Market Outlook for June 1, 2025: AI's True Identity as "CDE" and the Looming Economic Crossroads

The speaker in "Market Outlook for June 1, 2025 - AI is really just CDE" delivers a compelling, data-rich analysis, arguing that while the Federal Reserve has clear "permission" to cut rates, the market remains precariously balanced, threatened by escalating tariff wars and a fundamental misunderstanding of AI's capabilities, which are better framed as Cognitive Domain Emulators (CDEs) with profound implications for labor and investment. This outlook suggests a period of significant transition, where discerning investors must look beyond surface narratives to navigate both macroeconomic shifts and technological disruptions.

(Please note: The provided video title, "Market Outlook for June 1, 2025 - AI is really just CDE," does not contain explicit speaker names. Therefore, insights and quotes are attributed to "the speaker" or "the analyst" as the presenter of this outlook.)

Key Insights

1. The Fed's "Permission Slip": Why Rate Cuts Are Justified and Overdue

The speaker argues compellingly that the Federal Reserve not only has the economic justification but also an imperative to begin cutting interest rates, moving beyond a purely reactive stance.

"Personally I think, I think they have permission from the data. PCE came in year over year, headline at 2.1%. Their target is 2%... I think the inflation data gives them permission, I think the economy gives them permission."

The analyst points to several key data points supporting this view: headline PCE inflation at 2.1% (strikingly close to the Fed's 2% target), a jump in initial jobless claims to 240,000, and concerning unemployment trends for new graduates. With the Fed Funds rate at 4.33% and a neutral rate estimated around 2.5-2.6% nominal (assuming 50bps real neutral rate), policy is seen as overly restrictive. The speaker emphasizes that continued high rates exacerbate the national debt through mounting interest expenses, creating an unsustainable feedback loop: deficits increase debt, higher debt leads to higher yields, which in turn increases interest expenses.

The argument extends beyond mere data-dependency, urging the Fed to adopt a more forward-looking approach, akin to their own Summary of Economic Projections. Delaying cuts, as the speaker believes happened last year, could necessitate more aggressive, potentially disruptive, action later. A proactive cut could also unlock some of the $7 trillion sitting in money market funds, channeling it into capital markets and stimulating economic activity rather than merely drawing on government finances.

Actionable Takeaway: Investors should monitor upcoming FOMC meetings and Fed communications closely. A pivot towards rate cuts, even a modest one, could signal a significant regime shift, potentially favoring duration plays in fixed income and providing a tailwind for rate-sensitive growth equities, provided other risks are managed. The speaker is personally long Fed Funds futures, anticipating more cuts than the market currently prices.

2. Tariff Turmoil: The "Angry King" and Underestimated Equity Risk

The speaker expresses significant concern over the market's apparent complacency regarding escalating tariff risks, particularly those driven by former President Trump's unpredictable and ego-driven trade policies.

"His ego will outweigh policy. If his ego is bruised, and to repair it, he would have to hurt America. He would hurt America... I just don't see how, how the market can stay at 22 [forward P/E] with an ego that's very upset."

The transcript details a "soap opera" of tariff announcements and retractions, highlighting Trump's recent threat to raise steel and aluminum tariffs to 50%. The analyst uses the moniker "taco" (Trump Always Chickens Out) and suggests that any perceived slight to Trump's ego could trigger damaging policy decisions. With reciprocal tariffs potentially being reinstated in early July and a lack of tangible progress on "90 deals in 90 days," the speaker questions the sustainability of current equity valuations, with the S&P 500 trading at nearly 22 times forward operating earnings.

This geopolitical uncertainty, characterized by an "angry king," is seen as a major headwind that the market is underpricing. The speaker notes being "puzzled by the move in equity markets" given these persistent threats and advises against "chasing price at these levels." This caution is reflected in their personal positioning: short SPY, though balanced with longs in IWM (Russell 2000) and IJR (Small-Cap Core).

Actionable Takeaway: Investors should build in a higher risk premium for equities, particularly those exposed to international trade and complex supply chains. Diversification and hedging strategies may be prudent. Sectors less reliant on global trade or those benefiting from onshoring trends might offer relative safety. Monitoring political rhetoric and trade negotiations will be crucial.

3. Nvidia Shines, But AI's True Winners Are the "Pick and Shovel" Plays

While acknowledging Nvidia's continued strong performance, particularly in its data center segment (up 73% YoY), the speaker suggests the most reliable investments in the AI boom are not the AI model developers themselves, but the suppliers to the ecosystem: chips, data centers, and energy.

"This is chips. This is data center. This is energy. These are the suppliers to the AI ecosystem. I think these are the winners. They'll, they'll win because they're not dependent on who the, who the AI winner is."

Nvidia's results were impressive, with data center revenue up almost 10% quarter-over-quarter. Even after adjusting for export control charges, the company's forward P/E is estimated around 28.44x, which the speaker doesn't see as overly demanding given its growth. A potential put-selling strategy around a $112.50 strike price is mentioned as "fairly safe." However, the core insight is that the AI model development space is becoming "a very crowded space very fast," with uncertainty about who will ultimately succeed or if it's a "natural monopoly" situation where few can survive due to high infrastructure costs.

In contrast, the companies providing the essential infrastructure for AI – semiconductors, data center capacity, and the energy to power them – are positioned to benefit regardless of which specific AI applications or models triumph. This "pick and shovel" analogy suggests a more durable and less speculative way to gain exposure to the AI theme.

Actionable Takeaway: Investors looking to capitalize on AI should consider focusing on established leaders and critical suppliers in the semiconductor, data center REIT, and energy sectors. While direct AI software and model companies offer high growth potential, they also carry higher idiosyncratic risk. Nvidia remains a key player, but a diversified approach across the AI value chain is recommended.

4. Deconstructing AI: It's "Cognitive Domain Emulation," Not True Intelligence

A central and provocative thesis of the presentation is that "AI is really just CDE" – Cognitive Domain Emulators. This reframing challenges the hype around artificial general intelligence and provides a more nuanced understanding of AI's capabilities and limitations.

"AI software. I think CDEs is a better name. Although we're not going to get rid of AI, this is a cognitive domain emulator. So these large language models are not emulating intelligence, they're emulating cognitive domains."

The speaker uses Bloom's Taxonomy of learning (Remember, Understand, Apply, Analyze, Evaluate, Create) to illustrate this point. Current AI/LLMs excel at the lower cognitive domains: remembering vast amounts of information, understanding it sufficiently to teach or explain, and applying knowledge in structured environments. However, they "can assist" but do not master higher-order domains like analysis in novel situations, nuanced evaluation involving ethical judgment, or true creation of novel paradigms. These higher domains, the speaker argues, still require human ingenuity, intuition, and emotional depth.

This CDE framework implies that AI will automate tasks predominantly reliant on lower cognitive skills but will augment human capabilities in tasks requiring higher-order thinking. It's a critical distinction that cuts through the often-binary discussion of AI replacing all human work. The speaker notes, "It is doubtful to see how it can get to this level. To have intuition, emotional depth, ingenuity. I don't see that out of code."

Actionable Takeaway: Businesses and individuals should assess AI's impact based on the cognitive demands of specific tasks. Roles heavily reliant on remembering, basic understanding, and structured application are at high risk of automation. Conversely, roles emphasizing critical analysis, complex problem-solving, ethical evaluation, and creative innovation will see humans working with CDEs, leveraging them as powerful tools.

5. The CDE Impact: Significant Labor Market Disruption and the Underemployment Crisis

The speaker forecasts tangible and significant labor market disruptions due to CDEs, estimating a conservative 2% increase in unemployment in the US over the next 12-24 months, with specific industries facing obsolescence. This is compounded by an existing crisis of graduate underemployment.

"My projection over the next two years is an increase in the unemployment rate because of the loss of jobs of about 2%... US Grad unemployment... 2025, 5.8. That is a big jump... The underemployment... 41.2% of people with degrees... holding a job that does not require a degree. This is absolutely stunning."

Industries identified as vulnerable include standardized test prep (SAT, GMAT), coding and app development, traditional search (like Google), graphic design, and K-12 tutoring. The analyst projects that tasks performed predominantly by humans in the US will decrease from 43% today to 29% by 2030. Data on new graduate hiring in tech is stark: Google, Meta, Microsoft, Amazon, and Stripe now see new grads as only 7% of hires, down from 25% in 2023. Startups show a similar trend.

The speaker highlights the alarming statistic that 41.2% of those in jobs not requiring a degree actually hold degrees, suggesting a systemic issue with the value and alignment of higher education. This "underemployment" crisis, coupled with CDE-driven job displacement, paints a challenging picture for the labor market, particularly for new entrants. The analyst questions the push for mass university education, stating, "All you're going to get are watered down degrees that aren't worth anything."

Actionable Takeaway: Individuals need to proactively develop skills in higher-order cognitive domains (analysis, evaluation, creation) to remain competitive. Lifelong learning and adaptability will be paramount. Policymakers and educational institutions must urgently address the misalignment between education and evolving job market demands, potentially rethinking curriculum and vocational training. Companies should prepare for workforce transformation, focusing on reskilling and identifying roles where human-CDE collaboration creates value.

Insightful Quotes

1. On AI's true nature:

   "These large language models are not emulating intelligence, they're emulating cognitive domains... If we accept that this is a cognitive domain emulator and not an intelligent system, it is doubtful to see how it can get to this level. To have intuition, emotional depth, ingenuity. I don't see that out of code." (This quote encapsulates the core "AI is CDE" thesis, grounding AI's capabilities and limitations.)

2. On the Fed's policy stance and market implications:

   "So if the Fed can move from being just data dependent and what is sometimes rear view mirror data to being, to forecasting a little bit... I think they have permission now and if they don't take it now, they're only going to have to do more rapid cuts later on because we, we do live in a deflationary world." (This highlights the speaker's view on necessary Fed action and the underlying deflationary pressures from technology.)

3. On assessing AI's impact (and business valuation generally):

   "Every business is always worth what it will do. So we buy 100% of the future... If you're going to assess the benefits or the threats of AI, you must forecast out and then discount those opportunities or those threats to today and say here is the state of affairs based on where we're going, not where we are or where we've been." (This emphasizes the forward-looking perspective needed for both investment and understanding technological disruption.)

Market Implications

The speaker's analysis points to several critical market implications and potential investment strategies:

• Fixed Income & Rates: The strong case for Fed rate cuts, driven by moderating inflation, weakening labor signals, and the unsustainable trajectory of interest expenses, suggests opportunities in duration. The speaker is personally long Fed Funds futures, betting on more cuts than priced in. Lower long-term rates would also ease government financing pressures and could support equity valuations, if other risks are contained.

• Equities & Tariff Risks: Equities, particularly the S&P 500 at a 22x forward P/E, appear vulnerable to the underappreciated risk of escalating and unpredictable tariffs. The speaker advises caution against "chasing price" and is personally short SPY (though hedged with small-cap longs). Sectors sensitive to trade wars face headwinds.

• AI Investment Strategy: The "AI is CDE" framework leads to a nuanced investment approach. While Nvidia remains a strong player, the most durable AI investments are likely in the ecosystem suppliers: semiconductors, data centers, and energy providers. These "pick and shovel" plays benefit from overall AI adoption without the idiosyncratic risks of picking winning AI models in a crowded field.

• Labor Market & Sectoral Shifts: The projected 2% rise in unemployment due to CDE adoption and the obsolescence of certain job categories (test prep, coding, search) will create winners and losers. Companies effectively integrating CDEs to enhance productivity in higher-cognitive tasks may outperform. Sectors focused on reskilling and critical thinking development could see growth. The high graduate underemployment rate (41.2%) signals a potential crisis and restructuring in higher education.

• The Deflationary Power of Technology: The speaker underscores that "the pace of technology across all sectors... is deflationary." This, combined with CDEs boosting productivity, could keep a lid on long-term inflation, further supporting the case for lower rates, but also posing challenges for companies if they cannot maintain pricing power amidst massively increased supply.

Ultimately, the outlook for June 1, 2025, is one of cautious navigation. While opportunities exist, particularly if the Fed pivots, significant risks from trade policy and the disruptive, yet often misunderstood, impact of AI (as CDEs) require a sophisticated, forward-looking approach from investors. The emphasis on developing critical thinking and higher-order cognitive skills is not just career advice but a crucial element for navigating an increasingly complex economic and technological landscape.