Morning Call 10/21/26

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1:00Morgan Brennan: I'm Morgan Brennan, and this is your Morning Call.

1:17Morgan Brennan: Good Wednesday morning. Liftoff for U.S. stock futures, at least some of them. Let's take a look at where we stand this morning. You have the S &P poised to open up fractionally higher, about three points. The Nasdaq up 45 points. The Dow down 63 points. We have some modest moves in both directions here at pre-market. That was after gains for the Dow yesterday, but the Nasdaq under pressure again as AI, semiconductors, neoclouds continue to face increased scrutiny. We'll see how the market reacts to all of that on the heels of those SpaceX results last night. More on that in just a moment. Meantime, let's take a look at the bond market and what we're seeing with Treasury yields.

1:54Morgan Brennan: See higher across the curve, U.S. 10-year Treasury yielding 5.11 percent right now. Fed-sensitive two-year Treasury, 4.78 percent, and the 30-year U.S. Treasury yielding 5.42 percent. Let's also get a check on oil after crude's wild swings yesterday. 24 hours ago, we were talking about WTI, you know, much higher than where we're seeing it now. This morning, we're up about 1.6 percent, trading around$99.50 a barrel. Keep in mind, we had WTI OPEX. We also had that November contract expiring, so maybe a little technical wonkiness playing out yesterday, but huge swings and gyrations in crude oil yesterday morning.

2:32Morgan Brennan: Also, some jawboning and some leaked reports about possible thawing of diplomatic relations. We continue to keep an eye on all of that. But let's get to our top stock story and an action-packed earnings call and a long call last night from SpaceX. The biggest news, Elon Musk confirming talk of deal talk, saying both SpaceX and Tesla have formed special committees to discuss a possible merger. He's not involved, he says, but cautioning that a deal is also not a certainty. I think some people out there assume that a SpaceX and Tesla merger is a certainty, and I think that would be overstating it.

3:08The, you know, do I think it would be a good idea? Yes. But at the end of the day, the shareholders have to be supportive of this. And particularly on the Tesla side, we will need a 50 percent vote of all shares, not just those who vote, but of all shareholders. And that's quite a high hurdle to try to achieve.

3:33Morgan Brennan: Interesting comments. Is this something I've been reporting on since the IPO, having spoken to board members of both companies and longtime investors, is that Tesla shareholders specifically will likely be the friction point in terms of any merger moving forward. That said, while she wanted to hear it, shares of Tesla up 1.6 percent. We're going to get those results after the bell today as well. As for the earnings for SpaceX, first profitable quarter for SpaceX, bringing it closer to S &P 500 inclusion. Revenue up more than 160 percent to 14.6 billion dollars. beats across all three segments, space, connectivity, and the rebranded SI, formerly known as AI, segment.

4:10Morgan Brennan: The star of the earnings show was SI. Now SpaceX's largest business, Musk laying out aggressive plans to bring 13 gigawatts of AI compute capacity online by the end of 2027. That is higher than previous forecasts, which were already ambitious. SpaceX ended Q3 with 1.7 gigawatts deployed. SpaceX also saying that many customers are asking for that compute. They can afford to essentially be picky in terms of who they're bringing on for partnerships and that deployments are generating a payback in less than a year. Musk forecasting eye-popping growth on the call. I mean, in a nutshell, what this implies for SpaceX's annual recurring revenue by the end of 27 is somewhere between$500 billion and a trillion.

5:01Morgan Brennan: SpaceX is also building out an additional 20 gigawatts of power and cooling infrastructure. Remember, they are designing their own gas turbine parts now as well. Musk saying that that's really the bottleneck in terms of building out all the compute rather than the chips, the NVIDIA chips, since they work exclusively with NVIDIA. Flurry of bullish demand comments, sending shares of Neocloud stocks like CoreWeave and Nebius higher last night. And as you can see right now here, pre-market. It will all require more spending, though. After$19.6 billion spent last quarter, Q4 will see up to$40 billion in CapEx revenue.

5:32Morgan Brennan: In Q1, though, that's expected to more than double from current levels. And Wall Street also got updates, too, on other segments. The Starship flight, that's targeting next month. SpaceX will attempt to catch both the booster and the ship. Musk saying Starship will fly weekly starting the first half of next year. and Starlink next gen deployments will ramp dramatically as well. And the SpaceX team also discussing more of its plans to build out a wireless mobile service. So we're going to have much more on SpaceX because there is more to tell you about in just a moment. But first, let's see how things are kicking off with early trading in Europe and where we closed in Asia with our Karen Cho.

6:12Morgan Brennan: Karen.

6:16Morgan, good morning to you. Well, Elon Musk certainly has carried a lot of weight with tech stocks across Asia and here in Europe today. And when it comes to those Asian markets, stocks climbed today, strong earnings, boosting investor sentiment. Nikkei surging amid renewed optimism over demand in the AI sector. A nod to Elon Musk. And you can see across in the South Korea market as well, a pop of more than 3%. Demand remaining intact, certainly carrying those tech stocks to the front of investors' minds. Now, shares of Elise rebounded as well after plunging 32 % in their trading debut yesterday.

6:49The South Korean NeoCloud company raised 201 billion won in its IPO, which had priced at the top of its marketed range. European equity markets are firmer today as well as earnings season. On this side of the pond gathers pace. Sportswear giant Adidas has upped its four-year profit outlook after reporting a 37 % rise in operating profit in the third quarter. Well, Ray-Ban maker Esselor Laxotica has beaten expectations for third quarter revenue, the stock towards the top of the stock 600 today. And you can see across the board, we've got modest ranges to the upside today. Tech, again, investors taking another look at it.

7:26Healthcare names, you saw the diversification stateside yesterday. That's catching some traction here in Europe this morning, too. Morgan, back to you.

7:33Morgan Brennan: All right, Karen Cho, good to see you and good to hear from you. Thank you. OK, let's turn back to SpaceX results. We're going to get some reaction here. Joining me now is Anthony Valentini, U.S. aerospace and defense analyst at Barclays, right here on set with some reaction. I mean, we just laid out quite a bit. And in some ways, I feel like that still only scratches the surface. What were your takeaways from the results we got? Well, thank you for having me. The results, I think, were really impressive. They continue to prove that the impossible is possible. And I think that, you know, with the next Starship launch, that's going to be the beginning of kind of the unlock of what's, you know, SpaceX is going to be able to do.

8:09You know, they spoke about on the call, Elon, you know, highlighted the fact that they're going to try to recapture the entire Starship vehicle, which will be the first time that they've done that, which I think, you know, First time anybody's done that. Yes, exactly. And so, you know, that's really going to unlock the entire model. I think that some folks misunderstand how much of a moat that they have on the launch capability and how important that is for them to be able to launch both orbital compute, but also some of the Starlink capability that they're trying to get into orbit.

8:40Morgan Brennan: I want to talk about the terrestrial AI infrastructure piece of this. I mean, because 13 gigawatts next year is it's a gangbusters number. I mean, there are no there are estimates that are floating around out there regarding the industry more generally that it's anywhere from 35 to 50 billion dollars to deploy a gigawatt of AI compute right now. Do we have a sense of what it's costing SpaceX to do that? Because it would seem like if you just do a napkin math here, they're on the lower end of that. But I would imagine it's still going to require a certain amount of capital being raised. Yes, absolutely.

9:11And I think they were pretty clear about that when they went through the IPO process, that this was going to require a lot of capital. We're just in the stage here where the acceleration of growth with, you know, what AI can do is so big that I think investors are willing to underwrite it. I think what's more in focus and maybe more important broadly here is how they're being able to monetize that compute.

9:33Morgan Brennan: Yeah. You know, I think originally they were talking about$10 to$20 a watt. You know, Elon has said that or maybe Brett, the CFO, had said on the call last night that it's actually on the higher end of the 30 to 50 dollars that they've previously said. And that's much higher, much higher. Right. And so, you know, it's it's such a strong lever within the model that the numbers can just like blow through what Wall Street has pretty quickly. And I think some of their customers are actually monetizing that computer at 100 dollars a lot. And so, you know, Elon had spoken on the call about some pretty aspirational numbers for what he thinks they can do for ARR for next year.

10:13But, you know, if you're moving from 10 to 20 bucks of, you know, monetization per watt and that can go from to 50 to 100, you can pretty quickly get to very large numbers.

10:25Morgan Brennan: What do you think about what's happening with Starlink right now and Starlink Mobile? And the fact that we are seeing, they also talked about Starfall, obviously, with Starship coming online, what that's going to mean in terms of unlocking launch capabilities and more infrastructure and orbit in general. I mean, it's not just neoclouds and other AI stocks that are trading higher in Tesla as well. It's also the space stocks. So what is the read-through to that sector overall? Yeah, so I think that there's a lot there. I mean, the capability that they're going to provide with Starlink going forward is a little bit remained to be seen.

10:57I think one of the biggest parts of the call last night is that Elon is now saying, hey, we understand that we haven't given you a ton of detail on our go to market on the mobile side. We're going to do an entire presentation about what we see there and how we think we're going to unlock that market. I think that there's some skepticism on whether they're going to be able to compete with the big carriers. I think, you know, from my standpoint, the scaling opportunity of having, you know, the satellites in space and bringing that connectivity to people worldwide is a huge unlock. And it also brings really high incremental margins, which makes their business model just better as a result.

11:37In terms of the read-through into all the other space names, I think that what they are going to accomplish with Starship is going to make new things economically viable in space that we don't even know about yet. And so there's companies out there that you've seen pop up, many of which are in Southern California that are doing things that five years ago seemed impossible or was just... Many of them were SpaceX engineers.

12:03Morgan Brennan: Exactly. And a lot of these folks that are starting up these companies are coming from SpaceX. It's very similar to what we've seen in the defense tech industry from folks from Palantir and from Anderil. And so those are kind of the three companies that are spurring a lot of this growth. OK, before we wrap this up, SpaceX and Tesla combining. How is that factoring into your assessment of the company, investment thesis, valuation? Is this inevitable, regardless of what Elon Musk said on the call last night? Yeah, so I think it's pretty consensus at this point. that this will eventually happen. I think that from my standpoint, you know, as an analyst on SpaceX, I actually don't think that it really moves the needle all that much for my overall view.

12:45At the end of the day, I think what Elon is really trying to do is get to bring people and equipment and the economy to the moon and to Mars. And so Tesla's, how that's going to impact that I think has remained to be seen. But Elon sees a future where there's going to be robots that are helping to build starships on the moon. And then I think that there's also connectivity between the two companies on TerraFab, which is a huge part of the supply chain. Obviously, chips are massively in need for all of these different things. And so I think Elon sees that there's synergies there as well. But ultimately, I just, you know, I think that at the end of the day, if you believe in the SpaceX story, you know, you'd probably believe in it with or without Tesla.

13:34And so we'll see what happens. But yeah, we'll see what happens after the bell.

13:38Morgan Brennan: We get tested results and I'm sure he gets more questions from more investors and more analysts there as well. And speaking of, I mean, we've got updates on TerraFab, too. They're moving pretty quickly with the chip design and development and potential production, too. So a lot, a lot for investors to wrap their arms around. Anthony Valentini, it's great to have you here on set. Appreciate it. Thank you so much for having me. And shares of SpaceX are higher in the midst of all of this pre-market. Well, let's shift gears here. Market flash. The French 10-year bond yield hitting 5 % for the first time since July 2002.

14:09Morgan Brennan: And you can see just slipping just slightly back below that here in the last couple moments. But we're watching the rest of the yield curve in France as well. And this amid fiscal concerns and what we've seen with protests and riots. and the picture, the debt picture there overall and how that's rippling out across the rest of Europe and across the rest of the global bond market. We're going to talk about all debt a little bit later in the show with Charles Dallara as well. But let's get a check on more stocks on the move on earnings, including Netflix. That's falling ahead of the open, despite reporting Q3 earnings that topped Wall Street expectations.

14:44Morgan Brennan: Investors instead focusing on the fourth quarter outlook that came in weaker than expected. The company also slashing its ad sales forecast with co-CEO Ted Sarandos saying he knows, quote, we can do better. While Q3 sales were higher, the 11.8 percent revenue growth was the slowest increase in nearly three years. You could see shares of Netflix are down about 6 percent. Of course, all of this amid leadership changes on the content side and a shift there. United Airlines also lower after forecasting current quarter profit well below street estimates, despite expectations for record sales. The company says airfares are rising sharply, but fuel costs are climbing even faster, and that is squeezing profits.

15:23Morgan Brennan: The outlook means United expects lower earnings overall for the full year. Those shares are down about 1%. Really, this has been the takeaway so far from airline earnings. The demand has continued despite the higher pricing. We also heard this from some of the suppliers, including RTX, when I spoke to Chris Calio yesterday on the heels of those earnings, too. We're going to hear more about it, though, on Squawk Box. They're going to speak to United CEO Scott Kirby later this morning in a first-on CNBC interview. You don't want to miss that. And finally, let's also get a check on shares of Supermicro.

15:51Morgan Brennan: Those are surging. That company says it expects quarterly revenue and profit margins to come in well above street estimates. When it reports next month, those shares are up almost 13 percent. The news sending shares of rivals and hyperscalers higher as well, including Dell, HPE, CoreWeave and NVIDIA. And as we head to break, we've got a live picture from NVIDIA's GTC event in Berlin, where CEO Elon Musk is delivering his keynote address. And it's actually not Elon Musk, it's Jensen Wong. So we will monitor those headlines and we will bring you the latest as we get them. That is Jensen Wong from NVIDIA on your screen.

16:29Morgan Brennan: We've got a lot more to come here on Morning Call, including the stock, Morgan Stanley says, is its top idea to play the quantum computing trend. The CEO of Continuum joins me next. Plus, we've got more leaks ahead of the debut. the latest inanthropics surging sales and growing losses. That is coming up. And later, President Trump weighing in on the data center build-out debate with a plan of his own to win over reluctant communities. We have a very busy hour still ahead. One call. We'll be right back. With the power and endurance of Toyota trucks, you can go to the most incredible places, like this valley, where the Echo does different voices.

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18:14Morgan Brennan: Welcome back. We have some breaking news. Russian news outlet IFX says U.S. Special Envoy Steve Witkoff has met with Russian President Vladimir Putin following Witkoff's Ukraine talks in Norway earlier this week. Russian media adding that Moscow will send its first tanker with diesel fuel to the U.S. tomorrow with 40 ,000 metric tons of fuel. If we get a check on diesel prices here in the U.S., the ultra-low sulfur diesel contract, we're still up. We're up about 2 percent right now this morning, trading above$5 a gallon. Watching shares of Continuum this week, too, though. Those are coming off a 2 % jump yesterday morning and up again pre-market right now, another almost 1%.

18:54Morgan Brennan: Morgan Stanley recently naming the stock as its top idea to play the quantum computing trend. But for more, I am joined by Raj Hazra, CEO of Continuum. Raj, it's great to have you on and good to see you again. And I got to start with the breakthrough that you've announced this week around quantum error correction. What is it and why does it matter? Good morning and thanks for having me. Great to see you again, Morgan. It's a pretty exciting time. What we announced and demonstrated actually this week was taking this idea of quantum error correction, which is really the way to take quantum computers, the promise of quantum computing and deliver commercial value by having large amounts of computation be reliable and scalable.

19:40What we announced specifically was on our Helios quantum computer, the combination of hardware and quantum error correction techniques delivering results that are stunning in terms of the reliability that the field has known up to today. Five errors in a million operations. And more importantly, perhaps, how we see the path of lowering these errors further with very efficient scaling of resources. What this really means and why we're so excited isn't just those numbers. It is about getting to fault tolerance for our customers, implementing those commercial use cases around new drug discoveries, new molecules for materials, large optimizations of supply chains, all of those things that have been the promise of quantum computing now in the neighborhood of 2029 as we build out Apollo, our fully fault tolerant quantum computing.

20:37And this week we put all the recipes together to do that.

20:41Morgan Brennan: Yeah, it's funny. We're just talking about at the beginning of the show, rocket science, literally. Now we're talking about quantum and all the physics and all the science that goes into this, too. There's still a lot that has to do this being sort of one of those key metrics, but there's a lot that has to go right to fully realize a quantum revolution here. How does 2029 stack up against previous targets that you've had out there? And what else needs to be realized for that number even to materialize? Yeah, we are very confident now of realizing the vision in 2029. And the reason for that is it's not just a vision anymore.

21:20We put the recipes together of how you build the physics or tame the physics, if you will, to build the hardware. You get things like quantum error correction to work accurately to give you these stunning accuracy and reliability levels, and most importantly, working with customers to actually demonstrate commercial use cases that create value from all of this infrastructure of hardware and software. We are very confident. Our scaling path is very clear to us. Our supply chain management has been put in place to scale it to the demand, And we see 2029 as really the most exciting next step of making quantum computing real, getting it out from the labs and into data centers and working for our customers.

22:07Morgan Brennan: Yeah, I want to dig a little deeper into the scaling piece of this and the manufacturing piece of this. What will that take to fully deploy on a commercial scale by 2029? Well, first and foremost, we're building the capability, which we've demonstrated. You know, our scaling technologies are dependent, you know, use and leverage the similar and same kinds of innovations that are driving microelectronics today, building larger chips, packaging more and more chips into complex packages and driving optics in cryogenics. That that recipe is in place. Moreover, with the supply chain, we are management that we put in our our very strategic deals with our partners in the supply chain.

22:53along with some of the things that you've heard about recently in terms of increased funding from the U.S. government and support, that we are very confident of being able to scale this from one, two, three systems to the scale that we need to supply to the commercial demand that we see computers like Apollo unleash. Yeah.

23:15Morgan Brennan: And I'm going to ask you the same question I asked Nicola Demasi over at IonQ. how to think about the relationship between quantum and AI at a time, especially, where we're talking so much about the deployment of AI infrastructure and all of the possibility that's going to bring online. We actually see AI and quantum as very complementary. And the simple reason we say that is it's not any sort of a technical jargon. It's what our customers are doing and want and need to solve their problems. We see AI as a wonderful tool that is automating some of the more complex jobs, adding intelligent automation.

23:55And we see quantum computing unlocking the value of that AI, being able to take the hypotheses that AI makes and accurately measure things, simulate things in a way that classical computers could never do. So AI plus quantum running and the AI running on increasingly more competent and capable HPC infrastructures, that is the future of compute, of advanced compute. And for us, being able to deliver quantum computers that have this level of reliability that we've demonstrated, fully fault tolerant, universal at scale, just is a big piece of completing that puzzle or the puzzle pieces of the next era of compute.

24:39Morgan Brennan: OK, Raj Hajra of Continuum, it's great to have you on. Appreciate it. Thank you. Straight ahead. On the front lines of the U.S.-Canada trade war and the battleground Senate seat that could help tip the balance of power in Congress, our Megan Casella is live in one of my favorite cities, Portland, Maine. Megan. Morgan is one of the tightest Senate races in the nation, and we're here to take a look at how tariffs are hitting at the heart of one of the state's most iconic industries. We'll tell you more after the break. We're an agent supposed to take things off your plate. Building another to handle the others is a bit much.

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26:41Morgan Brennan: Welcome back. We're turning to the midterm elections and much of President Trump's agenda in focus, including his ongoing trade wars. One state caught in the middle of the president's tariff fight with Canada is Maine. That's factoring to the Senate race there, as Democrat Troy Jackson looks to unseat longtime incumbent Republican Susan Collins. Our Megan Casella is live in Portland, Maine, with more on the big factors at play in this key race to watch. Megan. Morgan, no state has been as vulnerable in the U.S.-Canada trade war as Maine, and that's especially true of the state's lobster industry.

27:17So lobster itself was left off the retaliation list at the last minute, but everything else that these lobstermen rely on is getting more expensive. The rope, the bait, the fuel, and especially the lobster traps. So Mark Brooks is a third-generation lobster trap manufacturer and supplier. He says the domestic steel that he uses to make his traps is up by 20 percent. And the roughly 10 percent of his business that had been sales to Canada, that was wiped out virtually overnight. Take a listen. It's changed so much so rapidly that it's it's hard to quote prices. We we don't know what product is going to cost us by the time we get it here.

27:58It's it's a nightmare to try to do business under these conditions.

28:05Now, these tariff costs are piling on top of already high cost of living, things like home heating oil. Maine is more dependent on that than any other state. That's up by 79 percent year over year. The diesel, the electricity, you can see some others there. So all of this, affordability broadly and tariffs more specifically, is at the heart of this year's Senate race. The Republican incumbent, Senator Susan Collins, has been criticizing the tariffs. She's been able to secure some key exemptions for the state of Maine. But her challenger, the Democrat Troy Jackson, says that for all of Collins' seniority in Washington, she should have been able to do more.

28:39So Maine then is becoming a test of whether a Republican incumbent is able to separate herself from this unpopular piece of the president's agenda. And the folks here that we're talking to, they say that she can. She has been like a guardian angel for the lobster industry for many years. and I can't oppose her because she's in the same party as somebody I don't like. Now, Morgan Collins is the only Republican incumbent running this year in a state that voted against President Trump in 2024. And the polls say the race is essentially tied. I will note, though, that the polls said that Collins was in a similar position back in 2020.

29:21She went on to win that race by almost nine points. Morgan.

29:25Morgan Brennan: You know, it's incredible. The other piece of this in terms of this U.S.-Canada, you know, trade tiff, if you will, Megan, is the tourism impact on a state like Maine when the closest ocean beaches in Montreal are actually those along the coast just south of where you are in Portland. And as a family that vacations there every summer, it's been incredible to see how quiet it's been in terms of the lack of Canadians, the French speaking Canadians. In light of all of this, I know you've been up there for a couple of days now. You just touched on it a little bit, but the man on the streets sort of sentiment, what you're seeing, what you're hearing, what you're picking up as you do speak to folks in the area.

30:03Yeah, Morgan, it's been really fascinating. We have talked to a lot of people and we are in Portland, which has historically voted against Collins, even in the races that she's won. So I've been surprised to see how much support she has here. We were outside of a polling location yesterday where folks were voting early. And in just a few minutes span, we did get a little bit of a varied sense. We talked to one Republican who always votes straight Republican who said he would never consider a Democrat. We spoke to a Democrat who said that he was voting for the Democrat. He couldn't remember his name, but he knew that he hadn't voted for Susan Collins.

30:34And then we talked with someone who said that she was voting for Collins because she liked her independent streak and the way that she pushed back against the president. That's a lot of the sentiment that we're hearing here. She has these independent credentials and they do like to see that. inside the industry, the folks we talk to in the lobster industry, it's been almost unanimous. Everybody in that industry is still supporting Collins.

30:54Morgan Brennan: All right. Megan Casella, great to have you and great reporting. I'm going to send you some restaurant recs too. Still on deck. Unrest in Europe, surging interest rates and energy prices and questions about the global AI buildout. Charles Dallara is next. He's going to weigh in on all of it when Morning Call returns. I'm Morgan Brennan. Welcome back to Morning Call. Let's get a check on U.S. stock futures this morning, which are in the green. The S &P, we're building on some gains here from just about 30 minutes ago. The S &P is poised to open up about 20 points. The Dow up 32 points, so fractional gains there.

31:28Morgan Brennan: The Nasdaq up 144 points. This after a mixed trading session yesterday where the Nasdaq finished lower, the Dow finished higher. Stocks to watch today on the back of earnings, SpaceX, Netflix, United Airlines and Super Micro Computer. SpaceX up more than nine percent right now. Netflix is down about six and a half percent. Super Micro had a pre earnings announcement on SpaceX specifically. Plenty from the earnings call, the earnings and the call. The biggest news, though, that Elon Musk saying both SpaceX and Tesla have formed special committees to discuss a possible merger. He's not involved, he said, but cautions that a deal is not a certainty.

32:03Morgan Brennan: Shares of Tesla rising on the news, about 1.7 percent. That's ahead of its own earnings report later today. As for the SpaceX earnings themselves, first profitable quarter for SpaceX, bringing it closer to S &P 500 inclusion. Revenue up more than 160 percent to$14.6 billion and beats across all three segments. Space, connectivity and rebranded SI, formerly known as AI. The biggest news from, well, we already talked about that. But in terms of some of the other news off of the earnings call. SpaceX, Elon Musk also saying that he that Starship is targeting its next flight as soon as next month. And they are planning to both to catch both the ship and the rocket booster.

32:47Morgan Brennan: That's going to be a big one for Wall Street. And talking about V3 Starlink deployment and a little bit more on details in terms of that Starlink mobile rollout after that big spectrum deal as a whole. You've seen Neocloud and AI stocks trade higher this morning pre-market, and you're also seeing the whole space sector get a lift. Firefly, Redwire, Rocket Lab, Planet Labs, AST Space Mobile, all higher, meaningfully, as you can see right there on your screen. And really the star here for SpaceX was AI, and they have ambitious targets for compute build-out, 13 gigawatts now by the end of next year, and huge numbers in terms of annual recurring revenue, anywhere from half a trillion to a trillion dollars being realized with that build out next year, according to Musk.

33:33Morgan Brennan: And let's turn to the action overseas. French officials out with estimates from last weekend's widespread protests, riots and looting, saying the damage caused will likely cost hundreds of millions of dollars. One company already bearing the cost is French supermarket giant Carrefour, sinking this morning, down 14 percent right now after cutting its full-year forecast, citing what it calls, quote, an unprecedented situation in France, adding, quote, in light of the worsening social and security situation, the group considers that consumption trends and operating conditions in France are facing a deterioration.

34:05Morgan Brennan: This as the French 10-year benchmark bond, the OAT, hits 5 % just a little bit earlier. First time we've seen that since 2002. Let's talk more about this situation, the regional fallout, what it means for the global bond markets and for investors. Joining me now, Charles Dallara, former Institute of International Finance director and current partners group chairman and advisory partner, has a long list of job titles and service commitments over the years on the resume as well. Charles, it's great to speak with you and have you on the show. Welcome. It's a pleasure to be back with you, Morgan. Glad to be here.

34:40Morgan Brennan: Let's start with the situation in France, what we're seeing in the bond market there as well, and how much of this funnels back to discussions and focus on the fiscal picture and affordability and what it means for the general public in a place like France or elsewhere? Well, I don't envy the French people or the French leadership at this point. I think that the French bond market is indicative of the fact that France is approaching an unsustainable debt environment if they don't do something to cut into social expenditures. On the other hand, the expectation of more social support is growing.

35:25So finding solutions to that are going to be exceptionally difficult. If you look, however, at the long-term trends, over 30 % of France's GDP is swallowed in social support. There's no other country, certainly no other major country, that spends almost a third of its GDP on social support. So I think that France is going to have to accept a reckoning to move its deficit and debt trajectory downward. Otherwise, the markets are going to continue to put pressure on French bonds. And this is going to make the fiscal environment even more difficult.

36:05Morgan Brennan: It looks like we're getting headlines right now, Charles, from French President Macron saying that I will hold meetings with French intelligence services on Thursday ahead of planned Saturday protests. It would it would appear it would seem that the situation, at least on the ground, is perhaps not getting better, continues to be very tenuous here. A lot of comparison has been drawn to what we've seen in the past with Greece, which we know went through a major restructuring, something you know very deeply, very personally as well. Are there lessons to be learned from that situation that could be applied to France today?

36:38There certainly are. I think one of the key lessons to be learned is try to get ahead of the bond market before it withdraws its support dramatically for sovereign debt. And the Greeks did not do that. I still remember the day in April of 2010 when the markets basically said no more. And they withdrew completely, virtually completely, except for the trapped Greek banks, their support for the bond market. And this forced the French government into the hands of first the European support program and then an IMF program. And through an extraordinarily painful adjustment period, it'll be important that France begin to provide a framework for addressing its debt.

37:21Hopefully before the market loses such dramatic support, because the cost to the French economy and to the French people could be quite severe. It's been 50 years, you know, since a major Western European economy has had an IMF program. But they need some discipline there. And it either has to come from within or it'll come first through the bond markets and then through European and IMF support. I do recall very clearly the situation in Greece. I think the situation in France is not quite so ominous in terms of the potential of this to spread around Europe as a whole. After all, there were five countries involved in the European debt crisis a little over a decade ago.

38:07Today, other European countries are in broadly somewhat better fiscal and external debt positions. And the IMF and the EU have developed mechanisms now to provide support. But that support will need to be conditioned by and large on an adjustment program for France. And it will take some fiscal discipline and probably a little bit of political magic to be able to deliver that.

38:35Morgan Brennan: How are the wars in the Middle East and in Ukraine factoring in to all of this with elevated energy prices, particularly in a place like Europe? Well, I think it's not only the elevated energy prices, although that is certainly a major problem for Europe. But it's the broader geopolitical uncertainty that's being generated by this as well, Morgan. I think if you look at energy, oil is finally starting to flow. And I do give the U.S. Navy some credit for finally moving some oil through the Australia for moves. But the problem is the cost of moving it has increased significantly. So a little bit more oil is moving around the world, but it's not moving at a lower price, but at a much higher price.

39:17So energy prices will continue to put pressure on overall inflation. I don't see a near term end to the tensions in the Middle East. We'll have to see what the attitude of both Iran and the United States may be after the midterm elections. I think we can expect there's going to be no major initiative on either front. But more recently, Iran has begun to attack some of the commercial shipping again. And the U.S. has also done a relatively good job of strangling the flow of oil revenue into Iran. I think that the energy situation does not, though, hold much promise to improve in terms of prices in Europe or the U.S., notwithstanding this highly debatable decision to increase the availability of Russian diesel oil.

40:06I think the war, the continued war in Ukraine, I think, has generated additional pressure on energy, obviously. But I think it's also generated a substantial layer of geopolitical uncertainty because Europe and the U.S. simply cannot afford to allow the most battle-hardened, the most innovative military in all of Europe to be taken over by Russia. And I don't think markets have appreciated the risk to that that is growing as the U.S. has suddenly appears increasingly reluctant to support Ukraine.

40:45Morgan Brennan: I mean, I just I think sort of it almost seems like we've opened up a new chapter in terms of economic warfare and what that means moving forward and critical infrastructure in the crosshairs, even civilian infrastructure in the crosshairs. When you look at the Middle East and what happened in Saudi Arabia recently as well. What we've seen in terms of the run up in rates globally, it's not just a Europe story. It's not just a France story. Japan, even here in the U.S. What do you think is continuing to propel that? And what does that mean more broadly for investors and for markets, especially when you have, for example, AI companies looking to pull in more capital?

41:20Well, there are a number of forces, I think, that are pushing rates up in the bond market and created a swirl of somewhat conflicting but nevertheless worrisome pressures on the bond market. First, you have persistent inflation, particularly in the United States. I think it's important to recognize that the Fed still has a huge amount of work to do, notwithstanding the recent move. Inflation is still running between 3.5 % and 4 % in the United States. Markets should be prepared for more interest rate increases in the months ahead. And it'll be necessary for some fairly difficult action there in order to rein in inflation.

42:00I think also, of course, the markets have become increasingly conscious of the unsustainability of debt outlooks for a number of major economies, not just France, which we've been focusing on, but the United States, Japan and others. After all, if you compare the existing sovereign debt on a comparable basis, including state and local, U.S. sovereign debt is larger than French. percentage and this year we have a whopping six and a half percent deficit that we're adding on and again that those figures include state and local to make it comparable but this is extremely worrisome that there's a lack of fiscal discipline in the United States at a time when we're trying to stabilize the bond markets and I think the bond markets are sending a signal that they want substantive medium-term plans for fiscal stabilization and fiscal retrenchment in these economies, not short-term palliative, like increasing the supply of debt.

42:59I'm here in Japan right now, and if you look at the Japanese situation, it's a bit different, obviously. The Japanese economy is still growing, admittedly modestly, but they are in the midst of debating a difficult issue of reducing consumption tax, which will potentially, if it's not fully offset, that create more of a hole in an extraordinarily large debt situation here, which is one of the highest in the world. I think the markets have looked at this outlook for fiscal, lack of fiscal stability and discipline. And when you combine it with the debt outlook, it's extremely worrisome. And then you bring in the AI picture.

43:44Now, I'm not as concerned about the debt serviceability of the AI boom as the markets seem to be right now. I think the fundamental question here, the fundamental question for AI expansion is whether or not the hyperscalers and others can justify this in terms of return on capital. After all, if you look, the NASDAQ has been very flat this year as a whole, right? And part of that has to reflect question marks surrounding the extent to which pouring all of this money into AI is going to generate investor returns adequately. After all, dividends are a small piece of the picture for the hyperscalers.

44:24And the future needs to depend upon capital appreciation. I'm not so concerned. I think the debt serviceability issue is somewhat blown up, as I heard some of your speakers address separately. But I do think when you look at the combination of these forces, AI anxieties, sovereign debt anxieties, and continued inflationary pressures. It doesn't look to me like we're going to be seeing lower rates anytime soon, and we may well face somewhat higher rates.

44:53Morgan Brennan: Charles Dallara, it's wonderful to have you on. Thank you. Morning Call is back in a moment. It's time for your call sheet. Crew members today, Nick Frassi, Matt Maley, Ross Mayfield. My God, we're so crunched, and I'm so sorry about that. But let's go lightning round here. Matt, I'm going to start with you. What are you watching today? Well, we're going to be watching Meta and the earnings that come out tonight. The stock has been beaten up a little bit because people are concerned about, are they really going to make up much money from Muse, especially on the enterprise side? So how that acts over the rest of this week is going to be very important.

45:24Morgan Brennan: OK. Ross, how about you? I want to see if the SpaceX earnings can give a boost to some of the more beaten down corners of the tech sector. Obviously, higher rates have really weighed on some of the riskier parts of the AI market. But strong earnings from SpaceX could give a boost to some of those beaten down corners. So that'll be interesting to me. And then obviously, that amused economics, I think, is fascinating as well. Yeah. Nick, I mean, it's all earnings in every way right now. What are you watching? Yeah, SpaceX is very interesting. You know, from the AI infrastructure play, they were largely a space company, as everyone thought, pre-IPO.

46:00So having this much revenue driven from space and infrastructure, I think, is super interesting. We're very constructive on them over the 10-year time horizon as AI super cycle is part of our long-term themes. So, yeah, definitely paying attention to what happens there.

46:14Morgan Brennan: All right. Thank you to our call crew, our bridge call crew today. Appreciate it. Hi, I'm Cindy Lauper, Cosentic's lead detective in the new mystery series, Unpredictable Symptom Squad. My team and I are on a curious case to gather clues about plaque psoriasis and psoriatic arthritis and learn how Cosentix treats both and can help stop further joint damage in psoriatic arthritis. Cosentix Secukinumab is prescribed for adults with moderate to severe plaque psoriasis and adults with active psoriatic arthritis. Don't use if allergic to Cosentix. Get checked for TB before starting. Increased risk of infections and lowered ability to fight them may occur, like TB or other serious bacterial, fungal, or viral infections.

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