11AM Hour: Undersecretary of Defense Emil Michael, Former White House Coordinator for the Middle East & New AI Model Competition 10/6/26

0:00This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash marketupdatepodcast, or find Schwab Market Update wherever you get your podcasts. Tyler Reddick here from 2311 Racing. And Bubba Wallace. You know what's the worst part of a race? A rain delay.

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1:14We'll talk to one of those leaders, Undersecretary of Defense Emile Michael. Plus, could a powerful new AI model shake up the AI race? We'll explore how NVIDIA-backed reflection might threaten the current U.S. and Chinese AI leaders. And we are joined by veteran diplomat and former White House advisor Brett McGurk. He served in four administrations and we'll discuss the latest geopolitical risks for investors. His new book is out today. All time highs for the S &P here. First one since August, as we've got pretty good breath, better than two to one positive. Only one sector is in the red. That's health care today.

1:47VIX back below 16 at little 10 year yield back basically to five and a quarter. Yeah, it's amazing what lower oil prices, some relief on yields, especially and France can do all the way up to record highs again. We're going to start on this market. And just how long the AI bull market could last. NBC's senior markets commentator Mike Santoli joins us to discuss his new market memo. So how do you how do you go about evaluating that? It doesn't operate by a clock or a calendar. So that's always the challenging part. So the market is telling you that this bull market will carry as far as the AI theme takes it.

2:22So you keep hearing from the tech leaders that are building it that it's still early. Okay. Sundar Pichai of Google 10 years ago said we're going to be an AI first company. Last quarter, he still said it's early. The earnings projections still seem like there's plenty of life in them. We keep getting the CapEx projections. The market, though, is less willing to pay up for those projected earnings versus what it was a little while ago. And you're starting to see some late cycle characteristics start to shadow parts of the market. You guys, you were talking about the French yields. How about corporate credit spreads?

2:56And, you know, the ragged breadth that we've seen underneath the stock market is a sign that the market is maybe at this maturing phase. That being said, you could often have these kind of rest phases in a bull market. I think that's what we've just been through. Take a look at this chart of the S &P 500 over the last six months. From early June, from June 2nd to August 4th, we were trapped in that range. We jumped to a new high that was two months and two days. Got there August 6th, got to about 7 ,800. Two months and two days is today. And here we go poking above that range. It's ridiculous how neat and tidy that seems.

3:29It probably isn't going to stay that way. Maybe we don't even close above a new high. But during that period from August 4th to now, look at how the market stayed here. The Nasdaq 100 has been ripping the equal weighted S &P 500 underwater, and it's netted out to a S &P 500. That's protected you if you're an index investor as the rest of the market registered the higher yields and higher oil prices where it mattered. So I do think you have a market today where the leaders are leading and the laggards are bouncing. That's the ideal setup. It's not clear how much life we have in that. But so far, it's not necessarily seeming as unhealthy as a lot of folks would have said that the uneven market was in the last month or so.

4:09Although I'd love to see the Russell plotted against that. Yeah, Russell looks a little worse than the equal weight. In fact, the Russell can't hold a bid today. So that's something you have to keep an eye on. So this is my question is, can you be super bullish on the build out and chips and NVIDIA and also want the yield environment to get better? You can. You can be super bullish on it. I think we have seen phases of that. So to me, the key is AI still is kind of the locomotive of the bull market and the indexes. But you don't want the rest of the market in absolute terms declining and under continued pressure.

4:44If they underperform, if they just do nothing, that's fine. But if they are actually a drag on it, that's telling you something about the macro that we don't want to hear. And you don't think the triple C spread business is... I mean, that's the far edge of low quality and high risk. And obviously, it means something. You're starting to see high rates attack the most vulnerable parts of the capital markets, but it's not bleeding through. And, you know, as much as even double B spreads look like they're getting to flare up to a point, but they were higher in the first quarter around the war and they came right in.

5:21And as they come right in, it refreshes risk appetite. Well, the demand and the voracious appetite for AI, I think, is overpowering all of it. It is overpowering all of it. I do think, though, that we are in a phase where we maybe have seen the moment of highest exuberance around that. And we have an unwillingness to sort of extrapolate from here. I keep saying it. Micron's$150 below its high from June. So you have seen some rationalization of the long-term story. Yeah, I think B of A today, Savita says, maybe some of those AI trades will be harder fought from here. I think it's fair. Yeah. Mike, thanks.

5:55Let's stick with today's markets and bring in Rosenberg Research founder and President David Rosenberg, who I'm sure has been listening. David, is market breadth a big deal for you at this moment? Well, I think it should be for everybody because the one thing we know from history is that rats with a lag ultimately leads what's going to happen with prices. So, you know, as Bob Farrell, my hero, famously said that healthy markets are ones where there is widespread participation and unhealthy markets is when the market action is concentrated to a handful of names. And that's what we've had on our hands now for the past several months.

6:35And it's intensified. So how long do you think that environment can last and hold up the headline indices? Well, it's a question everybody wants answered and nobody really knows. I mean, I don't think anybody today has the answer as to why the Nasdaq peaked and the tech bubble peaked in March of 2000. What was the alarm bell? It's ultimately, I think, when you start to see investors lose confidence in the broad AI trade, what that's going to take is going to probably be some negative guidance or something that has less to do with CapEx and more to do with the revenue assumptions, because ultimately, it's going to be the future revenue flow that's going to determine whether or not the return assumptions make sense right now.

7:27So that's going to be the key, I think, is going to be at what point do we start to see the guidance shift and start to influence market sentiment as far as it relates to the AI trade? I mean, let's make no mistake, you talked about breadth. I mean, the white swaths of the market, as Mike And as Mike said, we're dramatically oversold. I mean, the average stock going into this week in the S &P 500 was down 20 percent from the 52 week high. The median stock was down 17 percent. So away from the A.I. trade, there's a whole lot of pain out there, especially in the areas of the market that are very cyclical in nature and very sensitive to what the Fed is doing and bond yields.

8:12And yet, you know, overall, David, the story of the stock market and of the economy and of the earnings picture continues to be one of strength. I mean, double digit expectations for earnings growth is ultimately what's underpinning all of this, isn't it? Even with the high oil prices and the high rates. Yeah. And again, it comes down to the initial question about the concentration of this market that's in the biggest companies that have the fastest growth profile. So, I mean, that's really what it comes down to is, you know, how do you want to be invested? You know, if you're that bullish on AI, just focus on the hyperscalers, focus on the semiconductors.

8:53The rest of the stock market is not really behaving that well. You talked about how great the economy is doing. I would sort of push back on that a little bit because we have the upward revision. I know. That's why I said it. Well, you know, I found it interesting that after we got last week the second quarter upward revision of GDP, nobody talked about the fact that the previous two quarters got revised down. And yes, consumer spending was the linchpin, 3.8 % growth, but there was no income growth in the personal sector. You see, this is what I mean about the lopsided nature of the market and the lopsided nature of the economy is that we have a consumer that's being fueled at the high end by the fact that people are spending money against their portfolios.

9:37And at the low and medium end, people are rapidly using up more and more of their unused credit card balances just to stay intact. But what do we call a consumer growth economy where there's no income growth in real terms in the past year? It's incredible. And it was actually fractually negative in the second quarter. That's why I question the sustainability of even what's happening in the economy, because no matter how much we talk about the spending boom, almost 70 percent of GDP is still the consumer. And I think the props behind it are pretty fragile. That's interesting. I mean, I'm thinking of Goldman, for example, their research, global investment research, where their house view has been pretty dovish.

10:23But yesterday they did a piece about what happens if rates stay around here for a while and what it does to the wealth effect on retail spending, what it subtracts from GDP. I mean, that was I thought that was interesting, curious, at least. Yeah. And I would say that, again, back to Sarah's comment about the stock market, I guess we could just spend our time, you know, gazing at the headlines. But there's so much information beneath the surface. Like, for example, yeah, I would say 100 percent that for the time being and maybe, you know, for months, quarters, years to come. It looks like these the AI trade is not intrasensitive just yet.

10:57It's not really cyclical because this is really classic long duration growth. Now, if I'm at the Fed, I could look at that. But then again, I want to gauge how are segments of the market responding to what's happening in the cyclical economy? like as far as the aspects that are correlated with the economic cycle i mean take a look at the retailer stocks the home building stocks the regional bank stocks uh the real estate stocks uh the areas that are most closely tied to the economy and are most hitched interest rates for all the people that are saying oh well the fed's actions have done nothing to the market no that's not true look at the areas of the market that are most hitched to the economy and to interest rates.

11:41And it's been very painful over the course of the past couple of months. So that's where the information is. In answer to Sarah's question, yes, you could argue, yeah, we have the AI boom. It's just generating 2 % growth in the economy. I seem to remember during the internet boom, now that was a boom that, it was the tide that lifted all the boats. Do you remember in that internet boom in the late 1990s, GDP growth was 4%. 4%, not 2%. We call 2 % a boom today. But you see, what's different is that this particular bull market and expansion in AI is sapping the vitality out of the rest of the economy.

12:20Like non-data center construction is running negative 7 % year-over-year. And AI and data construction is up like 60%. You look at a technology CapEx up 16 % year-over-year. The rest of the business sector is flat. Like, I honestly, in my 40 years in the business, don't remember a time where everything was just so out of balance and lopsided. Like, God forbid, if this thing on the technology side, broadly speaking, ever turns over, we're probably going to get a worse economic downturn than we had back in the early 2000s. So there's nothing left to hold it up. Every other aspect of the economy is struggling.

13:03We're basically a two-pronged economy, high-end spending, because people are spending their portfolios. We'll see how long that lasts. And then we have the AI CapEx. And that's the vitality in the economy right now. It's a two-pronged economy. And that's where I think what's important about Sarah's initial question was about the breadth. Well, yeah, because when you don't have the breadth, if one of those prongs ends up falling by the wayside, You got nothing left to pick up the support. So like even after the Internet bubble burst in 2000, it wasn't a horrible recession. It was a horrible bear market for equities and especially technology.

13:45But the housing market hung in pretty well. Right. The housing market right now is in a state of disarray. Nobody talks about that. Well, we talk about it, that's for sure. But you're right. We're being held up by two very powerful stilts, but stilts nonetheless. less. David, we got to move along here. Good way to start the hour. Thanks for the help again, David Rosenberg today. Great. Take care. When we come back, Undersecretary of Defense for Research and Engineering, Emil Michael will join us. He was just named to the president's new super intelligence task force. Plus, the Enduro winning a nearly$3 billion contract from the Navy to boost submarine production.

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15:36This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab. Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash marketupdatepodcast or find Schwab Market Update wherever you get your podcasts. Welcome back. And Dural just winning a nearly$3 billion contract with the U.S. Navy. Our Eamon Javers has more on that this morning.

16:13Morning, Eamon. Carl, they're calling it Arsenal 2, and it's going to be a massive new shipbuilding facility in Baltimore, Maryland, focused on high-tech parts initially for submarines. It's going to be a$2.9 billion contract for And Dural from the U.S. government. And the government says that Andura will also raise private capital to build out the facility, which will focus on Virginia class attack submarines, at least initially at the facility in Baltimore. They say this is going to create thousands of new jobs in Baltimore. And that's why we're going to see the president later on this afternoon at this facility announcing this new contract.

16:51And, of course, there will be some questions about this, Carl, given the role of Palmer Luckey in this new Pentagon study designed to look at the role of future warfighting. And, of course, if you have somebody who's helping shape future warfighting for the Pentagon at the same time they're receiving massive contracts like this that sort of form the core of that future warfighting, there are going to be questions of conflict of interest around that. Nonetheless, this announcement, they say, is designed to bring more capacity to the U.S. military to build more of those attack submarines and get them online faster with higher tech components.

17:27Carl, back over to you. OK, thank you, Eamon. Eamon Javers, good setup. For more on this story, let's bring in Emil Michael, CTO and Undersecretary for Research and Engineering at the Department of Defense, who was also just named to President Trump's super intelligence force. It's great to have you, Emil. Good to be here, Sarah. Welcome back. So maybe I'll just start on the Eamon question there that he that he just raised with this new big Navy contract for for Anderle and Palmer Luckey. The fact that he's now sort of in the semi-official role advising the U.S. government does. How do you make sure that doesn't raise conflict of interest questions as both he and Musk are major contractors now for all these new government projects?

18:06Yes. So we call it Project Meridian. And that's the future of warfare. It's being run by a nonprofit called MITRE. And what MITRE has done is collected a bunch of experts, academics, former generals, industry leaders, and brought them together to talk about what warfare might look like in 10 or 20 years. And the idea is that we missed, in some ways, the Ukraine and Russia war that started during the Biden administration, sort of the proliferation of drones and counter drones. And the idea is not to miss the next generation of new technologies that are hitting warfare. So we have a robust conflict process and it's being run by nonprofits.

18:46There's really nothing to see here. Got it. So that was taken into consideration, that it wouldn't just be, I guess, a roadmap for future contracts for these companies. Of course. Why is it important that the outsiders get a say in our strategy and military defense for the future? Well, this is not outsiders having a say. This is going to be a public study where we publish the results. And it's really to tell Congress. It's to tell industry, all kinds of industries, supply chain, critical minerals providers, like all kinds of things that we're realizing we need now. We just don't want to be surprised in the future.

19:27So having outsiders who think about these things, both academics and and former military and industry is exactly the right kind of mix that you want because you need to mobilize an entire nation in the event of a conflict. And so it just makes sense to have them around the table versus people who've never seen or never had any thought process around these kinds of things. I mean, it does strike me that in this administration, as technology develops and the Department of Defense moves closer to these game-changing technologies, it's Anderil, it's Palantir, it's SpaceX. Is this the new Lockheed and Northrop Grumman's?

20:05Well, I think we definitely want more than five prime contractors. Those three are great contractors. We also need the AI companies at the table. We need the supply chain companies at the table. Like there's a long chain of supply chain that goes into making anything that we use in warfare. There's also chips, all the things that sustain a domestic economy, that protect the homeland. So the list is really pretty endless if you think about sort of a major potential conflict. And that's why we need as many voices around the table as we can. Are we better than China at innovating here on military technology?

20:44We are much better than innovating on military technology. The thing that we also have to get better at is the ability to produce at scale. And you can see countries like Ukraine were able to produce drones at scale. So it is possible. But you have to have a little bit more of a wartime footing. And that's what Secretary Hague says than President Trump put us on, which is how do we make sure that we have the domestic capability to produce things at scale, Not just exquisite because they work the best in their best technology, but you have to produce more of them. And that's our goal. Emil, what do you want folks to understand about the superintelligence force?

21:21Is it about sort of looking ahead to future risks or investigating things we already know something about, like hugging face? It's more about looking toward future risk and future opportunity. And the thing is that there was a lot of scare tactics that have been perpetrated in the last few weeks, potentially with some foreign influence, that sort of scared the American people. You see how this pulls. And the idea is to make sure that American people understand that AI can work for them, can support their goals, and to make sure that we're talking to the different groups of people who it might benefit, but also to be cognizant of the risks and make sure that the AI companies, the megacorporations, are taking their own stock of the risks and investing and protecting against those risks and ensuring that we have the right regulations, laws and powers that we already have in place and make sure they understand that to ensure that they know that they're liable in certain cases and they take those risks seriously so that we have a robust AI industry in the United States that beats China, where the risks are being borne by those who create those risks and ensuring that the interests of the American people are first and foremost.

22:33So is that what the task force is about, how to make sure they are liable? Because I know we've talked about this before, and that's a big part of what you think needs to happen here to try to make sure that this doesn't get out of control. But, I mean, is any liability being enforced? Yeah, I mean, you saw a few months ago that when the president saw that Anthropic had released a model that had some dangers in him, He slapped up export controls on them within a couple of hours. I think this is not to educate them about the sort of liabilities, which are sort of self-evident and their legal teams probably know about them.

23:09But it's really to make sure that they're taking care to do the right things. And if you look at the White House accord that was signed by President Trump and these big companies, it said that they're going to have independent evaluators. They're going to have independent committees of the board that are going to look at the evaluations of those independent people that they have evaluating the risks internally, which harkens back to the hugging face incident. It's sort of helping them ensure that they're structured right to assume the risks and prevent and mitigate the risks and really deliver the benefits that they can without delivering any harms.

23:48It's interesting. When you talk about public opinion, we had the CEO of Airbnb on last week, and his view was that Americans in particular are hearing about AI mostly through an enterprise framework. And in that sense, they feel like AI is something that's happening to them rather than something that's working for them. I wonder if you think as consumer technology evolves, that'll change, that'll move the needle. Yeah, I think it will. If you look at GrokBot or Dots or some of these things which are getting more into the hands of consumers besides the sort of chat GPT that a lot of consumers know about already, and you think it's going to help them organize their day, it's going to take friction out of their lives, I think they're going to see those benefits more and more.

24:32But it's also incumbent upon these companies to display those benefits and to sort of have products that show them the benefits and deliver the benefits. So we're pretty early in this phase. I know we're sort of getting to a place where people are saying, oh, my God, you have to be scared about these things. But really, we should be in a place where people in these companies are showing the benefits that it gives the average American. And I think those things are going to come in the next year. Yeah, but I mean, agree. But it won't matter, right, if they're as dangerous as the people who are working on them are warning us that they ultimately could be.

25:09And what do you what do you do about that? Yeah. I mean, look, the incidents that we've seen so far, if you talk to these companies, they say they all were preventable. Right. They didn't build their sandboxes appropriately. They didn't check the logs appropriately. They didn't do these things appropriately. So if they do those appropriately, you wouldn't have those incidents. And then what would there what would there be to be scared of? And when you see, I think, the threat report that Anthropic put out, they say, OK, well, we saw people try to use these things for bad reasons, but then we stopped them.

25:41So they're actually effective at stopping bad things from happening if they're not, you know, if they're paying attention and have the right teams on it and they have the right visibility into it. So I think everything that we've seen so far was preventable by the labs themselves. And that's a key point to take away. Do you think these companies should be going public now? I mean, you know, that's up to them. I think that, you know, that'll determine, you know, that's based on what they think their financial interests are. I do think open source AI models are going to have a big impact in the marketplace.

26:20I think companies are being more efficient about what they're spending. And I think maybe some of them want to get out of the gate sooner to sort of be in front of that. But that's up to them. OK, well, we certainly appreciate you joining us to talk through both of these really important task force projects that you're on, both Meridian and superintelligence. Emil Michael, thank you very much. Thank you so much. Undersecretary at the Department of Defense. Still ahead this morning, NVIDIA-backed Reflection, unveiling a new AI model. We'll talk about how it stacks up against the competition. And then later, he served in four administrations as former White House coordinator for the Middle East, veteran U.S.

26:58diplomat Brett McGurk, joins us to discuss the current geopolitical landscape. And his new book detailing the race to free hostages from the October 7th Hamas attack. We'll get into all of that when we come back. The quarter pound of a cheese is made with 100 % fresh beef, cooked when you order it. Then comes the melted cheese, the slivered onions, the pickles, the ketchup, and the mustard. Add hot crispy fries and an ice-cold Coke, all for$8. And if things go well, one loose fry at the bottom of the bag. The Quarter Pounder with Cheese Meal, now$8.

27:42Weren't agents supposed to take things off your plate? Building another to handle the others is a bit much. Don't make more work out of work. Gemini is the one agent that knows all parts of your business and actually gets stuff done. You give it a project, close your laptop, and when you come back, the job's finished. No matter your industry or role, your agent has the skills to help every team stay in their flow. Seriously, make work less work with Gemini on Google Cloud. Check response, subscription required. This episode is brought to you by Schwab Market Update, an original podcast from Charles Schwab.

28:15Schwab Market Update, an original podcast from Charles Schwab, provides an information-packed daily market preview on stock updates, U.S. and global economic news, monetary policy decisions, and key results and statistics that may impact your trading. Download the latest episode and subscribe at schwab.com slash market update podcast, or find Schwab Market Update wherever you get your podcasts. Market popped to the open on pretty good breath here and it's kind of stayed there, 78, almost 78.40 here. First all-time high for the S &P since the middle of August. Yields have been pretty well behaved.

28:51The VIX below 16. Breath almost 3 to 1 positive. We'll keep our eye on all that, see if this holds through the course of the afternoon. Yeah, Treasury yields come in. Oil prices off a little bit. And just an overall comeback to what has been, as David Rosenberg called it, a little more lopsided market where AI works and other sectors do not. It's all working today, mostly, except for, I don't know. No, it's pretty green. All the sectors are higher. Time now for a news update. Pippa Stephens has it for us. Good morning, Sarah. Kenya has confirmed its first Ebola case and death in the current outbreak.

29:24The patient traveled from Congo through Uganda and died at a Nairobi hospital Monday. Officials have identified 28 contacts and are tracing passengers from his flight as they work to prevent further infections. Disney is in a Florida courtroom today asking a federal judge to block an early FCC review of eight ABC station licenses. The company says the The move is retaliation for its programming and violates free speech rights. The FCC denies the review concerns content, citing broadcasters' obligation to serve the public interest. And Francis Halsey has won the Nobel Prize in Physics for helping turn Antarctic ice into a giant particle detector.

30:05His Ice Cube observatory captured neutrinos, elusive particles arriving from space. The breakthrough gives scientists a new way to study some of the universe's most powerful events. Guys, back to you. Much. Still ahead, former White House coordinator for the Middle East, Brett McGurk's with us. We'll talk about his new book, also get his expectations for the Iran war as oil prices get some relief today. Plus, housing affordability, a top concern for voters this midterm season as mortgage rates continue to march higher. We're going to take a close look at how housing costs are impacting key races in Pennsylvania.

30:40We're back in a moment. Welcome back to Squawk on the Street. Tomorrow will mark three years since the October 7th Hamas terrorist attack on Israel. Our next guest was a key White House insider at the time of the attack. Is that with a new book today titled Brink, detailing the race to bring hostages home in the aftermath of the October 7th attack. And joining us here at Post 9 is former White House coordinator for the Middle East and North Africa during the Biden administration, Brett McGurk. Brett also held high-ranking diplomatic roles in the Bush, Obama, and first Trump administrations. Welcome to the show, Brad.

31:11It's great to be here. Great to be here. So this is not a partisan book. It's a great book because it is really just what you saw and how you experienced it. Why did you do this? Well, it's a very firsthand account. That was the only way I could write it. I just kind of poured it down what this was like. I know this crisis. We're three years now from that horrific day. And it's polarizing. It's difficult. It's horrific. and I just wanted to kind of, what it's like in the room to deal with this? What it's like to deal with Bibi Netanyahu? What it's like to deal with the Iranians when I'm in Oman on a back channel?

31:46In the situation room where 200 missiles are flying towards Israel and we're trying to contain a regional, trying to stop what could be a broader regional war. So it's all in this book and ultimately though it's a story about, look, it's war, peace, life, death, missiles, drones, Iran, everything that's kind of in the news now. But it's also a story about negotiations And how do you bridge totally irreconcilable positions? Because at the end of the day, after October 7th, and understandably, Israel said, at the end of this, Hamas will never be in power in Gaza again. That is their bottom line.

32:21And Sinwar, the leader of Hamas, who was holding the hostages, his bottom line position was, at the end of this, we will stay in power. If you want the hostages back, we will retain power. October 6th status quo, where we constitute on Israel's borders. So that, how do you deal with that? Get the hostages out, try to stop a war, contain a regional crisis. It's all in this book, and it's about negotiating using leverage, power incentives, things that your viewers understand. So what do you hope people know or will take away about dealing with Benjamin Netanyahu, dealing with Hamas, dealing with President Biden during that time that we don't realize?

32:58I hope a better understanding of what is in the heads of all these individuals. If you're the leader of Israel, you've got to deal with, you want to bring the hostages home, you also have to protect your people. And I think I make very clear, I think no Israeli government, this one or the next one, is ever going to allow Hezbollah to sit with 30 ,000 troops on the northern border, or Hamas to be armed with thousands of rockets in Gaza. At the same time, you're dealing with Iran. And, you know, Iran, on October 8th, the day after the October 7th attacks, started firing rockets into northern Israel and then started attacking us.

33:32So we're dealing with that, and it's about what Iran wants in the region, which is still playing out. Did Iran know about October 7th? It's a great question. So they, of course, supported Hamas and all these proxy groups for years. I don't think from everything we know, Sinwar, the mastermind in Gaza, did not tell the Iranians because he kept it so compartmentalized. But he hoped that right after the attack or days of attack, they join in. And Iran did join in. They didn't turn it up to a 10, but they started attacking us. They turned on all their proxies. Again, that story is in the book. And you're also there with the president in the Oval Office.

34:08You know, when do we use American military power here? What are our objectives? how do we use it deliberately and carefully to protect our troops, but not getting sucked into a broader war and trying to deter the Iranians. Do you believe Netanyahu was warned? You know, everything I say in the book, we looked at all of our intelligence. We did not have any warnings or indicators in our system. Hamas is primarily an intelligence target for Israel, not for us. But we didn't have anything. And I say the Israelis, from what they told us, did not have any warnings. Honestly, there could be something in there.

34:42That's why whenever something awful like this happens, we had a 9-11. You have a full commission of inquiry. We have a 9-11 commission, made reforms in our intelligence community. Israel to this day has not done that. They need to do that. It sounds like your hopes for diplomacy, long-lasting diplomacy, are minimal. Well, I mean, I closed the book. I won't give it away. But a lot of times books like this have a last chapter. Here are the five things we need to do now. I'm just very honest on how difficult this is. and some preconditions. If Hamas is clinging to power in Gaza, Carl, you're just not going to have a way forward.

35:17You talk about two-state solution, a Palestinian state. If you have Hamas there, that's never going to happen. So that has to change. If Iran is still in power in Tehran and still kind of pumping up its proxies around the region, that's going to cause instability. And frankly, Israel, and we have to be honest, after October 7th, their defense doctrine, they will not allow threats to gather. And so that's why I think a close U.S.-Israel relationship is so important because this situation can become even more volatile. What do you think happens in the Iran war? I mean, how long do you think this lasts?

35:47And is there a resolution where they're brought to their knees by this economic pressure now that the administration is pursuing? You know, the economic pressure, I've called this kind of the fourth act of the war that started in February. We had the strikes last year in Midnight Hammer. I thought it was quite effective. Right now, the economic pressure in that blockade, if you can... Iran has never faced this economic pressure. Iran's also showed, however, and I've sat across the table from these guys for years, they're willing to use ruthless power to stay, ruthless force to stay in power against their own people.

36:18You know, so does the pressure really actually crack that system? Eventually, this system, like any authoritarian state like Iran, it's lost support of its people. Eventually, it's going to come apart. But that could be a very, very long road. Then they just kill them all, right? That could be a very long road. Yeah, they are willing to use brutal force against their own people. But I think you keep economic pressure and you try to avoid getting back into a major military confrontation. And just, you know, then you try to use diplomacy. A lot of what this book is about, use leverage, incentives, without getting sucked back into a major military campaign again, which I don't think we need.

36:57Do you trace back any influence from Russia and or China to this whole environment in the Middle East? Well, it's a great question. You know, we started seeing before October 7th that kind of strategic cooperation between Russia, Iran, and China. And Iran's missile program just proliferated over the last 10 years. Missile and drone program proliferated to it has strategically significant effect. And Iran proliferates that stuff to Russia. I mean, Russia's now flying rocket-powered shot-head drones. These are Iranian-modeled drones. They make them now in Russia. Russia could not sustain this campaign in Ukraine without that cooperation from Iran.

37:40The Houthis, who were a group in Yemen, and you could say, who cares about those guys? But with Iranian support, they built up, and this is in the book, this massive anti-ship missile arsenal that can shut down the Red Sea. These are huge strategic problems. And some, I know you might read this book and say, man, Middle East is so complicated. Maybe, like, U.S. should get out of it. But that actually—you open a vacuum, you're sucked back in. It will get filled by something. You're sucked back in. I was going to say, this is shaping up to be one of the top issues for the midterm election in the U.S.

38:17And there are real questions and people, you know, campaigning against support for Israel, against Zionism, you know, against the allyship and the U.S. helping in these wars. What ultimately do you think the future of this relationship looks like? I try to stay out of the politics. I've never been part of the political party debates. But I hope whatever side of the issue you might be on, if you read this book, you come away with a better understanding of just what's really at stake here. And there's no easy solutions. I say in the book that if we had a shortcut to end in this thing, we would have taken it.

38:52And there were a number of times. It's so frustrating. We had deals. We had a short-lived deal in the fall of 2023, got 100 hostages out. Hamas then refused to release younger women that it had agreed to release. Remember, it couldn't find them at one point. Well, it basically lied. I mean, it said to us, this moment is in the book. It was such a torturous moral quandary. We have a ceasefire. Guns are silent for eight days. But the deal is for all women and children. And Hamas comes on day eight. And there's a number of younger women taken from Nova Festival, taken from their homes. And Hamas says, you know, let's skip over the younger women, talk about the older men.

39:27So what do you do in that moment? Do you say, yeah, OK, let's keep the ceasefire, try to get the older men? Or no, Hamas, you're breaking the deal. And the war started again that night. And I'm honest, I did not anticipate that night it would take us 14 months to get back to that deal. And three of those women, Romy, Jerome, and Emily, one taken from Nova, two from Kafaraza kibbutz, which is really detailed in the book, They came out the last day of the Biden administration in the deal we finally got by working together during that transition, the Trump and Biden teams. It's an incredible account, Brett.

39:59So thank you for coming on to talk a little bit about it. Thank you so much for having me. And congrats on the publishing of the book today. It's called Brink, Inside the Race to Free the October 7th Hostages. Brett McGurk, thank you very much. Thank you. Still ahead this morning, NVIDIA-backed reflection, unveiling an open-weight AI model. We'll talk about how that ramps up the competition with open AI and Anthropic when we're back in a minute. Welcome back. NVIDIA-backed Reflection just unveiling a new open-weight AI model. Our Kate Rooney joins us with some details. Morning, Kate. Hey, Carl.

40:25Good morning. So this startup Reflection is being seen as the American answer to popular, low-cost Chinese options that have really surged in popularity lately, unlike the closed options from OpenAI or Anthropic. Other companies, so think of a bank or startup, for example, can take these open-weight models, customize them with their own proprietary data, and that route can often be cheaper while keeping sensitive information in-house. Alex Garp has argued for this as one example. Reflection's CEO was on Squawk Box this morning. He compared it to owning versus renting AI. I kind of think about it from an AI rental market to an AI ownership market.

41:04Closed models is kind of like renting your AI, like renting an apartment. And as enterprises use AI more, they want to own it as much as possible because it becomes such a big line item. And so we see a big shift happening to open source and meeting this moment to produce a great American Western open model that enterprises can use for their most critical workloads. And guys, there is also a geopolitical factor here. Chinese companies have dominated this open source space, while banks, government agencies right now at least, have limited Western alternatives if they do want to run AI themselves.

41:38There is a similar trend coming out of Europe. AI startup Mistral this morning out with an even larger open-weight model. It does claim that it beats Reflection's version. It's called LeChonk. These models are still expected to lag the very best closed systems in the U.S. from OpenAI and Anthropic. The bet here is that these companies, like Reflection, can take a good enough model as another option in this AI race. But all of this, guys, could add some pressure to Anthropic and OpenAI in terms of margins as they look to go public. I was going to say, I mean, at this point of the game, what's the incentive to really work hard at the frontier when we can see where so much of this is going?

42:16The argument, Carl, has been that companies still want to actually pay for the best model. So take Anthropic, for example. They have argued that the cost per task. So the cost of actually doing something, knowing that it's going to work out and go well in this renting analogy. They've said, all right, you can trust Anthropic to say we have this complicated coding task. You know that you're going to get a very good outcome versus maybe running it a bunch of different times on your own version in this rental model and saying, oh, it's just taking too long. I maybe end up spending more in the end.

42:46They've said that it's actually more cost effective. So the best models are going to be worth it, although it does add pressure. I mean, the reflection CEO said the pie is growing. There's sort of room for everybody. But at the same time, did acknowledge that the margin question is huge. as these companies at a nearly trillion dollar valuation in both scenarios are looking to go public. Margins are going to be the number one thing analysts are looking at. And there may have been a moment where we did hit peak AI spending and all of a sudden here we are with these cheaper versions that are actually taking a bite out.

43:15Although Anthropoc at least seems to have been sort of Teflon in this. We haven't seen it show up in the revenue numbers. We haven't seen a dip yet. So we'll see if it does start to eat into revenue. Okay. Thank you. It'll be much more interesting when they're public companies. We can see how the market reacts to it. Kate Rooney. When we come back, housing affordability. It's a top concern for voters as we head into the midterms. We're going to bring you a live report from Allentown, Pennsylvania on how housing costs could impact two key races. We're back in a moment. Welcome back. Housing affordability.

43:42It's a top concern for voters as we head here into the midterms. Diana Olick joins us from Allentown, Pennsylvania today with a look at the impact of some of the key races there. Diana. Well, Sarah, housing affordability is actually the number one issue for voters aged 18 to 34. That's according to CNBC's All-America Survey. And we have new data. One in five Americans who rent or have a mortgage spend half or more of their pre-tax income on housing. Half spend between 25 and 49 percent, according to the CNBC and Survey Monkey quarterly money survey. Now, the standard guideline from banks and lenders, it's about 30 percent.

44:19Now, here in Allentown, 54 percent of renters are spending more than 30 percent of their income on rent, and home prices are up 4 percent compared with a year ago. For that person trying to get an apartment, person moving from an apartment to a starter home, starter home to a larger home, each and every one of those cohorts is reporting that it's a challenge right now. And it's something that is weighing on them in a very important political place. This district ranks eighth nationally among house races where young voters could most influence the midterms. And that's according to Tufts Index. 33-year-old Jessica Heller is a newlywed renting from a friend at a reduced rate.

45:02Going into a mortgage right now for someone like me, like unless I'm putting$50 ,000 down, but like where do you get that money? Your mortgage is still going to be like$2 ,000,$3 ,000,$4 ,000 a month. And like in Allentown, some of the most run down homes are still selling for four hundred thousand dollars. It's like we're not able to get like a starter home and invest into it. This district is a toss up between incumbent Republican Ryan McKenzie and Democrat Bob Brooks. McKenzie touts his support for the affordable housing tax credit passed in the 2025 budget bill. He also co-sponsored legislation in January to establish a homebuyer tax credit early, but it has yet to see a vote.

45:42Now, Brooks is pushing for more starter homes and a crackdown on corporate landlords and rent gouging. Over in Pennsylvania's 10th, west of here, it's another toss-up, but the Republican incumbent was the only member of the state's delegation to vote against the recently passed Road to Housing Act. Back to you guys. OK, Diana, always an interesting one, the purple state of Pennsylvania, Diana Olek. And make sure to join CNBC's Trading the Midterms Forum in Washington, D.C. on October 14th. You can register at CNBCEvents.com. Meantime, really steady action here as we've been holding the highs of the day at the 7840, as we mentioned earlier.

46:21First intraday high for the S &P since the middle of August, even though, I mean, it's broad today. In the last few weeks, it's been mostly tech. Well, you got everything. You got lower oil prices. You got bond yields that are coming in. And then you have more AI deals, Constellation Energy, signing a big, you know, Google hyperscaler deal, catapulting that stock to the top of the market. All opinions expressed by Squawk on the Street participants are solely their opinions and do not reflect the opinions of CNBC or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet, or another medium.

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