Tech, Markets, and the Midterms

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With a real knowledge here linking in all of our work in finance. is Virginia, where Meredith Whitney has an affiliation. And we are just so happy on election day to speak to Meredith Whitney of the Meredith Whitney Advisory Group. Meredith, Virginia is not what it was 20 years ago, or even two years ago. It is this dynamic thing around Washington, to say the least. What are you watching in Virginia on this election day?

Well, I'm watching a lot of things on this election day. And by the way, your show has been so excellent today. So thank you for all that. You know, I think what people are watching most closely is maybe not Virginia, but Texas, because so much of the, you know, of AI is dependent upon who becomes the new governor in Texas.

And then there's so much that is, you know, Still in doubt because the polls have been so, so bad and the prediction markets have been so bad over the last election, be it Brazil, be it Israel. So I think everyone's going to be on your Tinder hooks tonight and tomorrow. waiting to see what happens. And, you know, from the work that we've done, I think it's going to be really, really bad. I mean, the Republicans have been so out of touch on affordability and the data that they're looking at, I think they know that they're.

At serious risk.

But the talk track that they've been doing that, you know, all income levels have grown in the most recent data— this is the BLS data— is very stale. You know, for people who have— who are really on the brink, one in four recipients of food stamps or SNAP has lost their ability to access food stamps. I mean, the electorate is really angry.

And I think we're going to be prepared for a big upset.

So talk to us about the data you look at, Meredith, to think about this affordability issue. Again, you follow all the financial companies, the credit card companies. You see that granular data that they see. What what are you seeing out there as it relates to this affordability issue, which is obviously issue arguably number one in this election cycle?

Well, if you want to see good things, you can. The banks lend to people who don't need money. They lend to Prime and Super Prime. If you want to see what's really going on with the economy with 50 percent of households, you have to look. closer at things like, again, who's getting food stamps, who's not getting food stamps, who's going to the big growth areas, which is pawn loans, which have grown 30 plus percent over the last few years.

Daily wage access has grown like a rocket ship in terms of people who can't make it from paycheck to paycheck. They have to make it from payday to payday. And I don't think that a lot of, first of all, the data is largely in the hands of private companies. Increasingly, you've got companies like Dave and Chime and Block that are making these types of products available. And they're the fastest growing products within those companies. But you've really got to pay closer attention. And a lot of the economists aren't doing that.

Just a headline just out moments ago. What did oil do here, Paul? Yeah, oil comes back. It was down $ 3, and now Brent is down $ 1.

This is a headline.

I'm just bringing it to you folks as it comes across from Bloomberg News. Iran says U.S. response to its demands wasn't convincing. I have no idea. Meredith would want me to do that headline here on this election day as well. NASDAQ up half a percent. as well. Meredith, from where you sit with all of your work over the years, I'm fascinated by the middle ground. Conservative Democrats or liberal Republicans, do they exist out there?

I think so. You know, certainly for the group of people that I talk to, I think there's a middle ground. I think let's give an example of Texas. Tallarico is a centrist. So I think that, you know, when he I expect him to win, that says a lot about the country, because, you know, for a Democrat to win in Texas, that's a major, major move. And I think more and more people are centrist. You've got the extremes that dominate the parties, but most people don't relate to what's going on with either party. So I think a central trend is growing in the country.

I've got to get the market open, but Meredith, please stay with us. I want to talk about the agony out there of people selling winners, which Meredith Whitney has fought against for years. Meredith Whitney with us on this Election Day with Meredith Whitney Advisory Group, with a real understanding, again, of the Beltway and Virginia. Meredith, I look at Visa.

You and I sat over a glass of wine four lifetimes ago, and you said, Tom, shut up and buy Visa. I didn't because I'm in triple leveraged all cash. Visa, onward and forward. Do you still feel the same way about the financials? Just buy them and hold them forever?

It depends on what financials. I'm not so, and I haven't been so keen on the banks, but for trading, because they've been largely vehicles.

Of share buybacks.

They haven't really grown. Obviously, we always separate JP Morgan from the rest of the banks. The payment companies have been the shining stars of financials. They were sort of the OGs of fintech. It's hard to think of Visa and MasterCard as fintech, but truly asset-light models, high-margin vehicles.

When we spoke, they were demutualizing from the banks, and that's always a fantastic success story for any company. But I think that the non-banks have really— outperformed and will continue to outperform. Let's give an example of Citi. Citi was trying to get a discount to Tangible Book, and now it's above Tangible Book. And so the banks, I don't really think there's much going on there, but the non-banks...

are really growing. And I hate to say it, one thing that I think of, a lot of clients have asked, what's the trade in a lame duck two years? And I think what is going to continue to be the case is this growing chasm between have and have not. So the non-banks that cater to the bottom K have been the outperformers over the last two years, and I think they'll continue to be the outperformers.

Meredith Whitney, thank you so much. Meredith Whitney Advisory.

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.

A lot of continuous conversation and we start strong this morning on Global Wall Street with Joe Quinlan. Chief Market Strategist at Bank of America, Senior Vice President Gridlock.

Is Gridlock good for your world, Joe Quinlan?

In general, yes, Tom, in the sense that we're not expecting anything between now and 2028. So we can settle down, see how it plays out at the state level with a moratorium on the data center. So the debt ceiling will be an issue. But in general, yes. But when I talk to clients and they're worried about the federal budget deficit, they want action, not Gridlock.

Joe, concentration, AI.

I think a lot of people don't even know really what their exposure is to AI. They're like, okay, I own Nvidia, I have my AI exposure. But it goes well beyond that here. How do you guys frame that discussion with your clients?

Well, we really pull back the covers on the portfolio. And you're right, Paul.

And when they look at AI, it's not just the names, it's the ecosystem. And it's even in the emerging markets, South Korea and Taiwan. So the hard part is getting away from this ecosystem and finding something else. So it's time to have that conversation as we're talking about. But at the same time, a lot of our clients, our FAs, they don't want to give up on these winners. These companies have done so well, and I believe they're going to do well in the 27 and 28.

So what is the, from the Bank of America private bank perspective, what is the AI trade here? Do I want to lean into this thing even more? Do I want to try to Hedge it out if I can.

What are we doing? Well, you know, the Mag 7 has not performed very well this year. I think like 3%, 4%.

So, we're seeing some clients step back in. But really, Paul, it's the infrastructure battle. It's the nuts and bolts. It's the pipes, valves, the transmission lines, water system.

It's old and dumb.

U.S.

That's where a lot of folks are putting new money to work.

I'm sorry for this cliche question, but it almost works on an election day. In this great bull market, what inning are we in?

Good question, Tom. I mean, the average bull market is five and a half years. So we're not there yet. We still got some runway, but we see a good 2027. I think it gets a little choppy in 2028 with the platform that the parties are going to run on.

So I don't we have we some we have some runway here.

Earnings are good.

The economy is strong. And it takes, as you know, it takes a while to slow down the supertanker. It'll slow down, but the earnings outlook is still pretty robust.

Tie in your economics here. Torsten Slack, Paul, what was the note from Torsten?

You're saying that the earnings growth we're seeing here, the earnings growth we're seeing implies a 10% nominal GDP growth rate.

That's like Banana Republic, just Bank of America. And folks, a heritage here on election day. A Bank of America, San Francisco. down to the Southern Combine. Have you ever been to Charlotte? They let you go there? Plenty of times. All the heritage of Boston and Brian Moynihan and Joe Quinlan in New York. I mean, truly, it's Bank of America.

And just as simple as I can, we've never lived this nominal GDP.

It's pretty robust, though. It is very robust. It's close.

It's closer to 10 percent than 5 percent. I mean, I spent a lot. You know, I spent a lot of time between New York and L.A.

I can't believe you just said that. I mean, but on the ground, Tom, between L.A.

And New York, there's a lot of things happening, manufacturing, building out plants, hiring. We're seeing it. There's a tremendous, you know, when the heartland, you know, whether it's Kansas City, Chicago, Texas, you name it. Chattanooga you were just talking about.

It's robust.

Okay. Triangulate this. We've got what Bank of America observes robust, solid, etc. And then you've got an election where half of America's in a primal scream that they're not making it. Then triangulate that with the Fed. How does the Fed post-election prosecute 5%, 6%, 4% buoyant nominal GDP?

They've got to thread that needle very carefully. That's what Chair Warsh is trying to work on. So maybe our team is expecting another rate hike in December, another one in March. You're just taking away the rate cuts from 2025. And we are seeing kind of normalization of the cost of capital, right? The cost of capital shouldn't be three below, and we don't think it's going to be six above.

It's right in that kind of that more sweet spot now. So we've got to adjust to that and work that through. There's still a lot of foreign demand for our securities, our assets. So we're in, I wouldn't call it a sweet spot, Tom, but we're in a good spot relative to earnings and the economic outlook.

One of the questions we get often is, can stocks work in a world where interest rates are, in fact, higher? And they're probably going to stay at this level, if not maybe even a little bit higher. Can stocks work.

In that environment?

For sure. We're seeing that because they're higher for the right reason. Right.

I think, yes, yes, there's energy shock, but they're higher for the right reason. And that's nominal growth driving where there's income, where it's investment, U.S.

And foreign. So it's they're rising. They're elevated here for the right reasons.

Go ahead, Paul. Get one more in here. Let I sit.

When you go to one of your private wealth offices around the country and you're in one of those conference rooms after cocktails, what's the first question that comes your way?

AI.

Is it going to take my job? Is it going to allegedly kill us? you know, what's the end game? That's the question is like, are we in, it's not, are we in a bubble? What's the end game? What is, what does 2028 look like 2029?

Brian from Boston emails in, he says, ask Joe if he's using AI in his work.

Of course. Yes, absolutely.

Joe Quinlan, thank you so much. I love the cliche there for thread. The needle really looks so appropriate after this election day, Joe Quinlan there with the bank of America, private bank. Stay with us. More from Bloomberg Surveillance coming up after this.

Joining us now, the chief economist of SMBC, NICO Securities, is public service to the nation, as noted with the Trump administration as well. Define Livonia gridlock.

LaVornia gridlock is the Democrats getting a blue tsunami, basically an effective wipeout, and the party believing it's got a mandate to govern in 28.

Interesting. So how what are your views?

I mean, given your experience, Joe, how do you think this is going to play out over the next 12, 24 hours?

Well, I don't.

So the problem I have with the betting markets is I don't think they understand the the potential breadth and depth of a likely or highly likely Democrat victory. So, yes, the Democrats win the House, but they may have 235, 240 seats. In the Senate, Democrats probably pick up at least six seats.

Really?

And people don't really understand that because, look, what happens is if you look at these localities, these districts, these states, they're highly predictive of other areas because of high correlation.

So, for example.

In a state like Kansas, which probably goes Democrat, as you know, you haven't had a Democrat win since 1932.

So that's a farm state.

So if you have a farm state, because they're mad at Trump, but understandably so, because of where diesel costs are. So, okay, then Iowa's in play. And then Nebraska's in play. Oh, and by the way, who's one of the biggest employers or an important player in Kansas?

Oh, Bombardier.

Bombardier. I thought you were going to say the Kansas City Chiefs.

Yeah, no, no.

I was going to make another comment, but I'll refrain. So why does that matter? Well, because the trade war with Canada. So, well, what state is very important there?

Well, Michigan.

Look what Roger said against the tariffs. So like Michigan's in play. LSA, I think, wins there. So it's a real mess. And a large of it, a lot of it, I think, was unfortunately itself inflicted.

So let's assume that happens.

Does economic policy, policy in general, change materially over the next couple of years?

Well, you tell me.

I'll throw a question back to you guys. How is the president going to react? Does he take accountability and responsibility for what's happened?

Does he deflect? Does he do executive orders?

Okay, we're going to stop the show right now. And for all of you around the world, Anybody of any walk of life absolutely thunderstruck yesterday by a president of the United States out by the reflecting pool, that huge magisterial body of water from the Lincoln Memorial. It's a generalization down to the Capitol. Joe LaVornia, this is a president who has people around him like you served. You took the pay cut. You went there. You worked the 80 hours a week. What does his government look like today?

after tomorrow? Does everybody exit like Joe Livonia exited?

Well, to be fair, I work for Secretary Besson, who still, I think, has a very highly thought of view, at least among all the investors I talk to. And I wanted to work specifically in Treasury. And I did my term for less than a year with little kids. I wasn't going to be long. So my leaving was family related.

And to the extent I can offer guidance and solace, I certainly would.

Do you look for a huge turnover?

Typically, you get turnover in a second term after the midterms, given the likely drubbing Republicans are going to get.

Yes, I would expect major turnover. So. Changes in economic policy at all?

Do you think that President Trump will be heading into tariffs, for example?

Well, so I don't think the president's going to act like a lame duck. So he's got executive orders. He's got veto power. Who knows if we get involved in more geopolitical skirmishes?

Does the U.S. consider, you know, upping the.

The blockade against, say, Cuba or doing something there, but potentially militarily. Does the US talk again or the president talk again about annexing Greenland?

I don't know. I mean, it's certainly possible.

I mean, as a risk manager and looking at markets, you've got to game theorize a whole lot of different scenarios that would not happen under, let's say, a more traditional president. So I don't know what happens. But to me, the gridlock is not good kind of gridlock. It's bad gridlock because the political divisions and divisiveness are worse.

Things like shutdowns could be longer.

We've got a debt ceiling that's going to break up the deal within the next year.

That could be a lot worse. I mean, this is just not a pleasant picture.

From where you sit, and as a student of American history, going back to the Bull Weevils, going back to the Blue Dogs, they got a fancy new name for conservative Democrats. What will be the power of Democrats elected by 52 to 48 percent elections across the nation pockets of conservative Democrats that are going to say to the traditional liberal Democrats, you've got to be kidding me. Is that going to be a theme?

It could be.

I mean, the thing is, what I think could happen is, I actually think that Democrats are going to get more than 52 seats.

I mean, 06 is a great baseline.

If you look at presidential net approval ratings, enthusiasm, generic balloting, it suggests that Democrats should get at least six seats and 31 House seats. So, I think that's what you'll get, maybe even a bigger majority in the Senate. Democrats could take that as a mandate.

Understandably so, and move far too far to the left.

Not unlike, Tom, what the Tea Party was back in 2010 when they got 60 plus seats. And then the question is, OK, what happens in 28? Do the Democrats govern more from the center or from the fringe?

That I don't know.

I had the clearest memory. The only one that covered 94 midterms was Dan Rather. Nobody else was on at nine o'clock at night for that monumental Newt Gingrich campaign. And the Republicans were all on the same page. Do you, a student of this, Joe LaVornia, do you see Democrats all on the same page in December of this year?

I don't see it. No, I don't see it.

But that doesn't mean the party is going to necessarily be as fractured as one might think. I think there's going to be competing elections. narratives to see who, you know, who's going to run in 28. And by the way, we should have a good sense by Super Bowl, by Valentine's, who's running on both sides. And then we'll see who they are. If it's someone, you know, there's a whole list of Democrats that could run. Some are very centrist.

I got to stop.

This is bad form. I feel like Dustin Hoffman in Hook. I need the outfit in that. How impolite of meta platforms to announce a five-part U.S. dollar bond offering on Election Day.

Sure.

That's bad form. Why not, though? Didn't they do one last week?

Yeah, they're just continuing to issue capital here. Joe, I mean, step back here. Give me your 30-second elevator. How's our economy doing today?

The economy is a boom. It's just not a disinflationary boom. It's more of an inflationary boom. And that's one of the main reasons. Affordability, cost of living, declining real wages. Why the Republicans are going to get beat, I think, as badly as I'm guessing. Because the American worker is suffering.

And by the way, even though it's not in the inflation data, look at first-time housing affordability.

It's essentially all-time record low. People are hurting. It's not good. If you're at the RNC, you're like, this was pretty much all self-inflicted.

Oh, it's totally self-inflicted on a variety of levels. But again, I just did my small part and I'm happy to be back in the private sector.

Martin Schenker just emailed in, folks. He's my number one advisor, tells me what to do. He says, act like a journalist. Joe LaVornia, is Secretary Besson considering higher office? Is he looking at a future within the Republican Party?

My gut instinct is yes, but I don't that's not based on any, you know, nobody. I mean, the scuttlebutt is that, you know, he's very happy and understandably so at Treasury.

He's never said anything to me. People say no, but it would not surprise me. Again, this is my own personal view.

So he says.

I mean, in all seriousness, I honestly I don't know, but it would make sense. I mean, I wouldn't surprise me this way, Tom. If you said yes or no, I'm going to say yes. But that's based purely on gut.

If you feel like you want to come on tomorrow, can you please come back tomorrow? Talk to my people.

Okay, I can try. Were they not listening today?

No, no, that's fine. This was absolutely brilliant. And no, they never listened to me. My people, they don't.

It's like, yeah, I get it.

I can't say enough about it, folks. His perspective, hugely valuable. I think for a lot of people, stunning to see his call there. on the level of Democratic victory today.

Mr.

LaVornia is with SMBC, NICO Securities, and his Publix to the service to the nation is noted. Stay with us. More from Bloomberg Surveillance coming up after this.

Back to economics, finance, investment, and the future of American technology. Heath Terry with us, head of tech and communications. I can't say enough, folks, about the granularity of his research note. Here's just one sentence. This is likely to continue to reallocate scarce resources to companies that build, energize, and secure all of the components of AI infrastructure. Heath, what is the tension right now that the fancy mag seven people and their brethren can't get it done because they don't have the infrastructure?

It is really easy to talk about building data centers. We've had plenty of companies announce big APEX spending plans, and we're going to build a 10 gigawatt data center here. And then when it actually comes time to do it, and the permitting, the power, the labor, the electrical equipment, it's hard. And what we've seen a lot of this year is these Q4 projects that were expected to get done by December are now Q2, Q3 projects for next year.

And that's pushing a lot of that supply back into the supply chain. So you're seeing spot markets show softness because of that. And you're seeing companies that were expected to be able to turn that revenue on.

Sooner, having to push out some of that upside.

Ultimately, I don't necessarily think it's a bad thing for the broader AI trade if we push some of this out. You and your colleagues were talking about what you do with Micron at 11 times. That's the market telling you that it doesn't trust that this growth for them is sustainable. And so to the extent that we're able to push some of this building out into 27, 28, 29, and these companies have more sustainable earnings because of that, I don't think that's necessarily a bad thing.

So that's kind of where I wanted to go, Heath. I know you spend a lot of your time speaking with institutional investors around the world. And I just want to get a sense of where the AI discussion is these days. For the longest time, it seemingly was build.

Build, build.

Then we kind of migrated to more of, I need to really see a return on investment. But that doesn't stop the hyperscalers this week from rushing to the markets for debt financing, equity financing.

So where is the writ large conversation these days?

Yeah, the writ large conversation is really struggling with the fact that, particularly when you're talking about the hyperscalers, it's sort of a tale of two cities because there is the AI-related part of their business where you're seeing this massive acceleration in revenue growth, 900 basis points of growth acceleration from Q2 to Q3, hyperscaler backlog up 142% year over year. Everything on that side, You're generally positive. And then you get to their legacy businesses, Google search business, Amazon's retail business, Microsoft software business.

And it's a different story.

And that's what's dragging those stocks down because AI is effectively crowding everything else.

Out.

I know you guys talk to economists all the time.

There's the AI part of the economy, and then there's the other part of the economy that's not doing so well.

And I think that's what's really weighing on this.

But for the hyperscalers, they know they've got to continue to invest in AI to generate the returns that they're seeing for it.

And they are.

The math that we do would suggest they're seeing 26% cash return on cash invested in their AI investments. And so if you can borrow money at 6% and get a 26% return, you're supposed to do it.

He makes it sound so damn easy.

He's been around the corner a couple of times. He knows what he's doing.

So, Heath, you mentioned Google here. There's a classic example here. When I first heard about AI several years ago, my first thought was, oh, boy, this could be a really competitive threat to what is Google search. But, boy, they just kept putting up numbers and putting up numbers. But maybe this past quarter suggests that there is something there.

How do you think about our friends at Google these days?

Yeah, I mean, that's a concern, right?

This last quarter was the first time that we started to see some cracks in that search dominance or something that would suggest that the monetization that they're getting out of AI-driven search isn't comparable with what they've been able to build that business on. And to your point, it has been the bear case for the last four years that even if Google is wildly successful in AI and they're going to be, they are clearly one of the leaders in AI. They've got incredibly performant models. Their GCP business is doing extremely well with enterprises looking to adopt AI that it's unlikely that their AI market share is going to be the 90 percent that their search market share is.

Rather than the pearl clutching and the hand-wringing, Terry, of AI and what it's going to do to America, with all of Citigroup's representation in Washington, the politician types, they're going to have to look at it as a national asset as they try to regulate it. Aren't they going to just look at AI and say, hey, this is what we're going to win at?

I mean, that definitely seems to be the direction that this administration is going in, which is when you think about AI on a global scale, the U.S. wants to win this. And to win it, you've got to support the companies that are leading it globally the way the U.S. companies are here. But it's a hard tradeoff because public sentiment wouldn't be much more negative around AI. And so for You know, today's election day for politicians that are looking to get reelected, being negative AI is a winning position.

To take. And going into 28, that's going to continue to be the case.

And Paul, I think it's 40-some, 41 ballots on data centers.

Yeah.

I mean, it's front and center here.

Hey, the companies that you've historically covered, they've Enjoyed, you know, very unlevered balance sheets, not a lot of debt and great free cash flow.

But boy, that model's changed recently.

How comfortable are you with these companies taking on increasing debt and burning through their operating cash flow with all this CapEx?

Yeah, I mean, look, it's going to weigh on the stocks. It already has, right?

I mean, we've seen from the beginning of this year to now, Google's revenue estimates for 2027 are up 25%. Their EPS estimates for 2027 are up 12%, and the stock's down 10%. And that is the market saying that there is a cost there. to being an issuer versus a buyer. And, you know, it's going to continue to drag on valuations. And it's just something we, you know, we have to factor in, Paul.

Can I go nerd on election day?

I can handle that.

Okay, it's okay. I am beside myself over the media and the gurus out there who only look at the dynamics or their supposed guesstimates of the income statement. I see a dearth in technology of ratio analysis. I see a complete underestimation of use of cash and free cash flow. Am I off the mark on that? I mean, the analysis see out in the, you know, the noise, the noise dome, whatever it's called, it just seems to be so simplistic. What do you follow on the accounting statements?

Well, I go back to the North Star for us on all of this is what I mentioned before, cash return on cash invested. What are you investing your money in and what are you getting for it? And so we look at those balance sheets. We look at those cash flows. It's one of the reasons that we do like the hyperscalers ultimately because they are generating high returns on their cash invested.

But there's a timing difference here.

Because right now, the numbers being invested are bigger and bigger than what's being returned. But if you offset that timing difference, the math gets pretty simple. Apex plus time equals profits.

So, John Ternus, in a paragraph, says they had $ 28 gazillion of free cash flow and returned it to all the shareholders. At Apple, that's use of cash, right? See, that is.

Yeah, absolutely.

That's a Keith Terry radio answer. Yeah.

So that's that's what you do.

You know, that's you know, and that's and look, that's what these companies have been doing for a long time. If you have owned Amazon or Google or Microsoft, you own them because they generate a lot of cash. They bought that stock. They pay dividends and they made it really, really easy to sleep at night. That's not the case anymore. Again, it's why you're seeing the underperformance in these stocks is because you've got this turnover happening from investors that owned them for all of those reasons before. Whether you're running a dividend fund or a value fund, you can't own them for of those reasons now. And so you've either got to go and own something else or you're just going to pay a much lower multiple for the ones

that you do own.

Heath, another question I'm sure you get a lot is, is this incremental CapEx spending associated with AI for the hyperscalers? Is it a kind of a one time three, four, five, six year increase in CapEx cycle?

Or is this the new norm? Yeah, this is the new norm.

Now, there is a one-time component to this where we're seeing just this massive step function where these companies have to catch up with where demand is. It's very similar to what we saw in the early days of cloud compute, where Amazon and Google had to significantly step up their investment in data center infrastructure to service their cloud businesses.

But we are compressing that into a much shorter time. What took 10 years to build in cloud, we're trying to do in three. And so you get this sort of one time negative free cash flow.

Period that we're in right now.

This stuff, you know, once it goes live, once you get it built, it starts generating cash flow. And we just have to get to the point and we think it's 2029 where that crossover happens, where the cash flow generating assets are bigger than the incremental cost of new assets. And that's a, you know, for us, that's a 20 in our models. That's a 2029 event.

Sorry.

Thank you so much. Driving all the technology. It's sitting here.

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