planned capital raise. So lots to build, lots of forward visibility on contracts. But the next section makes this one more interesting.
[10] Altman floating an AI freeze.
I’ll end with this one, because it’s the signal underneath the signal. Altman floating the idea of a freeze right after launching a frontier model is loaded.
A few reads. First, this cannot be good for the AI buildout crowd. Second, is he trying to complicate the Anthropic IPO backdrop and insulate OpenAI from competition?
Third, is this real fear about where AI is heading and what it can do?
Either way, I think this is a more important signal for thew space. It says we may be closer to bending the growth curve than some believe.
To be clear, that’s a view about deceleration in the rate of growth, not an outright slowdown. The absolute numbers can still be big while the second derivative starts to roll.
Net Net
Growth is fine. The parts of inflation the Fed actually controls are already near target. The consumer is finding new categories to spend in, and the AI infrastructure buildout is being partially financed by the customers using it.
Once again, the narrative that this is a fragile economy waiting to break down isn’t showing up in the actual data.
The one thing to keep an eye on is the AI signal underneath. Altman calling for a freeze right after shipping a frontier model, paired with Oracle’s backlog being customer-funded, is a hint that the shape of the buildout is starting to change. Not slower in absolute terms yet, but the growth curve may be bending. With that make sure to subscribe to Avory Around the Desk Podcast + This Newsletter!
That’s all for this week!
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