Inflation and Bonds Amid AI Concerns

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1:52or watch us live on YouTube. I am laughing. It is a jewel, folks. Into the economic data here in a moment. Just out. Smart investing in real life from two grizzled pioneers of the business, David Katz, Stephen Weinberger. I love what you've got on page 167. It's the husband, the wife. They're at dinner. They're having wine and candlelight. It's beautiful. He's on the phone. and to think if I hadn't been having dinner, I might have missed this wonderful investment opportunity. Boy, does that sum it up as well. There's an old way that we used to do this. What does David Katz say is the new way to do investment if I'm not picking up the phone at dinner on an investment opportunity?

2:44What the book focuses on is the old way. We think setting up a long-term plan, sticking to that plan, trying to keep costs low is the best way to increase wealth. Not getting obsessed with the day-to-day volatility. And it's really a guide on how to do that. Are we over-diversified today? Are we doing too many things? Steve Ballmer bought Microsoft, said that's it. That's what I'm doing. Are we over-diversified? Well, certain investor portfolios that might have 20 different funds are over-diversified. But you'll also see right now you're talking about the AI implosion. A lot of investors put a lot of eggs in that AI basket, and they're a little bit too concentrated.

3:21So there's some sort of balance in between. So dig into that a little bit, because a lot of the indices that people invest in markets is market cap weighted. So when you get these mega cap names in there, you tend to be very concentrated in your investing. So are these doing a disservice to some investors in the long term? Well, the S &P 500 is a living index, and right now you're right. It's probably the most overweighted to growth that it's been in some time. So you do have to understand that as an investor. You just don't want to put all your eggs in the S &P basket and think you're most diversified.

3:56There are other areas to be. There's small cap, mid cap, international. What about 60-40? I asked that of Irish Jersey earlier, Waylia BlackRock. Again, there will always be times when it doesn't work, But for long term investors, having a 60, 40 or 70, 30 asset allocation is going to allow you to grow with the stock market over time. But a little bit more protected on the bond side. What do you do with the impatient investor? They're not long term. They're behind actuarially to their retirement. They're not there. What do you do to that person? So that's we keep talking about that in the book.

4:31The key to success is taking that long term approach. Don't try to don't. I'm saying what percentage of people coming to the door, David, don't have a matrix asset? They haven't done that. So a lot of people don't do that. So we're sort of the lesson is you've got to do that to be successful. We think if you're trying to chase the past trends, you don't do as well. And all of these studies show that if the average mutual fund makes 10%, the average investor in that fund makes 7%, that's because they're trading in and out at the wrong times. So some of the sectors that you like currently, right, you like staples, discretionary, interestingly, utilities.

5:12And, you know, utilities are one of those sleepy sectors that, you know, you think about buying for income and for dividends, not necessarily for growth. So talk about why maybe you like some of these sectors more than others. So the stock market has been a risk on, risk off stock market winners and losers. And the stuff that we highlighted there have really been done poorly this year. They've lagged the market And we think some of the better opportunities on a go forward basis, where is the puck going to go, is in these places. Consumer staples, there are a lot of good businesses at 14 times earnings.

5:43Utilities had a great run, gave it all back when you had the AI sell-off take hold. There are a lot of utilities right now that are paying a 3.5%, 4 % yield at 16 times earnings that are going to benefit by the AI build-out and more electrical usage. David Katz, please stay with us here as we celebrate his wonderful new book. And we come up on the economic data this morning, red and green on the screen. But the VIX over two days shows that AI tensions 17.48 on the VIX. You see price up and yield down. There is a flight to quality into this important economic data of retail sales in initial jobless claims and PPI.

6:21Let's go to the data. Here is Alexis Christophorus. Wholesale prices. Wholesale prices for the month of September are out. and they show a month-over-month increase of 0.8%, much hotter than expected. Estimates, or I'm sorry, actually they are up 1.3%, so much hotter than estimates of 0.6%, and hotter than the 0.4 % we saw the prior month. We also saw year-over-year wholesale prices rallying to 6.3%. Estimates were for 5.4%, and the prior month was 5.4%. Let's take out volatile food and energy for a moment. And month over month, PPI up 7 tenths of 1%. That is hotter than the 0.3 % expected and more than an acceleration really from the 0.2 % we saw in August.

7:13And if we take out food and energy year over year, PPI up 5%. Estimates were for 4.4%. This compares to 4.6 % in August. So we're seeing on every measure inflation at the wholesale level coming in stronger than expected. Elevated prices for crude, gas, diesel continuing to drive wholesale and manufacturing input costs higher. Of course, this report coming a day after a hotter than expected September consumer price index. Let's get to those retail sales numbers now. Month over month, up 0.8 percent. So consumers continuing to spend despite higher inflation. The pace of spending, though, slowed a little bit because retail sales were up 1.2 percent.

7:54The prior month, if we take out auto and gas on retail sales, up a scant two-tenths of a percent, right in line with estimates, and a lot lower than that 1.2 % we saw the prior month. But I just want to repeat one more time that wholesale inflation month over month up 1.3%, and year over year up a hot 6.3%. Guys. Alexis, thanks so much. Ira Jersey with us. What a joy that is this morning. Paul Sweeney, I believe in tomorrow. And basically, bonds crush yields lower prices higher as well. I'm looking at this. And first of all, you need to leave the studio and go to work. I mean, does this do we actually begin discussing with this inflation print in October increase?

8:36Well, I don't think so. I still think December is most likely the you know, the interesting thing about here is margins. Right. So when PPI goes up faster than CPI, that means that margins theoretically should be compressing. And that's something that You know, we look at at the aggregate level quite often. So that's something I'm going to be looking at. But interestingly, behind all of this, there's this little wonky data print called the retail sales control group, which is all those pieces of retail sales weaker that go into GDP. And that's weaker than expected. At 0.1 percent, that's actually pretty low.

9:09I agree. That's the line that I went to as an amateur. Explain to us what that means. I mean, this is where Whaley was, which is that GDP is just not as solid as it's been. Yeah. So basically, when you think about the personal consumption expenditures, right, that's personal consumption is about two thirds of GDP. The retail sales control group are the pieces of this report that go into that reading. And this is relatively weak. Now, granted, it's one number and it's only one month. But the question is, is this going to be a trend that we see in October? That sounds like David Katz talking. Let's go back to David Katz, Matrix Asset Advisors, as we celebrate a really useful book on investing 101, smart investing in real life.

9:52What's changed is the media focus. It's Tom Keen's fault. We have this media frenzy of looking at economic data. How do you listen to Tom Keen but ignore him for the sanctity of your long term plan? And for your long-term sanity. It's very important to know what's going on. You talk to Mrs. Keene? It's very important to know what's going on on a daily and monthly basis. But we think that from an investment perspective, you want to take a longer-term view. How do you divide the two? This is the heart of the matter. How do you divide the two? Set up a long-term plan. Stick with that plan. Be aware of what's going on.

10:28So we would not react to today's print and all of a sudden change your asset allocation or change your equity exposures based on that. But be aware of what's going on. What do you see in the David Katz world of consumption right now? Do you see an exhausted America? We think the consumer has been surprisingly strong. We think the economy has been shockingly strong. And we think that it's going to continue to be OK. We do think in terms of today's hot inflation number, if there's ever sort of an exit ramp out of Iran, oil prices will come down sharply. And the inflation numbers, which have been pretty negative, will cool down a lot.

11:04And then we think that's going to take pressure off the Fed. And that would be bullish for the market. Do you agree with that, O. Weissman? Well, yeah. I mean, if oil prices come down, ironically, you know, oil and gas prices being where they are is a tax on the consumer. So, you know, if those go down, the growth should be better. Is the tariff a tax on the consumer? Absolutely. You can stay. David Katz, thank you. Thanks a lot. I want to get you a Scarlett Fugues email. We need to get David Katz on Bloomberg Money. The book is a celebration. Smart investing in real life. I can't say enough about it.

11:35I'll do that on Twitter and LinkedIn today. David Katz Matrix, thank you so much as well. Let me look at the market right now with Ira Jersey, because our next guest is beyond esteemed. I mean, David Katz, move aside for Dana Telsey as we get her in here. I'm looking, Ira, at the yield space. And I mean, it's not often that you see yields gyrate around. What's your interpretation of the curve right now? Yeah, so actually, since these data came out, the 30-year has actually rallied, right? So we've actually seen lower yields than where we were before. And I think it is. People are focusing on that control group, number one.

12:12And then number two, with PPI being so high that people are maybe thinking that margins are going to compress, at least at the high-level macro level here. We'll have to see. Thank you for the way you choose to listen to us. Good morning. 99.1 FM, Nathan Hager Radio, that wonderful midterm seminar yesterday in Washington. A huge success. 92.9 FM up in Boston. Good morning. And, of course, Bloomberg 1130 here in New York. Particularly good morning in continental Europe here. Where is euro off of this? 111.99. Euro churning this morning is how I put it. Our economic data, to do that with Ira Jersey, a privilege.

12:54Our economic indicators brought to you by IBKR. For the past three years, interactive brokers, individual clients average 24.3 % annually, beating the S &P 500. Lower costs and access to 170 plus global markets. It matters. Visit IBKR.com slash performance. As we begin today, really our midterm coverage. We begin today our Q4 consumer dash. Dana Telsey is definitive at Telsey Advisory Group. We're thrilled she's here. It's like a hit record. It's like when something's magical in the movies. There's a destroyed brand. A guy named Blasey shows up. And Chanel is like, I was going back and forth with Deborah Aitken in London.

13:46Have you ever seen a recovery of a house like Chanel in the last year? It's been amazing. And thank you for having me here, Tom. It's absolutely been amazing. And what's so interesting about it, his impact on the clothing impacted every other part of the company. I mean, even their makeup, you try to get the Chanel Crush lipstick, it's sold out everywhere. So Chanel is back in vogue. And it's something that Gucci would only like to see, given that they haven't had the star power. How does Gucci carrying a destroyed brand, how do they find this guy, Blaise? They need to find someone, too. And some of it's just connecting with, frankly, their customer, but also the next generation of customers and doing it globally.

14:30One more fancy social. I got two more fancy social luxury questions. Deborah A. can make it clear to me that the magic is social. Getting out on YouTube, getting out on Twitter, TikTok and all the stuff Alexis Christoffers looks at. That's the new messaging, isn't it? It goes viral and it goes global. And it also crosses generations. So the ability to have that appeal is that is that's I have this theme of the letter A. What are the topics of 2026? AI, affordability, activation, assortment and agility. Think about what activation is. That's what social does. One more snobby question. Ira Jersey wants to talk about Home Depot in Target.

15:14Dana Telsey, I look at this and I see something that I still think is totally nuts. Hermes in Brooklyn and Williamsburg. What does that signal to you about the spirit here of high-end consumption? Williamsburg is where high-end consumers are living, where high-end consumers are going, and it's new neighborhoods that are being activated. Look at the rents overall, even in Williamsburg and Brooklyn, compared to Manhattan. It's not cheap. Yeah, Jonathan Miller with this on Bloomberg Money with Scarlet Fu Friday. Alexis, get in here a question with Dana Telsey. Well, I'm just trying to absorb what you just said.

15:50I grew up in Williamsburg, Brooklyn, in the 70s and 80s, when it was a very different place than it. I mean, if we had a sushi restaurant come in, that was like stop the presses, right? Why are people continuing to spend despite this high inflation? I guess my question is, where are they putting their money? Are they buying the necessities? Is there discretionary money out there? Are they going out and buying the fun stuff? There's discretionary money out there for upper income. But even when you're looking at lower and middle income consumers, they're choosing what to spend on. So they'll choose the experience.

16:21They'll choose what they see virally. But then what are they going to buy? The other change in buying patterns is about GLP ones. GLP ones are causing new apparel wardrobe changes, new apparel wardrobe purchases. and they're not done because the impact that it has basically extends. So I think there's different reasons for consumption, but higher interest rates is a headwind to housing. We go to surveillance, GLP correspondent Ira Jersey here with Dana Telsey. So let's talk about the other end of the consumer, right? So let's talk about the big box stores, you know, or even the home improvement stores, right?

16:58The Targets and the Walmarts of the world too. How are they doing? I mean, presumably some of them are picking up and maybe others aren't. You must have been in our conference last week. I had my conference last week. And basically, whether it was Lowe's, whether it's Target, Nike, they were all there. And so what you're seeing out there on the big boxes, look at Target this year. Target's up over 50 percent. The newness in the assortment, the new collaborations. Look at Hollister and Home that's in Target. Look at Warby Parker's shop and shops in Target. There's newness there. There's that search for value.

17:29You look at Walmart. The fastest part of Walmart's growth is coming from household incomes that are at their highest level for Walmart. Home Depot and Lowe's, they're waiting for that spigot to get turned on for improved housing. But they're both enhancing their business models in order that when it does, there'll be an acceleration. Go ahead, Harvey. Yeah, I just want to tell you in the retail sales report, you see that Home Depot and the home improvement did okay. Yeah. How do you do that? I don't even know how to look that up. Oh, it's in the Bloomberg Terminal. There's lots of tables in there.

17:59I'm learning every day here. Alexis, another question with Dana Telsey here. What are we not buying? Do you track that? Yes. So where the headwinds are lately, look at active footwear, the athletic footwear. That category has been very tough. It's been promotional. And you need the newness from Nike to resuscitate the category at the same time. Hasn't the industry moved on from Nike? Well, you know why? They've moved on because post-COVID. Now people are getting dressed up to go to events. They're wearing bow ties to go to work. They're wearing brown suede boots. She can come back anytime. Here I am.

18:36Okay, here's the reality. I am honored that Ralph Fitzgerald puts the suit on me. I happened to see Ralph yesterday. He's on a huge roll helping people with their suits and all. And he was talking about the suit is back. Why is the suit back, Dana Telsey? I think people want to look differentiated. I think people want to be not formal, but they want to look good again. They take pride in their appearance. And there's more meetings. There's more events. There's more conferences that people are going to watch what's on people's feet. Watch what they're wearing. They may not wear ties, but they're wearing a suit without a tie.

19:12They are wearing dresses again. Dresses is huge. Bottoms are selling well. Denim is being worn to work, to events, and on the weekends at the same time. What's the holiday season look like? First time I've asked this question. I think the holiday season is going to be okay. And you know why? I think the advertising and the activation is moving that holiday season. It's already gotten started because Amazon Prime Day kicks it off. And you saw the targets and everyone else do events surrounding that. So I think it'll be a decent holiday season. I think you're hedging it. I think it could be greater than what we expect because of nominal GDP.

19:49Well, we're coming out with our holiday forecast next week. So we'll tease it for next week. Oh, come on. There's only 42 people listening. Go ahead. Only a couple. But I think it'll be a decent holiday season. What is Louis Vuitton doing? I mean, they came out. They were really soggy, to say the least. You know, for those of you, it's Mr. Arnaud, and there's like 42 children. They bought Tiffany's in that. I mean, they should make a TV show about the succession, right? They should. And you saw the numbers that came out on Monday. Yep, Monday. Basically, fashion and leather goods, which is 45 % of the business, was weaker than expected.

20:24Why? China. Chinese consumer demand was weaker. It was down mid-teens. That was the headwind. At the same time, Sephora is still growing and growing very successfully. Yeah. And that's doing well. Watches and jewelry, also jewelry doing well. And jewelry's been doing well in all categories lately. But the fashion and leather goods part of the business, you see how important the Chinese consumer is. The youngest daughter has the daily Sephora. She's figured out that instead of going once and killing me, she goes daily. Did you know this, Ira? It's a daily Sephora. I did not know that. You go daily, and then it's less pain.

21:02It's death by a thousand cuts. Come back next week with your new report. Eric, did you see that? She's like selling her new report a week out to come back. It's a shrewd move by Dana Telsey. Thank you. Thank you so much. And thank you, Joe Feldman, for the big box analysis, Telsey Advisory Group. Ross Mayfield with us right now with Baird. Thrilled he could join us this morning. I got a couple charts up as an amateur. And I know you got 42 charts up. And Ira Jersey has 78 charts up. Sweeney even has more charts up than me. And I'm looking at core weave debt just made down to new lows. Can't find a bid.

21:37I got a NASDAQ on economics when Alexis did it. Came down to new lows. It's recovered a little bit, but it's soggy. What do you as a strategist, an arching strategist, how do you synthesize the immediate two-day AI angst? I think you say, all right, it's clear that yields are higher for longer. This inflation data, there's nothing good to find in it. You've got a Fed that's clearly back hiking, bonds at the long end going higher. And so it means investors have to be more discerning. So a core weave, which is kind of on the higher risk spectrum of the AI trade, gets hit. And I think, you know, quality and this rising tide that lifts all boats in AI, I think that's a story kind of of the past.

22:19Do you see that in the tech earnings in two weeks, that they will generate free cash flow growth to calm everybody down? I think the big ones will. And I think the big ones will continue to catch a bid. The MAG7 has looked fine while the semis and the Cosby have sold off. So I think it's just you focus on quality and there's quality in tech. Valuations are not super stretched because those earnings have been so strong. But it's going to take a more discerning investor than we've seen for most of this bull market. So think about the downstream of this AI investment boom, right? So there's obviously going to be some firms that win that maybe aren't really on the radar of the general public.

22:59Are there any names like that that you guys are looking at? Or are you just sticking with the top line, those firms making the investments? Well, no. I think the picks and shovel names, to your point. I mean, the company is providing cooling or storage or a lot of things that you need to build a data center. I think at this point in the cycle, too, you can start to think about, especially with Muse being so popular, who are the winners that get to use AI and boost productivity without being levered to the trillion dollars in spending? So we look at something like health care. I think financials are a place that could benefit.

23:34So I think there's still a lot of ways to play this. But in this rate environment, you want to focus on quality, strong balance sheets, not too much debt. And I think, you know, winners and losers get separated a little more. So, you know, in these winners and losers, you know, you mentioned some sectors like financials. Right. And when I think about financials and I think about the Fed potentially hiking interest rates, another 50 to 100 basis points, depending on your view and obviously what the market's pricing, that tends not to be good for financials. So why financials here? I think they're well, just from a price perspective, they're they're a bit oversold, but they've had a nice year.

24:11The consumer remains strong. If you if you listen to Wells Fargo or some of the other banks talking about it, the consumer piece of the business is solid. The wealth management piece of the business is solid. There's still pretty strong capital markets activity. And again, I think if you if you look at the kinds of companies that should benefit, if A.I. is what we've been promised, the productivity enhancer, financials stand to benefit. I think there's a lot of fraud and waste that can be rooted out with strong productivity from AI. So we like the financials here. I also think for the average investor, it's a nice hedge to being super overweight tech if you just have an ETF.

24:47So we continue to like it. Deregulation as well. Russ Mayfield, this investment strategist, Baird, private wealth. We had in the Baird crew yesterday on technology and on the banks as well. What is the mood of your security analysts about this earnings season? What are they going to see? You know, they're in the conference calls. What's the view forward as a general tone? I think the view on earnings still remains really positive. For all the other headwinds out there, the earnings are the great lifter of this market and puts a floor under it. So the optimism around earnings is still there. I think the question is, what happens when you get to 2027?

25:25and you circle the base rates and the earnings growth slows to 10, 15 % rather than 30 plus percent. So that's kind of the optimism is there for Q3 for the rest of the year. Right. But looking out to 2027, can it continue, right? No, that's the heart of the matter. Ira Jersey with Ross Mayfield. Yeah. So I'm harping on this financials theme and the bank. So, you know, you mentioned some things like capital markets. You know, we've seen obviously significant like, you know, debt capital market activity with the AI spend and the like. That can't last forever, though, right? Like, so so how do we think about the the maybe the profit mix for some of these financial institutions, particularly those that are, you know, reliant on their capital markets businesses?

26:13Well, I think for one thing, the tailwind for the capital markets business is still there. When we think about comparing today to like the late 90s where there was 50 IPOs a day, I mean, this is not a robust capital markets, IPO, M &A environment. It's recovering. It's a little better. Thank you. And certainly rates are a headwind. I was in the absolute heart of that. Ross is too young either to understand how correct he is. people here have no idea what the frenzy was like 98 coming out of august 98 and the resurgence of remember in 98 ira nobody thought equities would move forward and they boomed yep well the ipo issuance was insane you had a ton of ipos and at the same time you had a lot of debt being issued right so you had things like the the tech and tmt bubble right so you had you know deutsche telecom coming out with a$32 billion deal, which was not this similar to the AI trade today.

27:14I agree, but the distinction here this morning with the Corweave piece just moments ago making a new low, this is the 15.4 % yielding. I can't believe I'm saying it. In two years, I can make 30 % with Corweave. It's great. Ross, I'm looking at this, and still, as you mentioned, into earnings season, it's a reaffirmation of the profitability. That's really what we're talking about. That's the story, right? And I do think to your point about CoreWeave and some of the companies underneath the hood that are taking it on the chin, the other comparison to the late 90s, and you tell me if I'm right or wrong, there doesn't seem to be a complacency about this market yet.

27:55There is a real kind of discerning nature to picking winners and losers rather than just ignore all the macro, bid up everything related to AI. Anybody new market, we bid up. So So, you know, it's not that sentiment is in the dumps, although for the consumers it is, but there's not a complacency that gets you super worried yet. Okay, Ross, thank you so much. Ross Mayfield with Baird this morning. 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.

28:34Find the flip side wherever you get your podcasts.

29:04your 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.

29:20You'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. Joining us, Weili of BlackRock, absolutely definitive of taking her acclaimed mathematics into the market. What's the single distinction of first-second derivative dynamics now that you see in the markets? Well, what's happening in markets right now is significant repricing relative between bonds and acquities. Is it abrupt or is it controlled? You tell me if it has been abrupt so far this week.

30:02It's been pretty dramatic. Okay, okay. So on Monday, we put out a note, essentially upgrading treasuries, front-end and back-end, and downgrading U.S. equities to manage risk and just thinking about the potential focus on AI policy and AI build-out. And subsequently, we have seen what's happening in the market pretty dramatic, really. But ultimately, the big picture is that after years of yield repricing in the U.S. treasury market, we think bonds are back. We first went underage long-duration treasuries. It was more than six years ago when U.S. 10-year was below 90 basis points. And now look at where we are.

30:47Yeah, it was hard to like yields five, six years ago, right? Yeah, there was so little room for it to come down. Yeah, exactly. And now, so I know that one of your focuses is on the front end of the curve. And when I look at the two-year and two-year break even, we'd have to double the yield in a year's time for you to lose money buying a two-year note. That is exactly how we think about it. Yeah. So when I look at the Bloomberg function here, CT2 government FAHZ, the fixed income horizon analysis is key on this. But talk about then the duration side of things, right? So you like long duration now, too.

31:24There's a lot less wiggle room for error there. Yeah, so we're actually neutral long duration, having closed our long-held underweight, but we pushed front-end to overweight. So if you bring the two together, we still prefer the front-end over the long-end. So that would be then bull steepening of the yield curve is what your expectation is. That's one way to look at it. But ultimately, actually, the duration move trumps curve move, as we have seen so far this year, both on the way up, yields pushing higher, and also on the way down. So ultimately, this is an expectation for yields to give you very good income.

32:02This is absolute gold, folks. Weili and Ira Jersey, with the most jargon I've heard in six months, this is a family radio station. There's kids listening on their way to school. Weili, I want you to translate this back to people going, hey, yields are up. I should jump in, but I'm worried that they go upper. When you look at the economic mix, do you worry about a 5.3 % yield becoming price down, yield up a 5.5 % yield? Well, if U.S. 10-year go from 5.3, but actually now it's close to 5.1, to 5.5, actually the total return on the year is still going to be positive. You're still up 2-3 % on the year, right?

32:51So the bigger picture is that so far this year in particular, competition for capital intensified and that pushed up real rates. Are you in speaking terms with Rosenberg and Costa Rich at BlackRock? Of course. OK, when you three sit there, what do you think of a 60-40 portfolio? It's like back in vogue, right? Well, 60-40 doesn't necessarily include private markets. So we have to increasingly consider the role private markets play in portfolio. But what we have seen so far is that because bonds are back, having greater allocation to income generating assets, even though it's diversification, balanced properties have decreased, having more bonds makes sense as evidenced in our asset allocation views this week.

33:39You know, I've been on the show for 30 minutes and we have not mentioned the Federal Reserve yet, which is, I think, pretty interesting. So what are you waiting for me? Exactly. So what are your thoughts there at BlackRock concerning the Fed? Where will we be going? And, you know, are you worried about any of these major changes in communications policy and the like? Oh, wow. You know, I focus on the bigger macro picture and markets are currently pricing, I think, more than three hikes for until the end of next year. If you look at CPI prints yesterday, it was quite hot across the board, broad based.

34:16and that kind of added to the hiking case. But the reality is also that, you know, look at the labor market. It gave them some kind of room to wait as well. The bigger picture is that, you know, like people interpret the September hike as the beginning of a sustained series of hikes. But ultimately, that also was down to preserve credibility, and that was important. So we don't think that in itself necessarily is the beginning of like a sustained hike. In the time that we have left, the IMF in Bangkok and Chairman Worsh speaking tomorrow, I believe it is, or with a 12-hour time zone, I can't remember where it is.

34:53I have to ask you, Wei Li, about your China. I am distressed by the general essays I get of a lethargy in China. The kids can't get jobs. I mean, forget about the politics of it, but do you see a dampening of GDP, of nominal GDP and a dampening of mood across China where they're boxed into a societal lethargy right now? Well, there are really two Chinas. There is the part of China that is doing well because of AI and the exports that is really flying. And then there are structurally challenged part of China. You talked about the low employment of youth, but then more broadly, the property situation is still kind of playing out, right?

35:45The overhang is still playing out. And then on top of kind of the employment picture, aging population is plaguing China, too, which is why when it comes to China, we are quite selective. We're neutral, but we prefer the part of the market that is actually driving growth right now. And there is the bigger picture, which is also the intent of translating the market share into profitability. It's less straightforward in China. So it requires an active approach. Weili, thank you so much. Well, BlackRock can't say enough about her impact on LinkedIn, folks. One of the reasons just to go to LinkedIn is to follow Weili at BlackRock, where she is chief, global chief investment strategist as well.

36:28Thank you so much for being with us. Stay with us. More from Bloomberg Surveillance coming up after this.

36:42You'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. For Ira Jersey, we had to bring someone that looks at the short-term paper like Ira does. That would be Winnie Caesar, global out of strategy. It credits Sise and Thrill. She's in studio today. Is there still trust in the bond market? When you look at the plumbing of the market, is it still there's still an integrity to short term paper? I think that there's definitely still an integrity to short term paper.

37:18But we've noticed that the sensitivity to things that were maybe second tier economic data or a little bit less of a market mover in the past tend to have amplified effects. more recently. And of course, recent FedSpeak is kind of ratcheting up some of the sensitivity to short-term paper as well. So we have to talk, since you're with credit sites, we have to talk a little bit about credit. So obviously, we've had a lot of corporate issuance, and we were just talking this morning before you came in studio about something like CoreWeave bonds being at 1 ,200 basis points now in terms of option-adjusted spread.

37:56Talk about your view, personal or via credit sites of the credit market now, and specifically these hyperscaler AI related debt? Yeah. So the credit markets have been really interesting this year, really until the past few weeks in aggregate, they had looked rock solid. But when you started to decompose and peel back the layers, there are some sectors that have performed really well, obviously energy and basics. It's the commodities inflation trade, whereas the hyperscalers, the technology, the triple C's have been decompressing. And there's that kind of reassortment of valuations and what looks cheap and what doesn't look cheap.

38:33And it's very unusual relative to history, especially in the investment grade market. Some of this is fundamental in that people are worried about the outlook for inflation, the Fed hiking outlook. What are these lower rated issuers going to do? But some of it is very technical in terms of portfolio construction. Okay, I got to ask the two. Folks, they're like talking to each other. I have no clue what they're talking about. But there they are. I want to talk CDS right now, which is completely away from both of you. I bring up the Oracle CDS, which is to get people going right now. I bring up a trading envelope of that.

39:07And the answer is we've got some substantial moves here. I'm eyeballing it as a two-standard deviation move, worse, sir, for Oracle. To grizzled short-term pros like you, Ira, What does that mean for you? Well, you know, when credit default swaps, right, they're just a spread, right? So I actually wrote the Credit Suisse handbook on credit default swaps back in 2005. That helped the bank. Well, we did okay in 2007 to 2009. It was after that. You know, credit default swaps, as they widen it, they are a signal that you're going to have, you know, wider and higher borrowing costs for these firms.

39:47But one of the things that I want to ask you, Winnie, is when we look at all of this issuance, and we do have a lot of corporate issuance, how well digested is it really being? We do see new names, right? So obviously there's diversification factors that are at play. But is there that much depth in demand for this paper overall? Yeah, what's interesting is we are seeing deals get digested, right? We haven't seen a hyperscaler deal fail to clear the market. We haven't seen a high-yield bond deal in the data center infrastructure space really have a massive failure as well. Things are pricing at wider levels across investment grade and high yield.

40:30So things are definitely getting digested. But the analysis that investors are having to run is, OK, I know more is coming. What is the appropriate yield to compensate me today when I know that there is a lot more coming? OK, so here's the end. I brought this up, folks. Ira Jersey taught me how to do this. Winnie didn't. The Amazon 6 % way out 2076. The only one in the room that's going to see the end of that is Alexis Christophoris. And the reality is Amazon, which is doing better than good, has gone from 100 to 89. I mean, even if that's a good quality, that's quite a price decline, Ira, right?

41:07Yeah, and a lot of that's going to be because of rate, right? That's not only because of credit spread. Or they're readjusting to the future. Well, part of it's credit spread and part of it's the fact that, you know, when that bond was issued, it was, you know, we were at 5%, you know, 30-year yields, not 5.5%, right? So, you know, you can't completely disconnect, particularly from IG names, the rate component of that. You know, as we think when we hear about credit quality and aggregate, right, how concerned are you about, you know, earnings, about credit quality? You know, obviously there's still demand, as you mentioned.

41:44But, you know, are we going to see a deterioration as companies are, you know, either have to pay more wages or maybe gross lows? Yeah, I think that from a credit quality perspective, the first thing we are always looking at as credit people is the interest coverage levels. And that is going to be under pressure as borrowing costs are higher. And we've seen a wave of intentional releveraging across some cohorts of the market. when you go down into the leveraged finance space. We've seen much less of that intentional leveraging, but it's been a bit problematic more recently because there's no sponsor-to-sponsor M &A.

42:17There's no exit opportunities for some of these smaller cap companies. What's the integrity you see in money market funds right now? I think that I'm never going to bet against money market funds. And especially as we are seeing more rate hikes and cash is yielding again. We're up to$8 trillion. Do you just go to$9 trillion or$10 trillion? I mean, when you think about the cash that that cash generates, there is just this tremendous compounding effect. Even as you see amazing muni ETF inflows over the past few weeks, people are trying to reallocate. But, like, that compounding effect cannot be underestimated.

42:55Winnie, thank you so much. Winnie Cesar with us, Global Head Strategy at Credit Sites in studio with us. Stay with us. More from Bloomberg Surveillance coming up after this.

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44:47You'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. Let me Cantrell with us right now. I want to get to the midterm elections. And how many business days? It's like 13 business days till we get to the midterms. If you look at the weekends, that's just a focus on the Denver Broncos. Cantrell here because she can't concentrate tonight. We're going to come back. We've had a really difficult season so far, but we're going to come back.

45:20But this is like a real football game tonight. I mean, Broncos, Seattle. We're just like fingers crossed that Bo Nix delivers, honestly. That's like late season football tonight. I really do appreciate that we're leading with this, Tom. Because this has actually been more of a center of focus in the midterms, obviously. Well, it's a focus, but seriously. And, folks, this was after Libby's contribution yesterday with Nathan Hager to money markets in the midterms in Washington. What was the body language at that seminar yesterday? Well, yeah, I would say just in general in Washington, I was on the Hill afterward.

45:53And, you know, Republicans are pretty down and out on the House. I think that they've just almost capitulated that they are going to likely the House will flip. Of course, Republicans will have a three seat majority, as you know. So Democrats don't need to do much to take it back. But it did feel like this sort of resignation was setting in. I think the Senate, people still think that Republicans can pull it out on the Senate. I think regardless, though, it's going to be a very small majority. Within your holistic research at PIMCO, do you have any measurement of turnout now? To me, that's the immense mystery.

46:26Yeah, I think it's easy to read too much into early vote. You are seeing some states that have started the early vote. Of course, about half of the electorate will have voted before the actual election. and the turnout is high, but I would just say there have been a lot of sort of false positives in terms of the early vote. You know, what you're just seeing, though, in terms of the enthusiasm gap, Tom, so, you know, you can look at prediction markets, but we also like to look at sort of old school economy, old economy metrics. One is the generic ballot, just the difference between general view of one party over another.

46:59Democrats lead by D plus eight, D plus nine, and then the enthusiasm gap. And that oftentimes has translated into voter turnout. out, that's a Democrat plus 11. So those are both in wave territory. They're consistent with 2010. They're consistent with 2006. Those were those were waves. And in terms of the midterms, the real problem here is I have no enthusiasm this morning. Canadians lost last night to the capitals with enthusiasm as Ira Jersey of Bloomberg Intelligence with Libby Cantrell of PIMCO. So, Libby, we're talking a lot about the federal government, the federal elections, But there's a lot of other state elections and the like that are also going on.

47:38And some of the major investment in AI is really being affected by decisions at the local and state levels. Talk about those dynamics and how you're thinking about it at, you know, your firm from an investment perspective. Like, are there other things that we should be paying attention to outside of who holds the House and the Senate? Yeah, I mean, at least for the foreseeable future, we think that, you know, policy will really be a state issue in terms of AI, not a federal one, particularly if Donald President Trump sort of stays consistent with what he's been talking about and how he doesn't want to necessarily regulate.

48:14That could obviously change. But the state level, this is absolutely on the ballot. And you're seeing 36 of 50 states are going to vote for their future governors. Many governors are running on an anti-data center in particular platform. Many candidates in these races, both Democrat and Republican, I think this is the most interesting dynamic of all of this issue. This issue is so bipartisan that now you're seeing, you know, the gubernatorial candidates on both sides of the aisle advocate for pretty draconian policy responses. Lots of candidates, particularly in Ohio, where there's a lot of capacity that's sort of in the hopper, if you will.

48:53Both governor candidates are advocating for a full statewide moratorium. So I think that what we're going to see in 2027, I would expect, you know, I just was saying this on air, politics leads policy. Policy follows politics. The politics of this are very bad. And we're not necessarily endorsing that, but like they're very bad. And so we're expecting more friction, more moratoria, more restrictions just in general. And that could definitely, you know, at least put some potholes in this AI story. What I hear interview to interview is the Democrats are challenged to come up with a theme. What does Speaker Jeffries do the first Wednesday of November when he takes the House?

49:33Yeah. So one staffer told me yesterday, he said the real challenge for Democrats is will they want to make a point or will they want to make laws? And I think that is really the issue. And what's your study of that right now? Well, I don't think they're going to impeach the president. I think they've learned that lesson. That just takes up way too much airtime, politically doesn't really deliver the intended results. They may impeach, you know, Secretary Hegseth or what have you. That, of course, conviction takes two-thirds of the Senate. That won't happen. But I think they're, you know, it sounds like they're really going to try to focus on two or three issues where they could actually get over the finish line with the president.

50:12Affordability, so health care, housing could be part of this. Data centers could be also. The House has already passed this data center bill. The Senate failed to pass that. We'll see if they've been the lame duck. If they don't, you could see that in the new Congress. So I think they're going to try to pick kind of the low-hanging fruit, if you will, things that actually could get the president's signature. I will just say the big open question is, do Democrats take back control of the Senate? Not to be too wonky here, but I know I can walk out with you guys. Because, you know, for most legislation, you need 60 votes in the Senate.

50:46Democrats will not get that even if they take back the Senate. However, reconciliation, it's a specific type of bill that they can pass with just 50 votes. So if the Democrats take back both chambers, then you could actually see them try to pass legislation around a couple of issues and with the hopes that President Trump signs into law, or at least daring him not to sign it into law. So we'll, you know, we'll see. This is still obviously a real work in progress and the election still needs to happen in the first place. So one of the things that I hate, I think it's the dumbest debate that Congress has is over the debt limit.

51:19And with the... You and me both. Okay. I'm glad I have a... Yes. Oh my goodness. Trust me. The amount of work that we have to do at PIMCO in advance of that is... Yeah, It's crazy, right? You wind up having to do these daily models. What is the X date? And all this other stuff. You have to take it seriously, too, of course. And we're fiduciaries. So it does affect the way that we invest in bills, for instance. Yeah. And so obviously you see that, right? Those T-bills that are kind of in the crosshairs always trade cheap. Tom, I know we're getting in there. Continue the conversation. Are we nerdy now?

51:52We're a side today. I took the day off. This is too much. I feel like I'm in the fixed income cafe. I love it. I got a minute. I'm here for Broncos and Bonds. I mean, please, guys, have me back. Let me take over here. What does President Trump need to do to help his GOP in the next 13 business days? I mean, I think he has to honestly pivot this rhetoric. I mean, he really needs to take the affordability issue seriously. He needs to, you know, assuage people that he's going to do a bunch of things. And, you know, when he comes back in a new Congress, I just think that as we've talked about, lots of folks have already voted.

52:31The sentiment is incredibly calcified. And the other thing, Tom, I'll just say is that this this angst among voters has been brewing since covid. So, you know, the Democrats were the casualty of this in 2022 and 2024. Now Republicans will be. I think Democrats could overinterpret their mandate here. Think it more as an endorsement of their own party versus a protest vote. and especially in 2028, voters will be shopping. I hope I see you five more times in the next routine business days. Good luck to the Broncos tonight. Thank you. We need it. We need it. Fingers crossed. This is the Bloomberg Surveillance Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

53:10Listen 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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