CPI and the AI Trade

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1:52or watch us live on YouTube. Four minutes away from the inflation report. Right now, Eric Winograd with Damian Sassauer and me as we begin our coverage. We are commercial free to the nine o 'clock hour. Winograd, David Rosenberg and Rob Saka. And that's the way that we roll. Eric, what do you expect to see? What will this inflation report state to America? So I think what we, you know, we expect roughly in line with consensus, sort of a mid point two month-on-month print for the core CPI figure. I think the message that that sends is inflation is still higher than we would like, but it's not running away.

2:29It is maybe not coming down as fast as we would like, but it's not accelerating either. And I think that that gives everyone a little bit more time to see how things play out. In Alliance Bernstein, do we get used to a 2 %-ish plus near 3 % inflation? Can America survive with that elevated rate? So in our forecasts for a long time now, we've argued that inflation is going to be between two and two and a half percent. Remember, pre-pandemic, it was running between one and a half and two percent. So we have always or for a long time expected it to be somewhat higher. I think three percent is too high.

3:05But I think that between two and two and a half is something that people can live with over time. That to me is not disruptive. Eric, our last guest was talking about the underlying driver's inflation and that they are primarily supply shocks. You believe the same thing. Are those supply shocks going to be resilient? Are they durable or are they likely to fade in the coming months? So we expect that they will fade in the coming months. But, you know, again, the supply shocks are often driven by non-economic variables. And so if the war in Iran persists or accelerates or, you know, that there have been discussions in the market that perhaps after the midterms that we might see an escalation, who knows?

3:43The problem with supply shocks is you can't really forecast them because they come from exogenous events. The one thing that would give me pause if I were a member of the FOMC today, you know, we're accustomed to looking at inflation expectations over the long term and five and 10 year inflation expectations look just fine. There has been though over the past few months a march up in short term inflation expectations. The New York Fed survey of one year inflation expectations is marching higher. The University of Michigan survey of one year inflation expectations has risen. That suggests that economic actors, businesses and households are starting to extend how long temporary lasts.

4:22Right. We originally thought this would be a matter of months. It now looks like maybe people are thinking this might be, well, maybe it might be more than a year that starts to stretch the definition of temporary. And if that is something that continues, it might give the Fed pause. Eric, have you been surprised about the resiliency of the U.S. consumer, the sustainability, the durability of demand strength here in the U.S.? Yes and no. At an aggregate level, yes. But if you break it down, no. The investor class, people who are invested in markets, look, higher prices are an inconvenience, but they aren't really a problem because the market has been so strong.

4:57If you are paycheck to paycheck, however, the situation is very different. And alongside the CPI release this morning, will get the real average hourly earnings print, which is negative, which means that if you are relying on your paycheck for your income, you have lost ground over the last year. So we're seeing two different economies and the investor class has been strong enough to pull the aggregates up. Mark Zandi at Moody's has done work that says that the top 10 % of income earners are responsible for more than 50 % of the consumption in the economy. So that pay shape, that bifurcation gives you a stronger aggregate than I think many people feel.

5:33A terrific sum into this report. Eric Winograd working off the work of Dr. Zandi at Moody's. You know I've talked about it, folks, to the point with Chris Waller of saying there should be two R-stars in America, back to John Edwards years ago politically, of talking about two Americas out there right now. We're going to look at one inflation report coming up here, and of course the ramifications into the midterm elections with Eric Winograd and David Rosenberg. Hear the report.

6:09The Consumer Price Index for September is out, and it shows consumer prices rising 0.6 % for the month. That is up from 0.4 % in August. Year over year, consumer prices rising 3.7%. That is more than the 3.6 % expected and hotter than the 3.4 % the prior month. When you exclude volatile food and energy prices, taking a look at core CPI month over month, rising to three-tenths of a percent that is right in line with the prior month and hotter than estimates for 0.2%. Core CPI year over year also coming in hotter than expected, up 2.6 % versus the 2.4 % the prior month. Analysts were expecting a rise of 2.5%.

6:55Of course, this inflation reading coming less than a day after New York Fed President John Williams told Bloomberg News he sees one more Fed interest rate hike this year as appropriate with no need for further tightening next year. So once again, headline CPI accelerating in September, led by prices for energy, airfares and consumer electronics, core inflation, core, which is also, we know, closely watched, coming in hotter than expected. Tom and Damien. Alexis, thank you so much. Our economic report, of course, this important economic report, brought to you by IBKR. For the past three years, interactive brokers, their individual clients averaged 24.3 % annually, beating the S &P 500 lower costs and access to 170-plus global markets.

7:39It matters. Visit IBKR.com slash performance. performance and the elasticity of equities bonds currencies commodities a two-year yield was out five basis points higher yield down seven basis points 4.86 uh percent as well 10-year up five basis points even the 30-year bond lifts three basis points over the quiet point earlier but in the foreign exchange market damian i look at euro crushed 111.60 well you're i mean look the 10-year at 526 now. I mean, that's not up five bips. Yes, it's five bips on the day, but it was down two, two and a half bips coming into the number. So that's a seven-bip U-turn, so to speak.

8:20And my God, look at the two-year, 486, 4.86%. Eric Winograd, Time and Alliance Bernstein to assess. Eric is like, we're halfway to OMG. Is it an in-betweeny report for the Fed? Yeah, I think it is. It's enough to keep October in play. But as you mentioned, John Williams said they want to that one more hike is appropriate, but that he thinks they need more time to assess it. Vice Chair Bowman said the same thing. Vice Chair Jefferson said the same thing. You know, it's funny for a Fed that Chair Worth doesn't want to give forward guidance. They've given us a lot of forward guidance, and most of it seems to point toward December rather than October.

8:57That's still our base case. I don't think this print is hot enough to push them to move in October. But you can't rule it out either. And so it is, as you say, Tom, sort of an in-betweeny number. Got to press the blue button, the Detroit Lions blue button here in the studio. Eric, thank you this morning. Eric Winograd leading our coverage on inflation. Lindsay Piegs in this hour. Eric Winograd, Alliance Bernstein scheduled coming up. Rob Sockin, P. Jim. James Bianco will join us on short notice from Chicago, joining us in studio. But now on the inflation report, Damien Cesar and Tom Kean. And also, I should mention as well, in celebration of 170-some pages, a new book by David Rosenberg on top of his true expertise on America's inflation, Bear in the Bullring, Rosenberg.

9:51The movie rights have been sold to Hollywood, for those of you listening this morning. I think it's the first book from David Rosenberg, isn't it? It's funny. I was looking for it, but I had the name wrong. I had beer in the bull ring, not bear. Oh, sorry. So I apologize, David. It is good morning. Morning. You know, I look at this, David, and I want to talk about the book first before the inflation report. It is a wonderful study in ARC. Thank you so much for mentioning Richard Yamarone in the acknowledgments who we all miss each and every day, led our data coverage as well. Let's start there.

10:27When did you learn the study of a granular study of inflation? Well, probably on my first day as a street economist back in 1987, because inflation is one of the key determinants of interest rates, and interest rates determine all asset classes that you have to estimate where future cash flow streams are coming from. So day one, October 19th, 87, although that day I was probably focused more on deflation in the stock market. Was this with Merrill? No, that was at the Bank of Nova Scotia. Okay. But then you went to Merrill. How intimidated were you working with Bill Farrell as a young buck? Well, he was like an uncle to me and still is.

11:16So he was actually the antithesis of stress. There was a lot of stress being the chief economist of Merrill Lynch, but he helped alleviate it quite a bit. And so did Rich Bernstein, by the way. So they did call me the skunk at the picnic, but I did have a few friends there. I've heard that reputation. It's in the book. It's in the book. In the celebration of bear in the bull ring, Damien Sassauer with David Rosenberg. Well, David, any inflation watcher knows it's all about protecting your downside. It's also about all about capital preservation. I've read a lot of your work over the years about diversifying into real assets, into infrastructure.

11:49Is now a time to be doing that with yields at these levels? Because don't cap rates rise? Does it become more and more challenging to hold some of these infrastructure assets, property, commercial real estate, etc.? Well, over and beyond that, when I talk about hard assets, I'm also thinking about commodities, principally base metals, pipelines. So a lot of energy infrastructure. That's not really an interest rate story. that is just purely based on future expected supply and demand curves and how they're going to look. I should throw gold in there as well. So it's over and beyond just say, you know, property.

12:29And in fact, I think residential property is not a good place to be in right now. But, you know, we just raised actually our allocation to bonds to 30%. So we like these yields both normal and real where they are right now, notwithstanding today's CPI number. So when you look at the market, are you really looking at it through the lens of an an inflation-adjusted, a real investor looking at where inflation expectations are going, where they're going to be? And do you trust them? Do you trust what break-evens are telling you today? Well, I have no reason to think that they're not to be trusted.

12:56It's just a residual from the nominals. So why would you? I mean, I hear that. I don't trust the break-evens. You know, you had your previous guest talking about one-year inflation expectations. But But when you're talking about long duration assets like equities and like fixed income and like real estate, why would you be looking at one year expectations? Well, isn't the 10 year nominal just a collection of one year forward rates? I mean, if you look at it that way, I mean, it's certainly. Yeah, but it's exactly one year forward rate. So it's not just a one year rate. It's a one year that's rolled over over 10 years.

13:30So the thing is that, look, there's a consistent story here because it's not just in the tips, break evens that have been really range bound. for the past five years. Where are, for example, collective bargaining agreements going right now? What are wage expectations doing? They were double where they are today back in that 2021-2022 non-transitory inflation period. Today, collective bargaining agreements are containing annualized wage increases of around 3.5%. That is not inflationary. And so when I look at the situation, again, going beyond today, I mean, energy still affects the core. Cork came in a bit above expected, but you've got airlines in there, you've got travel, you've got other things that are first cousins to what energy is doing.

14:15But I'm looking at the dollar. Is the dollar telling us we have a big inflation problem? Is it telling us that the Fed's got a big credibility problem? The answer is no. Is gold reaching new highs? Is that an inflationary signal? No. Money supply growth over 5%. It was running double this time back in 2021, 2022. No. Wages? Wages are decelerating. Nominal wages are decelerating, which is telling you that slack is building up in the labor market. No. And what about home prices? What about home prices? We got existing home sales yesterday. Average prices were down 2.8 % sequentially down each of the past three months.

14:46David Rosenberg with us here, Jim Bianco and Rob Socken coming up across America. We're commercial free at this half hour as we look at America's inflation. Futures deteriorate, negative 25. VIX not out to 16. VIX actually pretty good, 15.76. Two-year yield now up a solid 12 basis points. For Paul Sweeney, we may get a five. I don't think Paul's coming home. Until we get a 5 % two-year yield. The 10-year yield right now up nine, make it eight basis points, 5.29%. David Rosenberg with us. The big, big difference this time, David, and you are definitive in parsing inflation, is the technology boom, witnesses, odd nominal GDP, witness this morning's massive Chinese exports.

15:33How do you treat all that AI boom with the rest of America flat on its back? Well, I mean, you mentioned China, which is notwithstanding their PPI number today. They're battling excess capacity and deflationary, disinflationary situation domestically. The extent to which that's being exported to the rest of the world, of course, is being offset by what's happening on the energy side. So you have to disentangle all these forces. You know, I'll just say this, you know, we're freaking out over core inflation of what, 2.6%. When Paul Volcker left office in August of 1987, core inflation was running at 4.2%, and he was viewed as a hero.

16:20He was viewed as a hero. Today you have a two-handle on core inflation, and everybody is just going hog wild. I mean, there's monuments and plaques and trophies built for Paul Volcker, the inflation dragon slayer. But when he left office, core inflation had a forehandle. So I think this comes down to, you know, I guess this sentiment that's emerged, I think actually more on Wall Street and more on the commentators that come on to shows like yours. Because like I said, you're taking a look at a bird's eye view of inflation. Right now, when you're taking a look at the situation, we've had four huge shocks.

17:00within six years we had the covid shock then coupled with the big fiscal shock two trillion dollars of fiscal stimulus checks just as the economy was reopening then we had russia ukraine shock then we had the tariff shock right now we have this shock and that's why i was encouraged you know when uh kevin morris was applying for the job right he was telling us doesn't talk about anymore about the double the dallas fed the dallas pc uh trim mean right right it's what's are running at right now 2.2 percent i gotta squeeze this in before we do the interview of the year for us here david rosenberg with us jim bianco just walking into the studio david what do the montreal canadians need i mean they need dylan larkin from the detroit red rings right uh well i totally agree but you know um what's the cost of that like we're going to give up Paige, Bull Duke, two first-round picks.

17:54I mean, I would love Larkin. I would love Larkin. I would fly to Montreal and take him out to Moise's Steakhouse for like three weeks in a row. I'd take him to the cigar bar where you overlook the Leonard Cohen wall, which is just huge as well. This is a joy. Let me frame this for you. One day at Davos, I'm sitting there with a laureate, Joe Stiglitz, and Ken Rogoff shows up. And I interviewed Ken Rogoff and Joe Stiglitz at the same time with two massively different views about international economics. We have in the studio now, for those of you worldwide, including Chicago, James Bianco with a view on inflation and David Rosenberg from Toronto with a view on inflation.

18:40And I would say on a Venn diagram, we can find a common ground. Jim Bianco, you're going to reaffirm that inflation here is there. What's the Fed need to do off this report? Are they behind the eight ball and need to raise rates six times? Well, I think if you put it into perspective, from 2024 to 2026, the Fed cut rates 175 basis points in six meetings. And the 10-year yield went up 130 basis points. It's the first time in 50 years that we've seen an extended rate-cutting cycle produce higher long-term rates. The message was that the market was saying, you're too easy. And I think that that message is continuing right now.

19:21I think we're stuck in a 3-ish percent inflation world. We're not going up. But I think the reason we're going to have a hard time disinflating is from when China joined the WTO in 2001 to 2020, goods inflation stuff was deflationary. It's minus half a percent. Now it's nearly 2 percent inflation on goods. Right. And I think that that's because we've got deglobalization. We've got tariffs. We've got wars. wars. We've got chronic supply chain problems. We're not going to get goods deflation again. And that's a choice. David Rosenberg, I want to discuss it. This goes back to David Malpass at Bear Stearns.

19:56The gimme is that we have a vector of disinflation in goods. Do you see that out there at some point? Well, you know what? Well, the answer is that we are seeing disinflation in core goods. I didn't see what the year-over-year trend was today. I haven't gone through important detail, but let's just say that through August, the year-over-year trend in core goods, CPI, was running at 0.7%. And this doesn't have hedonics or imputations. It's basically what you can see, touch, or feel. A year ago, it was 1.5%. So this is what I'm going to ask. I'll ask Jim and I are good friends, opposite sides of the trade.

20:35But where did the big inflation come from from tariffs because the experts were saying that after liberation day and the u.s tariff rate went from two percent to fifteen percent that core goods inflation was going to go to four to four and a half we barely got above two and now we're at point seven what happened to the tariff inflation well i'll tell you it's because the labor market is weaker than commonly perceived that's why nominal wages are going or decelerating so this cost push inflation is hitting a wall in the labor market and you're not going to get sustainable inflation with all due respect to today's report unless the labor market plays ball which it did in 2021 and 2022.

21:14So the question becomes who ate that inflation from the tariffs because we know the tariffs went up. Was it was it the exporter not wanting to sacrifice market share in the U.S. market? Was it the importer of origin? Was it suppliers along the chain. I'll just make this point. Only 25 percent of that tariff shock, OK, made its way through to final inflation. And that was not expected at the beginning. Does that get us from a two and a half percent run rate, Jim Bianco, to a three percent run rate on inflation? Just the tariffs in place. Well, it's it's more than just the tariffs. It's also the chronic supply chain problems and the choice of deglobalization.

21:53When the San Francisco Fed came out with their study last week and said that tariffs accounted for most of the goods inflation. The implication in that was, see, if you just stop the tariffs, then the inflation goes away. No, we don't want to stop the tariffs. That's our policy choice. And because it's our policy choice, Dave, you're right. We're at seven tenths on CPI core. We're at about 1.8 on PCE core. But we're not negative. And that's been the big push up that's been keeping inflation for 66 months above 2%. And I think it's going to continue to keep it above 2%. Damien Sassauer with David Rosenberg and Jim Bianco.

22:30What a special treat. Well, Jim, David, I'm hearing everything you're saying, but let's look at the market here for just one second. I mean, you've got the 10-year up to 5.3 % now. It's up nine and change, nine and change bips this morning. Only 11 of the economists in Bloomberg survey of 73 thought we were going to see a 0.3 month over month on the core. So clearly the market is looking at this data and trading off of it. Are they right, David? I mean, is the market just trying to, you know, basically throw anything up on the wall? And it's just basically, you know, I mean, what do you think?

22:59Where's the market? For today, for today, the market is right. As you just said, you got a 0.3. Mark was looking for a 0.2 on core. I am not a big inflationist. And I thought 0.2 was actually sitting the bar pretty low. I think it's an outsized reaction. I don't think this puts the Fed back in play for the next meeting, but it probably raises the odds for December. However, it doesn't alter my fundamental view because I take, it comes down to what Tom Keaton asked at the beginning about my inflation approach. I take a top-down view towards inflation. Today's reaction is natural in the bond market.

23:40Do I think that it's a little extreme because you missed by 0.1? Is that worth nine basis points? Well, not really. But it just shows you how the market was positioned. We were down like two beeps before the number. Let's do this. This is such a treat, Dan. Jim Bianco and David Rosenberg, Chicago and Toronto in studio with us in New York. Jim, are you okay on your airplane you got to catch? Yeah, I'm good. Is a Gulfstream going out of Teterboro or Middletown? I wish it was. It was. Well, we'll see. It's going out of Terminal B. Brammo has a Gulfstream in Bangkok. In Bangkok, Mr. Warsh is going to speak.

24:14So let's bring this back to the Fed. Jim Biaco, let me start with you. There's a new Fed in town. There's a new messaging. How does he message this core creeping up? And as Damian mentioned, the two-year yield, 4.92%. Sweeney's coming home when it's 5%. So I want to build off of what David said in that he doesn't message. Warsh doesn't message. He doesn't want to give forward guidance. So in that vacuum, we look to people like Williams or Philip Jefferson, the vice chairman, and we assume that they're the new spokesman. When did Philip Jefferson ever move markets? Is Waller the spokesman? Well, that's the question.

24:57Is Waller the spokesman? No, we don't know. And that's why he wants us being the collective of the market not to overreact to one number. We're overreacting to one number right now is what we're doing. David, your thoughts on the new Fed? Well, I'll get to that in a sec. But just let's keep in mind that they focus on the PC deflator, right? Like his new metric, the percentage of items going above or below 3 % is not the CPI. It's the PC deflator. Like right now, my team is going and slicing and dicing the data to see what the components mean for the PC deflator and the core. And then we'll have to get the PPI, especially the health care component, to get a view on that.

25:36So this is a hyper reaction, but not the first time that we've seen it. My view on this Fed is, you know, I roll my eyes a lot at the stuff that Morse talks about the economy. uh you know he basically at jackson hall talked about how the economy is resilient and strong and solid and then goes on to mention ai eight times mentions housing once do you does anybody talk about housing do we do we actually live do we live and watch tv in a data center i mean home prices are deflated you knew home prices are down seven and a half percent year over year Home prices are cracking. It's a$50 trillion asset class.

26:18And here's the thing that we're not talking about is how the BLS calculates shelter, OER, rent. All the deflation that we're seeing in rents and in home prices are not filtering just yet. They will with a lag into the CPI data. Let me just give you an example. All you're talking about today is core, core goods. But let's take a look at X shelter core CPI. Okay. It's running 2 % on the nose year over year. um so i don't know like basically um powell when we had the tariff shock appropriately said when you're in a dark room you stand still so you don't trip did he raise rates because of tariffs no and he was right not to in my opinion um but what really unnerves me is here we had a wash when he was applying for the job and cozying up to the president the dallas feds trim mean core PC deflator, which excludes the idiosyncratic noise in both directions in the data is running at 2.2%.

27:17And he never talks. Well, he never talks about it anymore. And to be fair, Powell was very big in the trimming. Damien Sassauer with Jim Bianco. Yeah, Jim, you know, I mean, we have midterms coming up in less than a month here. And I'm just looking at real average hourly earnings falling 0.7 % year over year. And then you see the CPI data coming in hot. I mean, how do you sell that through ahead of the midterms? You have a very difficult time selling that through the midterms. And I'll just feed off of what David said. You know, when you were talking about what Warsh was saying in Jackson Hole, my question to you is, was he speaking to an audience of one, the president?

27:53Or was he speaking to everybody? Because mentioning the economy is great and mentioning AI eight times sounds like he's speaking to the president during that speech more than he was speaking to the larger audience. And this slides into your question, right? Why do a lot of people think the Fed's not going to raise rates in October, but raise rates in December? I've read a lot of street research, and their argument is it's a week before the midterms. So they're openly saying we're going to make a political decision. And so the Fed seems to be more politicized than we've seen in a long time because of this.

28:25Well, we have retail sales coming up at the end of the week. I mean, does this take a little bit of the pressure off of that data? I mean, like, again, it's a boom economy. Can you stay? I'm really worried about your plane flight. You OK? I can stay. OK, we're going to do this, folks. I'm making it up as I go. Jim Bianco, David Rosenberg now, Rob Socken's people, steam coming out of their ears at PGM right now, over across Johnson. We're going to have Rob Socken top of the nine o 'clock hour as well. So we're going to continue with Jim Bianco and David Rosenberg and go from there. I want you two to answer my arch question.

28:59none of us have seen a nominal GDP like this that we all know must come down. Let me start with you, Jim Biakko, so then you can stand up and leave to get the Gulfstream. How will our nominal GDP come down to something normal for David Rosenberg? I think it is normal, for starters. Six and a half percent. Oh, well, the latest quarterly number. It's the old normal. But yeah, the latest quarterly number is a little bit hot. I was thinking more of like a longer run average of around five-ish or so, which is three-ish something inflation, two-ish. What's the damage to the stock market if we pull it down to five-ish or 4.8?

29:39Nothing. And the reason I would argue it's nothing is we are anchoring ourselves to 2010 to 2020. We had zero interest rates for all those years, and somehow we think it's normal. And now we look at five, and we freak out that this is crushing the economy. It's not. This is normal. Zero was abnormal. How do I know that everybody's anchoring themselves? The president is demanding zero on the funds rate zero to one. The Treasury Secretary is talking about financial repression by being in the House to bring rates down. Your driver in the Bentley just called. You got to go. Jim Bianco, thank you so much.

30:13He's got an airplane to catch here. Bianco Research can't say enough about it. David Rosenberg to wrap up. David, we've never seen a nominal GDP like this. Bob Farrell's never seen it. Richard Bernstein's never seen it can we move down from this nominal gdp to something normal yes damage yes we've seen it many times in the past and let me just say one thing here this is not a boom economy okay we have two percent real and the rest is nominal but just keep in mind when you're talking about nominal gdp and you're talking about inflation inflation somebody's pricing power is somebody else's cost squeeze so let's not talk about nominal gdp being some great thing when basically 70 % of the nominal GDP is coming from prices and costs and 30 % is coming from real economic activity?

31:01Because historically what was normal was that the inflation component was half and the real component was half. This is a lopsided economy. It ain't no boom. 2 % real growth? I'm sorry, no growth in employment in the past year and real wages contracting, that ain't no boom. What's it going to take? we ran the analysis and we found that absent the four shocks we've had in the past six years corn headline inflation today would be south of two percent so what we what we have to see is the end of these shocks and who knows what's going to happen is this war with iran going to continue what are the hoodies going to be doing uh with saudi arabia what about russia ukraine so we are vulnerable to these shocks but this is not some ingrained inflation in the system okay This is basically one shock after another shock.

31:52So if these shocks ever subside, we saw when the tariff shock subsided, right? The tariff shock subsided. Everybody knows that is now in the rearview mirror. We saw, I said before, the part that it affected the most, which is core goods inflation, has been cut in half in the past year. So we ended one shock and saw in real time in the laboratory what does happen to underlying goods inflation. So if these shocks cross our fingers, ever fade away like the tariff shock did, then we will see headline and core gravitate down towards 2%, which, by the way, is exactly what that Dallas Fed's trim mean PC deflator is telling us.

32:34And talk to me about Warsh. I don't know why nobody ever asked him. What happened to that indicator that you said forever was your favorite inflation indicator? It no longer is. The changes that go on. Damien Cesar, one more question for David Rosenberg. So inflation prints this week are not just about the U.S. They've been happening all over the world. I mean, we've seen China, we've seen Japan with inflation coming in lower than expected. We've seen inline inflation coming out of places like, you know, Germany and India. So these inflationary pressures, are they unique to what we're seeing here in the U.S.?

33:02Or is this being felt globally? Well, don't forget that each individual country has their statistical agency measuring inflation differently. Tomatoes. Okay, so basically the way we measure shelter is completely out of line with what shelter costs are doing. That's the one area where we're not seeing inflation. We're not seeing inflation in house prices, and we're not seeing inflation in rents. The way that it's treated by the BLS makes the inflation numbers in the United States look higher than it does in many other countries in the world. That's interesting. I didn't realize that. So basically shelter, which is such a large component, is actually almost biased to the upside here in the U.S.

33:37relative to— If you stuck in residential rents, which are still deflating year over year, and you stuck in home prices, depending on the measure you want to use, underlying inflation and headline would be at or below 2 % right now. I got to finish strong here with David Rosenberg. The book is Bear in the Bullring for Global Wall Street. It is a fabulous vignette into the career of Mr. Rosenberg. And I look at this and I just simply say with your idea, we always regress to the mean. David Rosenberg on this uncommon bull market. Bob Farrell's rule number one. Look, I think that, and I said this at the grants conference yesterday, that, you know, I won't call it a bubble.

34:22Okay, that just gets people really upset. But I am going to say that in my 40 years in the business, I have not seen such widespread imbalances, divergences and extremes. By the way, not just in the market, where 10 companies comprise more than 40 % of the market cap. We already knew about concentration risk back in the late 1990s when that was less than 30 % share. But the bifurcation in the economy, bifurcation in the economy. You know, when you talked about the consumer before, we have hardly any real disposable income growth in the past year. We have almost no employment growth. And so I think that the mean reversion has to be that people actually start to see the economy for what it is, because the gap between personal income and corporate income is unprecedented.

35:08And the gap between what's happening in the rest of the economy and AI. OK, I got to leave it there. David, you and Jim Bianco, thank you so much for that moment. That was just magical to have someone looking at embedded inflation and Mr. Rosenberg collegially disagreeing with his good friend, Jim Bianco. Lindsay Piegs are with us. We had Eric Winograd, David Rosenberg, Jim Bianco. That was gold. And now we finish this inflation coverage strong with Rob Socken, who's been more than patient. Thank you so much. Do you adjust your Fed call here? You've been aggressive about a call. I mean, this tilts towards the Socken view, right?

35:46Yeah, absolutely. I mean, we've had three rate hikes this year, September, October, December, since the beginning of June. I mean, even before Kevin Worsh started. And it was based on this view that fundamentally inflation is going to stay high. Growth's above trend. The labor market's stable. Inflation is broad based. And we saw that in today's data. This was in line with our forecast 0.3 on course CPI. I think this fuels it doesn't seal the deal that October is going to happen, but we like our call here. And if anything, it could be more hikes than what we have in the base case. Rosenberg just in is more benign.

36:21He says the greater economy is in disinflation where AI is nuts. What Pichum saying is you got to aggregate the whole thing, right? Yes. Yeah. I think AI is part of the story. But if you look at just the number of items that are running with elevated inflation rates, it's not just an AI story. It's high energy. It's maybe some still tariff pass-through that's happening through the data. And it's still very sticky, non-shelter services inflation. That is not AI-related. And it's shown no signs of cooling. Val Hartman just publishing at BMO Capital Markets. Linden's off today. Work from home or something.

36:59Quote, it was a troubling round of inflation data. That from Ian Lingard and Bill Hartman. Rob, we have the Fed meeting on October 28th. I mean, that's only two weeks away and not a lot of data between now and then we have retail sales on Friday. How much pressure does this put on some of these data points between now and the 28th? I think for retail sales, I don't think there's a lot of pressure there because we're coming off a very strong run rate for the consumer. All of the data are very volatile. That's something we've been highlighting. So you could easily get a bit of payback in that data, but you look at the trends, It's a strong growth, strong consumer backdrop.

37:33I think the PPI data is important tomorrow. But you're right. It's really going to come down to, does the Fed want to hike with the type of data universe we've seen up to this point? We think they will. We think Warsh is going to be able to get the votes to do it. Are you kidding me? The midterms? Warsh is going to say to them at the Eccles building, guys, you've got to protect my back with the president. Do you like your jobs? Exactly. Thank you. Are you kidding me? You think there could be an October rate increase? I think the midterms are there. I don't think they would have started a rate hiking cycle going into right before the midterms.

38:11But the fact that they started in September and the fact that Warsh has been signaling this hawkish path since the middle of the summer, I actually think it looks more political to skip October, given they're telling us we have a big inflation problem. But there's no urgency. We think there's a lot of urgency here to raise rates. So it's the credibility question again, right? I mean, I thought we were past this with Fed credibility being called into question, but I guess not, right? I mean, like, you know, if you're gaming the market, if you're a Fed watcher, you really got to be thinking midterms here, no?

38:39Yeah, I mean, the challenge here is now they're in even a tighter spot. Because before, you had some data that could argue for a pause. You had downward revisions to inflation. You had a softer than expected jobs report. We think that those weren't the right signal. We think if you look at the trends, it's still a stable labor market. It's still hot inflation. But now going into the meeting with how hot the inflation numbers are coming in, if they don't hike, they're going to have a real challenge. And you might get a pretty big response on the long end of the yield curve if they don't hike at this meeting, that markets are going to get more concerned that they're not going to get inflation under control.

39:13My first study today, Rob Salkin, was Chinese exports were absolutely jaw-dropping. The Bloomberg essay out of Hong Kong was just, folks, I can't say enough paragraph to paragraph how America doesn't understand the China boom. Does that continue? Yeah. I mean, on the China side, what you've seen, if you go back to last year, a lot of expectations that when high tariffs came on China from the U.S., it would slow down the economy. And what we've seen is an incredibly resilient, adaptable export machine from China. and they've been able to find export markets even beyond the U.S. and grow their market share.

39:53Eventually, I think that their economic model, they have to broaden out the consumer spending element. But over this year and the next few years, I think this export machine can keep going. Rob, thank you so much. You're a trooper. Rob Sock and Pigeon. Can we make a note, so can we be sure Rob gets in in the next 10 days? I need to get an update from him. He takes the Hinkley. They have a Pigeon, folks. You don't know this across the Hudson River. They have a Hinkley picnic boat. Is that right? Yeah, they take the boat. They don't use transportation. They have a Hinkley picnic boat that comes right across the Hudson River.

40:22Well, I thought they were in Newark. I thought they'd go to Teterboro, grab the chopper. You know, they fly in. They land on the top of the Bloomberg building. It's great. Let's come down the other. Rob Socken, thank you so much. Greatly appreciate it. We'll get you back in here real soon. Stay with us. More from Bloomberg Surveillance coming up after this. If you invest or lead a business, one-sided views aren't enough. Join me, Brad Rogoff, and my team at Barclays Research as we debate what's driving markets on the Flipside podcast. Find the Flipside wherever you get your podcasts. With ChachiBT, you can do more than get answers.

41:00You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask Chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence. Get started at ChatGPT.com.

41:38You'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. Ted Mortensen is definitive. David George, by the way, yesterday was brilliant. Was just brilliant. But on technology, we are going to stop, calm down, and listen to Ted Mortensen with his years of expertise on technology. What's the biggest thing we're getting wrong in the zeitgeist about AI? The demand is historic. I mean, look at ASML's report, look at Samsung's report, look at Micron's report.

42:20Now they're booking into 29 and 30. So we've never seen this kind of demand versus supply metric ever. When I look at this Ted Mortensen, it comes down to the unit dynamics. Huge demand is a general statement. But also the price disinflation. We have people going, we're disinflating tokens, usage goes up, etc. Do we underestimate the profit challenges forward? In the near term, probably. In the long term, not. This infrastructure build is very positive and, quite frankly, Tom, very inflationary. I'm on so many conference calls and every single conference calls GPUs or raw semis are up 15 to 20 percent.

43:03Memory is up triple digits. So in this inflation report, we do have at least a near-term inflation infrastructure issue. In the last three weeks, you rightly point out, Ted, that over$250 billion in funding has been raised or proposed from Anthropic and SpaceX and OpenAI on and on. You know, is this going to crowd out investors in other fixed-income asset classes? I think it already is. And I think you have to look at these two components. One is the debt market. And I think from IPMs, they took notice of$250 billion coming to market on the debt market. So it is stretched. But more importantly, the equity capital markets to fuel this growth have to stay open.

43:49And that window has to be wide open for the names like OpenAI and Anthropic and others. Unfortunately, in the last three weeks, we've seen three major tech companies postpone IPOs. So that window has closed a bit, and it has to stay open. Ted, what are your thoughts on a secondary market for GPUs and compute systems? I mean, is this a good thing? Does this allow investors to really underwrite their residual value? What are you buying a computer this weekend? No, I'm just talking trade here, Tom. No, but seriously, I mean, imagine a secondary market where you can actually get forward pricing on what compute costs.

44:26I mean, wouldn't that make your job a little bit easier? I think it's indicative of the early cycle of the infrastructure build. We can't meet demand. So an old GPU is going up on price almost 20 % if it's not being utilized. I think that's a near-term issue. Long-term, I think that mitigates. Distinguished Ted Mortensen with his folks with Barrett of Decades, I will get to his comments on the United States Navy, of which he has a great commitment coming out of the academy years ago. What's the thing about the Mag 7 that provides a distinctive feature? I mean, Oracle, CDS, or the moon. Parse the Mag 7 for us.

45:09It's all about free cash flow, Tom, right now. And Microsoft is doing better than the others. $19 billion. I don't think they can spend on infrastructure like they would. So you're going to see them have an unbelievably good report on Azure and Copilot, as well as their free cash flowing around$25 billion a quarter. Same thing with Apple. The reason why Apple is up every single day is$30 billion of free cash flow. My clients are going to balance sheets and free cash flow. So, Ted, the million-dollar question, as you say, is whether or not investors are going to get defensive into your end. If they do indeed get defensive, obviously that's not good for tech.

45:47What sectors is it good for? I think one of the where I'm seeing a little bit of sector rotation right now is in the semiconductor index. It's been weak for the last couple of days, pretty brutally. And attribution is key with all my portfolio managers. If you look at the socks, it was up 87 percent from the peak. That's a good decade return in a year. Where I'm seeing some interest in rotation is going from infrastructure into software. Take Microsoft ServiceNow, CRM. Those are the names that if you really look long term on the enterprise adoption of AI, those are three companies that are going to are going to fuel the AI revolution.

46:26And for all of those listening across the nation, frankly, around the world, in continental Europe, in the Middle East, with Ted Mortensen combining your engineering and technology with your public service to the nation, give us a technology update of the drones to come. We all have this uninformed fear of drones. How legitimate is that fear? The genie is out of the bottle. And if we would ever restrict AI development, we're putting our defense industry complex at a huge disadvantage versus China. The amount of AI that's going into new defense budgets is immense. This has been wonderful. Too short a visit.

47:10Thank you so much for being with us today. Ted Mortensen is with Barrett and Definitive, we know, with many others, including Wayne Sanders, the public service to the nation, which is a good perspective.

47:36Stay with us. More from Bloomberg Surveillance coming up after this. With ChatGPT, you can do more than get answers. You can get things done. When you're running a business and looking to expand, you need a clear view of the landscape before making any decisions. ChatGPT can help you prepare. Connect your Google Drive, point to relevant files and reports, and ask Chat to research competitors, industry forecasts, and market signals. It can turn the findings into a strategic deck in your team's template that you can review before presenting to your leadership team. Growing a business is ambitious, and ChatGPT can help you do it with confidence.

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49:17You'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. We are so privileged now with the turmoil in Brazil, in Mexico, to have with us someone genuinely expert who has lived it. He is from Mexico with his public service to the people of Mexico. Ernesto Ruvia is chief economist, Latin America, it's Citigroup. I need to explain this first because my family was in Mexico City ages ago for a small bank there called Citibank. Right. It goes back to 1929, you know, the original domestic American experiment to go south.

50:04I mean, Citigroup has a huge historic exposure to South America and Latin America. Completely, Tom. Argentina was actually the first global branch of Citi. So the presence of Citi in Latin America, South America has been there for a long time, more than 100 years in many countries. And right now we turn very constructive on the region, seeing it from the street level. Translate the politics. We'll get to Mexico. And good morning to the Mexican government. I'm told all sorts of people across Mexico City listen to us each morning within the Scheinbaum administration. We thank you so much for your attention south of our border.

50:41But go further down. There seems to be a political seismic change from El Paso on down to Argentina. Do you buy it that there's a permanent change in the politics? Definitely. The political pendulum, Tom, has changed from left to right in most of the region. We have had a super cycle of elections in Latin America since the fourth quarter of 2025. And most of those elections have turned to the right. There's a discussion where this is cyclical. Is it an establishment sentiment or is it something more structural? We think it's the latter. We will see. But this has had meaningful impact on investor sentiment and the business friendly approach that these governments are going to have.

51:24Hold on, Ernesto. Are we really talking about elections being good in Latin America, being business friendly for Latin America? For a change, right? It's unbelievable. Remember the pink tide in the early 2000s, the moving to the left, more populism, less market friendly policies. Now we're going to the other side. So now that takes me to my next question. Bolsonaro, let's say Flavio gets elected. how on earth is he going to cut$40 billion out of Brazil's budget? What comes next? I mean, that's one of the few central banks in the world that's actually cutting rates here. So talk to us about what that means for investors in Brazil.

51:55So Brazil has a great opportunity in front. I mean, there are many tailwinds. Commodity prices are high. But there's the fiscal challenge that you just highlighted. Bolsonaro is coming in strong with support. He's the big favorite to win the election. He has Congress on his side. At least there is more on the right side of Congress. But he will have to do a big fiscal reform and the regulation. So far, it seems that it's in his plans that his economic team is going to be very strong. And asset prices have reflected that. They have moved quite a lot. So when you and Dirk Willer are in the war room, you're thinking about how to tell investors how to invest in Latin America.

52:35You know, I'm looking at the equity markets. I'm looking at the Brazilian Ibovespa. I mean, yeah, OK, it's up 28 percent in local terms, up over 40 percent in dollar terms and the same for Colombia and some of these other. So, I mean, equities, I mean, a lot of it might already be priced in, no? That's right. There's a lot priced in. Now it will depend on execution and implementation. That's the next leg. The global tailwinds are still there. First, Latin America is far away from conflict, so it's a good place to hide and to diversify. Then you have strong commodities, a weak dollar, the political cycle.

53:06But now it's up to Latin Americans, and we have to weather the current shocks. Locally, you have El Nino. Globally, you have higher long-term rates. I have to ask, and I'm going to be putting the Jane Frazier compliance chair, major timeout chair. Jane is tough as nails. She has Kate Moore watch over me while I sit there. I have to ask with your public service to Mexico. I think from sea to shining sea, Americans in our stereotype tend to look north to Canada and all the tariff stuff in that. Guess what? Mexico is as large, if not larger, away from autos, maybe some of the natural resources as well.

53:47How do you perceive the tariff dynamic between the Scheinbaum administration in Mexico and the administration after President Trump? Well, it's definitely noisy. Remember, Mexico is the main trading partner of the U.S. I think most of our listeners and viewers, including Tom Keen, don't know that. It is amazing how Mexico has surpassed China and Canada to be the main trading partner of the U.S. And even in the last 10 years, that trade has only increased despite the noise and the renegotiation of NAFTA to USMCA and so on. So Mexico is ideally positioned to benefit despite the noise. And we see that in the data.

54:27One more delicate question before Damien saves the interview. The stereotype here is the violence of Mexico, the societal angst of the cartels wrapped around the business spirit and entrepreneurism of Mexico. What's the biggest myth people watching Netflix or, you know, whatever TV show, what's the biggest myth we get about the violence? What do we get wrong about the violence in your Mexico? So let me start by acknowledging that it's a problem. It's a big concern, not only in Mexico, but it has spread through Latin America. Big organized crime has diversified out of criminal activities into the real economic activity.

55:08So it's a concern. But I would say the myth is that there is huge swaths of economic activity and regions in Mexico that are doing very well. You have high productive sectors, especially the export oriented sectors. You have very safe cities, for example, in Mexico City. So it's definitely a concern that the government needs to take head on. But the economy continues trading with the U.S. and hopefully growing more going into the future. Ernesto, you referenced the geographic distance between Latin American economies and the war in the Middle East, what's going on with Russia and Ukraine. And you mentioned that as more of a defensive approach.

55:45I look at some of these returns. There's one country, one of the big six in Latin America that's really lagged, and that's Chile. What's going on in Chile? Chile, I think it's a fascinating tale, and I hope it's not a cautionary one for the rest. Chile, as you know, has strong macro fundamentals. It's an investment-grade country, very strong fiscal. And they already did the political transition towards more market-friendly and business-friendly. But now President Kast is having trouble enacting his reform agenda. And that's the implementation risk that I was alluding to before. Chile is growing very little this year, but we expect a recovery the next year.

56:20Thank you so much for joining us today. Really, really appreciate it. Great. Thank you. Thank you. Ernest Reveille with us. He is with Citigroup, driving all of their study of the economy, the political economy of Latin America and South America. Thank you so much for that. 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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