Geopolitical Risks and Market Uncertainty

0:00If 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. When you're a business owner interested in expanding to new markets, there's a lot to consider and countless questions to answer before making the call.

0:37The most important one being, are you ready? That's where ChachiPT comes in. Give it a goal, add your files, and ask chat to help you map out different scenarios for the future of your business. So when growth is on the table, you've got an expansion plan ready to implement. Get started at ChachiPT.com. For big business, AI opened up a world of promise, but that world of promise turned into a world of pain. Cost spiraling, data trapped, security and governance risks multiplying, and ROI out of reach. That's why enterprises turned to Boomi to connect data, apps, and AI, helping them operate securely, efficiently, and at scale.

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1:52or watch us live on YouTube. We're back to school, folks. It's Labor Day's over, the summer's over. Let's talk to some professionals here. And we started off strong with Jim Caron, CIO of Cross Asset Solutions. Boy, the people at Morgan Stanley that hand out the titles, they do a phenomenal job. They've got just titles that you just can't imagine. He's a Morgan Stanley Investment Management. Jim, thanks so much for joining us here. Good morning. As we kick off this final, you know, three months here, four months of the year what's your top story here what are you asking your teams to focus on or maybe what are your teams telling you they're focusing on so the top story for me in terms of how we look at multi asset portfolios is what's going to drive returns and what's driving returns right now is really factors that align very closely with nominal gdp growth right so effectively what we're getting is a lot of great top-line growth in the U.S.

2:49economy. We've had some notable Wall Street analysts upgrade their 3Q GDP forecasts and even for all of 2026. That is something that's going to drive earnings. That's something that's going to support earnings growth. It's going to support profit margins. This is why the equity markets are holding up really, really well. But now I've only told you half the story. The other half of the story is what's going on in bonds. Well, good nominal growth doesn't necessarily distribute itself evenly. It's better for equities. It's not so good for bonds. Because effectively what it's saying is that as nominal GDP rates start to move higher, that actually makes bond yields move higher as well.

3:30And as bond yields move higher, the price moves down and it hurts the performance of the fixed income markets. So then what you get is a rotation. Then you have investors that are investing in multi-asset portfolios, diversified bonds and equities, and they're making a choice. And they're saying, do I want to hold more bonds or do I want to hold more equities in this higher nominal growth environment? And what they're choosing is equities. So then you peel the onion back another layer and you say, within equities, how do I start to think about this rotationally? So you start to move to value, to quality, and you start to really broaden out the market.

4:08And that's what's happening. So what we are focusing on at Morgan Stanley Investment Management is we are focusing on ways that we can think about generating higher returns without taking excessive risk. And what the weight and what the mix between fixed income and equity ought to be. Jim, toss into the mix the Fed meeting next week and your calculation for that. So, you know, there's a lot of debate on this. I think the markets have priced that there's a 60 % probability that the Fed's going to hike rates, you know, next week. I'll say that my view is that they will not. But clearly, that's highly dependent on what happens on Friday when CPI gets released.

4:50But what I think is the more important, and I really think it's a two-part question, what I think the more important part to that question is, is if they hike interest rates, how many do they go? Like how many times do they hike interest rates going forward? In other words, if they hike next week, does that start a campaign of four to six rate hikes going forward? Is this the signaling event that we're going to have a rate hiking cycle in front of us to try to slow down demand in the economy and bring inflation lower? Or is it a signal that, well, this is just a fine-tuning policy rates of 3.5%, that may be too low, maybe we'll hike one or two times, and that's it?

5:30Well, the market's already priced for that. So if that's a signaling that comes out of the Fed meeting next week, then it's not a negative for riskier assets like equities or even credit spreads. In fact, it could stabilize long-term bond yields a bit more and keep them relatively steady because it addresses the inflation concern risk. So, I mean, one could argue, Jim, and I know it's kind of almost 50-50 at this point, but one could argue that the Fed really has a decent argument to do nothing next week. The market's already done a lot of the heavy lifting for it. Maybe just sit on the sidelines and maybe see how inflation plays out over the coming periods.

6:10Yeah, I think that's really the way that I would think about it. I would think about this as a signaling type of a meeting, meaning that if they hike interest rates 25 basis points, the markets have already priced that in, right? So that's not really a big deal. But if they signal like, look, we've hiked 25 basis points and, you know, this is really just a fine tuning adjustment. This is not the start of a really big campaign. That's actually really positive. I mean, that would actually be a really positive outcome. So it's really a question of how they signal. So it's one of these questions of, you know, listen to what they say.

6:43Don't watch what they do. What they do is going to be less relevant than what they actually say, because this is really about signaling. And that's the key that the market has to sort of catch up with right now. I know we're consumed with do they hike? Do they not hike? We have an ECB meeting this week. We have the JGB, sorry, Japan meeting next week. you know both central banks you know ECB and the BOJ are likely to hike interest rates at their meetings but it doesn't necessarily translate into the U.S. having to do so though. Jim stocks have proven vulnerable to past jolts in the bond market not necessarily this time around why is that?

7:24I'm sorry so you said that stocks have proven vulnerable to some of the jolts that we've seen in the bond market in the past, but not necessarily this time. What are the dynamics that are taking place? Why is this different? Yeah, sorry. Yeah. So, what I think is very different right now is really just the earnings story. And I'm going to go back to what I said in the beginning is it's a nominal GDP story because nominal GDP is what drives earnings. Nominal GDP is real plus inflation. And that is basically the cash flow that companies are getting cash flows right now, and you were talking about this earlier on your show, are really strong.

8:00Nominal GDP growth is really strong. Top line growth is really strong. This is something that equities, higher earnings is mother's milk to equities. That's the principal form of valuation whenever we think about valuing an equity. So I think when an equity investor looks at what's happening in the markets. And yes, bond yields have risen, but nominal GDP has risen a whole lot more. And you could make the argument that nominal GDP has risen a lot and bond yields have a lot of catching up to do still before the rise in yields becomes restrictive and it breaks the equity markets. And so that's why we're in this transition phase of catching of bond yields, catching up to nominal growth.

8:43And that's why the equity markets have been able to pretty much ignore some of the jolts, as you put it, in the bond markets, in the equity markets, if you kind of look past it. Because even with yields rising, I mean, look at second quarter earnings. I mean, yields rose. And boy, second quarter earnings were pretty strong. Absolutely. Jim, thanks so much for joining us. Always appreciate getting a few minutes of your time. Jim Caron, he's the CIO of Cross Asset Solutions. Morgan Stanley, Investment Manager. Stay with us. More from Bloomberg Surveillance coming up after this. If you invest, lead a business, or allocate capital, one-sided views aren't enough.

9:24Join 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. 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.

10:01Connect 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.

10:29You'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. Yesterday, 4 o 'clock, sitting on the beach, John, toes in the sand, enjoying the Labor Day, thinking, is it too early for my first adult beverage of the day? When I check my work email, which I do all the time because I was trained as an investment banker and we work 24-7, as opposed to some people who like to think when they leave the office, they don't have to look at their emails.

11:01I do all the time. What hits my email at 4 o 'clock is an email from Stuart Kaiser at Citigroup. He said, US equity trading strategy. I read it and it was concise, as his notes are. And I walked away thinking, all right, I'm a little bit smarter here. I'm ready to go. I'm ready to go. And Stuart Kaiser in studio. We appreciate it. Stuart, how are you setting up your clients? What are you hearing from your trading clients as they think about this last third of the year here? There's a lot of crosswinds out there, not the least of which is elections, I guess. Yeah, look, I think people are still relatively bullish.

11:34But the fact is, there's a ton of event risk in September, starting on Thursday with PPI, CPI Friday, and then the FOMC, and then obviously the kickoff to election season as well. So I do think people still want to be long in the market. I think the bar to buy right now is a little higher just because they're respective of all those risks. I think any kind of reasonable dip, call it 2%, 3%, 4%, is going to get bought pretty quickly. But until then, I do think investors are going to be just a little bit cautious because of the calendar really that we face over the next 30 days. And at the end of the day, it's all about earnings and earnings upgrades, at least according to what we track here, the upgrades are on the longest run in about five years.

12:12How do you see it? Yeah, it's been an incredible earnings revision year. If you look at forward 12-month S &P earnings, they were 311 at the starting of the year. They're 397 now, which is a stunningly large number. We've sort of termed it trickle-down EPS. You have these hyperscalers that are spending massive amounts of money on the AI CapEx build-out, and that money is just trickling down to the rest of the market and you're just seeing very broad-based earnings revisions, we expect that to continue. That money is being spent from free cash flow or debt issuance? And tell us, you know, that matters.

12:45Yeah, look, it's being spent from both. If you look at the average credit spread of those hyperscalers, it's basically tripled over the last 12 months, but it's only 66 basis points. So, to your point, you had very strong free cash flow for these companies. They have issued debt. They are spending that free cash. But the bottom line is they're borrowing, you call it 6%, and they're earning, in our estimate, almost 30 % on that investment. And almost any finance manager is going to borrow at 6 % and invest at 30 % if they get the chance. So yes, there is negative free cash flow for a lot of these companies.

13:15But I think if you look back to earning season, both Amazon and Microsoft, I think, are very, very important because they talked about the demand, but Microsoft really made the case for the return on invested capital that they're generating. And I think it calmed people down because again, borrow at six, invest at 30 is a trade that any of us would do in our PAs probably too. First time I heard that, read that was yesterday on the beach. AI CapEx will continue as borrowing at 6 % to earn 30 % is hard to resist. One of our guests said that this morning. So I think that she read your research and got that there.

13:46I'm nervous about AI. It's such a big part of the economy. It's such a big part of the earning story, which is really propelling the market. My concern is when it ends, how bad is that going to be? Or maybe it won't end. I don't know. Look, it's a reasonable question. I would say Heath Terry on our side, who does our AI forecasting. I knew him when he was a kid. Yeah, and he's an excellent analyst. Awesome. They have a trillion dollars of CapEx globally next year and almost$4 trillion by 2030. So unless these companies pull back the reins, and I don't see them doing that unless they don't expect to earn the return on it.

14:21I think we have another few years here of just very aggressive spending. And this is not just a U.S. story. About two-thirds of all data centers are in the U.S. To do active chat from an AI perspective, you need to be within about 100 miles of the person doing the chat, which means this is a global story. You're going to need data centers built out in China and in Europe as well. So again, I take your point, but we do expect the spending to continue at least for the next four, eight, 12 quarters. And if that's the case, these earnings numbers are going higher. Equities generally come under pressure from higher yields.

14:54Let's talk about risk for a moment. What do you see out there? Yeah, look, I think the 30-year yield, I think, is what people are really paying attention to. And similar to AI, this is a global story. You know, Japanese 30 years got above 4.1 percent, which is an exceptionally high number for them historically. So I think yields are a risk. We're seeing this morning, you know, the Houthis attacking Saudi oil infrastructure. You're getting oil back towards$100. So higher yields, higher oil, those are two huge risks to the market. And I think those are persistent. Equity markets have done a very good job of compartmentalizing oil.

15:26And on the rate side, I think rates becomes an issue between earnings, if that makes sense. So when we're reporting earnings, equities are happy to ignore all of that noise, right? If there's a hike next week, is that the beginning of a cycle or is it just a one-off? To me, the type of inflation the Fed is trying to fight is persistently above target, right? So I would view this as call it one or two hikes, and then they'll leave rates there until they see progress on inflation. And that's not the economics view. That's just, you know, kind of the meathead markets view. But what's interesting from equity guys is to your point, equity investors get worried when you get an inflation cycle, inflation like accelerating higher.

16:04This is not that. This is inflation stable, just above target. So I think equity investors are just going to have to swallow hard. I think the first couple hikes could be a little bit disruptive. But when equity investors understand that this is just a couple of hikes and it's not going to be an aggressive cycle, I think ultimately equities will be able to deal with that. Are your clients on the Citi trading desk, are they buying protection? Are they buying volatility? What are they looking to do at this point, do you think? Because we've got, again, a lot of stuff happening, whether it's the Fed meeting elections, there's a lot of uncertainty out there.

16:37Yeah, for most of August, we had actually seen clients selling optionality because implied volatility was so high, we had cleared past earnings. What we saw late on Friday was a lot of people buying upside on the VIX, so trying to own volatility, trying to hedge in that way. And I think that was just because the VIX had gotten down to about 14, all the event risks that we mentioned. And I think some clients were saying, you know what? This long holiday weekend, a very quiet August, these hedges have gotten cheap, and we're going to put those on. So we have seen a little bit of hedging, but it was very late last week.

17:06I would expect that to continue this week as portfolio managers are still long and just respect the fact that there's a lot of event risk here. So we went from selling vol to the vol getting so attractive that some hedges got put on late last week. Can you talk individual names or sectors? Where's all the interest right now? I mean, you mentioned AI, of course. Look, I would say two areas of interest outside of AI and any PM we talk to is telling us, give us your even third best idea that's not AI related. And I think the two that have really caught a lot of interest are banks and healthcare, especially banks.

17:41You know, just the regulatory environment's helpful. The capital situation's very positive. And then on the healthcare side, after that Moderna announcement, I think people got really excited about pharma and biotech. So if you look at, you know, the consensus portfolio right now, I think a lot of capital goods, which is kind of AI build out, pharma and biotech banks, and then semis and hardware after that. So again, I would say outside of AI, healthcare and banks would be the two areas where there's a lot of focus. Stuart Kaiser, thanks so much. Appreciate it. Stuart Kaiser, read his research, folks.

18:10It's very direct, succinct, to the point. It tells you where the markets are and what he's hearing from clients. And it's very helpful if you're trying to get a sense of what's going on out there in the markets. Stay with us. More from Bloomberg Surveillance coming up after this.

18:30You'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're back at work. If you were a bond investor, I don't think you got the summer off because there were so much new issuance over the summer, and now we've got another deal coming from Amazon. Peter Cheer, he's back at work. He's head of macro strategy at Academy Securities. Peter, we head into the final, you know, kind of third of this year, 2026. How are you setting that up for your clients here in early September?

19:04I think we're kind of very cautious on bonds and yields globally. I know Besson has talked about bond vigilantes. I don't think that has anything really to do with it. It's just the sheer amount of supply that's coming from corporate America, from sovereigns across the globe. At the same time, some of the countries that used to buy a lot of our debt, like the Saudis, are now having to take out loans. They're having to spend money. So I think there's a supply and demand problem that's just going to push longer-dated yields higher, almost regardless of what the data is. Pete, is there issuance fatigue?

19:36You know, I don't think so. I think people are, you know, the story has been pretty well telegraphed, so people have money set aside. I think it's much more a decision. Do I buy 10-year at 4.7 % or do I buy one of the hyperscalers at maybe closer to 6 %? And I think a lot of investors are saying, I would rather invest my money, get 6 % from a top rated hyperscaler than the U.S. government. So I think that's pushing on those yields. I think it'll get absorbed, but it is sucking some capital out of the market. So we got, I don't know, Peter, we got the 10 year at 480, the two year pushing up the 440.

20:10If you're Fed Chairman Warsh, what do you do next week? Well, one, I hope they actually make some progress on their data task forces. I do think when Waller spoke last week, he's correct. If you look at the last two or three months annualized, the data's a little bit better. I was just playing around with Atlanta GDP Now. They create their own core inflation metric. It's actually only at 2.5%. So, there's all these things I think that they should look at. And I think the one thing the Fed has to really do is push back on saying, we have two sources of inflation right now, at least in my opinion.

20:42One is the war. Hiking rates is not going to help. The other is this hyperscaler buildout. The compute build-out is massive, but I don't think raising 50 basis points to 100 basis points is going to stop that. These companies believe they're making 10x, 20x. They're going to go ahead. So I think rate hikes is kind of futile right now. So I would stay the course, watch and see how this plays out. So you're going against the grain in terms of the forecasting for hikes from the Federal Reserve, right? Yeah, and I think I really break the world up into two parts. So the front end of the curve is completely determined by the Fed, and I think they're going to kind of be on hold.

21:16I think they're going to push back on the need of hiking. And yes, we see the inflation there. But if you hike and it's really not going to help inflation, why would you bother hiking? So I think we see stability on the front end. And then this long end to me is really supply and demand. So I think yields tick slightly higher there. I think that puts some amount of pressure on equities, but nothing that can't be overcome. And the rest of this, going back to your previous segment, I think across the globe, you're going to be seeing an infrastructure build out. I want to own infrastructure. I want to own energy.

21:43I want to own rare earth and critical minerals globally. because I think that's the opportunity set. Peter, at Academy Securities, you have the benefit of working with retired senior military folks, generals, admirals. It seems like the market has compartmentalized the wars in Iran, the wars in Ukraine. What are your leaders at Academy Securities saying how they think these things will play out? Because again, the market seems to be looking past them until it doesn't, I guess. And I think that's probably the advice we've been giving to our clients. I think we probably missed an opportunity when we did the initial ceasefire, waited a few weeks, then did the MOU, which then we waited a few more weeks to discover was worthless.

22:25That was probably a lost opportunity where maybe if we pressed harder, we could have driven this to a better conclusion sooner. Right now, I think we're in the status quo. We are going to try and blockade them. We're going to put some financial pressure on them. They're going to lash it back out periodically. They're going to try and get the Gulf states to put pressure on us. So I think the market's doing relatively the right thing. though again we're seeing Brent at 98 I think maybe the markets have underplayed it a little bit too much so I think we're at that ebb and flow and I think there's this risk right now people are gonna have to start pricing in not just higher oil prices but to me it's really diesel I keep watching diesel very closely I feel that permeates the economy much more that's ticking higher so I think we've got to be a little bit careful there I think we're a little bit more optimistic that come next year we get some sort of ability for something to calm down in Russia and Ukraine and the one thing I think we're all a little bit shaking our heads on is you've seen such a clear lesson from Ukraine, how important it is to build, manufacture drones quickly, get them out in the field, and how you can at least slow down an enemy.

23:19And I'd like to see us, you know, I keep waiting for us to show up in Iran with 500 ,000 drones. And it seems like that's probably longer way than it should be for an economy like ours, who've seen the importance of this. Well, at your company, what's the thinking? Is this a long-term conflict? Does it end anytime soon? No, I think we're probably leaning towards we walk away a little bit. It doesn't really escalate much beyond what it's currently escalating, but it also doesn't completely go away that we're going to have to threaten ships in the region periodically that we're going to have to put there.

23:52So, you know, certainly not a forever war, but maybe a, you know, much longer term kind of police action until something really gets resolved. So, Peter, the driver for global equities has been earnings and certainly the earnings story here in the U.S. has been extraordinary. How do you guys think about that going forward? You know, I think it's been great. One of the things is you start looking at some of the earnings, and it's only a portion of it, but it's been companies marketing to market their private equity investments, things like that, that to me aren't quite as sustainable. And all of this still comes down to, is the data center AI build as good as it is, and how quick is Chinese compute catching up?

24:29So I'm a little bit nervous that Chinese compute is amping up. There's been a little bit of noise in China about rare earths and critical minerals. I think they still hold the biggest card. So when Trump sits down with Xi, they have been working really hard to catch up on compute and data centers. They're still way behind us, but they are flooding our market with cheap compute, which could hurt our markets. And they do have that threat of rare earths and critical minerals, which could drive our economy to a standstill. So I'm OK with equities. But again, I really think we need to build out the things that we need to protect ourselves against Chinese influence.

24:58So it's energy, it's, you know, smelting, refining, processing. Again, if I'm Canada, that's my response to all these tariffs. I try and figure out how to smelt and refine my own stuff and sell it globally. So I think this is going on. And I mentioned this maybe two weeks ago. Australia has now announced their first refinery. They're now actually announcing potentially some drilling. So you're seeing this trend. That's where I want to be heavily invested. You're not taking as much of a binary bet as I feel you are right now in the hyperscale or compute build. Peter, thanks so much for joining us.

25:26Always appreciate getting a few minutes of your time. I'm Peter Cheer. He's head of macro strategy at Academy Securities. Stay 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.

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27:13you'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 okay i'm looking at yields here and i'll up again a little bit here the 10-year treasury up at basis point four spot let's call it 480 i mean remember when we traded four to four and a half percent that seems kind of quaint are you getting tempted what's that are you getting tempted oh yeah absolutely i mean i clip coupons for a living look at that in a two year i mean i don't have a lot of confidence in my government but i think they'll pay me back in two years if i get to your piece of paper and get 4.38 that's not a bad living right these folks down in dc can pay me back in two years i think right you would hope so i would hope so let's talk to professional about this stuff oxana aronov she said of market strategy for alternative fixed income at J.P.

28:07Morgan Asset Management. Oksana, thanks so much for joining us here in our studio. What is alternative fixed income for you guys? Good morning. Thanks so much for having me. Great to be here. Alternative fixed income aims to the way we define it, which is specifically through an absolute return lens. We define it as being able to generate a return for investors, irrespective of whether the environment is a benevolent one for bonds or not. And of course, over the past five years, we've been in an environment that's not been benevolent for bonds. So we were positive in 2022 and continue to do so ever since and consistently generate more positive returns in your traditional fixed income approach.

28:45I put this question to Peter Scheer before, but is there issuance fatigue? Do you detect that? From the Treasury? Well, from all across fixed income. So the interesting phenomenon is that, of course, the Treasury is going through the motions to try and bring long rates down. The administration wants lower rates. which, by the way, is every administration since the beginning of time. I don't know that there ever has been one that did not want lower rates. But zero rates are never walking through that door. So we should just get used to that reality. That was a very particular moment in time. Is there issuance fatigue?

29:20What's happening is you have a tremendous amount of issuance from the Treasury to plug this deficit that we have. And at the same time, you have competition coming in from high quality hyperscaler issuance or what continues to be high quality for now, at least hyperscalar spreads are certainly widening meaning they're having to pay more to issue debt but there is some there are some technicals that are there that are not great for treasuries as well as the overwhelming demand for the treasuries is coming from overseas from our largest holders such as china such as japan so we are definitely very much beholden to that the dynamics of that demand when i look at the in go function on the bloomberg terminal it shows me returns across fixed income.

30:02Year to date, the best returns in the U.S. have been leveraged loans, number one, and high yield, number two. So it seems like the market's willing to take credit risk. Are you guys willing to take credit risk here? Do you know what has done better than high yield, or at least as well year to date? The very front end of the curve. Is that right? Yeah. With significantly less risk, you got to the same or better place year to date with significantly less ups and downs, which is, of course, what keeps investors invested, right? So you can't eat volatility, but that's what keeps folks invested and that's what you want for their long term.

30:34So that just tells you the fact that the very front end of the curve, three month T-bills are pretty much where high yield, the riskiest part of the bond market is tells you that the market is kind of like a coiled spring in credit, meaning spreads are so very tight that everything is moving off of interest rate risk, which has not really been the friend of bonds this year as yields have moved up. And that's just telling you that there's tremendous amount of richness in the credit market. And we're seeing late cycle market. Well, one of my good ski buddies, long time hedge fund manager on the street.

31:05I would always loved our chairlift ride because, you know, he'd give me some really cool stock ideas. Now he's retired. All he does is roll three and six month treasury bills. I mean, hugely boring. I'm no fun at all anymore. And you could do it through treasury direct, too, I guess. And but that's what you're saying. I mean, even the smart people. And interestingly, you know, interestingly, so much of the investment industry, particularly in fixed income, has evolved around being fully invested throughout the cycle. And sometimes you have to make the most intelligent decision, which is, you know, where are you going to be on the curve?

31:36And it doesn't always pay to have duration. Sometimes you want to have the least amount of duration and get paid. You know, you started out asking, are you getting excited about the tens at 4.8? I'm excited about twos at 4.37. I mean, why not? That's above the Fed funds. We're likely not going to see a meaningful hiking cycle, if we get a hike or two here, which the bar for that even is fairly high. So sitting there at, you know, nearly 4.4 in the two year. It's a great place to be. I don't know if this is within your remit, but can you, back to issuance, do we know if, what the breakdown is between companies issuing debt or using free cashflow for their investment?

32:14What's that breakdown? So hyperscalers have pretty much entirely switched to issuing debt. And we're seeing their free cash flow going negative in some cases, right? Because initially they funded this CapEx exclusively from their cash coffers, which were enormous. And now they're funding it almost entirely through debt issuance. Because they can? Because they can. I mean, they're borrowing, even though their borrowing costs are going up, the math in their mind is, you know, they're spending whatever it is, 6%, but they're in the hopes of making 30. I mean, do you see that reversing at some point?

32:46Absolutely. I mean, I think that math only works if that 30 materializes, and it's not clear whether it does. So much of the, not just the investment industry, but our economy generally is tied up, tied into this spend. Something like 50 % of our GDP next year is expected to come from this AI spend. So it is a very important tailwind to the U.S. economy. And if the, you know, acceleration rate at which they're spending slows down, I'm not even saying that it goes, you know, entirely negative. If the acceleration rate slows down, that does have meaningful ramifications for the economy, I think, overall.

33:21That feels, the way you just phrased that makes me nervous here. Well, we are, if you look at the spend from the hyperscalers and compare it to the telecom spend, which all parallels are flawed, without a doubt, but we are currently, you know, the telecom spend reached kind of one to one, one percent, I should say, of GDP. We have now doubled that. We're at 2 % of GDP on the hyperscaler spend, and we're on track to get to 3 % of GDP by 2027 at some point. So we essentially are on track to triple the spend that we saw during the telecom year. So the amount of money is enormous and has significant impacts for us.

33:56And John Tucker, I was right smack in the middle of all that new issuance in the telecom space in the late 90s. It was a glorious time. We made heaps of money. Until it wasn't. Until it wasn't. Exactly. So I signed my last contract, February of 2000. Talk about timing. Oksana Aronov, she's head of market strategy for alternative fixed income at J.P. Morgan Essin. 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.

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