AI Scares and Inflation

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This is a joy, and I'm going to rip up the script right now. I can do that with Tanya Fikui with just first-rate academics at the Metropolitan Life Insurance Company. I'm sorry. That's what I'm calling it. MetLife. We'll have to see on that. They're driving all of their economics and market strategy. Heating oil, New York Harbor, we were just talking about. From the bottom of COVID, it's up 39% per year. From the beginning of the.

War, it's up.

My eyes are failing me here, Paul. I mean, it's killing me here. It's up 77%. We haven't doubled, but we're getting there fast. Forget about all the macro babble from UCLA, Columbia, that the shock of that to people, to fancy people at the Fed, understand the shock of global, that bill on housing, on businesses, on heating oil.

I'm sure they do. They do actually do a lot of analysis on data on the distribution of earnings and spending. So I think they do. Whether the Fed... I mean, the Fed has its hands tied because it doesn't have the tools to redistribute wealth or have different interest rates for different levels of household income, right? Their hands are tied.

They have to look at the macro economy. They can't look. at, you know, the folks that are struggling any more than they can look at only the AI folks. So that's the problem there, right?

But it is a problem. I agree with you.

It's huge.

It seems like this 2% number that the Fed has as it relates to an inflation target goal It seems maybe it's less relevant today in a world where we're onshoring more and more stuff. That presumes or implies maybe some higher costs. AI spending maybe is an inflationary push. Less immigration, presumably that might push up wage rates. Do those structural things suggest that? Maybe 2% isn't really the right number.

100%.

I mean, I think the problem is that the Fed is in a pickle, right? They have committed to 2%. They reaffirmed it recently. And so that's a problem, that they have that as a commitment. And if they change their targets, that's going to undermine credibility because of the changing gold post situation. But I think you're right. I mean, this is all New Zealand's fault, right? New Zealand picked 2%.

Now we're all suddenly at 2%. Not clear that we have to have exactly the same inflation rate as New Zealand.

Are these rates we're seeing out there, you know, a 10-year adder close to 5% right here?

We're at 498 now.

Are those rates, maybe they're just appropriate for an economy that's growing nominally faster?

Six-ish or maybe even more percentage. I don't know.

I think we're in a better ballpark now than we were a couple of weeks ago, I think. I think there was a little bit of a falling knife situation there where people were just afraid to step in front of that, of rising yields. Now, I think this level approximately makes a lot more sense given the fundamentals of the economic economy.

When you talk about broader market trends here with your clients, what is the conversation today? Is it Is AI overdone? Do I need to try to diversify? Do I need to think US versus non-US? What are some of the broader discussions you're having?

I mean, I think the broader discussion really is that the AI, we are, the U.S. economy right now is dependent, quite dependent on AI as a growth engine.

It's not the only thing.

I think the consumer is actually doing a little bit better these days. I know, let's, okay, let's not say doing better. They are spending more, which is perhaps because, as you said, home heating oil is so expensive.

Mm-hmm.

But they are spending more. And we've got defense rising as an important sector. But AI is a big thing. And you can't fully ignore it, but you can't.

Overcommit.

Tanya Fukui, MetLife with us. Just thrilled to have her in here today on a Friday to give us a bigger view of things. Of course, into elections, I've been surprised how tariffs haven't played a part in this. This goes to your wheelhouse at UCLA. Years ago, you're Did tariffs process out as you perceived they would? Or were you surprised by what these onerous tariffs did to Americans?

Well, so I would say in my previous job, we always looked at I worked for the federal government analyzing tariffs.

Right.

And it's always a relatively small share of the total economy.

Two percent. Three percent.

Yeah.

Very big in certain sectors and in certain parts of the country. But overall, not as much of a big deal. The uncertainty is what gets a lot of the businesses. And so we see some CPI effects, some inflation effects, but it's not huge, and I'm not surprised that it's not huge.

So if it's.

10-ish now, if the budget lab at Yale has it at 10%, where is your optimal tariff level if beforehand it was 2-ish? Hmm.

As a good economist, you always want zero tariffs.

Oh, she's going there.

It's great entertainment, folks.

But, yeah, no.

But, you know, there's also the change, the pace of the change matters. And going back to oil, I know this is terrible for consumers, but oil, higher oil prices are.

A net problem.

Growth enhancer for the U.S. right now.

Really?

Because we're a net exporter.

We're a net exporter. This is a surveillance break exclusive. You're telling me $ 114. 90 a barrel is positive for America? For GDP growth.

Not for you and me, for GDP growth.

Oh, skepticism floating around. She mentioned calculus, so I'm going to do a Latinos and Tang for you.

Yeah, I mean, the U.S.

Has become a net exporter of oil, so that drives. So how sticky is the inflation out there, do you think? If we were to get a resolution- Tomorrow, President Trump on the golf course tomorrow says, you know, I've had enough, let's walk away.

He's on fire today. That's the smartest question today. How sticky is the inflation?

Sticky, well, I mean, I take issue with your premise that it's going to be over tomorrow, right? That's the fundamental problem is that if it were going to be over and you could tell, and you could show me evidence that it is going to be over and it's not going to be un-over, right? Then I can tell you that everybody will be super happy. But I take issue with that initial question.

One final question. We're doing this as the VIX is going to give me a 20 here in a moment, folks. Markets deteriorating. I got to go to a Drew Mattis question just to harass him. You know, working with Drew. Tony, look at this. Alan Greenspan would say chapter 23 of any economics textbook, the market matters to the economy. If we finally get a legitimate correction or dare I say a bear market, What does that do to the American economy?

It's a problem.

I mean, that is one of the reasons why consumers are doing well. I think last time I came here, I was looking at net wealth. Net wealth across the board has improved. Growth has improved since last year, even for the relatively, you know, the 20th percentile and up.

So if you don't have, if you.

Look at your, if you look at your stock portfolio, 401k, your investments, and that's, or even your house price, home price, if, well, home prices may be, may still keep going up.

But if your, if your assets.

If your retirement is going down, big problem for a lot of people, they'll stop spending.

Yep.

Absolutely.

The wealth effect. And it's been, it's been big.

And if you don't, and then the bottom half of the K is If you don't have that wealth effect, then the inflation hits you.

I've got to get the surveillance glasses on. The data's moving so fast. Thank you, thank you, thank you so much with MetLife. Stay with us. More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

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Okay, without question, given the moment we're in, this is the interview of the day. Celine Wu is with Lazard. Orzeg puts up with her. I mean, it's all there is to it. And she does AI, she does tech, and she's from South Korea. Before we get to this, You know, I look at Samsung in South Korea, and I'm going to kill the pronunciation. The Pyeongtaek campus at the Gyeonggi province. Did I do close?

Close enough. Pyeongtaek campus in Gyeonggi province.

It's the biggest building in the world. What does the AI tech echo box in the West not understand about that manufacturing excellence?

First of all, they don't understand this big capacity that is coming online. It will take some time not only to build the FAB, but also taking some time to improve the yield so that these companies can actually start producing at scale making profits. That being said I think market is probably underestimating why they are doing it. People stay just focused on the big numbers here and there they might create the oversupply but at the end of the day memory companies are doing it because memory becomes the critical driver for the performance. AI customers will tell you that the bottleneck from the memory in terms of performance is what is preventing them from doing better. That is what they are doing. And I think that is

still very much underestimated.

The AI call in the marketplace, Celine, let's call it fluid. It seems to be changing pretty rapidly.

How do you guys at Lazard view the AI trade here today? How do you want to be exposed to that?

We think it's really puzzling. I think the market recently has been pretty much dominant by all the headline uncertainties, whether oil price, interest rates, middle list, and the elections. And we're also right in the middle of this earnings season. There's going to be a number of big tech companies.

They're going to talk about the earnings and outlook next year. So market doesn't want to deal with uncertainties. What we see instead is a growing disconnect between this market sentiment and the fundamentals. Look at the earnings so far. ASML, TSMC, SpaceX, Meta, strong earnings and very strong guidance. I expect the trend, the high-level perspective will remain the same.

So is it a question of, do you feel like you need to hedge AI risk or do you feel like you.

Just need to be smart on the long side of AI?

You're smart. You're trying to be smart long on the side, but you have to be more smart. stock-specific. We're actually concentrating the portfolio. We're putting more bets on the companies we have greater conviction. I think that's where ultimately the beauty of the portfolio construction comes from.

And now, folks, we're going to go fancy. I've been making jokes about calculus all morning. We're going first and second derivative with Celine Wu of Lazard. I think there's a complete misunderstanding of the dynamics of free cash flow. How do you perceive the free cash flow lowering due to high CapEx and the first and second derivative change of a more constructive free cash flow out the x-axis somewhere?

How malleable is that? How elastic will that recovery be?

I mean, that's a great point, and that's exactly what investors, including ourselves, are trying to focus on. It depends on the company. It depends on the company. Alphabet, for example, they already turned free cash flow negative just the last quarter. I mean, that's what spooked the market, but they were justifying that cash flow direction change. Because the cloud services revenue growth was actually exceeding their peers by a big margin.

What was the percentage of that number, just roughly? Robert Schiffman of our credit team had 18% revenue growth blended. I mean, that's a ginormous number.

That's crazy. I mean, given the level of their revenue, right? I mean, last quarter, if I'm not mistaken, that was like close to 80%. This quarter, I think the consensus is talking about 100%.

Like in the book, Chipmore, my book of years ago. The bottom line is we don't understand, folks, the processes of these companies, whether it's Microsoft or Taiwan Semiconductor. I'm just making this up. But, Celine, to me, the major miscalculation is the recovery of free cash flow once they spend the slug of money. Do you have any visibility on that?

We do.

I mean, we think we have pretty good visibility because we have a good conviction in their strategy, why they're doing it. Listen, ultimately, this CAPEX is to build the full stack capabilities. And I think that's where these hyperscalers stand out. The full stack capability is their ability to sell their compute, their custom chips, their data, their distribution, their software as well, which is critical for the AI agent-driven economy as well. So I think that's really great.

You're a core member of the global robotics and automation team at Lazard Asset Management.

What does that mean? What do you guys invest in there?

Well, I mean, what we're trying to focus on in terms of thematic opportunities I mean, at the heart of our investment philosophy is, I mean, automation is what is really critical to drive the productivity gains for the customers. And if you look at the history, actually, given any point of the history, there were different types of specific technologies that were driving that productivity gains. Used to be like steam engines, electricity, right? And then fast forward to semiconductors, transistors, internet.

Right now, that is AI. I mean, at the end of the day, robotics is actually a subset of the automation technologies. And then what we're trying to do is find the best companies across the world who can deliver their productivity gains for the customers.

Give me one of the holdings in your portfolio that you guys like right.

Now, particularly.

Well, I mean, we do have a lot of AI-exposed companies, and given the correction we just talked about, a lot of companies are providing pretty compelling evaluation. I mean, NVIDIA, which is a household name, which is our top-holding name, is at the center, front and center, powering this automation and robotics as well.

I have to do a surveillance audible with immense respect. I want you to talk about your South Korea and what It's frozen in time. Forget folks about Blackpink and all the singers and blah, blah, blah. There's what's almost like a lost generation. Is it the NPO generation where there's, you know, the kids in South Korea, like, don't know what the future is? How is the nation going to work with that, given the febrile nature of the Pacific Rim?

Well, I mean, I would argue that South Koreans are one of the most resilient people of the world.

I'll say so, yeah. We've gone through.

So many different hard times, difficult times. And then we were able to basically pull together and create this miracle, one of the fastest economic growths of the world since the war.

Oh, stop. You're underselling it. It's the greatest American capitalism export we've seen across three generations.

Yeah, and then now we're becoming the powerhouse for the soft culture. So hardware manufacturing, export-oriented economy, excellence, plus soft culture, power, and leadership. That's, I think, a really exciting time for the country.

Paul and I talk about this all the time. Your thoughts... on the transfer of labor from Taiwan Semiconductor, Samsung, and others over to Phoenix, over to Texas. Can you develop an American labor force that can do the magic of South Korea fab plants?

I used to be more skeptical that that transition could be much more time consuming, but in the case of TSMC with their Arizona fab, I have changed my mind. you can actually get that done much better than people's expectation. With all the training, bringing the people from the home countries, you can actually get together and work together. So I'm actually hopeful and constructive. I understand why these companies are expanding in the U.S. I think that's critical to serve their customers, the biggest customers that are based in the U.S.

So strategically, I think it makes sense, and I'm staying hopeful that they can work it out.

Amazing. So did Samsung actually send some people over, some clients?

They do, from just like groundbreaking to the building, everything just from one to zero. I mean, everyone local has to be involved to transfer the knowledge and training and then everything.

Awesome.

Great stuff. Celine, thank you so much. We appreciate that.

Celine Wu, she's a portfolio manager at Lazard Asset Management. Give us some thoughts on what's going on there. She is the head of the global robotics and automation team.

Stay with us. More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

Eastern.

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app.

Or watch us live on YouTube. This is a joy.

We're going to digress on a Friday with all the market news. Can we do something called non-AI? Yes. Let's do that. Non-AI. We are thrilled to have in our studio and honored to have with us Masa Takeda, who's portfolio manager for the Hennessy Japan Fund. And it's just simply, we all know that Mr. Buffett lined up Japanese ownership as a priority a bit ago. And of course, it's a fund with some really, you know, recent performance. Oryx, Mitsubishi, Tokyo Electron, Hitachi, and that. Is the performance of the Hennessy Japan Fund a slave to a strong yen? Do you need a strong Japanese yen to win?

No, I think it's actually the opposite, because we are broadly invested in global Japanese companies.

So the WE Korean actually helps the business fundamentals. Our portfolio is.

Positioned such that whichever the yen moves, we're naturally hedged.

For dollar-based investors' perspective.

So it's a Hennessy, I love this, Paul, it's a Hennessy Japan fund, but what percentage of it is not Japan when you look at multinational sales?

Well, in one way or the other, all our portfolio holdings have significant growth opportunities internationally, but that also includes Japan.

So one of the reasons that I've heard consistently over the last several years why Japan is a more attractive place to invest is continued progress on corporate governance reforms. Specifically, what is happening in Japan in terms of corporate governance?

Right.

So essentially, Japan's corporate governance reforms is really about not just improving checks and balances, but it's really about improving the capital.

Efficiency of businesses. And it's been around for a long time. 10 years, actually.

For the last three years, the world finally saw caught up with it, but it's been around 10 years. Now, Japan is a very slow moving culture and therefore return on equity has improved 5% to 10% in the last 10 years.

But compared to international, average is still very low.

And being a slow moving culture, we think that this trend can be long lasting.

So talk to us about, I mean, again, another area, another reason why we've heard from Warren Buffett and from others why they are looking at Japan is attractive value. relative to other parts of the world on a kind of a value to growth basis, is it still attractive from that perspective? Because I don't want to get caught in kind of a value trap here.

So I think the valuation levels for the Japanese stock market, it went up quite a bit. Just several years ago, it was 13 times for earnings, now it's 17 times. So we have to be a little more selective going forward. But it's really the improvement of capital efficiency that should drive the market forward.

I had lunch yesterday at the Sony Club.

Oh, did we? I was at the McDonald's on 3rd Avenue.

Yeah, it was some very heavy hitters there in the Sony Club, but they loved me there, had some great sushi. What are sectors that screen well in Japan these days?

Well, so Japan has a lot of breadth and depth compared to, let's say, Taiwan and Korea. So it's not just about AI semiconductor trade that drove the market first half of this year. Right now, we are heavily invested in, for example, financials, including Japanese insurance companies, one of which is Tokyo Marine that announced strategic partnership with Berkshire Hathaway.

So that's one big area. Also, there's the, you know, defense, spending angle, entertainment.

There's a whole other things.

The stereotype, Masa Takeda with us here with Hennessy Japan for an honor to have him here. It's something we don't talk enough about. So two questions here. The first one, for all our listeners and viewers, Hitachi is a TV set that couldn't compete with Toshiba or Sony or whatever. Hitachi's up 26, whatever, phenomenal Apple-like performance. What is it about Hitachi and other Hitachis that Americans don't understand?

So Hitachi is no longer the ailing, low-margin manufacturer that it once was. It has turned into a power grid solution provider. So what they do is they look after mission-critical social infrastructure, including power grids, railway systems, and so on. So- It's a much more service oriented and recurring income kind of biased business model now.

So one of the concerns that folks, when they look at some of these Asian markets, whether it's Korea or Taiwan, they're pretty narrow markets.

They're not very broad.

I mean, maybe, you know, Korea in particular, the KOSPI with all the tide to the 70s. Talk to us about the breadth in the Japanese market. Can I get, you know, I don't want to get too much concentration there. Talk to us about the breadth of that market.

Right, so that's the point I was making earlier.

I mean, Taiwan and Korea, you always have one or two stocks, dominant stocks skewing the entire market. And now each of these stocks, they have market cap of more than $ 1 trillion. Now, we don't have company of that scale in Japan, but then we have $ 300 billion market cap, $ 400 billion market cap companies.

By the dozens. And so that's what I mean by more breadth.

When I was over in Japan for about eight months back in 88, the management practices there, I noticed, just as a very, very, very young banker, very different from the West, broadly defined.

And not a problem. You just had to get used to it, understand it. Has that changed at all?

Or did the Japanese kind of manage their businesses different? Is that something that Western investors need to take account of?

I think one of the inefficiencies as an active manager that we've been exploiting is really the differences in terms of ways of doing business in Japan versus in the West. So to some extent, yes, Japan has become a lot more global, global minded country. But then there are certain things that are very different from the West. So that Japanese ethos is something you have to have a good understanding of.

How is AI going to come to Japan? Do you think these companies are going to embrace Claude in that or the Chinese alternatives?

I don't know which model specifically companies are using at this moment, but I think unlike in the US, people are not worried about AI taking away your jobs too much because of the.

Labor shortage issues that we observe everywhere. So we need, we can leverage AI.

You can leverage, okay, fine. Do you follow Japanese baseball?

On and off, but I'm not that committed.

It's unbelievable the Dodgers, how they own the franchise on that.

There's more Japanese players coming, I understand.

And Murakami's with the Chicago White Sox. He was so much fun to watch. Yeah. I mean, it's great. Have you been to a Japanese, like the baseball games there?

Yes, but I think I follow Otani more now.

Otani follows Otani, like a lot of people do.

The Dodgers.

Who doesn't?

I know, the Dodgers.

He's like the best player of our lifetimes.

Pretty darn good, yeah.

And a lot of the Japanese players keep coming.

I got a minute. What's a single myth that Americans have about modern Japan that's wrong?

That's a good question.

So Japan is a home to, again, kind of making the same point. to a quite handful of world-class companies ranging from AI related to defense and even.

Consumer products like Uniqlo.

So again, speaking of breadth, I think that's what most Americans probably don't understand just yet.

Okay, this has been wonderful. Don't be a stranger. Masa Takeda, we just love doing this on a Friday, taking a moment with the Hennessy Japan Fund with some real excellence along the way. And we mentioned some of those companies that are in and not in the portfolio, the Hennessy Japan Fund. Mr. Takeda in from the West Coast and Japan.

Stay with us. More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m.

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Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.

I did not go to Bangkok this year. I talked to Jackson Hole. I talked to the team Gorgieva at the International Monetary Fund. And I said, I'm just not going. Lisa went out and all good time was had. With their schedule, it took a while to get to Paul, the most important book that comes out every year. I busted managing director Gorgie Avis-Chops for years. It's now like PDF online and all that. And Jason Wu remembers when it was the green book.

Sure.

It had appendices. Absolutely definitive. The Global Financial Stability Report. This is for me an annual conversation. We're honored that Dr. Wu could join us from the International Monetary Fund. Jason, in the appendices of the Global Financial Stability Report, what was the most interesting one for you given 2027 ahead?

Well, first of all, good morning, Tom.

Good morning, Paul. Thanks for having me. This is great to.

Discuss the Global Financial Stability Report. Look, I think what's the most interesting for us is this time a deeper dive into the AI ecosystem, in particular, the amount of debt that's being used within the AI stack by various firms.

Okay, well, I look at the debt and I look at AI. The world's blowing up here on a Friday afternoon. I know the IMF doesn't look at a one-day rate, but do you have a three-year or five-year vision of when free cash flow returns to those companies?

Thanks, Tom.

We don't actually do forecasts in the Global Financial Stability Report.

We do worrying, which.

Means that if those monetization free cash flows don't work out, we try to figure out the severity and the consequences. And so, what we have observed is that the free cash flows have been exhausted. So, investments are turning increasingly to other sources of financing, namely debt. And we do wonder in a environment of rising interest rates, as well as potential slowdown in AI investments, what that might entail for financial stability, and in particular, for the institutions that are currently holding those debt.

Jason, is it the amount of money that's being invested in AI, is that the concern, or is it more about how it's being financed, i.e., we're seeing some of these tech companies that really haven't needed debt capital now really coming to the debt markets aggressively?

That's right, and so I think there are two parts to this. One is that some of them are tapping public markets. For example, corporate bonds, investment grade corporate bonds in particular. And for that, at least we can see what the debt levels are, the financials are clear. Then there is the more opaque part, Some of these involve the so-called circular financing ecosystem, where debt is raised outside of more transparent public markets, some of them through private credit, and some of it is circular in nature, meaning that debt is offered in return for future revenue commitments. I think those are the ones that we will look to scrutinize a little bit more going forward.

So what we understand, Jason, is there's going to be even more investment for AI as we listen to some of these tech companies and their earnings calls. And the expectation from the bond market is we're going to get even more debt financing coming up. Is there a limit that would get your attention that, gee, maybe this is a system? substantial risk for the global economy? Is there a limit you've identified or is this something we just have to play by ear?

This is a very important question.

If we look at some numbers, we will see that the peak year forecast in terms of AI investments will reach 3% of GDP. By comparison, during the early 2000s in the internet era, the peak investment was 1.5%, I believe. Similarly, during the werewolves, the investment was also less. In other words, this particular AI phase is one that commands a lot of investments. I think it is fair to ask, what is the threshold investment level at which sustainability becomes an issue?

We are working on this topic, and a lot of it depends on what the productivity gains are. and what the impact AI has on corporates.

Okay, folks, the money, I want to do, we're going to come back after the bell at 9.30 and continue this discussion. But Jason, I just put out on Twitter and LinkedIn, my money chapter. Anybody who cares about AI, has to read chapter three of the Green Book. It's called the Gorgieva Green Book. Jason doesn't know that, but that's what we call it. Here, Jason, your chapter on tokenization is absolutely definitive. What's your message on this uproar about what tokens are costing a given company?

So yeah, we observed that tokenization is a growing area, particularly for real world assets, including tokenized equities, tokenized bonds. Those things are now having real use cases. They remain fairly small. So the top line message of the chapter that you're referring to, Tom, is that there are ways to remove barriers so that they can scale. But as they scale, we also need to be attentive to financial stability implications. For example, Could the increased use of tokenization in real world assets lead to higher leverage in the financial system?

Let's come back. Jason Wu with us. We're thrilled with the International Monetary Fund in celebration of Bangkok in their financial stability report. I'm giving Alexis a few seconds here to get the market open because it's Friday and she needs a few seconds. Alexis Christophorus with the market opening.

There was a heavy lift and boy, what an ugly beginning to our Friday morning here. NASDAQ composite going to start the day down 116 points. Dow Jones Industrial Average off nearly 500 points. S & P 500 down 41. We are continuing to see investors move to the safety of the bond market. And right now, the two-year yield.

Is at 4.66%.

10-year, 4.96%.

30-year, 5.29%. We've also got Brent crude at $ 1. 1526 a barrel now, so above $ 150 a barrel. This is its highest level since May. It is up about 2%. WTI crude up better than 2%, closing in on $ 102 a barrel. Bloomberg Dollar Spot Index little changed at $ 12.

2057.

We have got Bitcoin up nearly 1% at $ 81, 800. and spot gold at 40.28 an ounce. American Express down 3%, slashing 5% of its global workforce as it looks to reduce expenses. Amex also posted earnings that beat estimates and raised its guidance. That's your Bloomberg opening bell report. Tom and Paul.

Alexis, thank you so much. We continue with Dr. Wu at the International Monetary Fund on my most important document of the year. This is out of Bangkok. They even did it in Thai.

Is that right?

You can read it in Thai. Jason Wu with us on the Green Book, the Financial Stability Report. For the kids out listening, this is the Bible to understand how the PhDs work around the clock, thinking as hard as they can on what's out there. A delicate issue, Dr. Wu, before I let you go, how does China fit into AI and our financial stability forward?

That's an important question.

So they play a major role in the AI ecosystem through hardware, through chips, and as you know, through some of the frontier models as well. I think there could be a positive outcome to their participation in the sense that if the frontier of AI models is being pushed together, this might take away some of the excessive investments, if you will, and while not compromising the power of the end product. However, there's also a potential negative aspect to this, potential negative scenario, in other words, where essentially some of the cheaper models coming out from China is going to raise substantial questions about whether all of these investments are needed.

Jason, also in your global sustainability or financial stability report, you call out cybersecurity. And that's not the first time Tom and I have heard this topic just today. Talk to us about the cybersecurity threat in an AI world.

So as finance become more digitalized, first observation is that the attack surface is much larger now. In other words, cyber attacks can impact many types of financial institutions, including financial infrastructures, banks, and other types of financial institutions. The second observation is that in an AI-driven world, the speed of attack has also increased. So we have a neat chart in the Global Financial Stability Report showing that the so-called zero-day rate, in other words, the vulnerability is discovered and on the same day it's being exploited, has risen to close to 80% in 2026 compared to just 20% in 2018. So within the course of a few years, we have a lot of these vulnerabilities being exploited on

the same day This reflects the speed that perhaps AI models can bring when it comes to the cyber threat landscape.

Dr. Wu, thank you so much. From the International Monetary Fund, just a really must-read linking in technology and AI to the financial stability forward for the IMF countries as well. Stay with us. More from Bloomberg Surveillance coming up after this.

You're listening to the Bloomberg Surveillance Podcast. Catch us live weekday afternoons from 7 to 10 a.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.

Bruce Wolf joins us.

He's the Senior Vice President, Wealth Solution Leader. The firm is alight joining us here in our Bloomberg Interactive Broker Studio. So some volatility coming back into the market. Bruce, we see a VIX right there around 20%. What's the discussion you're having with your clients these days?

Sure.

So first of all, thanks for having me back.

I appreciate it.

So our firm basically provides benefit administration services. So basically help individuals within their company to think about and make good decisions around wealth and health and so forth. And certainly the messages that we're sending out for most of those individuals is, you know, ride things out, right? Most of these folks, as was alluded to a moment ago by Tom, is, you know, they should be thinking in terms of decades versus weeks. And if they're thinking about retirement, they certainly don't want to make decisions based on what's happened today, what's happened in the last week. We all know that if you invest over the long term, you're most likely going to end up in a very good place and you're going to have a larger amount of

assets to be able to retire with.

So you got to think about it for longer, right?

Because retirement is probably a lot longer for me, not that I'm ever going to retire, than it would have been for my father's generation.

People are living longer. Absolutely. So when people walk into your office, are they prepared for that?

So I think most individuals, to some degree, you could almost think of it being overprepared. And what I mean by that is that they are so worried about running out of assets because they do think they're going to live a long time and many will.

That they underspend.

And so, matter of fact, there was a nice piece put out in The Atlantic by Jean Chapsky where she talks about underspending, which is a real issue. That many individuals are not spending their money in retirement because they're worried they're going to run out. And as you can expect, the big beneficiaries of that are their kids.

Right.

Right. And so instead of living maybe the lifestyle that they had planned to, they end up spending less.

I told my kids the last check I write is going to bounce.

A lot of people sort of think about that.

But once they get into retirement, the reality of seeing their assets come down can psychologically be very jarring. And there's ways to mitigate it. There's certainly ways you could, for example— If people are truly worried about longevity risk, you can go and buy an insurance product that specifically covers longevity. It'll kick in, say, when you're 80 or 85, and it'll cover you from that point on until you pass away.

That's a very efficient way. to get coverage around that risk.

And then also, as you imagine, then it gives people a little bit more flexibility and freedom that they can spend.

I get the feeling, Bruce Wolf, that there's a new panic out there. And it's a summary of day-to-day expenses. We had Max Chifkin and Stacey in on the price of beef. Okay, fine. but it's about healthcare in this trust that it's out there somewhere when I'm more fragile. Alexis is so young, she thinks fragile is 55. Okay.

It's fragile out there for retirees is like, you know, 80, 84, 94 in that. Should we have confidence that the medical system and the social security system is going to be there?

Sure.

So I guess a couple of things. One is, I mean, from a Social Security perspective, I think the reality is there'll be adjustments made over the next five or 10 years.

So there's going to have to be.

What those adjustments look like is kind of too early to tell. There's an interesting dynamic, and I'll come back to the core question in a moment, but we're seeing that younger individuals are concerned that Social Security won't be there. So as a result, they're changing their behavior to save more, which is a great you know, is a great phenomenon to see.

Their parents didn't do that.

No, a lot of people did not.

No, and in fact, I'm really, I'm kind of the first generation that lived through defined contribution where we were starting to save money in our 20s and 30s. either on our own volition or now, as you know, automatically, people, when they join a company, are put into a defined contribution plan. So I think there's just a higher awareness, certainly, in people in their 20s and 30s that they need to be saving, which is a great thing. I mean, as it relates to healthcare, we at Alight, we put out a mindset plan study every year where we go out and talk to individuals about health and wealth. And what we find is individuals are definitely concerned about health and expenses associated with health. What we're finding, though, is

that individuals are looking for help, right? They're looking for somebody to help them kind of navigate through it. Because as you know, regardless of how old you are, it's very complex.

So where....

I guess probably a lot of people who have maybe had some professionals helping them with their money.

Sure. Is there a new type of professional they need.

Or are the brokerage firms, are they evolving to deal with this issue?

Sure.

So first of all, I'm a big advocate that people need some level of advice. Some people may want to have ongoing advice and need an advisor to help them sort through that. Others may just want, we'll say, kind of a point in time. So like as they get close to retirement, they want somebody to help them kind of set themselves up. Because we clearly see that most individuals, particularly as it relates to finances, are challenged.

I got this one last question. And this is what's coming, folks, in 2027, 2028. So you get a pot. How do you spend it? How do you use your retirement plan out there when you're a fossil? Do annuities fit into this? Do you see an efficacy of some form of annuity, almost British annuity overlay?

Sure.

So, yeah, I mean, I think, as I was referring to earlier, I think the most effective way to use insurance, I believe, is to protect against this longevity risk, right? And there's a product out there called a deferred income annuity that specifically is.

Designed- So when you say insurance product, you're saying annuity. I don't think our audience thinks that way. An insurance product is, what if I die?

Right.

But an annuity is, for Americans, annuities, it's almost a foreign concept, isn't it?

Yeah, it certainly is, especially compared to other parts of the world. We are not annuity friendly in terms of thinking about it. But it is a way to provide that level of certainty. And again, I'm not saying that somebody should put all their assets into it. I think actually a very small component of it. They cover very specific risks that individuals have when they move into retirement.

And then otherwise, I think it's really just setting up a systematic approach to withdraw those assets. And I think part of the problem we have today is most individuals think about it in terms of like a total return strategy. which in my view is not the right way. You need to think about it from a cash flow management perspective.

I'd rather talk to you, but unfortunately they're telling me I got to do the markets.

I understand.

Bruce, brilliant. Bruce Wolf for this with a light here this morning on solutions to your.

at retirement this is the bloomberg surveillance podcast available on apple spotify and anywhere else you get your podcasts listen live each weekday 7 to 10 a.m eastern on bloomberg.com the iheart radio app tune in and the bloomberg business app you can also watch us live every weekday on youtube and always on the bloomberg terminal

Thank you.

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