Fed Decision and Tech Earnings

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She's senior advisor, macro policy perspective, chief economist for The Economist. intelligence unit constant hunter with us this morning. I want to frame out two groups. There's a group looking for maybe one more rate rise, that's it, then down we go, disinflationary vector, etc. And there's another group saying they should be raising rates today or at least raising rates in December and raising rates again. What is the single distinction between those two groups, Constance?

So we have this debate on our team all the time, and we are not monolithic. We have both representatives. And the raise once and then possibly be on a downward trajectory is looking at factors in underlying inflation that are moderating, non-energy factors. And of course, the real question is, do the energy price spikes spillover into services? Is there demand for inflation, enough demand for inflation from AI that's going to have broader inflationary effects, or is that going to be contained? And then I think finally, we are not done with the trade war.

Okay.

So how, folks, this is This is the Latin moment of Bloomberg surveillance this morning.

Sweeney killing Latin at Duke.

You were at Lawrenceville years ago. You took Latin?

We had Latin at the Blessed Sacrament School in Trenton, New Jersey. I'll bet we did.

So let's go Latin with Paul Sweeney.

Ex ante, get out in front. Ex post, you got to wait.

I'm suggesting this is a Fed that is massively ex post right now.

Yes, and they are not alone, right?

We have two other central bank meetings this week. We have the Bank of Japan and the Bank of England. They are both going to hold and wait and see. And Japan probably has the most significant inflationary pressure that is both demand pull and cost push. And they, too, are taking a wait and see approach. And there's really– look.

If it is an insurance cut and what they are signaling is they're tough on inflation, you can make a strong argument that they cut today. If you look at the underlying economy, does it matter if they hike today or hike in December? It really doesn't matter that much for the underlying economy.

She says demand pull, cost push.

It reminds me of Scotch, cigars, LBJ.

It's so 60s.

60s.

So, Constance, what is, in your mind, the underlying inflation out there? Because there's obviously the energy aspect. There's the AI aspect. I mean, companies are spending left, right, and center, raising money all over the place to spend money. When you peel all that away, what is the underlying inflation out there? Is it something that the Fed- should be concerned about?

Well, this is a really good question, right? Because we have a different backdrop than we had, say, in the 1990s. A lot of people like to look at this time and say, well, if we compare this to the 1990s when we had the internet boom and that technology boom. How does that transfer? And the fact is, in the 1990s, we were in a global economic backdrop where we were reducing friction, right? We were advancing free trade. More countries were becoming capitalist and democratic. We had institutions that supported coordination And so we had the peace dividend from the fall of the Berlin Wall. Now we have a situation where we are increasing frictions, where global institutions are not easing global frictions, where security, supply, and statism are really

pushing up prices and in some cases pushing up demand. So if we look at that backdrop and we say, okay, what percentage of the basket is AI? It's really not an AI-related component. It's not a large percent of the basket. But the question is, can that grow as this continues to grow? And that is, I think, an unknown, but something that we are closely monitoring.

The Fed, I mean, Fed Chairman Walsh, he is sticking with this 2% inflation target, as the Fed has done for a long time. But A lot of folks are suggesting maybe that's not the right target anymore. We're onshoring more manufacturer trying to onshore more manufacturing. That suggests maybe higher inflation. We're restricting immigration that might push up wages.

That could be inflationary. Maybe the 2 percent target isn't the right target anymore. Maybe it's something higher. How do you think about that?

Well, Tom talks about this all the time. He talks about nominal GDP, right? Are we in a nominal GDP world that's a 6%, 7% nominal GDP?

I had a drink with Kodlow once, and he slipped something in my drink. I've never been the same again.

That could happen to a person.

But in any case, I think that it really.

Depends on what is nominal GB, where is overall demand. So the concern and the reason we have the dual mandate, right, is that if you have higher inflation, it curtails economic activity. And so you don't want persistently high inflation because that makes it difficult for businesses to operate, right?

Talk about.

Paul's great question in nominal GDP, this boom economy, and yet if I look up credit card delinquencies or percentage of month-to-month expenditures on credit cards, it's beyond ugly.

It's not mean for everyone.

Do you agree we've never seen this before?

Well, I think you need to look at credit card debt and credit card expenditures as a ratio of overall consumption, right? So with that number is growing, obviously the credit card number then also grows. How is it growing proportionately? And so if we look at it in terms of how it's growing proportionately, it's really in line. But then if we look at where our delinquency is starting to tick up, who are the consumers and households that are really stretched?

Right.

And there's a significant cohort of them.

Okay, Constance, thank you so much.

Constance Hunter getting us started this morning with EIU and, of course, her work with Julia Coronado, Macro Policy Perspectives.

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Dominic Constance, without question, our global Wall Street interview of the day, definitive at Mizzou, all of his decades at Credit Suisse as well. Never have I seen you top out a note on the jobs market. Paul and I called yesterday seismic. that Microsoft are asking 60,000 people to head for the door. You and I and Clement Attlee have never seen this before. I mean, tell me about the jobs market.

Well, I guess the idea is that the workforce is lower and we're still able to create enough jobs to keep unemployment unchanged. But clearly, we're at the precipice, maybe, where with this AI thing, you know, we might be changing that and Microsoft might well be reflecting that. And you're seeing a bit more and more of that. However, I would sort of suggest that Walsh and I sort of share something in common in the sense that When you have these sort of productivity events, usually the labor demand recovers as productivity expands and you reabsorb these workers.

But the analog all of our listeners are using is we had textile workers in the Carolinas.

Dominic, that's down south in America.

Yeah.

The Carolinas.

They went to China. They went to Asia. And we didn't replace those jobs. Do we risk that again?

Well, I mean, as a transitory phenomenon, yes, a little bit. But I mean, you know, supply creates its demand. And when you have excess supply in the States initially, then I think that will get reabsorbed and you'll create the demand to support it. And it's going to be in different areas. I think the economy basically has a way.

of basically dealing with this. And I wouldn't be afraid of this sort of Luddite sort of idea that we're forever going to create a mass unemployment that somehow can't be reabsorbed. I think the bigger issue is actually income and capital distribution. I think the idea is that the terms on which labor gets reabsorbed basically might be less favorable in terms of real wages and ultimately capital and the people's ability to own a pension and buy a house.

And that is where a policy has to come into effect. So that's your kind of K-shaped economy. That's a much bigger issue than I think people being made redundant and never getting a job back again. I think that won't happen.

So if the Fed, which we're going to hear from today, and Tom will have full coverage starting at 1.30 p.m. Wall Street time, Fed focusing on inflation, There's not much they can do there. I mean, it seems like the energy is going to do what it's going to do. AI is there. It doesn't seem to be going away.

And that probably has some inflationary push. What can the Federal Reserve really do here? I mean, it suggests that they should just sit on their hands and kind of see how things play out.

I mean, it's a great question. I mean, when you look at all the models on inflation, I mean, the thing that stands out is inflation expectations matter a lot for inflation. and the Fed itself matters much less. I mean, it doesn't mean the Fed doesn't matter, but it's more important to actually bring down, especially the front end inflation expectations.

And to some extent, maybe the Fed hiking rates helps do that. I think really, what the Fed is, where they do matter, is they give you some sense of credibility in the inflation fight that helps stabilize a long end of the market, in rates markets. So I think what the Fed is doing, to some extent, will help reduce inflation in addition to to assuming inflation expectations normalize.

But the bigger issue is by being seen to be caring about inflation, they get credibility for the long end of the market, which stops interest rates going up to, say, 6% in 10s or 30s. And that's kind of where we're at.

I mean, again, the 10s, you mentioned sitting right at 5%. Is this a reasonable level for the yield curve to be at, given that This economy is growing pretty darn quickly. So maybe rates are where they should be.

I don't know. MARK BLYTH, JR.

Well, yeah, what do you mean by reasonable? I mean, it's certainly not reasonable for debt service. I mean, it's a big problem for a lot of countries, including the US, to have rates this high. There's nothing about stabilizing the debt and having discretionary spending available to the government with interest rates this high. I think if you're thinking about the economy, then yeah, I mean, it's not totally unreasonable.

It's probably a little bit high. I mean, I think the idea is that inflation is running at 2% and real growth, even if it was 3%, you still probably ought to have a government security that's close to 4, not 5. And based on that, you could argue it could be a little bit lower in the end. But right now, obviously, you've got this inflation problem. And it's a big problem, and it's going to take a long time to fix.

Dominic Constan with us from Missoula. Paul, can we go Austrian economics?

Sure.

I mean, I'm thinking of Hawtree in England. Did you study with Hawtree?

No.

Was he an agent?

No.

Maybe he died by then.

Yeah, probably.

Capital deepening.

Dominic Constan instructed me and Ira Jersey on capital deepening for productivity swings alone. What's the character of AI capital deepening you see in this CapEx frenzy?

Um, well, I mean, capital deeming strictly means, you know, you can make more output, you know, with relatively more capital to labor. So it's a sort of ratio, if you like, of labor to capital use and productivity. So clearly, you know, given we just talked about, you know, Microsoft getting rid of jobs, et cetera, that's consistent with that labor input sort of being somewhat weaker. And yet we're adding a lot of capital. And capital comes in lots of different forms. It used to be obviously structures. But now it includes software and all of that sort of intelligent capital. And that's really what AI is delivering. And, I mean, we have productivity miracles that happen right the way through centuries. And there are these Kuznets cycles and

conjugative waves. And they're like 20 years or 50 years. But basically, I like the 20-year one, which is Kuznets. And that basically is sort of where we're now. Last time we had a prodigy miracle was about 20 years ago.

This is great.

Okay, we're going to go to Kuznets here. I'm going to go 1947 is after Autry. Okay, fine, Dominic. Except I don't know the depreciation cycle of all this capex being spent on all this stuff. We're going into this blind compared to what they did in the 50s and 60s.

Yeah, that's an interesting one, the depreciation. I think the idea basically is that these things perhaps are not depreciating as fast as you might think. I mean, this has been one of the issues around AI valuations. I mean, basically, you're still, I understand, you're still using a lot of chips that came out a few years ago that still have a tremendous amount of sort of use in them still, which is basically allowing the capital deepening to be even greater, basically.

because there's less depreciation. So I think in a way, this is a more profound capital deepening than perhaps we've seen before, when depreciation might be much faster and all the capital you've been spending just has to be replaced very quickly. So net capital stock isn't increasing as much.

What do you think of that S1 from Anthropic? I'm sure you've poured through every page here. I mean, this is the AI dawning moment, I guess.

I don't know. Well, I mean, I observe.

From where I work and the clients that we interact with and obviously our own bank, that the take-up of these language models is really still only just beginning. I mean, you know, I'm using Claude a lot now. But I would say six months ago, a year ago, you know, it was really peripheral. It was really more for sort of, you know, instead of search. So I think from the business side, this thing is really just beginning. And we're not spending that much money on it yet in terms of a customer.

I've got to squeeze this in. Simon Kuznets, Nobel Prize winner, 1972. One, he said, don't confuse GDP with well-being. Are we right now confusing our nominal GDP.

Boom with well-being?

This is my favorite topic. I mean, I think the GDP is a terrible measure of welfare. And the reason why people are miserable is because GDP is not the right way to be looking at it.

Thank you.

You have to look at consumer surplus. Consumers get a wonderful gain from wanting something and not having to pay as much for it as they're willing to pay. That is why profits, by the way, are so high. because companies are taking that consumer surplus and putting it into profit.

Dominic Karsten, my clinic there, did you ever think, Mike Bloomberg came up to me once, he said, you've got to get Simon Kuznets into the show.

Yeah, exactly. For the ratings.

That was a clinic on British mid-20th century economics.

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This is a good time to speak to David Schlosser, multi-asset solutions at VanEck. And I bring that up because, you know, they were alternative before alternative was alternative, I think is how.

I put it. And I love, love your comments here.

On AI.

I mean, you nailed it. Everyone loves to hate AI right now.

So over the next five days, what do you see 10 days out after we get a report on AI from 43% of the S & P 500 market cap?

Five days out is pretty tough, but let's push it out a little bit further here. So first off, really big picture. We are macro investors. We are thematic investors. And we believe you make most of your money from riding trends. You want to do it in the most diversified way possible. And now on AI, the most hated trade ever. Here's the thing. People are already writing it off.

The technology is still being refined. It's improving at rates faster and faster and faster. The infrastructure is still being built. Companies are still trying to figure out how to use it. Yet if you speak to a lot of people, they think the trend is completely over. We don't think that that's right at all. You know, the best way to play it, we think, from here is you want to think about infrastructure development companies, right? No matter who wins on the technology side, the winners and losers are constantly changing, right?

You develop a new model, you generally get six to eight weeks before you get leapfrogged. No matter who wins on the technology side, everybody's going to pay their electric bill. Infrastructure development stocks, a lot of these are beaten down significantly. A lot of these look like the same prices that they were in the beginning of the year. So buy the dip on those, do it very, very broadly. That's where we're at.

What did you make of This S1 we saw from Anthropic just dropped this yesterday, I guess. What does that mean for the space? Are your phones ringing off the hook? Your clients want exposure? What did you guys make of that?

We think from a very, very high-level perspective, it's just more of the same thesis, right? Everybody's investing. Everybody's starving for capital. More and more and more and more.

Of the same.

The situation is this, is that if you take it from a really, really high-level perspective, People are trying to constantly write off the trade, tell you why it's a problem. At first, it was going to take our jobs and it was going to take our lives. Now we can't fund it. There is a scarcity of capital. It is a friction. But bubbles aren't popped when people exactly know how it's going to happen. Bull markets don't end this way.

We're very, very early in this. We think it runs for a very, very long period of time.

Dovetail.

All the ability of VanEck on commodities, on metals, on gold, dovetail that into the infrastructure build-out of AI. What do you see as how it buttresses into the commodity cycle in VanEck precious metals, but everything else as well?

We think about it this way. We want to have exposure to the entire opportunity set. We want to have exposure to everything below the earth. Think of copper, minerals, metals, energy, right? The company's benefiting from the extraction, refinement, distribution of commodities, natural resource equities, infrastructure development, the rails, moving the energy, MLPs.

We want the entire opportunity set, right? From all the way from below the earth, all the way to the refined product, which is the finished product, which is the data centers. That's what we're focusing on. So we are leaning into technology. We're doing that as well, but we're also barbelling it through the infrastructure development. That's the way that we're doing it.

So how are those... I mean, it was... A lot of folks will come in here and say, I'm looking for a hedge on AI. And it's hard to find one. I should throw out, well, just buy a utility with a dividend. No, utilities are ripped because of the power play there. Are you thinking about hedging at all this AI?

Are you just kind of long across the board?

The world has changed in a pretty funny way. It's really hard to predict. So think about it this way. We've made most of this money this year from refined product. If you and I would have been sitting down having a beer on New Year's Eve and we said, Dave, how are you going to make most of your money in 2026? I wouldn't have said, listen, this is what we're going to do. We're going to buy heating oil diesel, Euro gas, et cetera, and refined products and go through the moon that Iran was going to be invaded and that Russia and Ukraine were going to blow up each other's refining capacity. We wouldn't have said that. So point of that whole message is really, really simple. You want to spread the peanut butter as much as you possibly

can across all the assets that are scarce. When you do that, you could sit back and benefit from that scarcity and the different return drivers over time. Gold's a funny one, right?

Let's talk about gold because that's hit 5,000. We pulled back down to 4,000.

We were well above $ 5, 000. So, you know, you're close to, you're around $ 5, 500 and now we're at $ 4, 000. Now, here's the funny thing.

The catalysts.

Gold are significantly more elevated now than they were at $ 5, 500. Why do people buy gold? They buy gold for protection. They buy them from the basement protection, inflation protection, geopolitical shock protection, weaponization of the US dollar, right? Broad-based uncertainty. So if you take all the factors when gold was peaked out and then you pull them forward to today, the catalysts are significantly higher. Why did gold correct? Gold corrected because prices were overbought, And then interest rates were higher, dollars stronger. We think gold goes a lot higher. You think you go to $ 5, 500 and beyond.

I mean, this is textbook VanEck.

And if you can't comment on this stock, but it's just too much romance here. Saskatoon, Saskatchewan.

Oh, boy. 25,000 employees. Nutrien.

I'm sure they had some amalgamated fertilizer name years ago.

And they distribute potash, nitrogen, and phosphate products. How boring.

And yet that's the biggest holding in one of your funds. I mean, it's, again, boring commodities is what you're looking at, right?

So I'm not going to comment on specific stocks, but what I would say this is that assets with embed scarcity really come to life. If you think about the world from a really, really simple perspective, the barriers to growth. So we always talk about bottleneck investing. When I say bottleneck investing, what am I saying? What scarcity is preventing growth?

And scarcity are now physical assets. Physical assets are the building blocks of growth. They are the ultimate bottleneck. What does the world suddenly need but there's not enough of? You want to do that in the most diversified way possible. So you can go across the entire commodity complex. What is boring in a different regime is not boring in the next one. In the next one, we're talking about a higher growth regime. AI promises more productivity, more economic growth.

If you're going to get more economic growth, you need those physical assets. But it's not just for the build-out. Because the hope is more productivity and growth. Then you're going to get rising living standards. People consume more. That's the whole idea.

What's your X axis on that? What's the timeline to get proof of AI concept for the gloom crew?

You're already seeing it. I mean, look at Meta in September, right? It was up 27% off of increased advertising as well as Muse adoption, right? You're going to see more and more of that. We're in the early stages. It's a pivotal technology with big, big promises. It's going to take some time. Five to seven years is likely where you're at.

Everybody wants it now, but they've got to realize how fast they can move.

Are you based in Saskatoon or New York?

I'm right in Midtown, sir.

Good.

David, thank you so much. David Schleser with us. Love it from VanEck Funds as well. Multi-asset solutions.

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

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This is a joy.

It's a three-hour conversation with Ed Ludlow in way too early on the West Coast, driving all of our technology coverage. Ed, without question, for Paul Sweeney and I, The idea that any major blue chip company, Ed, that's a phrase from 50 years ago, would eliminate 26.9% of their workforce is never before seen. What in the coffee shops... In the Bentley dealerships, what's the response of Tech Bro to what Microsoft's 60,000 employee buyout? How has that been handled, taken in by the people that follow Ed Ludlow?

There was a magic TV moment yesterday on the show where I read out the headline when it broke and Bloomberg's Brody Ford took like a big pause and goes, this is a big number. And it was just like classic TV news, but it is a big number. You know, Microsoft is a giant company.

It had.

More than 200,000 employees by the end of June. But, you know, how many people do you really need to market and get sales channels for software? You know, at the end of the day, that's what Microsoft does still. So they are there's a really straightforward story, right? Wall Street cares about free cash flow now. It really does.

And if you are committed to spending at the levels that Microsoft is, something has to be a mechanism for belt tightening. And that's the answer, Tom. But it was a big number, yeah.

Okay, they're lemmings off the cliff. Are we going to see more of this?

Stack up all of the big technology names, stocks, and look at their performance year to date and ask, what is it that distinguishes them? Top of the log is Apple and NVIDIA. And bottom of the log is Meta and Alphabet and Microsoft somewhere in the middle.

Bottom of the log.

Has negative free cash flow. And those are the companies that have also taken action in most cases. Top of the log, throwing off cash like nobody's business. For them, they're more worried about shareholder returns than needing to let go of anyone. So the market is fickle. And I say that carefully in the sense that it is specific to the company. When Oracle entered negative free cash flow, I remember Paul, you and I were talking about this live right at the moment, it was like the apocalypse.

The world had ended because that company had gone into that place for the first time since 92. When others have done it like Amazon, the market's super chill.

Why?

They just believe that it's not an issue. So when companies take action reducing staff, generally it's cheered if the market's attitude to that company has been, okay, we're not so worried about you being in the profile of negative free cash flow. That's kind of dry stuff, but really it is specific to that company and whether Wall Street likes them or not.

So Alphabet's shares have lost value since its July 22 results here. What do you think they need to conveyed to the street this evening with their current earnings call.

So what's astonishing is that it's likely that Google's cloud business will grow 91%, maybe not more than 91% year on year. The market actually believes that if there's room for a surprise to the upside, it is the juggernaut of Google's cloud business. What has also happened in the court of gone is that Google has had some problems.

key talents left the company to go elsewhere to start their own thing. They are in this position just like Meta is where you know Google because when you fire up the computer pool and you're like, what happened in the game last night? You search in Google, right? That's your relationship with it. And they're having a really hard time convincing the market of the straightforward equation that if their cloud business is growing beyond 90% year on year, that's evidence that AI is going well for them. People still think it's the core search business and they want to see evidence that that core search business is somehow made better, is somehow made more profitable by all of the work that's gone into AI. To Google's mind, they're

kind of distinct stories.

There's no reason to believe that we'll hear from either Microsoft or Alphabet that they are reducing the growth rate of their spending, will they? No.

Yep. Big numbers.

Yeah.

Uh, I've got them written down here, but yeah, just, let's just say they're big numbers. What's the point of putting numerics on it? Um, I think, you know, the difficulty with all of this is that, uh, you know, the bar is, is high. So if you and I are having this conversation with Tom six months ago, and I came back the next day and said, top line growth was as expected.

Good.

The market would buy it. Now the Wall Street wants more, they want profit. And That's good old-fashioned company earnings coverage.

Ed, quickly here.

I've had a conversation.

I'm not going to drop the names, but a lot of fancy people about local AI, where we're going to have these magical toys on a computer on our desk. It may be slower than Claude or whatever, but is this what's coming down the pike where everybody's going to have their own thingy on their desk at home.

And at business?

Yeah, I mean, the device makers were talking about this in the year 2023, immediately following the chat GPT moment, that because the modus operandi by which the world interacts with AI is their smartphone... You just need to be able to contain it on that device. If you fast forward to present day, a whole industry has been built around this. The idea that what is old is new.

We are obsessed with the idea that data centers are being built around this country seven days out from the midterms and everything is up in the cloud. Actually, the direction of travel in industry has been the opposite. Companies big and small are building little data centers on-prem, which is a very old-fashioned term, because they want to have all of that AI run locally to them. It's called at-the-edge computing. All of this is jargon, but very simply, what you're describing where your life, your interaction with AI is on your personal computer, closed from the world, that is what is happening.

Okay, this has been wonderful. Ed, huge day for you. Thank you so much.

We really appreciate you coming in. as early as he can. He probably came in, like, way more, you know, like, driverless.

Bloomberg Technology, blah, blah, blah. Driving all that coverage.

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