Previewing the Fed Meeting and AI IPOs

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I truly appreciate that. Like, I'm supposed to give them some lofty introduction. You'd have Gary Gensler and then Robert Kaplan for an extensive conversation as to what it's about, the former president. head of the Dallas Fed with all of his work. The only equivalent I can say to Robert Kaplan is Michael Spence with all he did in academics at Stanford and what he did across all of economics.

But I got it. Can I do an audible start? I mean, it's closing, but I have to. Alexis just mentioned Coca-Cola. You grew up in the Dr. Pepper belt. Were you weaned on Dr. Pepper?

In Kansas City. It's Texas drink, but I drank it in Kansas City, yes.

You have no idea how foreign that was when I was a kid.

I like Dr.

Pepper.

Once a year. And we'd get a bottle. It's good. You'd have to split it.

It's yummy.

It's a little medicinal tasting for me, but I just don't send me hateful X things.

Mrs.

King calls it Robitussin.

I'm with your wife.

Robert Kaplan with us, always of Kansas and Goldman Sachs, and of course his public service at the Dallas Fed. I look at the moment we're at, and what I want to say, Dr. Kaplan, is we want to get back to basics. What are basics for Robert Kaplan out of the election and given the news flow that's mind-numbing, how do we get back to Robert Kaplan basics?

Two or three points.

I'd say this economy is, if it's anything AI related or defense spending related, super strong. If it's related to housing, autos, serving low, moderate income consumers, sluggish. Government, historically highly leveraged. And we're seeing that play out in the treasury curve. And while that's going on, you've got a historic demand for capital. to fund this AI infrastructure boom. And we're seeing that play out in rates. And on the inflation side, you got to say some of this inflation and maybe the bulk of it is structural, not necessarily cyclical. I don't know that there's an overheating of this economy. So those are some of the things that we're looking at.

How does the Fed put all that together over the next couple of days, do you think? Uh.

I think I would be spending most of my time debating how much of this.

Is supply, how much of this is demand.

Torsten Slock's note this morning.

Yeah, and I saw his note, and it's based on a paper from the San Francisco Fed, and I always read Torsten Slock. I don't know that they know. They say some of it's supply, some of it's demand, some of it's ambiguous. I think that would be where I'd be digging in a lot more, and I don't think the data is going to help you as much as being out there talking to companies.

I'm going to interrupt here because, folks, you just heard the Kaplan distinction there. You've got a lot of PhDs who are really trained not to say, I don't know. But this is your heritage at the Fed where you'd say, wait, we don't know, is it? There's a lot we don't know right now.

And here's why it's confusing. Diesel bleeds when diesel goes up. Turns out it's embedded in 50 other items. And so a broadening of inflation is not a surprise when diesel is this elevated. But the issue is I could raise the Fed funds rate if diesel does not come down. the impact of raising too far too fast may be to slow already sluggish parts of the economy, and it may not make a dent in inflation. And so that's the kind of thing, that's the reason to skip today and raise rates but do it deliberately. There are pros and cons to that. If I thought this was a cyclical overheating, I'd say let's get moving faster.

AI impact on just economic growth. A lot of folks would say if you take a look at maybe 2% real GDP growth, half of that may be related to AI.

I guess that's good.

As long as it's working.

But boy, if it rolls over to any degree, that could be really rough for the overall economy. Do you think the Fed thinks about that?

It should, and that this is not a broad-based... We're used to, over the last number of decades, a consumer-led economy that, you know, how strong is the consumer?

Is unemployment up or down?

This AI push is more narrow. It's about building data centers, power, chips, everything related to it. And then you've got the adoption wave, but we're early in the adoption wave. I'm very optimistic about how many of these adoption use cases.

Are going to work, but we're going to learn a lot over the next year.

So then go to leadership at Harvard, your three books there on leadership. To quote a Larian, Muhammad Larian, with the unknown unknowns of AI and How does a given CEO, away from tech certitude, how do they lead out three years, out five years, out 10 years?

So we talk about this a lot. As a CEO, the most important thing right now is to be able to ask a question. be open and confident enough to seek advice, have debate and disagreement, say sometimes, I don't know, I'm not sure, I changed my mind. I think that's the sign of a good leader.

Let me digress, Paul. Paul wanted to talk about this. 60,000 love notes at Microsoft? Yeah. Have you and I ever seen this? I don't think so. No.

That, obviously, I won't comment on any one, but that's significant. I actually think more broadly, and I see this among clients I work on in our own business, and I see it among small business. I think the AI adoption phase will change the mix of businesses. The issue at Microsoft, they have lots of programmers. There are going to be fewer programmers, but I think you're going to have more and more people covering clients, building relationships, externally focused. The mix of employment will change, and the challenge for an individual worker is if you define your job very narrowly, It's going to be tough. You're going to need to be more flexible and you need to be able to read, write, communicate,

have a debate, build a relationship. And I think I think with all the remote communication we've got, I think those skills have atrophied a little bit and we need to rebuild them.

We're going to have some elections a week from today here in this country. We have obviously some elections in Israel today. What do your clients want to discuss with you about a world where there might be a change in Congress? It might be that the Democrats maybe take the House, maybe even the Senate, who knows? What does that mean for their business, for their growth and their capital allocation?

So like a lot of things, most business people and certainly the markets have already priced in the outcome. However, the part I think that they don't know is we need more productivity growth.

We don't have much labor force growth.

Is there going to be a change in regulation? I don't think people think a change in Congress for the moment is going to change tariffs or immigration policy. But is it going to change regulatory policy? And that's the thing people are watching.

Is there a dash right now into year end? I mean, literally, you know, getting ready for.

I think I think I think most people still think we've got a couple of more year window where we're going to have not no regulation, but balanced regulation. And I think business leaders, I think, are hoping and I'm hoping, too, that that continues. We in an economy that needs more growth and we're highly leveraged.

Right.

You need productivity growth and balanced regulation can help with that.

Robert Kaplan with us. We continue with the former head of the Dallas Fed with his work, vice chairman of Goldman Sachs as well. So Jess Manton was in the other day fighting Texas Aggie. And there was disparagement out on Twitter that she's better than me, that she should do it every day.

Yeah.

And that I should be pretty good. In honor of Jess Manton, Robert McDonough, McTeer gave me this. This is my fighting Texas Aggie bow tie.

The lonesome dove.

I should say my father, to say the least, was a class of 50 at A & M with their great sacrifice. I grew up the whole, I would have gone to A & M except they didn't have a hockey team.

Wow.

I said to my dad, I'm not going hullabaloo, canook, canook, and all that. So with that said, in what Robert McTeer lived... We have moments where we're certain and then bad things happen. And usually we don't see them coming, think the SNL crisis and the roll-up. What do you worry about at night? What do you worry about in class when some mouthy person.

Is— Well, now I'm out with clients, but I would say the biggest tail risk I see still starts with— governments around the world and witness what's going on in France. Governments historically highly leveraged. And in the aftermath of COVID, we got a lot more leverage and we don't have workforce growth. So that means we're putting all our chips on productivity growth. And I do worry that we've got to come up around the world, including here with a fiscal approach that at least shows how we're going to bend these deficits as a percentage of GDP because I worry about the long end of the curve that it keeps backing up. And that's squeezing housing. It's squeezing a lot of businesses.

I've got to get this in quickly because Paul's got a series of questions. So then do you advocate that we should get our blended tax rate back up to where it was. That's what's coming down the pike from, say, 17% or 18% of budget up to 19% or 20% halfway there.

I'm not smart enough to know it. But I think there's 15 things you need to do.

So what do you need?

You need to grow faster. I would argue we need to relook at immigration. We need $ 1 million to $ 2 million a year in immigration. There are a lot of open jobs that are not getting filled. And it's slowing growth. I think you're going to have to continue to keep balanced regulation to help spur growth. Yeah, we need a plan to use all the– every company we've just heard is using AI to control costs. Governments should be doing the same. So reinstitute AI. embedded cost management in all the government entities. And entitlement reform is going to be on the menu, also has to be, because it's such a big part of the budget. And you notice the big miss on the budget deficit in 2026, I think $ 250 billion of it was entitlement surprise heading north. Another

$ 100 billion, I believe, was interest expense. So we're going to have to look at entitlement reform. So you need a menu of things. And we can do it, but we've got to start.

These are the conversations that we as a society have been having for 40 plus years that I've been on Global Wall Street. We just haven't had the political will to engage. Do you sense there's something that's going to accelerate this? Is it people looking across the pond to France and saying, you don't want to be in that position?

So people say all the time, we've been talking about this my whole life, it's never mattered why now. I think we're getting to a level of debt to GDP now. And you're seeing this in Europe, you're seeing this around the world, you're seeing in Japan, where I think the treasury curve is not acting right now like a cyclical diversifier.

There was a flight to quality the last two weeks. I think it was refreshing.

But for the last two years, the theory is when the economy slows, markets go down, treasuries rally.

We're not seeing that.

I think we're getting to a level of debt where people are more reluctant now to own treasuries. That's a dangerous thing. I think that should be the red warning light that gets us to address this.

I've got to get this in. It's too important. Skydance. Paramount. Five days a week in the office. Warner Brothers.

Yes.

Three days in the office, work from home. Robert Kaplan wrote a book years ago, folks, What You're Really Meant to Do. And it didn't, you know, it wasn't like a Netflix series because it was really an uncomfortable book. The importance of relationships. How in God's name, Robert Kaplan, would you or I be where we are today, working from home?

Discuss.

This is why most businesses during COVID, the first reaction was, oh my God, this is working better than we thought working remotely. And then eventually people realize, no, training, mentoring, coaching, relationship building deteriorates. And that's why most businesses, including ours at Goldman, we asked, we got to come back to the office because we need the gathering in person in order to... make our folks, help our folks develop. So what does Nick Booth.

At Stanford get wrong? Let me cut to the chase. He's leading the academic charge on him. There's a lot of, full disclosure, folks, I'm six days in the office.

Okay.

What's Booth and the crew get wrong at Stanford?

Listen, there are certain functions that I think, and I think there's some good development, certain functions you can work remotely. Listen, if you have children and you have other obligations, I think we ought to accommodate those. But by and large, I think what you're missing is the cultural development, mentoring, coaching, observing.

Coaching requires observation. I can't observe you if we're not together. For younger people in particular, they need the coaching, and I see it every day. And you can't do it if it's remote because I don't know what you're doing.

Absolutely. Real quickly.

So Goldman Sachs, the younger bankers, I mean, to me, when I was a young banker, I learned by just observing and interacting with my senior folks. I mean, to this day, I have no idea. I do things a certain way because I think back to what?

Same here.

I mean, was there a generation lost there?

I think when folks were out of the office there for a year or two, I think some of the training, leadership, development, mentoring, and coaching might have atrophied a little bit. And I think we're working very hard, and I think most businesses are, to rebuild that if you want a successful firm.

Come on, the movie Margin Call. Could they have had that famous meeting with Jeremy Irons at the end of the table if they were all worked from home? I don't think so. Robert Kapp, we got through it without talking about University of Kansas football.

We're to important topics now, yeah.

Robert Kapp, thank you so much. With Goldman Sachs, the former president of the Federal Reserve Bank of Dallas.

Stay with us.

More from Bloomberg Surveillance coming up after this.

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He's no introduction to global Wall Street.

Mr.

Gensler's here, the former chairman of the Securities Exchange Commission. The Nobel laureate Simon Johnson has the privilege of working with him up at MIT. How's that going? How's this wonderful experiment of Gensler and Johnson going? Johnson and Gessler going.

We're having a lot of fun.

And of course, the markets and we call this show the power and consequence. And there's so many different things going on around this White House, around international affairs in Europe and, of course, artificial intelligence. So we're doing all right. I don't think we're nipping at your heels yet, though, Tom.

Well, you know, we're living it every day. Paul and I are living this fire hose of news flow. Let me just begin with almost a Greenspan and Schiller of Yale idea of Gensler calibrating the exuberance. The word I use is almost people feel it's febrile. It's almost got a fever to it, this moment we're living in of technology.

of politics, of Iran, the news this morning that maybe there'll be talks. Do you sense a constructive or less than constructive exuberance?

Well, I think that we will have.

A deceleration of this AI boom, and then some form of a reversal in the next 18 to 30 months. And the question really, to me, is a little bit about timing, when, and then how deep it is. And I think the depth of it is going to be all dependent upon all the debt.

How much debt's in the system? Where is it? Who holds it?

So, I don't know, Tom, if that does it for you. And now in terms of politics, we're going to have the midterms in a week. And then, Katie, bar the door, there's going to be 15 or 20 people running for president for 28 that will all be announced by January or February of next year.

Or by the Wednesday after the election.

Exactly.

So, Gary, yesterday was... Just an incredible day for AI, the story, the theme. We had Anthropic File. It's S1, long awaited.

Have you read the 400 pages yet? We're getting through it.

I'm having AI work on it for me. We also had Meta just do a flyby $ 90 billion equity offering. So just extraordinary amounts of capital here. How do you frame this AI discussion? Because one could argue, as you just suggested, that to the extent it ever pulls back, rolls over.

Whatever you want to say, that could be problematic.

Well, Paul, it will pull back. I mean, history tells us this. You can be positive about the technology and still say our capital markets tends to overfund in an exuberance. There's some game theory, too, that everybody wants to get in on it, on railroads, on canals, on the internet, and on this. And so it's just a question of when and then how deep it goes. And I would say this, when you see the metas raising $ 90 billion, when you see the debt issuance, which is very significant.

You saw Broadcom announced late yesterday a $ 63 billion package that's not even in that S-1. They have to amend the S-1 and put that in. $ 63 billion of complex guarantees and so forth, all off balance sheet.

You start to worry.

That's feeling a little like that 08 off balance sheet craze.

Gary Gensler, with his service to the nation, Many different jobs, but I would suggest with the election, there's a less regulatory persuasion and then a more regulatory persuasion. Does the government at some point, particularly if the Democrats take over again, have to step in and begin manifesting? these huge amounts of money flowing in, the risk to the public? Do you desire more regulation?

I think it's a balance, and I would say in terms of the capital markets, I think we're really successful in the U.S. keeping the government out of the choices we make, that we're merit neutral. And if the public wishes to invest in Anthropic, that's the public's choice as long as there's the material disclosures of all the risks.

On the other hand, there's this cleanup crowd that has to come in afterwards. And if I were at the Federal Reserve, This week, I'd be saying, look, if we have a deceleration, what does that mean for inflation, for growth in.

2027, 2028?

I think they're going to have a rate increase come December.

But what do they do after that?

And I am starting to think they're going to start to see a deceleration, and maybe they don't raise rates as much in 2027.

Well, Vice Chairman Gensler, can you see it? I can see it. Vice Chairman Gensler has a rig. I'm kidding, folks. But if I was speaking to Vice Chairman Clarity, it'd be the same question. Out of COVID, stimulus one, stimulus two, many have a stimulus that was called the Biden stimulus. Maybe there's a fourth, fifth stimulus as well. Has this nominal GDP been goosed so much that we risk not disaster, but some real pain and angst and workout as we pull nominal GDP down?

Well, look, this is a challenge for any central bank. But if you feel that you're kind of at the late stages of a capital expenditure boom, that's what I contend we are. If you're at that late stages, how do you affect monetary policy? And by the way, you might have been the right first person right here to say that there's going to be a fiscal stimulus package in 2028 on the horizon.

If we have that deceleration, I'll give you that credit.

Let's turn it over to Jack Lew, because I think I stole I steal from everybody. I mean, I know nothing about Duke. I steal it all from Paul. But the answer is, I believe Secretary Lew was the one who suggested the morning after the 28 election, we get fiscal challenges and also Social Security issues.

Study.

That's where it begins.

I think Jack's right about that. But that's the long-term structural thing. So we're already running very high debt to our economy. But see what's happening in France, who has even higher debt to economy. They don't have what's called fiscal room to step in. We have limited fiscal room as well, but we're a bigger, I would say more significant economy.

We're going to have these elections a week from today. Presumably, the Democrats are going to gain a little bit more leverage in the House, maybe even the Senate. What does that mean for our executive branch for the next two years here? A lot of folks are saying, you think you've seen some stuff here in the first two years?

Just wait for the next two.

Well, look, history tells us that presidents tend in the last two years. And remember, this president will have had six years already, will turn more to foreign affairs. They have less leverage with Congress. But I do think that there'll be Democrats on the Hill that will look to still get some things done. And if this president wants to work with them, and that's a question, I think they'll want to get some things done on behalf of the American voters. and address affordability, address housing, address the AI worry that's on everybody's mind, AI safety, and my kids being addicted to this stuff.

How about the kids up at MIT? How do they interact with AI, broadly defined.

Well, they're terrific students at MIT. I'm bragging on them all the time, the graduate students and the undergrads.

But they use it.

98% of them will use it. And most of them use it on some regular basis. The faculty use it as well. I say to them, you have to keep training your brain. You have to stay in front of it. Other people might have cognitive decline because they offload everything to it or most.

You've got to stay ahead of it.

But some of the students are just terrific in using the AI in getting ahead.

We're going to rip up the script. This is too important. But this is absolutely brilliant. And then two years out, five years out, 20 years out, We're going to have a cadre of intellect that uses AI as a constructive bolt-on to their critical thinking skills. And we're going to have this huge body of people slipping by, Gary. That's the worry. They're going to be slipping by using it as a crutch.

Yeah.

And so the challenge for all of us personally is that we keep pushing our brain. One of my colleagues, Eric So, wrote a terrific book on this. And he said, you know, we humans are actually biologically wired to conserve energy. So we're biologically wired not to use our brain as much. And we have to sort of fight against that biology and go further. But I think that MIT students got what they need to do that.

1987, you were too young. The answer is I learned how to spell portfolio insurance about 2 p.m. in 1987. Where's the shadow for you in the system right now, Professor Gensler?

Well, if you're asking me where is the debt in the system, that's a different question. But I do concern myself that the risk in the system is In artificial intelligence, we've raised over $ 500 billion of new debt this year. And then you add this Broadcom $ 63 billion. So we're pushing $ 600 billion. And who holds it? I think it's insurance sector I worry about that's picked up a lot of holding of debt through private credit or just directly.

I worry about all these guarantees that Broadcom, NVIDIA, AMD have written back into these data centers, and it's off balance sheet. They're setting up more special purpose vehicles than even Citicorp did in the day.

Let me get one more in here because Paul's got any questions. We're going to wait for Ethan Bronner, folks, a critical conversation from Tel Aviv. Gary Gensler, this is the critical moment then. If we have those worries... Do we understand the simple depreciation or obsolescence of all this technology?

I do not have a clear picture.

So and a lot of the funding is funding the chips, the memory chips. And those chips might have four to seven year useful lives.

Now, I get it. I get it.

It's somebody in maybe another country will be using these in the future.

But there's such uncertainty.

Fabulous scaling, such technological advances that the chips of 2026 won't be that valuable in 2032.

Are you have any confidence that our friends in Washington have any idea what AI is and what AI can be and what AI risks are? Boy, I think global Wall Street's trying to just figure it out as we go through this anthropic S1. I can't imagine our friends in Washington Look, it ranges.

Some part do.

And just like in the media business, just like financial analysts, they're grappling with it.

There's real issues.

That we can chat about, about AI safety and AI working on its own and.

Not being controlled by us humans. That's a deep thing.

I worry, of course, about this overall financial stability as we decelerate from a capital expenditure boom. And then you've got a White House that just got their foot on the accelerator pedal. and wants to go as fast as possible in competition with China. And China's not going to slow down. So these are hard choices. And then the Federal Reserve has to decide, well, do we raise rates again in December? Do we raise rates again in March?

I think they might pause after December.

What's the pixie dust? Come on. Simon Johnson finally won a Nobel Prize. His book, 13 Bankers, was brilliant on the crash, a short monograph. Holland Woodford, MIT. I mean, is it the legacy of Solo in 1956 or Stanley Fischer? What's the pixie dust on the Cambridge River at MIT?

Look, I mean, my colleagues and I don't agree. And that's a good thing about being at MIT. There's such a diversity of viewers. Some think there's only going to be modest productivity gains and there'll be significant labor disruptions.

I'm more optimistic.

About the productivity gains over the next five to 10 years, but that still could be that we've overbuilt some of these data centers at the same time.

Gary Gensler, thank you so much. It's a podcast. Simon Johnson, Gary Gensler up at MIT. Thank you so much. He's a former chairman of the Securities Exchange Commission. Stay with us.

More from Bloomberg Surveillance coming up after this.

Mike Wilson with us right now with Morgan Stanley here. It's clearing events we're looking for in the research. No, I know you don't write the research. I'm going to blame this on Nicholas Lentini or maybe even Michelle Weaver. Buried in your note, you have the dreaded word correction. Okay, that's like a correction. Except I look at SPX, I look at NASDAQ, and they're not in correction. Is the new correction just flatlining since the summer?

Well, it's a fair question. But I mean, you know, Tom, beneath the surface always tells us a little bit of a different story. So earlier this year, it was a broadening story. That was our call for 2026, and it happened, and it was an earnings story that drove that. And then that paused in June, which we identified as this mid-cycle transition. It became very narrow. And that's what we've been dealing with. So there's been an incredible correction under the surface that started in June for the right reasons.

And I think we're probably 80%, 90% done with that.

Do you buy the beleaguered corrected or do you stay on board the juggernaut?

Well, I think you stay on board with the leaders for now, which is quality. And it's not just the MAG-7. It's quality as a factor. And that's been our call since June. Now, ironically, these corrections tend to end with the quality index down. finally getting hit. So in other words, the S and P 500, what we've been talking about for the last two months is typically these corrections. And when the S and P catches down to the breath or the breath catches up, and we've seen a meeting in the middle of those two metrics that we follow.

And we think it's sort of, you know, we're in the ninth inning of this and this, and we have these clearing events, which you wrote about this week, that should kind of bring a final ending to this chapter. And then we can move forward with the bull market into 2027.

One of the clearing events, you highlighted the midterm elections a week from today. Um, I guess the experts are telling us the Democrats are going to get some, maybe win the house, maybe even, maybe even the Senate. What does that mean for, I guess it's just deadlock and gridlock and all that kind of stuff.

What does that mean for markets?

Not much.

I mean, to your point, the markets tend to trade pre-trade this just like any event, right? So another part of the reason why the markets have been unstable or weaker the last month or so is there is a lot of nervousness around this election, not so much who wins or the magnitude of the wind, but just all the anxiety around the tension. all the language that's being thrown around. The president talking about he's going to do something dramatic after the election. So the uncertainty around that.

So to me, it's the uncertainty factor. And most of that has been priced out too. And so sometimes these elections are clearing events simply because the event has come and gone. And then we realize that nothing has really changed. Going forward, is legislation really going to be dramatically different in the midterm? No, that usually happens in the presidential election when you have a real wholesale change in leadership.

Yesterday, all we talked about was AI because we had the Anthropic S1. We had the meta $ 90 billion follow-on offering announcement. We didn't even talk about the fact that the Fed's meeting. And, I mean, we're going to have a Fed meeting tomorrow. I mean, should we be paying attention to that?

Well, sure.

But I think the reason why is because the expectation is there's nothing going to be done at this Fed meeting. That was done last meeting, and now they're kind of on hold. That's the presumption. I think that's right. I mean, I'm not saying that that's wrong. But it's going to be more about the tonal interpretation of the press conference and all the Fed watchers scribbling afterwards. But at the end of the day, if I look at the last three or four Fed meetings, this is probably the one where the least amount of change is sort of expected.

Mike Wilson with us. He's Chief Investment Officer driving all of equity at Morgan Stanley this morning. Whitney Tilson darkened the door on Friday on Bloomberg Money. And he framed this out, and it was perfect for Mike Wilson. I own the Mag 7. I got lucky. I've made a lot of money. I've never owned them. Massive regret right now.

Or that group that bought them then sold them. And you've been so good about being patient. Discuss Mike Wilson's buy and hold. The blind holding is a phrase. Discuss buy and hold as a trap or is that a positive construct?

Well, generally, stocks over time go up. And the S & P 500, of course, is a great index. It's a high-quality index that is self-regulating, right? You have names go in and out. Now, what we've had in the last 10 or 15 years has been pretty unusual. You have basically monopoly businesses. That's what these are.

Thank you. At least monopsony, which is a.

Whole different discussion.

100%.

And they're in different lines. I mean, you have one that's feeding the hyperscalers. The hyperscalers are then feeding the other ones. So It's kind of a circular thing, but it's all being funded mostly by equity and cash flow, I mean, for the most part. Yeah, they've been borrowing more money lately, but the markets have adjusted for that.

I like to remind people when they say, oh, my God, the stock market's up 10% this year. It's like stock investors are idiots. They have no idea what's going on. Can't they see all this stuff that's happening? The multiple for the S & P 500 has gone down almost 20% from a year ago. So, you know, don't tell me that the market isn't paying attention.

It is.

The question is, is that enough of a discount? I think, yeah, I think the multiple now is cheap enough to basically feel comfortable that it's discounted a lot of these risks. And when you have these monopoly-type businesses really driving the bulk of that, it's hard to argue that this trend of earnings growth doesn't sustain.

Yep.

Earnings growth, you just mentioned, I mean, the first half of this year was just extraordinary. in terms of the earnings growth numbers. Third quarter coming in, I think, pretty strong as well. But if nothing else, the comps next.

Year are going to be tough.

How does a market deal with a 20%, 30% growth rate down to a mid-teens, which we would kill for at any other time? How does the market deal with that?

It deals with it by the multiple going down by 20%. So in other words, like last year, in October of last year, a year ago, we were trading at 23 times earnings. And people were pulling their hair out. They were screaming, like, what is going on?

Where are we now?

Well, now we're at 18, 19 times, depending on how you measure it, equal weight, market cap weight.

So we're going to be at 16 times out there on the x-axis. Maybe.

I don't think the multiple has to come down much further from here. In other words, the market is discounting the deceleration that you talked about. And a year ago, don't forget, a lot of people were very bearish on growth. If you talk to most economists and strategists, they were all bearish. And I was looking around going, why are people bearish on growth? You have all this fiscal stimulus.

You have all this cap access going to become. It's going to be a boom next year, and that's what the market is forecasting. So now what the market's forecasting is that boom is going to decelerate. And could that turn into something more significant, like a real growth scare, recession? It could, but right now it's way premature to make that call.

Paul, can I ask the rude question?

Sure. He can handle it.

Okay. He can handle it. Mike Wilson is with Morgan Stanley, and some would say he is Morgan Stanley with all of his driving of equity and optimism. Now, I assume you're getting anthropic shares. I mean, we just assume this. Are we going to see you top-tick Stephen Ross with a $ 101 million gift in athletics to the University of Michigan?

Are we going to see the Mike Wilson North Complex?

Let's talk about $ 100. That's my annual gift.

To migrate from that quickly here, Mike Wilson, the wealth generation of this era, we don't really understand.

No.

I mean, it's funny. People were talking about these big numbers and shows on recently, the size of these offerings. I go, well, what about the cost of these stadiums? We're going back to sports again. That's just inflation, Tom. So these numbers get bigger and bigger and bigger. A lot of the reason why the stock market has done so well since COVID is inflation. And we've written about this extensively, as you know. So we live in a nominal world. And you have to be honest with yourself and say, am I really getting ahead of myself? I mean, am I getting ahead of the world with my investments?

Or am I just sort of keeping up?

You've got to come back on Bloomberg Money and talk about this. To me, it's my arch theme. The kids really think they're getting ahead of themselves.

I'm like, yeah.

Maybe not. Mike Wilson, again, look to Morgan Stanley for his brilliant work as well. You know, you got to wait and see when Nicholas Lentini and Michelle Weaver and the rest actually write the material. Mike Wilson with Morgan Stanley. Thank you. 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.

Colin Graham with us.

Help me with the.

I'm the one person in America that can't do this. Rebecca or Rebecca? Rebecca. Rebecca. Very good. Rubico strategy. I'm looking here beneath the headlines at a persistent, stronger dollar. Euro gives way. I may get a 110 handle on Euro. And I got Chinese renminbi ever so slightly getting stronger. Fold foreign exchange and what it says about your strategy forward.

It's saying that while we've got earnings, then the ceiling is right. being raised for equity investors. However, the currency, the oil, the credit markets, that's really putting a floor on the volatility and that's actually rising that floor. So your gap between your earnings growth and the cost of capital and competition for capital is rising. So that's what we're really focused on. So the currencies are another contributor to that, you know, stronger dollar, good for the U.S., but it means it keeps the growth in the U.S.

You know, when we talk about weaker dollar, you talk about growth spreading out across the world, good for emerging markets, for example. But, you know, that's concentrating the growth in the US.

So I know, Robico, with my time working with them, global investors have been for 40 years, if not longer. How do you think.

About the US versus rest of the world these days?

It's expensive, especially on the equity market. The bond market, if you look at that, then, again, we're not even at fair value on a long 10-year. So is there room to raise? Yes, there is room There is growth differentials in the US which support higher rates. But if you look at Europe, you know, you look at France, then your GDP is like 2%. So, you know, you are getting tight monetary conditions within France, and that's what the market worries about. So for us, you know, we look at the US and go, you have to be there.

And then you pick and choose where you want to be within the US. But, you know, don't ignore the rest of the world because you will get points in the cycle and points in the year where they will outperform significantly.

And we look at the U.S.

As a source of capital.

So if there's a theme somewhere else and a little bit of capital moves out of the U.S. into those markets, they pop. You've seen it in Korea. You saw it in gold. You've seen it in these markets.

How are you thinking about just the, I guess, equities, bonds in the U.S.

Here?

Because you can clip some nice coupons here in the U.S. Treasury market, if you want to take a little bit of credit risk, even more so. How do you think about the stocks, bonds kind of allocation or discussion.

In the U.S.? Well, to me, there's no upside to bonds. You're going to get 5% return, but you can invest in the equities and you get 20% in from earnings. So from that perspective, there's no, yes, you're paying multiple. But if you look at the impact valuations have had over the last three, four years on the stock returns going forward, it's not been a good indicator.

I talk about nominal GDP. You've got a wonderful paragraph on my wheelhouse, which is nominal GDP is everything. The ultimate risk is nominal GDP in a given country or globally comes down. Is that a legitimate risk? Two years?

Yes, from that perspective, the high nominal GDP growth, especially in the US, has allowed other sectors to play. We've seen the numbers from UPS today.

Exactly.

So that allows them to generate good earnings. So to me, GDP coming down is an issue. So if we go through next year, what do we think the fiscal stimulus is going to be?

It's probably going to be less.

So that's going to probably deflate nominal GDP growth.

As well.

Okay, we'll bring that brilliant analysis over to France. Jay Hadfield had a paragraph on Frexit. Frexit. Is that like Fresca? Did you like Fresca?

No.

No, it was terrible. It was undrinkable. You don't even know what Fresca is, Colin, right? Blue can. Yes. Soda was undrinkable. OK, so let's look at Fresca over in France. And the heart of the matter is they don't have the nominal GDP elasticity over there because ECB plays by a different rule book.

Yeah, and that's why we're more concerned about Europe, because Europe doesn't have that growth buffer that the US does. So raising rates there into energy shock And it is more acute.

In Europe than it is in the US because they import much more of their energy.

It doesn't seem like a good recipe for continued economic growth and for investors necessarily there. And then if you look, rule of thumb, I will be shouted down by a true fixed income investor. But nominal GDP is the rate of growth of your economy. And if you can't cover your cost of interest from your growth rates, then you're in trouble.

And that's where France is.

Yes.

Basically. This has been too short. We've got to do it again. Colin Graham, thank you so much. Robico, did I say? Robico.

Robico.

Nailed it. Robico. Head of multi-asset strategy there. Thank you so much.

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 iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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