Anatomy of Anthropic, Buys Outside of AI, and What’s Next for Warsh? 10/27/26

0:00Logan Bartlett: Introducing Fidelity Trader Plus. With customizable tools and charts you can access across all your devices. Try our most powerful trading platform yet at fidelity.com slash trader plus. Investing involves risk, including risk of loss. Fidelity Brokerage Services, LLC. Member NYSE SIPC.

0:15Greg Ip: At Jared Jewelers, we know it's about more than fine jewelry. It's the moment they open the box. That smile they can't hide. knowing you chose exactly right. Because the right gift can bring a lifetime of meaning, a promise, a milestone, a memory in the making. Make every moment unforgettable. Find great gifts starting at$250. Jared, make the holiday last forever. Shop Jared Jewelers.

0:44Logan Bartlett: You're listening to The Exchange. Here's today's show.

0:51Logan Bartlett: Thank you very much, Scott. Tech stocks are jumping again today as the tech-led rebound continues. And the NASDAQ 100 unwinds some of the damage that's been done this month. I'm Kelly Evans and welcome to The Exchange. Would you believe that the neocloud Nebius is leading the NASDAQ today? It's up about 11%. The AI names broadly are having a nice session. Western Digital up 7, Dell up almost 8. Both are among the leaders in the S &P 500. Money just keeps flowing into the space. Broadcom is up 4 % on the heels of a$63 billion deal with Wall Street banks to fund Anthropix chip purchases. NVIDIA and Meta are also expanding their partnership with a$3 billion investment deal.

1:30Logan Bartlett: That comes as Meta has unwound nearly its entire post-views launch gains. The stock is down 20 % from its highs a month ago. And take a look at shares of Oracle, which are up 4 % today. Yes, they are still down 60 % from the all-time high last September. But Sam Altman is on stage this hour as OpenAI expands its relationship with Oracle. You can take a look there. This is the first time that we're hearing from Altman since we got Anthropik's IPO filing yesterday and got its emphasis on the scale needed to build out AI. That helped reignite enthusiasm in these names that spills over into today.

2:05Logan Bartlett: And the big question for investors is whether Anthropik can keep growing fast enough to justify its valuation and can OpenAI under Sam Altman's leadership there catch up. That's where we begin today. Let's bring in Logan Bartlett. He's managing director at Red Point Ventures, an open AI investor, if I'm not mistaken. Logan, do you feel like Anthropics is taking the spotlight a little bit this week or does it excite you about what Open AI may ultimately unveil as well?

2:31Greg Ip: Can I say both? I think Anthropics allowed to have their moment in the sun and I think unveiling of the S1. I mean, it's an absolutely incredible business. What they've done over the course of the last year in particular, you have to tip your hat to Dario and team on their execution. But I think that the numbers just show this is all goodness for the overall AI ecosystem. And I think OpenAI will benefit from that as well.

2:57Logan Bartlett: We obviously see Altman there at Oracle's, I guess they're calling it AI world now. And part of what seems to be happening is a little bit of these companies, NVIDIA has been doing this, Anthropic, I guess, OpenAI. I mean, everybody seems to be lining up their customers, their financing. And trying to just get enough scale, because what I perceive, you could, of course, could criticize this and say it's all circular financing. And, you know, maybe there's an element of truth to that. But I also wonder if you just take it at face value. These companies are telling us, and literally that was the opening part of Anthropics filing.

3:29Logan Bartlett: They're telling us the more scale they have, the more economic they can be, the bigger they can be, the more profit they can generate. So, yeah, go ahead.

3:38Greg Ip: I think if you go through, I mean, the bear case on all of this has been before we were actually able to see the numbers was either circular financing or that we were really subsidizing demand by selling a dollar of revenue that actually cost a dollar 50 or whatever to produce. And I think what you see in Anthropics business here is you're just getting incredible leverage on all the compute spend that they're able to unlock. The business has 85 percent gross margins, which is probably a little artificially inflated, given the latency on the compute demands and what they're seeing on the demand side.

4:14Greg Ip: But it's just really an incredible business. I think you have to tip your hat to this. And I think this is a tough day for all the bears that have been calling the end of the A.I. run and that Anthropic maybe was a benefit of circular financing. Right.

4:28Logan Bartlett: So you think then, without saying that you're going to give me your stock picks on Lumentum and GE Vernova or whatever, but you would say that this build out can continue and continue for some time. I mean, how big do you think these companies and this whole ecosystem can get?

4:44Greg Ip: Yeah, I mean, there are far smarter people than I that get to predict the valuations of what these companies are going to do. But I will say that this is definitely a bellwether for the AI ecosystem. And I think that the initial round of what people were kind of expecting and what they were going to see on the Anthropic side, you have to be extremely positive. And the derivative beneficiaries and the NeoClouds and all the infrastructure providers that are servicing these customers have to be quite happy to see the numbers and the results here.

5:16Logan Bartlett: There is one key difference, it seems, between Anthropic and OpenAI, which is that at least at the start, Anthropic was much more of an enterprise tool, CloudCode much more of an enterprise tool. That's been really the killer case for AI so far. OpenAI, and maybe I'm behind on this, is still mostly a consumer tool. And so will they benefit from the same economics that Anthropic laid out? Anthropic, by the way, also said in their filing, we will not advertise. We are not going to be an advertising-driven business model. OpenAI is already kind of moving in that direction.

5:47Greg Ip: Yeah, I mean, OpenAI has definitely become much more of an enterprise company than they were a year ago at this time. I think the initial use case that everyone saw around chat GPT definitely seemed to be a consumer opportunity. But I think we've seen over the last 18 months that productivity and the opportunity that exists in the enterprise is nearly untapped with the increasing intelligence that we're seeing. And so I think it's probably been a year or nine months since Sam really rallied the troops and said they were going to really go all in on the enterprise opportunity. And so I expect when you see the S1 from OpenAI at some point in 2027 or whenever they decide to file, you'll see that the trends are actually quite similar to that of Anthropic.

6:31Logan Bartlett: The narrative for much of this year had been that OpenAI kind of had to wait for the business to get better, maybe look a little bit more solid before this IPO. And like you said, that perhaps has been an inflection point as they've launched some of these new tools. Should they pull that forward now? I mean, is it is it now a case of Anthropic raising the bar in a bad way or raising expectations in a good way?

6:55Greg Ip: To some extent, you have to say Anthropic has set the terms of how open AI is going to be valued in the public market. And they will definitely be the one that open AI gets compared to. And so I think that if you're not going to be first and really set the terms of how you're going to be comped, then you should do it on your time and when you think it absolutely makes sense from an optimal point to be able to tell your narrative vis-a-vis the competition, vis-a-vis the overall market. And so I think once Anthropic decided that they were definitely going to be November in terms of their timeline of going out, it made a lot of sense for OpenAI to sort of take a beat and decide what the optimal point would be for them to go out.

7:36Greg Ip: And so it seems like that's going to be sometime in mid-2027, but I don't have any insider knowledge on that. That's purely from external reporting and what we've seen from news sources.

7:46Logan Bartlett: And finally, then, who else are you excited about in the pipeline? Are these two companies differentiated from everybody else or are there other, you know, I personally see a wave of new startups doing lots of focused things in AI. I don't know if they can survive going up against the big guys, but a lot of there seems to be the case that we're all going to end up using a lot of these different tools and maybe there's space for for a lot of new entrants. Are there any others that are at the point yet at which you'd be, you know, see as big upside as you might see for open AI and the like?

8:14Greg Ip: I think that there's probably the big three of SpaceX, Anthropic and OpenAI that are going to be to the tune of the top five, 10 biggest companies in the world. And I don't have anyone that's coming down the pipe from an IPO standpoint that's going to be that order of magnitude impactful. But listen, I don't think 10, 20, 50, 100 billion dollar businesses are anything to sneeze at. And so my guess is once we see these businesses go out and more liquidity unlocked into the ecosystem, 2027 is going to be a banner year for IPOs that maybe aren't trillion dollar plus, but I imagine 50, 100 billion dollar plus.

8:54Greg Ip: We'll see a number of those.

8:55Logan Bartlett: All right, Logan, it's great to check in with you. Thanks so much.

8:58Greg Ip: Great to see you, Kelly.

8:59Logan Bartlett: Logan Bartlett of Redpoint Ventures. Let's turn our attention now to Meta. Investors there, they get a little frustrated. I hear from them all the time. The shares sold off after earnings last week. and as we mentioned, are down 20 % from their highs just a month ago. The company is now seeking to raise more equity diluting, more equity, I should say, diluting existing shareholders in order to fund its AI ambitions. Now, NVIDIA was reportedly interested in buying up to$5 billion of shares in its raise. And today it announced a$3 billion commitment, in which Meta also said that it will increase its usage of NVIDIA's tools and its next generation agents.

9:33Logan Bartlett: Our next guest still sees major upside from Meta shares from here. Ronald Josie is a senior Internet analyst at Citi. Ron, it's great to see you. If I'm not mistaken, your price target is like 50 percent above where Meta is trading now. What would you say to shareholders who are suffering a little bit of whiplash right now?

9:49Greg Ip: Look, the whiplash is a direct result of we weren't sure about the raise. We got the capital raise. We're not sure about the costs that are needed to continue to fund news and the models and everything else. But I think the top line and the greater ranking recommendations and time spent on Meta help to prove out that what they're investing is, is actually delivering greater overall value in terms of time spent on all the Meta's platforms and the continued adoption of Muse. And so what I would say or what I am saying actually is that, look, the top line is growing quite nicely. It feels as if that should continue.

10:25Greg Ip: Engagement should continue to improve, particularly as we move to an LLM world within across Meta's ranking recommendation feeds. And then you have these newer businesses like Muse or Agents around WhatsApp that I think can drive just continued growth. So, frankly, I think a lot of the move today is around uncertainty and the noise around what the costs are. But I think that'll all come out very clearly in the next call at a couple of quarters, certainly by next year.

10:54Logan Bartlett: Yeah, I think you have around a 9.05 price target. The shares are down 5 percent this year. They're making no secret of their ambitions to raise as much as they can to fund this build out. Anything in the kind of muse, the way that, how should we say, engagement or usage seems to be fading somewhat after initially using it. Does that bother you at all? Or why do you have such conviction that Meta could still be worth so much more than it is today?

11:18Greg Ip: Yeah, I mean, we're not seeing the decline in engagement. We're still seeing, you know, there might have been a little bit of a dip last week, early in the week around downloads. It seems like that's come back. DAUs are, I think, closer to that two million mark. And we're six weeks in. We just launched Japan. So I think it's very early in terms of what Muse is, what Muse can be, and sort of the productivity tool and the time savings and potential overall dollar savings as well that consumers will have. One thing that Meta has that nobody else really does, and that's the ability to drive engagement and drive distribution across its 3.6, almost 3.7 billion daily active people.

11:57Greg Ip: And I think as Muse adoption continues to ramp, as newer tools launch, as the wonder model becomes a bigger part of Muse, I actually think there's a lot of upside from where we're going here.

12:08Logan Bartlett: All right. Then I guess we can turn our attention to Amazon and Google, which report tomorrow. We'll have the Fed meeting to get through, so we won't spend a lot of time on that in the afternoon. But these are huge events, probably the most important, along with Amazon on Thursday. We heard from some big spenders last week, don't get me wrong, but here we go. What are your expectations?

12:29Greg Ip: Yeah, here we go is right. I mean, the number one question I think we have or most people have going into earnings for both Google and Amazon is the compute capacity. Of course, the demand that we're building towards the growth rates within GCP as well as AWS. And then it's interesting, both of these companies have the consumer side. And so the big question is what happens to search? Where is Google's answer to Muse, which used to be called Spark, now might be called task. And from an Amazon perspective, what are their plans for Argentic Commerce? So we're 100 percent focused on the compute side and focused on where we're going on the demand from an enterprise perspective.

13:07Greg Ip: But there's also the consumer side that we're looking for a lot of answers as well in terms of where what the product roadmap looks like for both companies.

13:16Logan Bartlett: Any numbers come to mind as the key CapEx figures or any kind of general kind of ways to boil it down. In other words, reaffirming guidance, raising guidance, obviously not lowering it. I don't think that's what anyone wants or is looking for right now.

13:29Greg Ip: Yeah. Look, if there's one thing that's a lesson learned from Meta last week, it's the more guardrails or insights that the companies can provide on how we think about or how they think about their continued CapEx spend into 27, I think we'll go a very long way. We're looking for significant growth to continue in CapEx because, in our view, the demand remains insatiable on the enterprise side. And we just heard that from your prior guests. And we're hearing that from so many different places. And so CapEx is going higher. We think we've captured it. But frankly, there's probably more potential room for upside here.

14:02Greg Ip: So the more the companies can talk about the visibility or what they plan to do or help us around guardrails on both CapEx and expenses, I think would go a very long way.

14:13Logan Bartlett: All right. And that makes a lot of sense. Anything else you'd add? One of the sort of emerging themes, especially with Microsoft's layoffs, people are doing the math and saying they're laying off exactly the number of people they need to fund their increase in CapEx. So is that these companies becoming more efficient, again, to the detriment of perhaps their current workforce? Is there anything else you'd add? I mean, do you expect this to be a one time reset and then they're adding headcount or can they run more efficiently from here on out?

14:38Greg Ip: Look, I think we're running efficiently from here on out. We have certainly slowed down our pace of hiring across the Internet sector overall. We saw earlier this year Meta go through some layoffs. We've also seen AWS and Amazon go through multiple rounds of layoffs. And Google, I think, has slowed down their hiring cadence. All this as almost every single data point we hear are these coding tools, AI, et cetera, are driving greater productivity amongst the entire organization. So we saw the news, of course, with Microsoft. My colleague Tyler covers Microsoft. But from a Google, Amazon meta perspective, I think we're going to see just greater efficiency gains going forward.

15:17Greg Ip: And that might be in buyouts, might be in layouts. But frankly, we've gone through a lot of those already. It might just be more limited hiring going forward.

15:23Logan Bartlett: All right, Ron, really appreciate it. And an exciting week in one way. We hope in the positive way for the most part. Ron Josie, we really appreciate it. Thanks.

15:32Greg Ip: Thanks for having me.

15:33Logan Bartlett: Coming up, health care stocks are quietly outperforming everything but energy over the past year. And your next guest is adding to his positions in some select areas. We'll tell you where next. Plus, do interest rates actually look low? Yes, low. That's what The Wall Street Journal's Greg Ip is arguing in a new piece. He's here in studio to make his case ahead of tomorrow's Fed meeting. The Exchange is back after this.

15:59Greg Ip: This is The Exchange on CNBC.

16:27Greg Ip: and so much more. YouTube Premium, it's like YouTube got some extra gains. Try YouTube Premium for two months free at youtube.com slash premium. Trial eligibility varies, terms apply, cancel anytime. PNC Bank brings you The Call of the Wild Money Moves. You hear that? YOLO! That's an internet troll telling you to put all your money into a single investment. YOLO!

16:50Logan Bartlett: YOLO, YOLO!

16:51Greg Ip: He wants you to liquidate your emergency fund

16:54Logan Bartlett: YOLO!

16:54Greg Ip: And by a digital rice horse named Silicon Steve. YOLO. Stay vigilant. He's very persistent. YOLO! Guard against wild money moves with PNC Bank. Brilliantly boring since 1865. Building a portfolio with Fidelity Basket Portfolios is kind of like making a sandwich. It's as simple as picking your stocks and ETFs, sort of like your meats and other topics, and managing it as one big juicy investment.

17:25Greg Ip: Now that's pretty good. Learn more at fidelity.com slash baskets. Investing involves risk, including risk of loss. Fidelity Brokers Services, LLC. Member NYSC SIPC.

17:40Logan Bartlett: Welcome back. Tech and energy have been dominating the leadership board this year, but don't overlook health care. It's up 16 percent. And our next guest is bullish on several names in that space, along with other areas like software and financials. Let's bring in Surat Seti. He's a managing partner at DCLA and a CNBC contributor. Surat, it's great to see you. Starting with health care, it's not all of it. There are a couple of particular names that you like. Who are they and why?

18:05Greg Ip: I do. You know, we like Big Pharma for a while. We kind of trimmed some of that. But we're now focused more on the orthopedic side, more in terms of companies like Striker, Intuitive Surgical. These are areas that, A, the companies of all the stocks have come down, valuations have come down. And as people have postponed surgeries and a little uncertainty over Medicaid, these are great opportunities for high class, high growth companies that are trading in below multiples we haven't seen in probably over five years.

18:34Logan Bartlett: Right. So you're looking for areas where maybe they sold off or they're kind of more abundant, especially because you think the markets aren't going to do much until after the midterm. It's only a week. But you think we're in a holding pattern?

18:47Greg Ip: Yeah, I think we're holding pattern. We get the Fed tomorrow. I think you've got these companies have already kind of come out with where they're going to be for the next 12 to 24 months. And if you look at kind of their implicit growth rates, they're all going to be close to double digits. and the multiples are trading at, you know, at least with strikeouts 17 times, historically 24 times. Intuitives come down quite a bit, almost 20 percent of its multiples. So if you're looking for areas that, you know, perhaps are a little overheated, kind of like the AI trade that's come back and people are looking at that, these are some good opportunities to put money to work.

19:20Logan Bartlett: When do you think they're going to show big gains? Do you have to hold on to this for five or 10 years?

19:26Greg Ip: Oh, no. In our view, these are six months to nine months catalysts. I think especially in the case of a striker and intuitive, I think as soon as he's procedure volumes pick up and you kind of look at where some of the insurance falls through, I think you'll get the opportunity to make some good money here.

19:43Logan Bartlett: OK, what about Morgan Stanley? Why does that on the list as well?

19:47Greg Ip: So Morgan Stanley traded up, you know, 220 just a few weeks ago, back to the 180s now. I think interest rates went up. There was a fear that the IPO market would slow down. You're seeing more of that come back now. If it comes through, capital markets activities picking up, wealth management will do really well. So you add a sell-off basically in all the financials. And I think one of the highest quality ones here with a good dividend, great balance sheet. And really, Kelly, one of the things we look at, they're not that exposed to credit. So even if you get the bottom share of the economy decay coming down, Morgan Stanley is not hurt as much as some of the other regionals or some of the other larger banks.

20:25Logan Bartlett: It's a good point. Or if you have kind of a hiccup in the in the AI credit cycle or something like that. So in the software space where we've seen big moves, both down and then up in some cases, where are you buying and where are you staying away?

20:41Greg Ip: So if you remember, over the last year, we kind of rode the wave on Salesforce and Workday. Those have come back really nicely. An area that hasn't come back is Intuit. But Intuit needs to kind of fix their tax program. The stock really hasn't come back. And I think if you break up Intuit to some of the parts, it's worth a lot more. So the question is, what is management going to do? They're not really going to have LLMs do your taxes. It's more of a question of execution, pricing, and really how do those two pieces of their business really fit together, QuickBooks and tax. And maybe here's an opportunity that we think they can unlock some value.

21:19Logan Bartlett: Yeah, but do you think a breakup could be within the next six months?

21:24Greg Ip: You know, I think the pressure on companies in the SaaS or software world, if they're not responding as well or haven't kind of reflected what the others are doing, there will be pressure on management to do something. And I don't know if it's more buybacks or if it's more kind of do something else with their businesses. But right now, execution is the key in this company. And I think kind of they're on the watch list.

21:47Logan Bartlett: Yeah, they're down 50 percent after being a solid compounder for years and a 13 PE. We'll see if that unlock is coming, so to speak. Surat, thanks so much. Appreciate it.

21:56Greg Ip: Thanks, Ellie.

21:56Logan Bartlett: Surat Setty with DCLA. Coming up, one of the key focal points of next Tuesday's midterm elections is the Michigan Senate race. Contessa Brewer is there in Dearborn, Michigan, talking to voters about what's on their minds ahead of the election next week. Contessa.

22:13Greg Ip: Okay, well, and let me just tell you, in Michigan, one of maybe half a dozen states where we're seeing Democratic candidates, especially far left candidates, showing surprising strength. And what do you think is fueling that sentiment?

22:31Greg Ip: If my well-placed visual hint doesn't work for you because you're listening instead of watching, don't worry. We're going to talk about it in two minutes.

22:44Logan Bartlett: We're an agent 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.

23:11Greg Ip: This 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. There's a fire inside you you can't ignore. Stand still, not a chance. You're a lifelong learner who's come this far.

23:49Logan Bartlett: Now we are here to help you keep going further. Capella University, what can't you do? Visit capella.edu to learn more. We're counting down to next week's midterm election with a look at some of the key issues and battlegrounds across the country. In Michigan, Medicare for All is on the ballot and a progressive risks being the first Democrat to lose a Senate race in 30 years. But it's a tight one. Contessa Brewer is in Dearborn, Michigan, with more. Contessa?

24:17Greg Ip: Yeah, so, Kelly, this is part of the appeal of the progressive platform, showing surprising strength in a state that Trump won two years ago and where the nominee beat the establishment candidate for the Democrats in the primaries. But look, in this state, people are feeling pinched by gas prices. It's approaching five bucks a gallon on average in Michigan, where Trump's tariffs are having an outsized impact and where Canadian tourism has dropped 25 percent. Polls show neck and neck race between Republican Mike Rogers. He's a former congressman and progressive Democrat Abdul El-Sayed, a doctor who headed up the Detroit and county health departments.

25:00Greg Ip: The voters that we talked to made it clear they don't think that the current government is working for them. Most of the issues that we're concerned about is just a good-paying job, where you're getting health insurance, and where you're able to make the kind of income, where you're able to get into a home, pay for it, and be able to have some income where problems come up.

25:24Logan Bartlett: Our retirees are on a fixed income. They're faced with rising gas prices. They're faced with rising taxes. All of that affects them, even though they're still not in the workforce.

25:38Greg Ip: It's going to be very hard for my grandkids and my kids to have the American dream, like the opportunities that my generation had. and they're not, I don't think the majority of them are going to be able to succeed in that way that we did because everything has gotten so hard to do. Our recent mayor's poll in Michigan concluded about half of voters say their top issue is the economy and jobs, but many of the incessant local political ads feature Roger's support for Trump or his acceptance of big pharma campaign donations, which El-Sayed has said he won't accept any corporate donations. Or on the other hand, you have Trump and Rogers hurling aspersions at El-Sayed for his Islamic faith.

26:34Logan Bartlett: Early voting is already underway in this state, Kelly. Have data centers been an issue? Data centers come up, and I mean, because they're proposed for this,

26:46Greg Ip: The way that that's playing out is what's happening with utilities. Again, we go back to the cost of living. And Mike Rogers was just saying in a campaign event this weekend, look, green energy is on the ballot. You've got AOC and Bernie Sanders, who campaigned for El Syed here in Michigan, proposing a green energy tax that's going to raise your utility bills and tack on 20 cents to a gallon of gas here. And the data center issue is a big deal because people are worried about the impact on their utility bills. But I think it comes behind just those, I'm going to call them kitchen table issues of, are jobs going to be there?

27:27Greg Ip: Are the tariffs going to raise the cost of everything? And how much am I paying for car insurance?

27:33Logan Bartlett: And I heard that coming up again and again on both sides. Contessa, thank you very much. Appreciate it for now, Contessa Brewer in Michigan. Let's get to Frank Holland for the CNBC News update. Frank.

27:43Greg Ip: Good afternoon, Kelly. The family of Alex Preddy, the Minneapolis man shot and killed by immigration agents in January, is accusing the federal government today of stonewalling them over the investigation into his death. A lawyer for the family says the Department of Justice has refused to share even basic information about the case. The lawyer claims that's a violation of the Federal Crime Victims' Rights Act. The DOJ has yet to comment. Flavio Bolsonaro has reportedly left Brazil and is on his way to the U.S. after losing Sunday's presidential election to incumbent President Lula. That's according to Brazilian local media, which reports he was afraid of being arrested.

28:18Greg Ip: Bloomberg reports the federal police forced cancel Bolsonaro's passport after he missed the deadline to surrender it. And a dinosaur skeleton, which is a smaller relative of the T-Rex, just sold at Sotheby's for more than$47 million. That's far higher than expected. The skeleton, nicknamed Jody after a Montana rancher who found the fossil in 2019, sold just short of the record of$50 million paid for a T-Rex named Gus at Sotheby's auction over the summer. Kelly, back over to you.

28:43Logan Bartlett: So cool. What a great story. A rancher finds it seven years ago. Incredible. Thank you, Frank.

28:49Greg Ip: Thank you.

28:50Logan Bartlett: Coming up, our interest rates, get this, too low. I know, don't throw things at the TV. Greg Ip from The Wall Street Journal thinks they might be, and he'll join us here next to explain. with just over 24 hours until the penultimate Fed decision of the year. We're back on The Exchange after this.

29:11Logan Bartlett: Welcome back to The Exchange. The Fed's two-day rate meeting kicks off today. And while no change is expected tomorrow, according to CNBC's latest Fed survey, most people still think there's more work to be done on interest rates. Steve Leisman is here to explain. Hi, Steve.

29:25Greg Ip: Yeah, and I think we're going to talk about that in just a minute with Greg Yip. But right now, the CNBC Fed survey finding the Fed does have work to do, but it's not going to do it in October. Ninety three percent. If you take a look at our results, expect no change at this meeting. But 76 percent are looking for a hike in December. And that would bring up next year as well. The funds rate of four point one nine. They're looking for additional in addition to the quarter in December, another 43 basis points. Call that two quarter point hikes. Rich Bernstein, global head of macro investing at Janice Henderson Investors, writes in their hesitancy to raise rates is unfathomable.

29:57Greg Ip: after an extended period of monetary and fiscal generosity, with nominal GDP running 6 % to 8%, and when the leading indicators of inflation are uniformly warm to hot. Well, what does the Fed ask you to slow inflation down? Twenty-three percent say it's to slow the economy just somewhat. Seven percent say down to potential. That's 1.8 % to 2 % is the general fielding. But look at this. A plurality of 40 % say you've got to go below potential to get down to 2 % target. 27 % saying the Fed doesn't need to slow the economy at all. In the ongoing debate about what has caused bond yields to rise, respondents have collectively blamed higher growth, inflation, debt supply, and the Fed outlook at almost equal percentages.

30:37Greg Ip: So, Kelly, the answer to that question is E, all of the above.

30:41Logan Bartlett: All right, Steve, come on over because our next guest agrees that rates are headed higher. In fact, he says they look kind of low right now. And at today's level or higher is more like the new normal. And that's the focus of Greg Ip's piece today in The Wall Street Journal. Why? In a nutshell, artificial intelligence. He writes, growth is solid, stocks are near a record, and big speculative companies like Anthropic are raising billions of dollars. Let's bring in chief economics commentator for The Wall Street Journal, Greg Im. It's great to have you here.

31:08Greg Ip: Thanks, Kelly.

31:08Logan Bartlett: And this is in your newsletter.

31:09Greg Ip: That's right. Yeah, it actually wasn't in the journal this morning. It was in a newsletter, which I hope you'll subscribe to, Kelly. Anybody can subscribe for free. But what I'm trying to do is bring things to people's attention that they really ought to know. And today, what I want folks to get used to the idea of is stop thinking about today's rates as somewhat high. They're not. And what I'm trying to do is actually look at some market-based measures of the so-called neutral rate. That's the rate that prevails over time. That's neither inflationary nor recessionary. And that number, based on a very popular model out there called ACM, if you want to look it up, is 4.3%.

31:43Greg Ip: We're below that number. So if you want to be a purist about it, policy looks kind of stimulative. And if you look at the way the markets are behaving with stocks near a record, companies raising all this equity and debt capital, and with growth coming at 3 % or more this quarter, rates sure don't look restrictive. And I think that is caught most in Kevin Warsh's mind.

32:04Logan Bartlett: There's something, Steve, a guest said yesterday. I can't remember where, but that rates are the new risk on trade, meaning, and I think this is kind of what Greg's talking about. Rates have been rising when there's periods of enthusiasm, signs of expansion in the economy. Now, yes, of course, on some level that makes sense. That proves Greg's point, by the way.

32:20Greg Ip: That underpins his idea.

32:22Logan Bartlett: But because sometimes you get these periods, which was kind of the preceding few months where rising rates are risk off. You know, it's more oil driven. It's more, you know, inflation driven. It's the deficit. If they're rising because there's just a lot of demand for credit out there in the economy and there's a lot of competition for that, then we could be back like in the late 90s. I mean, the 10 year was over 6 percent in 1999, I think.

32:40Greg Ip: It could be. I just want to add one wrinkle to that notion. The government, among the things it does very poorly, does a very good job of telegraphing its borrowing needs. And that's why we pay so much attention. And any time the government surprises the market, there's a major reaction. There was, I think it was August of 24. Yes. The thing that was the surprise was the AI debt component. So the market is really just digesting that now. I don't believe it will be a surprise forever. I think at some point it will digest this and be able to figure out a way to fund it. The other thing that is happening that you've seen some of this data, we've talked about this on this show, more and more, how do you say it?

33:18Greg Ip: Hot hands are in the Treasury market. It's more and more hedge funds, less stable institutions. It's not a big percentage, but it's a bigger percentage than it was. So that's provided more volatility. One more component that's not in Greg's great column, by the way, which is wonderful. Newsletter. Newsletter. Sorry. Column newsletter. Sorry. I've got to get used to it. Is this. If Fed Chair Warsh is going to provide less certainty about the outlook for rates, the market is going to charge a higher premium. So some component of that premium is growth. Some is inflation. Some is AI debt. Some is government debt.

33:51Greg Ip: There's another piece that's uncertainty.

33:53Logan Bartlett: How much higher, Greg, does that mean that rates might be? Because this has implications for mortgage rates and everything. Again, it's not stopping people from getting capital, right? The people who have big demand for it are unfazed. But I worry that it to quote Barry Knapp, that it's exacerbating the K in the economy, that high Fed funds rates is reacting to demand for AI. but in reality making financial conditions tighter and less affordable for a lot of the rest of small businesses and everyday Americans?

34:21Greg Ip: Well, you can only have one interest rate for the economy, and that rate will by definition be too high for some and too low for others. There was a line in Steve's survey that caught my eye. It was one of his respondents was pointing out, we've got 6 % to 8 % nominal GDP growth. That's real growth plus inflation. And I actually highlighted this also in another newsletter. And if you actually track nominal growth over time, it tracks the 10-year yield very well. And that kind of makes sense because, like Steve was saying, in an environment where you're sort of like risk on, the 10-year yield is both responding to demand for capital, that's growth, and inflation.

34:54Greg Ip: And that's the nominal piece of nominal growth. And what that relationship tells you today is that yields at 5 % aren't really that high. They're actually kind of low. Now, you're asking me where are rates going? I have no idea. But what I'm trying to sort of like socialize here is the idea that a 4 % to 4.5 % federal funds rate is kind of normal. So we should expect higher numbers when the economy is overheating, lower numbers when it's in recession. But if we're just kind of like like putzing along at normal growth, that's a normal number. And for, you know, a lot of today's generation, it feels abnormal because all they can think of is the post GFC period when rates were somewhere between zero and two or three.

35:29Logan Bartlett: And nominal growth was, too. Yeah.

35:31Greg Ip: But Steve, back when we were writing about the dot and you and I were all writing with the dot com boom, I mean, Fed funds was four or five, six percent. Right. And you were saying in the 90s, yields were what, 7 percent? Much higher demand for capital. And you didn't have that demand for capital back then. You did have at the sort of end of the dot-com boom, they finally got into doing a lot of capital. But there is a huge demand for capital now. We're figuring out how to fund this. And I think we will be able to fund it with hopes that this ends up paying off because there's a deflationary or recessionary price to pay if it doesn't.

36:02Greg Ip: But I think that we had another person quoted in the survey saying, get used to five because five is the new normal when it comes to the 10 year. And the other way to think about it, and this is in Greg's newsletter, which which which is that you think about it. Well, what is the 10 year? It's a collection of two years. What's the two year collection of Fed funds? So that means that over the horizon, that's the expectation. and people, you know, spend a lot of time and spend a lot of money trying to disaggregate the 10 year. It's going to be all of those things. And if you look at our survey, we asked which component.

36:38Greg Ip: It was like 25, 25, 20 on all of those different components.

36:41Logan Bartlett: I guess the only last question I'd ask, Greg, then if this is the new normal is that then what or so what? Or, you know, is there a reckoning still to be had over that?

36:50Greg Ip: Well, no, there's actually a very positive side to this, because an economy where higher rates are the new normal is also an economy that's growing faster as the new normal. The demand for capital is the other side of, like, lots of great innovative opportunities there. I mean, I've seen forecasts. Most people have now raised their long-term growth forecast for the United States to somewhere north of two instead of below two. I've seen plausible estimates of two and a half. Maybe it's higher. Again, it won't solve the K-shaped problem. But over time, real growth of those levels will spread benefits to a lot of people.

37:22Logan Bartlett: I would argue it will solve those problems over time. I worry more about it, though.

37:25Greg Ip: I've got to say, when I look at the need for small business to compete with large business, which can afford large language models and all that stuff, and also with the tariffs, we've talked about this. I think that this idea of we need two different funds rates, if you're just a small business trying to borrow to expand, and you have to compete with Anthropic, you know, don't play that game because you can't win.

37:49Logan Bartlett: The argument that Barry Knapp would make is keep or lower the funds rate and tighten the balance sheet, right? Like if you want to tighten policy, sell off some of the bonds. The balance sheet is so bloated. Drive up the long end because the people borrowing at the fives or longer are those big players who can deal with it. Whereas the small business is more levered to kind of the overnight, the shorter term rates.

38:08Greg Ip: I don't think it really matters. I mean, you know, whatever the Fed does, Scott Besson from the trade will come in and do the opposite or something like that. So cynical, Greg. But I guess what I'm saying is that, like, first of all, the surveys don't tell us that there's a shortage of credit, not bank credit, not like, I mean, small and medium sized businesses. There will always be some who can't get it. But by and large, financing conditions are pretty good out there. Right. When and higher normal rates means higher across the curve, higher short term, higher long term. There's not some magical way to avoid higher capital by playing some game along the curve.

38:42Greg Ip: But I think that the positive side of that AI boom that's driving the cost of capital is it's now incredibly cheap for people to start their own business using an AI model now. So that's positive. I just want to make a quick asterisk here, which is that I don't think Greg is saying 5%. I think we're talking about ranges here. And I think we just learned there's a bottom of this range here, which is sort of 5%. There's a top that looks like it's 5.5 % on the 10-year. Nobody can peg an interest rate. What you can peg is a range with which it'll trade.

39:09Logan Bartlett: And for others saying 6%, they would wait to buy it. Because, again, now we're just—

39:13Greg Ip: Take those words back, Kelly Ellis.

39:15Logan Bartlett: I know. Imagine mortgage rate, 8 % in that environment. I don't want to be there. Stephen, Greg, thank you. And be sure to—oh, I thought we were going to promo the newsletter. No, be sure to catch our special coverage of our program tomorrow. Tomorrow's Fed decision. Brian Sullivan and I are headed back down to Washington for the big event. Coverage kicks off at 1 p.m. Eastern. The rate decision is at 2. The press conference is at 2.30. Don't miss it. In the meantime, go subscribe to Greg's newsletter. Coming up, OpenAI, Sam Altman taking the stage at Oracle's annual conference just a day after Anthropics public IPO was filed.

39:46Logan Bartlett: We'll bring you the highlights from Las Vegas next.

39:53Logan Bartlett: Welcome back. Oracle announcing new partnerships with Google and with OpenAI at its AI World Conference in Las Vegas today, where Sam Altman was just on stage a short while ago. Seema Modi is on site and has the highlights in today's tech chat. Seema?

40:07Greg Ip: Yeah, that's right, Kelly, OpenAI CEO Sam Allman joining Oracle's co-CEO Clay McGurk during his keynote. Widely seen just from a step back as a vote of confidence for Oracle, given that OpenAI is its biggest customer that has that$300 billion contract with a cloud storage company. On stage, Allman talked about its expanded partnership with Oracle in which its jalapeno chip, which Allman described as the best AI chip in the world for inference, would run on Oracle's cloud. And he also talked about how Oracle will be integrating OpenAI's tools into its application stack. Altman said this sort of reinforces OpenAI's big push into the enterprise, of course, seen as a key source of growth going forward for the company just one day after its competitor Anthropic dropped its own S1 in which it showed growth in enterprise.

40:56Greg Ip: Altman's big message, though, at the end of the chat with Oracle's co-CEO really revolved around security. Listen in. I find myself shocked at just how many vulnerabilities these AI systems are finding and what it's going to take.

41:12Logan Bartlett: Just the incredible, the Herculean effort that it's going to take to get ahead of us.

41:19Greg Ip: Altman adding that it may be too hard to patch every bug one by one and therefore new kinds of services constantly monitoring traffic may offer value. you. That was sort of his message to the audience where there are about 15 ,000 people in attendance here at Oracle AI World, Kelly.

41:35Logan Bartlett: I think we're all surprised, but it's even more surprising to hear Altman be surprised, I guess, at how many vulnerabilities they're finding. And he made

41:42Greg Ip: that point, by the way, on the stage. He's like, it's ironic that I'm the one giving you this advice to be ensure that you protect your AI and that security could be a risk, but also acknowledging that he's got to say it. It's something that does need to be acknowledged at enterprise customers. Even folks like you and I need to take it seriously.

41:58Logan Bartlett: Yeah, I think it's a message that Oracle is trying to use, you know, as a marketing message as well, to say we're here to help protect you. But in any case, deepening the partnership today. Seema, thank you. Seema Modi, appreciate it. Coming up, tech the high flyer again today in the markets. But energy is the clear winner for the month, up about 11 percent. Our market guest says despite gaining 50 percent this year, this name is still cheap. And we will reveal it when the exchange comes right back.

42:28Logan Bartlett: Stocks are positive for a second day in a row. Dow barely hanging on to a gain, but Boeing is a big drag there. The Nasdaq outperforming again up more than 1%. Our next guest says there's clearly a FOMO moment here and that solid diversified companies are the way to go right now. Here to talk all things not AI is Charlie. I thought I might call that a segment, Charlie, the non-AI segment. Charlie Babrinskoy is the vice chair of Ariel. You're allowed to talk about AI, of course, but I imagine that you would be frustrated if that's all that we were trying to discuss.

42:57Greg Ip: It seems like a lot of the people that I talk to, that's all they want to discuss, including the eighth graders that I teach once a month in an introduction to the stock market class. They don't want to hear about oil companies or banks. They just want to talk about AI. And that typically is a sign that a segment is overbought. When the public is infatuated, that's tends to be not a good sign that you want to follow.

43:22Logan Bartlett: Fair enough. But I was talking with Ed Yardeni yesterday about this, and this will really make the hairs, I think, on your arms or legs or whatever, stand up, maybe the back of the neck, I think is what you're supposed to say. But anyway, I asked him if the NASDAQ 100 was a better index fund than the S &P for young investors. This is something that Jim has talked about here. It's in his book. And Ed said that, honestly, he agrees. You know, if you think about the technology and the innovation that we're seeing and these platforms and this adoption is just getting started. And that was kind of the message in Anthropics filing as well.

43:54Logan Bartlett: I mean, I understand why the eighth graders are excited.

43:58Greg Ip: Yeah, the challenge with that is that those NASDAQ companies are very dependent on the economics of AI working. And fundamentally, if it turns out that this$700 billion that we're raising that we're going to spend on data centers and rolling out AI doesn't have a good economic return on it, then a lot of companies down the line in the NASDAQ are going to be hurt. So we think it's fine. If you own the S &P, if you own NASDAQ, if you own any of these indexes, you are getting a lot of AI exposure. That's fine. I'm not saying you shouldn't, but I am saying you should diversify that risk with non-AI companies.

44:36Greg Ip: And you know some of our favorites in energy and home products and consumer discretionary and even bonds. For the first time that I've known you, Kelly. I'm actually saying now is a decent time to buy bonds, which you've never heard me say before.

44:49Logan Bartlett: No, I said, wait a minute. Let me just get the stocks out of the way for a second. Quickly, you still like J &J. It's up 29 percent this year, just bites them ups and downs. You like Lockheed up 31 percent this year. Again, the best of the mag sevens up nine. So Chevron up 52 percent. You said if you want to take go more out on the risk curve by APA, it's up only 11 percent. Fine.

45:09Greg Ip: But 111 percent. Well, OK, typo here. Typo here.

45:13Logan Bartlett: Typo. Thank you. 111 percent. Let's get to bonds. So so now is an OK time because because we were just talking about how 5 percent might be the new floor, not the ceiling.

45:24Greg Ip: Right. So for 25 years, fundamentally, bonds have been a bad investment. They have had a negative return, literally a negative return for the last six years. And it's because people have been surprised by the trends in deficits, by the trends in inflation, which are always bad for bonds. We got to the point last month with a 10-year U.S. Treasury, about 5.3 percent, where the actual real yield, expected real yield after inflation, was about 3 percent. That's very attractive on a long-term basis. And it has come because, frankly, bond investors are tired of getting kicked around. They are tired of having inflation eat away all their income.

46:07Greg Ip: And so they are demanding a higher rate, which they can get because there is so much demand for credit. A lot of it coming from AI, but a lot of it coming from European countries that have just as bad a deficit problem as we do. So the point of that, we finally, for the first time in two decades, we have decent expected returns in the bond market.

46:26Logan Bartlett: Well, that is the best place that we could leave this. And again, like you said, this is prices move. you've got to change your mind, and that's what's going on here. 3 % real yield, you were saying, is the key there. About 5.3%. We're a little below that level on the 10-year now. Charlie, thanks. Great to see you today. Thanks, Kelly. Appreciate it. Charlie Babrinskoy with Arielle. And that's it for us. Thank you for watching The Exchange. Energy Secretary Chris Wright is coming up next on Power Lunch. I'll join Brian Sullivan for that after this quick break.

46:57Logan Bartlett: You've been listening to The Exchange. Make sure you're subscribed to get each episode every day, same time, same place. This episode is brought to you by Schwab Market Update,

47:07Greg Ip: 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.