Bloomberg Surveillance TV: October 27th, 2026

0:00Karen Gibson: If you invest, lead a business, or allocate capital, one-sided views aren't enough. Join me, Brad Rogoff, the Global Head of Research at Barclays, on the Flipside podcast. Each month, I go head-to-head with one of our expert analysts on my global team to debate the economic and market issues that matter most. From inflation and AI to equity and credit trends, each debate helps you see what headlines might miss. Find the Flipside wherever you get your podcasts.

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1:27Ludovic Subran: Bloomberg Audio Studios. Podcasts, radio, news.

1:36Karen Gibson: This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie Haudern. Join us each day for insight from the best in markets, economics and geopolitics. From our global headquarters in New York City, we are live on Bloomberg Television weekday mornings from 6 to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business app. The Fed's two-day meeting kicking off today. Market spending on a hold with expectations shifting to a hike in December. Ludovic Sobranoff, Allianz, writing, the Fed will have to tighten policy by two additional hikes in the first quarter of 27 after the hike already expected in December.

2:17Karen Gibson: Ludovic joins us now for more. Ludovic, good morning. Good to see you. Good morning. Welcome to New York City. Yeah, it's a pleasure to be here. Thank you for the visit. Why are you expecting additional hikes from here? I think this time around, it's very hard for the Fed to look through this inflation shock. We expect the energy prices to continue to go higher. And we expect inflation in the US to peak again around 4 % in the beginning of 2027. So the Fed can pause this time because we're one week away from midterms. But I don't think how they can pause all the way through Q1, Q2, 2027. You think the pause is explicitly or implicitly connected to the midterms coming up in the next week?

2:51Karen Gibson: I think so. I mean, this is a very heated moment for the U.S., right? A lot can happen. And a lot is actually linked to whatever is happening in AI. I know nobody cares about the Fed this week because all of this IPO stuff. But we do care. And to be fair, it's not the right moment to hike. And I think in 2027, though, if inflation stays around 4 % and higher, I think the Fed won't have a choice. They will have to hike. The problem is that they will have then to cut by the end of 2027, because the reaction function right now shows that this is really transitory inflation. And I know this is a taboo word after what happened in 2022, but I do think that we will have a mini-hike, a hiking cycle, and then the Fed will have to land somewhere closer to 4%.

3:28Karen Gibson: But we do think they will push it to 4.5%, 4.75%, yeah.

3:32Ludovic Subran: Do you think they're going to have to do more because they're remaining on hold in October?

3:37Karen Gibson: Maybe, and also because they waited a little bit. I think Chairman Walsh was very hawkish on the balance sheet and dovish on the rates, which is something you don't do in war economics. And so he changed his stance, right? And now he's getting a bit delayed in the hikes. And so he will have to push a few more hikes. Also, to be fair, this economy is running hot. If you look at the headline inflation numbers, if you look at all the leading indicators, AI is really fueling these capex cycles for a few quarters more. So I think it's very hard for him to stay put at this point.

4:07Ludovic Subran: What do you make of the argument that the areas that the Fed can have an influence on are not doing well and, frankly, are not very hot? And the areas that they don't have control over, namely AI, is doing just fine?

4:17Karen Gibson: I think this is a perfect, you know, I actually talk to, I always say Nvidia is the Fed of the AI world. So when Nvidia hikes prices for GPU, that will be where we'll see a real tightening of what's happening on the AI economy. And it's true. And this is what I was saying before. Nobody cares about the Fed. It's actually happening for 50 or 50, you know, 60 percent of this economy is actually not doing well. If you look at the consumer sectors, if you look at health care, if you look at where the jobs are concentrated, is that the construction sector, apart from AI, is actually in recession. Trade, a part of AI, is in recession.

4:46Karen Gibson: And so this is actually the cash 22 for the Fed. If they don't do anything, the AI is going to be burning hot. And if they actually don't do or they let it happen, we will see more inflation from the AI into the rest of the economy. So there is feel over. So I think that's why they cannot stay put. That's really because of the AI, which is concentrating most of the running hot of this economy. This is at a cost for the rest of this economy. When you look at the financing rate for people, for corporates in this country, the interest rate bills are increasing by 20, 30 billion a year. That's a lot for people to swallow.

5:15Ludovic Subran: It begs the question that does the Fed actually have the right tool to address all of this?

5:22Karen Gibson: Going back to my point, in war economics, usually you play a lot more with the balance sheet, which is something that I think Chairman Walsh was hesitating to do. I think there should be more quantitative tightening. That's really what the Fed should do at this moment. But they don't want to resume that because this is what is running the AI economy. And the second thing is he's launched all this work stream, including on AI, to try to see how you adapt your policy rate. It's a very tough one because, to be fair, that's why people talk about financial repression, because everybody sees that what's happening is those wealth effects on the financial markets.

5:53Karen Gibson: We have actually a framework we're going to come out with tomorrow as a paper about suppression of volatility. I think the Fed would like to be able to suppress the volatility coming from the AI economy and the wealth effect. That's something that we haven't seen in the past. They will have to do stuff on the balance sheet, repo and long-term balance sheet, not on the rates, which is something that for now they're hesitating to do. You've not released the piece yet? No, it's tomorrow. Can we dig a little bit further? Yeah, of course. Give us a bit of a reveal. It's a teaser. Give us more of a tease.

6:18Karen Gibson: Look, I think we are really in a pickle right now for central banks around the world. First, because they're very politicized and polarized. Everybody sees them as the tools of the center. So a lot of the people that are a bit more in the extreme are looking at central banks saying you're not able to do whatever you're supposed to deliver, including price stability. And so right now the Fed, like the other central bank, like my central bank in Europe, they have to do something which is akin to managing the very concentrated economy when it comes to the financial markets while maintaining something that is affordable for the rest of the people.

6:47Karen Gibson: And that comes with different tools. The different tools are this idea that if you want to avoid this economy running out on the financial markets, you're going to have to do things that are not with the base rate, but you may have to do dual rates. So you may have to decide that you apply dual rates to the economy. You may have to indeed decide that you do much more quantitative tightening or play a lot more with the balance sheet than with the rates. And more generally, you're going to have to go back with guidance. The fact that this central bank doesn't want to do guidance is very problematic because the data is run by AI.

7:16Karen Gibson: So if you just look at the data, you miss the rest of the economy. Do you think the world you anticipate will force the issue that ultimately they have to start thinking about using balance sheet? I do believe that nobody knows what's going to happen with AI. Let's put that as a disclaimer. I do think that this empirically driven type of world, you know, away from dogma is very complicated when it's so bifurcated. And so I do think that this world will push the Fed to act very differently in the coming 18 months for sure. Kevin Walsh was at least open to the idea of the Fed chairman. And then that kind of slipped.

7:47Karen Gibson: People got confused about what it meant for the policy rates, started to think that maybe we established on rates. Things got away from him at the long end of the curve and things got derailed pretty quickly.

7:54Ludovic Subran: Yeah, has his no communication strategy ultimately failed? Is it exacting a cost that is perhaps punitive? I just wonder how much appetite this Fed actually has to torpedo the AI trade because there was a little hiccup.

8:05Karen Gibson: We're going to find out.

8:05Ludovic Subran: And Williams and Jefferson came out. They're like, oh, no, we're not going to hike race. We've got time. We've got time. And all of a sudden, it's like, let's calm this down. So it gives you a sense. Are they really willing to use a balance sheet?

8:14Karen Gibson: They've got a massive opening in the next 24 hours to a torpedo a lot of things. Yeah.

8:18Ludovic Subran: Are they going to?

8:19Karen Gibson: They can kill forward guidance off if they want to. Sure. Just like that tomorrow afternoon. Think they're going to? Don't know. But he's got the opportunity. Just to keep repeating myself if he wants to.

8:29Ludovic Subran: You're going to keep lobbying for this. John's goading him.

8:30Karen Gibson: The Fed share has the opportunity to basically tell you every time that Williams and Jefferson schedule a speech before the data, it doesn't matter because it doesn't set the tone for the policy a month later.

8:41Ludovic Subran: The counterfactual is when he comes out and says that we're not hiking rates and I'm not going to give you any more guidance, he's going to reinforce the troika.

8:47Karen Gibson: Everyone will circle the speeches of Williams and Jefferson.

8:50Ludovic Subran: And say this is going to be the most important thing and ultimately gives you a sense of how much tolerance, not very much, they have for any kind of volatility in equities.

8:57Karen Gibson: A little bit before you go, never mind the Fed drama. What's going on with your ECB? Who's running your central bank? There's a bit of a leadership vacuum, let's call it this way. So the French pushed them to act, at least with what's happening in my country. Now everybody's like, OK, maybe the ECB should get their act together. I don't know. The French bond route has completely overshadowed the ECB succession, which is a very important succession, if you ask me, because three members are going. And so everybody's waiting to see what we're going to do, not on AI, because we don't have as much AI as you guys have, but what we're going to do on bond volatility, because everybody is affected by the bank seller.

9:30Karen Gibson: Stay with us. More Bloomberg Surveillance coming up after this.

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10:35Karen Gibson: The President Donald Trump attempting to accuse Iran of initiating the eight-month-long war as top Middle East officials agree to further de-escalation talks in Tehran. General Karen Gibson of Academy Security is writing, the real question will be what we seek to accomplish that hasn't already been achieved through eight months of warfare, strong economic pressure and diplomacy. General Gibson joins us now for more. General, welcome to the program. The strategy for the time being seems to be weighted out. Is time the ally of the United States or an ally of Iran?

11:04Ludovic Subran: Well, that's a great question, John. I think at the end of the day, this is less a contest between military powers where we have tremendous advantages and strengths. And it's more a contest of wills and political endurance. And in that case, you know, this administration now following the election will in essence be a lame duck administration that has two years left. I think the Iranians would believe that absent any truly concerted military operations, they think they can sustain that and outlast us. At the same time, we also have Israeli elections today. How much will that dictate what the United States decides to do?

11:43Ludovic Subran: Yes, I think there was certainly a lot of reporting that Prime Minister Netanyahu was strongly in favor of conducting some kind of attack prior to the Israeli elections. That would have been seen probably to help him at the polls. The fact that the elections are occurring now without that attack having happened, I think, takes that off the table as far as a factor that influences now the timing of an attack. If the U.S. was to reengage with more attacks against the regime, what kind of targets are you suspecting that they'll go after? That's a great question. I think about it in three different categories.

12:19Ludovic Subran: The first one, which I think will always be a given, is going after military targets, you know, specifically missiles and drones, because that's what can hurt our allies. So the production facilities, the weapons themselves, launchers, storage, anything related to an ability to use those. That, I think, again, will be a given. A second category might be things related to nuclear facilities, which we haven't gone after in some time. There was quite a bit of reporting in the last couple of weeks that Iran has been rebuilding, which would be expected at the sites that had been hit six months or more ago.

12:52Ludovic Subran: No signs that they've actually advanced their nuclear weapons program. But I would expect that could be another category to reattack those and to delete the reconstruction that's occurred. The third category, the thing that would perhaps potentially make this different, would be to go after revenue-generating infrastructure and energy infrastructure within Iran. That would be significant. And so to the question that John posed at the beginning, what would be different? What would we expect to change when we've been at war with them for eight months already? That would be something new and different.

13:26Ludovic Subran: General Gibson, it's clear that the regional nations are really concerned about any kind of escalation, given that they have been the recipient of some of the blowback. Saudi Arabia, Pakistan and Turkey, as the team's been talking about, is meeting in Iran to try to get to some resolution. Do you have any hopes for this? Is there any kind of sense that this could take down the temperature? Yeah, so I'd say two things. One, it is interesting to see now the Saudis also joining, not just the standard interlocutors of Qatar and Pakistan. And Turkey has been involved all along, but now the Saudis as well.

14:01Ludovic Subran: They can ill afford, as Tyler just pointed out, to withstand a barrage of missiles from Iran when they're already dealing with strikes from the Houthis to their southwest. So that is an interesting thing. But to your question about are there hopes for really diffusing this, I think the positions are still incompatible. And I think they're unlikely to do more than anything but nibble around the edges, if that. I'm curious about the Israeli election, not just the strikes ahead of today's election in Israel, but what kind of different approach that nation might take if there is new leadership, if Gadi Eisenkot does win and Prime Minister Netanyahu is sidelined.

14:43Ludovic Subran: It is a complicated type of election, so he wouldn't necessarily be off the scene. What's your sense of how significantly that could change some of the dynamics? Yeah. So in my dealing with Israelis of almost any political color, they share generally a sense that Iran is, in fact, an existential threat to the nation of Israel. And so I think we might see a different approach, perhaps different approaches towards the Palestinians, towards Gaza, towards a different way of getting after Hamas in southern Lebanon. But I'm not sure we would see a significant difference in the conflict against Iran, aside from perhaps an insistence on regime change, some of the things that Netanyahu has recently hinted at in terms of a desire to bring down the republic.

15:33Ludovic Subran: But I've never met an Israeli who was sympathetic to Iran. In the New York Times this morning, we have an opinion piece from Princess Rima, the ambassador to the United States, saying there's no limit to what the Houthis will do, calling on the international community to designate the Houthis a terrorist organization. Given that this is coming from Washington, D.C., do you think the Saudis are hoping the United States gets more involved in terms of defensive and offensive capabilities in terms of the Houthis? Absolutely. It would very much be in their interests. The Houthis, that's a really tough nut to crack.

16:05Ludovic Subran: It's going to be difficult to dislodge them from the terrain that they control and have for over a decade along the Red Sea there, their ability to interdict Saudi shipping. And they have tremendous asymmetric advantages. You know, look at how relatively inexpensive and easy to produce these drones and missiles are that they're using to cause real damage in the kingdom. And then the billions of dollars that the Saudis spend to defend, the Saudis have to intercept and prevent fatalities in every one of those strikes. The Houthis only have to make it through, you know, 5 % of the time to scare people away from coming to Davos in the desert or something like that.

16:43Ludovic Subran: It has a real economic impact, even when the Saudis are successful at defending against them.

16:48Karen Gibson: General, good to see you. Big month coming up potentially. General Karen Gibson there of Academy Securities. Stay with us. More Bloomberg surveillance coming up after this.

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18:55Karen Gibson: taking a top banking role in Anthropics Mega IPO. The Goldman Sachs vice chair, Rob Kaplan, joining us now for more. Rob, how big is the bonus pool going to be? Never mind that. Congratulations.

19:05Robert Kaplan: Thank you. How busy have things been? Things are extremely busy. And I think we're, and I am and we are, very optimistic about the promise of AI. Having said that, I think what you're also seeing, even with these large transactions, you're seeing in the last few weeks, the market started to differentiate based on business models and on capital structure. I think that's a healthy development. What I mean by that, I think you're going to have to have enough equity and limit the amount of debt based on the business model so that the model works in a downside scenario. And I think you're starting to see the market police that.

19:49Robert Kaplan: And I actually think that's a healthy development.

19:51Karen Gibson: Is it fair to say that access to capital is becoming increasingly uneven?

19:56Robert Kaplan: The market is doing what it does in most industries. It's differentiating based on promise to the business model, sustainability, and then, again, it's looking at how much debt versus how much equity. And I think it's starting to charge more if you are less than investment grade, single B. and I think that's what the market normally does and I think it took a while for that to happen here but I think it's a welcome development to see this scrubbing and differentiation. It's still more challenging to raise capital. There's an enormous amount that needs to be raised even for investment grade companies.

20:38Robert Kaplan: The concession has widened a little bit but I think there'll be good access. The market will just do what it typically does. It'll make choices and I think that's a good thing.

20:46Ludovic Subran: Just to underscore what you're saying, are the hyperscalers going to have to sell more equity in order to raise more money in the debt markets going forward?

20:54Robert Kaplan: I think they've decided to monitor their capital structure and their debt to equity. And so, yeah, I think they've decided to make sure that they've raised enough equity so they don't get too highly leveraged. And I think that's a responsible decision and I think a prudent one.

21:12Ludovic Subran: We've been talking about what almost feels like a race to get in before the window closes for financing. And there have been a lot of questions about how long the pipeline is before that financing window closes. From your vantage point, how narrow is that window versus how broad is the investor appetite?

21:31Robert Kaplan: Listen, there's two trends going on. There's the infrastructure boom. uh uh anything that creates compute that's where that's the capital debate we're having is is about that then there's the adoption boom model development uh that's the most most recent some of the most recent announcements honestly a little less capital but very dependent on enough compute. And I actually, we think there's still going to be very good access for both. But again, the market will differentiate and increasingly it will segment different types of models. Are you using the compute for your own purposes to monetize your own customer experience so that you can control it?

22:23Robert Kaplan: Are you a merchant that's selling it to others? How dependent are you on compute pricing? We think there's going to be a big ramp up continued in token demand and demand for compute. But the pricing for certain types of tokens will probably decline. And we think that's a healthy, natural development. And I think then you look at models and reframe and say, which are they most dependent on? How speculative is that? And then how much equity, how much debt? What's the right capital structure?

22:55Ludovic Subran: A big question is how much adoption there's going to be across the broader economy and how companies are deploying it. And as Microsoft offers 60 ,000 buyout offers to people, there's a question of how much the efficiency is going to have to come with layoffs or cutbacks of human workers. What's your experience at Goldman Sachs in this area?

23:13Robert Kaplan: Well, here's what and I can tell you talk with clients in a range of industries and including small business and entrepreneurs. customers. AI, we're probably in earnest a year into in earnest AI use case development. In other words, most companies started in earnest trying out 15 to 20 use cases maybe a year ago. We've learned an enormous amount. Some of the cases will work, some won't. We're refining it. We're learning how to use tokens, how to segment them. And I think even though many companies say we haven't yet seen tangible benefits. I think actually you're going to see more and more benefits realized over the next year as companies learn.

24:00Robert Kaplan: And that's been our experience. And the other thing we're seeing is it's giving CEOs more confidence to say, we're going to have 30 to 50 percent higher revenues. We're going to redeploy some of our people or hire new people to cover more clients, maybe less of some other internal functions. And because of that, you know, five years from now, we're going to have 50 % more revenue with the same number of people, maybe not less people, but a different mix of people. And again, you and I were talking off camera, the ability to cover a client, build a relationship, have a face-to-face communication, Those old-fashioned skills and flexibility are going to be at a premium, and I think that's probably going to be, in many ways, an exciting development.

24:49Robert Kaplan: But if you view your career very narrowly, I only do this or I only have a certain function, I think you're going to be more challenged. You're going to have to view yourself more broadly, and I think we're seeing that migration happen.

25:05Ludovic Subran: How do you view the political pushback we've seen in terms of AI?

25:10Robert Kaplan: Well, so there's two parts of that. There's number one, on the infrastructure side, there's the moratorium in number states, including the one I live in, Texas. But I think that's a little bit more trying to create a more level playing field on behind the meter power, sharing of tax revenues, water usage, et cetera. And I think trying to regulate these deals. Okay, so that's one kind. I think that'll get resolved. And then the other concern is, are we going to destroy jobs? Are we going to have new jobs? I think we're more optimistic on that. But also, what are some of the more dangerous elements of some of these models?

25:52Robert Kaplan: And how much should there be self-regulation? How much should there be third-party or government regulation? And I think those debates will continue. and I think that's where you're seeing a different kind of concern. They're separate concerns, but sometimes they get conflated and mushed together in a broad concern, but I think they're really different type of concerns.

26:15Karen Gibson: The Federal Reserve's got to monitor this as well. You've got experience in that committee. We were joking earlier. Can you describe day one of a two-day meeting? What time do you wake up? What time do you all get together? How does it go?

26:26Robert Kaplan: You get there. The meeting begins on Tuesday, but you get there on Monday. And normally, all the presidents, we would normally meet Monday afternoon. Away from the board? Yeah, away from the board. You would have probably a discussion maybe about bank supervision or some other topic, probably have dinner together Monday night. Meeting starts Tuesday morning. Day one, as you know, is a review. We all go through our views on economic conditions. And then day two, we all go through our views on what's the right monetary policy. The issue now, and you've heard me talk about this, is part of this inflation broadening, how much of it is supply, how much of it is demand, how much of it is cyclical, and how much of it is structural.

27:14Robert Kaplan: And I think the thing that's challenging here, we just talked about AI. If it's AI related, it's strong. If it's defense spending related, very strong. If it's housing, autos serving low-moderate income consumers, sluggish. And so there's a more mixed economy than the headlines suggest. And the other problem is if you could undo the diesel and oil spike, just that one thing, I think some of the bleed and the broadening of inflation is because of that structural change, not because of excess demand. Now, there's no right answer on this, but that's the debate they're having. And that may be one of the reasons if they skip October, that's the reason they would skip.

28:00Robert Kaplan: It's not that they won't keep hiking, but they want to make sure they understand these cross-parents. Do you think they've got the luxury of time of waiting? I think they've got the luxury of waiting one meeting. I think, you know, I've talked about there's strategic errors and there's tactical errors. strategic error is you you delay in a way that it takes a year or two to to fix it that probably is true of what happened in 21 and 22 i think that was a more strategic error if if you're a meeting late you'll live uh and i think what they don't want to do is make a mistake where they they hike too far too fast and we lo and behold we look up next year because because diesel's not resolved You haven't made a dent in inflation, but you have slowed further a bunch of segments of the economy that were already sluggish.

28:53Robert Kaplan: And maybe you're struggling with both ends of the dual mandate. And that's the balancing of the debate that they're having.

29:00Karen Gibson: Can we finish on communication?

29:02Robert Kaplan: I don't want to put you in an uncomfortable position, but do you think that the Troika is alive and well? I don't know. I can't tell exactly. And, you know, honestly, I will just speak for myself. If I walked into the October meeting and it was clear to me that the chair would like in this meeting would like to raise rates, I would not resist. I would go along with it. I'd prefer to skip October for the reasons I just said. But if you know you're going to raise in December, I think I think people would go along probably with October. But there wasn't the stage management to set it up. Do you think it's necessary?

29:40Robert Kaplan: I think in an economy that's leveraged over 100 % debt to GDP, as opposed to the Greenspan economy, which was in the 50s, when the economy is this highly leveraged, I think a little bit, you don't have to forecast what you're going to do, but a little bit more stage management, clarity about your reaction function, and get a little bit of the premium and uncertainty out of the Treasury market is valuable when we're this highly leveraged. It's a different economy than the one Greenspan presided over. Rob, deeply thoughtful.

30:13Karen Gibson: Good to see you, sir. Appreciate it. Thank you very much. The Goldman Sachs vice chair, Rob Kaplan. This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6 a.m. to 9 a.m. Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always on the Bloomberg Terminal and the Bloomberg Business App.

31:07Karen Gibson: We'll see you next time. ppt.com.

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