Navigating Rising Rates and the Trump-Xi Summit 9/24/26

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0:39and 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. You're listening to The Exchange. Here's today's show.

1:04Thank you, Scott. We are well off this morning's lows despite higher bond yields and Oracle raising some questions about the AI build out. I'm Kelly Evans and welcome to The Exchange, A huge reversal in stocks in the past hour or so on a report that the U.S. and Iran have discussed a phased deal to reopen the Strait of Hormuz and end the U.S. blockade. You can see the market action. Dow still negative. Same for the Russell. S &P trying to go positive. Same for the Nasdaq. Oil prices dropping back on that headline, but not yields, though. The 10-year sitting at 514 as we head back towards those session highs from this morning around there.

1:38maybe 5.15 we briefly pierced. The 30-year touching 5.44. That's a 23-year high. Oracle's also weighing on the tech trade today. They're invoking force majeure to delay payments on a massive data center project. We'll have more on that report with Siva Modi ahead. The shares are down 4%. But Meta is popping again, up another 3.5 % today and up 34 % in September for its second best month on record. We'll talk to Ken Gorelski in a moment about whether they're now making the AI build-out more expensive for everybody else. And could superintelligence, as the president calls it, be what brings the U.S.

2:13and China closer together? We'll have the latest on President Xi's first formal U.S. state visit in 11 years. But let's start with this massive and ongoing move in yields. The 10-year up 50 basis points in a month, up 15 basis points yesterday alone. Stephen Whiting is the chief investment strategist at CIO Group. He joins us for today's opening exchange. Steve, good to see you again. Good day. Is this a breaking point for equities? Is it about to be? Are you impressed how relatively well they're taking it? I think history shows these types of moves in the bond market that are associated with Fed tightening cycles, they really don't break the back of the equity market.

2:52When new tightening cycles have taken place, we've had expansions on average that have lasted another five and a half years. What we could be setting up for, however, is a period in which the Federal Reserve goes aggressive in a time where we have powerful investment growth driving the economy. And then it stops and policy is out of line. So I think that's the scenario I would be a little worried about. And also say there's really this unhealthy view that whatever the oil price is, whatever shock Iran delivers, we've got to adjust monetary policy for it. I mean, you know, what if the oil price for$200?

3:28What would be the right interest rate then? I agree. I don't think that oil at 200, if anything, you could argue for accommodating that. You could argue that$200 oil would hurt the economy and the consumer so much it would need support, not tightening. But I don't know. They take a different view. My hypothesis is their rate hikes are pushing up yields. But, you know, I'm no expert. I don't know. Maybe there's a different point of view on that. Maybe it is because the economy is booming. Is that what you think? Well, I would say I think the Federal Reserve has more to do with this. Really sentiment about how the Fed will address inflation.

4:05And certainly giving us more restraint on average, being a little harder on us than the Powell Fed over the last five years. Maybe that's a reasonable approach to take. But this idea, and Kevin Warsh brought it up, that there are a lot of hot spots around the world. And maybe we're going to have to tighten because, hey, inflation is always a choice. Sometimes it's not a choice. Shocks, wars have all been periods where monetary policy can't adjust so quickly. And take a look what's happened to rates. Most energy supply shocks have really had the preponderance of their effect in one year. We have hired nominal and real yields out to 30 years.

4:47So monetary policy is always going to move in a way that lasts much longer. It is not really timed closely to being able to stamp down on a shock. All I know is the last time, not the last time, OK, it's mid-August. Yields are starting to break out. The Treasury comes out and out of the blue announces we're going to increase the size of our long-term debt repurchases. Since then, yields are higher. Are you expecting any more measures to intervene? And again, I'm not saying this is an emergency. Stocks are fine. They're practically positive today. It's not even clear this matters. And like Ed Yardeni and others have said, five and a half on the tens could be next, could be 6%.

5:23We're talking about 6 % with Ryan Dietrich. I'm not saying that's an emergency. It's them who responded to it in August like it was. So I'm just wondering if there could be more moves to come. Well, if you want lower yields, spend less, borrow less, that's different from just changing the impact of where you borrow on the curve. But I think that the Fed is just more important than this. That, again, the Worsh Fed says we are going to do something more active about inflation. We're going to be less patient. And what you've seen from the bond market is it's moved out in yield into the distant future.

5:59So now, in addition to the quarter point rate hike that we just saw, we have 95 basis points of additional tightening priced in. Now, if you take a look at where we are on the yield curve, 123 basis points yesterday, that's fine. But when you think about the spread of 100 basis points from 10-year yields over the policy rate over the longer run, it really doesn't go quite as far as we would be if the Federal Reserve was, you know, on its way to 4.5%. So that's the thing. We just haven't necessarily seen an unusual yield environment for the environment we had 20 years ago. It's very different from this eternal crisis environment we've had ever since the GFC.

6:38Yeah. And we see the flattening there for the yield curve. really that's been happening all year long, 25 basis points. That's a headwind, as some were pointing out to me this week, for the financials. Could be one of the reasons they've, I don't know, had a little bit more of a softer footing lately. Quick last question, Steve, and this is kind of insane to ask, but the launch of Muse, which could do for the consumer and the whole CPU AI value chain, what Claude, what Anthropics Tools did a year ago, could that literally be behind the rise in treasury yields to any extent? I don't think it's behind the rise in treasury yields.

7:16I do think, again, this broader growth investment spending for AI has been meaningful behind it. It's a time of strong government borrowing and corporate borrowing at the same time. But it means a lot for, let's say, financial companies that, hey, rates are going up, but not their deposit yields. You know, again, consumer choice actually can be, you know, know, very potent if we have AI agents helping, again, consumers make the right choices. That may mean problems for some of the, let's say, the regional banks that don't adjust. We have to go. I was just going to ask if you have any concerns.

7:47You know, there's every time we see these Oracle headlines, we'll have more on that later in the show. But is this a shoe to drop, so to speak? In the end, we're going to find out that AI-related CapEx cannot continue at a 65 % growth rate. We're going to see that not just these hyperscalers, but literally the hardware companies, which have 30%, they're estimated 30 % of all future corporate profits. It's going to be an overstatement. We're going to see a lot of movement in the economy, a lot of creative destruction around that. Well, I'm just queuing up our next guest, Steve, thank you very much for now.

8:26I appreciate it. Steve Whiting of the CIO Group. Let's stay on the topic because higher yields could hit the AI build out. Could, could, maybe, we don't know. This also comes as some on Wall Street are asking if more companies will have to ramp up their CapEx now, speeding up product rollouts following the blockbuster debut of Meta's Muse. With us is Ken Gorelski. He's a senior internet analyst at Wells Fargo. It's great to see you. Thanks for coming here. So you just heard Steve saying like there's no way this pace of investment is sustainable. And now, I don't know if it's you, but some are wondering, could it actually increase based on this arms race?

8:58Well, I think what we've seen is a massive increase in investment. And for Meta in particular, there hasn't been much to say, to show for return, right? If you look at Amazon, you look at Google, yes, there have been handsome returns on broadly on reselling of compute. But for Meta, they're not in that business. And so for Meta has had a tough time in the summer, this stock, you just couldn't give it away. And now there is a product, right? Three weeks ago, or just over two weeks ago, Muse was launched. I would say this is the dawn of consumer AI. How much market cap? I don't mean to put you on the spot.

9:37Do you think Meta's added in the past two weeks since its launch? I mean, the stock is up 20%. So we're talking$300 to$400 billion dollars. Three to four hundred billion dollars from the launch of one. I mean, this is what innovation does if it really grabs the moment. Well, look, again, the stock had been depressed. Free cash flow been falling. All we saw was more and more capital investment and really little to show for it. Right. And so the market was saying, what is this product? And and now we see a product like it's very early days. There will be competitors. We would expect open A.I. broadly expected in the next week to release a competitor.

10:15Which we'll be covering that on this fine program, by the way. So we're excited to see how they answer that. And Google, I mean, Google has to act, right? This is very important for them. This is kind of, I would say, can be very competitive to their search business. And so we would expect plenty of competitors here. Where are you, remind me, price target on Meta? What happens with estimates and earnings now? Are they going to disrupt a bunch of Internet names. Yes. So we just raised our price target and we're in the high seven 90s now, just just under eight hundred dollars. The stock has moved very quickly towards that.

10:52And so this is a bit of a moving target. I think what's clear on Meta is that we have not we now the market is starting to incorporate this opportunity. But in financial estimates, those numbers are not in there on the revenue side. What I can tell you is for every point of, say, Google search revenues that Meta is able to take is about three points on their earnings line. So we think there is a fair amount of upside. This is still not an expensive stock, right? We're talking just shy of$40 of earnings in 28. And that's before any really upside from or monetization from Muse. And they paid what back in the day for Alexander Wang's company?

11:29It was like$14,$15 billion, which seemed like an insane amount of money. It seems like a handsome return at this point. And now that you're saying they've gotten 300 billion in market cap, the other interesting wrinkle that told you this might have been coming, did you see their comp plan like a year or so ago? They had this like crazy moonshot. I can't remember the details now, but I remember I couldn't hardly believe it at the time. It was like the stock would have to like quadruple or quintuple and suck and all these people had these huge equity, huge upside. They evidently you'd look at that and go, there's no way.

11:59Well, there is a way because they must have known that this could really take off. That's right. They've made a big bet here. They made a big bet by investing early and very aggressively. And this bet, early days, early days, to be clear, is paying off. Yeah. So what happens now? I mean, you mentioned Google and how they might be taking some share from Google. I think it's everybody hates when we talk about that because they say no one's ever taking share from Google. Forget it. There's no problem there. Is it time to reopen that? I think this is what is happening, which is consumer AI, like discovery is changing on the Internet.

12:36Everything in discovery started with search for a decade plus, right? And I think this, and we saw early days with ChatGPT, and that was more chat. But what we're talking about now is commercial intent shifting away from search into agents, into AI assistants. And that is a challenge to search, absolutely. I'll give you an anecdote. In the back, the hair and makeup team thought you sounded a little like Andy Garcia. And I thought I didn't know who that was. Now I realize I know him from Ocean's Eleven. So they talked out loud to their chatbot and said, you know, tell us who's Andy Garcia. And there was no Google involved in that entire.

13:13That just happened about 15 minutes ago. So that discovery cascade has huge implications for companies that built their businesses off of that platform, does it not? Can they shift over to chatbots and that MetaMuse discovery agent? I do think that, again, I think that chatbots will evolve into agents and AI assistants that will be running in the background, be very useful for consumers. I'm not saying that search goes away in any way. I mean, it's a$300 billion business. It's a great business. But I do think it's evolving. And I think many of these new tools will take the place of certain search use cases in the past, including, again, items with commercial intent.

13:59Anything where you're, I want to do any trip planning. I want to evaluate my consumer billing, whether it be insurance or cable companies. All of these things are use cases. All right. Ken, I appreciate it. Once again, and MetaShare is up 38 % nearly this month. Ken Gorelski from Wells Fargo. Coming up, the U.S. needs to regulate AI before it can strike a long-term deal with China, or so says our next guest. He's here to explain why, as the president's bilateral meeting with China's Xi continues, plus OpenAI disclosing another hack. This time, its agent breaking into an Australian government website.

14:36The details and international fallout ahead on The Exchange. This is The Exchange on CNBC.

15:15We'll be right back. 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 And subscribe at schwab.com slash market update podcast or find Schwab Market Update wherever you get your podcasts.

15:57Welcome back. President Trump's bilateral meeting with President Xi at the White House has now ended. Megan Casella is there with the highlights and the headlines. Megan? Kelly, a smaller bilateral meeting with the president began just before noon in the Oval Office. That then opened up into an expanded meeting with the Chinese vice premier, foreign minister, commerce minister, and then a number of members of the Trump administration as well. That just wrapped up in the last few minutes. President Trump telling reporters it was a, quote, great meeting, and he just took President Xi inside Marine One, the presidential helicopter, on the South Lawn.

16:29That's happening now. It follows a lot of pageantry here this morning,

16:36of the visit so far following the president's decision to ban three national news outlets. Their access was reinstated in the last hour, but for now, TV pool coverage remains suspended. But, Kelly, on the policy front, there have been some developments so far this morning. On trade, Treasury Secretary Scott Besant said the two sides have agreed to extend their tariff truce for another two months, so that brings us into January. On AI, President Trump posting this morning that he wants to leave AI exactly where it is, but President Xi spoke about needing to make sure that it does remain under human control.

17:07And then on Iran and Taiwan, some wire headlines citing Chinese state media in the last few minutes here reporting that President Xi is urging the U.S. and Iran to return to negotiations as soon as possible, and that Xi said China hopes the U.S. adheres to the position of opposing Taiwan independence. So no readout from the White House on those points just yet. Kelly. All right, we will look for that. Megan, thanks very much, Megan Casella. Joining me now to discuss the issue further, Derek Scissors, Asia economist at the American Enterprise Institute, and Julian Gewirtz. He is a former senior director for China and Taiwan Affairs at the National Security Council under President Joe Biden and a senior research scholar at Columbia School of International and Public Affairs.

17:47Welcome. You're right here. And your point of view is that, well, maybe before I get into the AI issue, what are your thoughts so far about how this meeting, I guess we call it, has gone? Yeah, well, from my perspective, the most extraordinary thing is the degree of pageantry, the optics that President Trump is putting on for President Xi, and that candidly seem to be the core point of this visit. You know, there isn't a tremendous amount of substance that the two leaders are discussing, but President Trump seems to want to show a degree of deference to President Xi and really to make him feel at home in Washington.

18:19What I'm asking is, well, what is the United States getting in return for all that pomp and circumstance? Do you have any theories about that? Well, you know, my own view is that at this point, President Trump is enjoying the pageantry itself. He's actually not looking, I think, to extract major new concessions from Beijing. And instead, he's looking to change the channel on some of the other events that are in the news, like the Iran war. And candidly, Beijing is willing to play into that because from their perspective, that decrease in tensions, that stabilization allows them to buy time. Derek Scissors, kind of, I want to make a cut, cut through this.

18:53What do you think is going on here? What are your thoughts so far? I mean, there's so little substance to grab onto. No offense to the reporting, but we all could have predicted that those were the results of the first day two months ago. So there's so little substance going on that it is about the pageantry. I agree with Julian. I find it unpleasant that the president is behaving this deferentially. I don't know why it's in the U.S. interest to do that. I'll add a little bit of spice, I guess. I think most of the Republican Party agrees that it's unpleasant. And we're setting up a political clash between the president and a lot of his supporters.

19:33We had Michael O 'Hanlon on yesterday of Brookings, Derek. I asked him for his theories. And he thought he actually invoked Kissinger, believe it or not. And he admitted, he said it wasn't planning to go in this direction, but said that Trump has some Kissinger-esque instinct when it comes to dealing with great powers. And might there be an element of truth that it's better for us to show a deferential attitude to China than not? Well, I think my first objection is that Trump has an element of deference to dictators. The EU is economically a great power. There's no element of deference there. Meanwhile, he praises North Korea's Kim, where North Korea is not a great power.

20:16I think that's an important distinction. I don't think this is positioning the United States in a great power competition or even cooperation. I think this is President Trump's personal orientation. He personally likes pageantry, as Julian said, and he likes Xi Jinping. Do you think, though, that there's a strategy behind all of this? Meaning we saw during the first administration that overtures to North Korea were also intended to maybe kind of get towards some kind of, I don't know if deal is the right word. You know, and in China's case, as you pointed out, and I've repeated this common number of times from a few weeks back, but they do have significant leverage over us on the issue of rare earths.

20:54I mean, in a weird way, what we learned from the terror fight is that we had to back down. I don't think we had to back down. We chose to back down because we didn't want to pay the price. And rare earths is a good example because the administration is moving to reduce Chinese reliance. So you might say, oh, well, they're buying time. Julian just said this about China. and we're going to take a stronger stance next year. First of all, I don't believe that. But second, we're doing the opposite on pharma. The administration is backing away and let the pharmaceutical industry tie itself closer to China, giving China more leverage over the United States.

21:28So if we are looking for cooperation with China because we have leverage over us, it's a terrible long-term strategy because we're ensuring that we're going to have to do this for years to come. Julian, turning to the issue of AI, which we were talking about to kind of set up this discussion where you're saying, maybe you can explain it, that we need to regulate AI in order to kind of come to some sort of agreement with China on it. I mean, do we need to come to an agreement with China about AI at all? Well, you know, I think most people would say it's common sense for the two AI superpowers to be talking to one another about this new technology that's exploding and developing so quickly and where the public in the United States is quite concerned about it.

22:06The question is really, I think some people have said we need some sort of immediate AI truce with China. And my own view is that's not realistic and it's not going to happen, partly because neither Beijing nor Washington is actually ready to regulate this technology in a systematic way at home. And from Beijing's perspective, I was very struck that when all the calls for an AI slowdown started cropping up here, a number of Chinese interlocutors said to me, we hear this as calling to slow China down, trying to freeze in place the American lead. And that's just reflective of the very low degree of trust.

22:41So while it's good to be talking and to have this issue on the agenda, I think our expectations should be very, very modest. But what should we be trying to achieve with this issue? I actually don't even understand the goals. So I think the number one goal, I would say, is that an incident, a crisis of any kind that develops in the AI space. For instance, we saw the Hugging Face incident where that open AI model in testing escaped its guardrails and attacked an external website. What if that happened to a Chinese website? Right now, there's no ability between the two countries to communicate on these issues.

23:14So that's why I say it's sort of common sense to have a channel open, but to have modest expectations. All right. We'll leave it there. But Derek, I guess a final comment. Is there anything further that could or should come out of this or is there anything? And I should ask both of you, but on the Taiwan issue, any movement that you would expect? I mean, I there's going to be another meeting. I think Julian said this right at the beginning, that President Trump likes the pageantry. He likes meeting with Xi Jinping as a distraction. So they're going to set up another meeting. And you might say, well, another meeting, who cares?

23:46It matters because when President Trump means President Xi, he wants everything to be smooth, which means orders go out to the administration not to take certain policies and to adopt other policies, to take a more positive, friendly stance towards China. So the fact that there's going to be another meeting in a few months or in six months means we're going to get a continuation of the truce, not because they agreed to a truce, as Secretary Besson said, but because there's going to be another meeting between the two guaranteeing an effective truce. Yeah, that's an interesting point. Guys, thank you both.

24:17Really appreciate it today for your thoughts and analysis there in the Trump-She Summit. Coming up, Oracle shares are falling after the company sent a force majeure notice to the developer of its data center project in New Mexico. They're looking to delay payment if it doesn't come online in 2028. We'll get into that and what it signals about the AI build out next.

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25:50New Mexico is an interesting location. We're making very good progress in terms of construction. Data centers is definitely on track. That was Oracle's co-CEO talking about the status of Project Jupiter on their earnings call just a couple of weeks ago. Fast forward to today, and the shares were falling as much as 8 % after they sent a force majeure notice to its developer, an effort to protect itself from higher expenses. Seema Modi has more on what this means for the project and the company's rising debt load and the AI trade more broadly. Seema? Fascinating times, Kelly. You know, force majeures are typically used when an unexpected event like an earthquake, right, causes delays.

26:29But to use it for political opposition to a data center, that's the first that we've seen. Oracle sending that letter to its financier of its New Mexico site this morning. As it does face growing opposition on the ground, New Mexico is a blue state. There are a number of politicians, we're told, up for reelection come midterms. And Oracle's data center in which OpenAI would be the tenant, this is a high-profile project. It's part of Stargate, and it's a 2.45 gigawatt project, but yet facing key issues tied to water. The campus is located in a desert, so that means it's water-stressed. Oracle's also awaiting an air quality permit and approval of its energy transfer gas pipeline, quickly becoming an important test case, right, for the scale at which this AI build-out can proceed.

27:11And who pays should this timeline get extended? Now, with this force majeure, a source familiar tells me that Oracle is unable to back away from any of its financial commitments, but it does give it some room to question the obligations tied to this contract with Blue Owl should these concerns around political backlash continue beyond the midterms. Oracle, on the record, telling CNBC, though, that this project, despite what it's facing on the ground, is still on schedule. Kelly. In other words, is this a I think there's sort of two ways it could be described with two different implications. One is that, you know, the company's overspending and the financing isn't there and the returns aren't there.

27:50The other is that everything's fine, but there's political or local pushback. It sounds like it's more of the latter. More of the latter. I think we do have reporting on just, again, the permits that they need to proceed and how without getting those permits in place, Kelly, the timeline gets extended. And why we care about the timeline is because any delay to being able to convert, right, it's backlogged to revenue. That means those who covered this stock and those who are invested in their stock have to also move their projections out a little as well. So that's why the schedule is so important.

28:21It tells us a lot about when this AI bet pays off. And by the way, I want to mention to you the credit default swaps. It comes up, right? And I would point out it's now back at a record high, the five-year CDS for Oracle. All right. We're showing it there up considerably the past quarter, too. Seema, thanks very much. Seema Modi. Let's get over to Frank Holland now for the CNBC News update. Frank? Hey, good afternoon, Kelly. Billionaire Barry Diller is withdrawing his bid for MGM Resorts after months of discussion with the company. In June, Diller's People, Inc. offered to buy the remaining stake of the casino company it did not already own in a deal valuing MGM at$12.4 billion.

28:55Then yesterday, Diller said that deal, it wasn't coming together the way he had hoped, and he decided not to pursue taking the company private at this time. MGM shares are down right around 10 percent. Starbucks said today that as part of its turnaround, the company will close about 250 underperforming cafes across its 18 ,000 North American locations. That represents just about 1 % of its locations. It's the second round of closures announced by CEO Brian Nichol in his two years on the job as he tries to improve the customer experience. And PepsiCo says it's raising prices on some of its soda, chips and dips.

29:28That is a reversal from a February announcement that it was actually cutting prices by as much as 15 % in a bid to boost sales. That increase will extend to brands including Doritos, Ruffles, and Sun Chips. Kelly, back over to you. Okie doke. It's going to make it, and it's not just the memory chips going, no. Yeah, it's going to be hard on the moms, those Sun Chips. That's a great snack. That's true. Frank, thank you. Thank you. Coming up, utilities are the worst performing sector in September, down 6 % and on pace for their worst month in nearly two years as higher rates hit the group. But one trader sees some opportunities in the space.

30:00The two names Jeff Kilberg says to own are next.

30:08Welcome back. Stocks were well off their session lows. We're sliding a little again, though, down 209 points for the Dow. It all comes after a report that the U.S. and Iran have discussed a phased deal to reopen the Strait of Hormuz and end the U.S. blockade. We'll see if there's anything more to that story. The best performer, S &P, down seven points. Ever Pure, formerly known as Pure Storage, is leading the S &P and hitting an all-time high today after its preliminary outlook for fiscal 28 showed accelerating growth from, yes, AI. They expect revenue to increase by up to 45 percent year on year.

30:41They're reaffirming its 2027 guidance. The shares are up 15 percent, best day in over a year. And we'll talk to the CEO next hour on Power Lunch. Perhaps he'll have some thoughts on Oracle and the pushback they're getting. Meantime, rising bond yields pressuring utilities. The sector down more than 3 percent this week. Worst performer. But our next guest is going bargain hunting. Let's bring in Jeff Kilberg. He is the founder of KKM Financial and a CNBC contributor. When I go bargain hunting now, Jeff, I go to Muse, right? And I say, hey, Muse, or whatever. In all seriousness, welcome. And yeah, how would you broadly lay out what's going on with the markets right now?

31:17Well, great to be with you, Kelly. I know Muse is going to highlight this trade, but when you see the two-year note about 4%, the 10-year note, oddly about 5 % or 5.15, I think you have to look at utilities and you look at a Duke Energy or a Next Arrow, which is twice the size of Duke Energy. You look at the disparity. And we always talk about this year, Kelly, this dysfunction, this dislocation, if you will, between sectors where energy, XLE, has been the leading sector all year up about 40 percent. And utilities is down, XLU, about 7 percent. So I think there is opportunity when you do see us get out of this Iranian war.

31:50It's going to be eight months next, Kelly. I think we're both a little bit too old for eight is enough, the old sitcom. But eight months is enough. $95 oil is enough. Rising rates has been enough. So we're hoping as investors to see a solution, as well as humanitarians, to see a solution out of Iran. But I think that will provide an opportunity. If you see a little bit of a reprieve and less conversations about having three rate hikes next year, that's where utilities come back to life. Utilities were a hot trade because of AI. So now they have this push and pull. It's strong because of AI, but it's not strong because of rates.

32:22I think it's throttle break. It's throttle break. And obviously, with the 10-year at 515, it is jaw-dropping. But think about what we have sustained. So you go back to when President Trump was elected or that voting in November of 2024, we have seen yields go from about 430, 440 up to 515, about a 15 % or 20 % rise in yields. But what has the S &P 500 done, Kelly? It was about 5800 at the time. Now it's at 7700. So about a 30 % move higher in equity. So I don't want to tell you that cats and dogs can live together, but we can see equities go higher in a rising rate environment. I think the big offset is this robust earnings season.

33:00We have Q3 projections for another 25 % year-over-year earnings growth. So I think it is hard to digest, and I think there's a lot of volatility surrounding it. But take a big step back. The VIX is at 15.5. Yes, 10-year note does not feel good. Yes, interest rates are higher. Yes, it's harder to buy a home. But I do think the opportunity in the macro perspective, once we get that range, is you will see markets move higher and rates come down. Yeah, no comment on whether we happen to be trying to sell a home in this environment. Anyway, so the 10-year, you used to trade 10 years, Jeff, in rates.

33:34So the velocity, like what happened yesterday, do you have any thoughts on what was driving that? And I'm surprised to see it continue today. Well, from an old pit trader who spent about 15 years in the pits in Chicago, when you see that type of velocity, that typically indicates stops, meaning people are repositioned. They're being forced to reposition because they have stops. So when you see it go above 5%, there were a lot of stops in the market. They were selling U.S. Treasuries, which are inversely related to the yield. But my takeaway from all my years of trading the pit is that traders, specifically bond traders, they want certainty.

34:04Up until that Fed meeting, we didn't have a lot of certainty. And that uncertainty provided a lot of skittishness, a lot of repositioning. Now we are looking at markets. And, yes, we have to service our$40 trillion national debt. But that's not the bigger picture. We want to understand the Fed policy rate. And I'm in the camp that we're not going to get another rate hike this year if we get out of the Iranian war. So it's a hand-to-hand kind of situation that we will see rates come lower. But we have to get crude oil back into the 60s. We have to get this inflation under control. So there's a pull and push to your point.

34:34You're adding to Google. You're adding to Amazon. You're adding to Broadcom. Are you on the Meta bandwagon real quickly, yes or no? We own Meta, but I'm not on the news bandwagon like you are. But I think Google, Amazon, Broadcom, those are a couple of names we own in our Gary ETF. They're under-owned. want to own more of them as we kind of see this continued bifurcation in between tech. Never even used it. I mean, I just didn't want to hook anything up. I just I see what the people are doing. Jeff Kilburg. You are the people, Kelly. You're leading the people. I love it. No. Coming up, a delicate balance for the home builders.

35:05We've got D.R. Horton, Toll and Pulte on a bumpy ride as investors weigh strong August sales against surging bond yields. We'll get the contrarian case for sticking with the sector next.

35:18Welcome back. OpenAI's Sam Altman urging the UN Security Council yesterday to create international standards for AI, including secure channels for governments to share information about any threats. And just this morning, Australia's prime minister said an OpenAI agent infiltrated a public health website earlier this summer. And what's believed to be the first known hack of a government site by AI. Kate Rooney has more in today's tech check. And apparently they were looking for statistics, Kate. Kelly, well, that's how it started. It is another example of AI agents acting on their own. And as you mentioned, the first example we have seen with a major government.

35:57Australian officials now say an open AI agent hacked into a government Medicare website. The model, according to officials, was given what they describe as a research task of looking for health and medical statistics. agents, found a way to get around these restrictions and then gained unauthorized access. So far, they say there's no evidence that personal information was accessed. But Prime Minister Anthony Albanese is not happy, as you can imagine. He called the incident unacceptable and has ordered an investigation into this. Said he also spoke to Sam Altman, the CEO of OpenAI, and expressed disappointment about the timeline.

36:33This happened back in June. Australian officials didn't hear about it until September. This is far from an isolated event at this point, the most notable AI agent hack was around the hugging face incident with OpenAI. And the New York Times now reporting that OpenAI's agents tried also breaching four other targets without prompting. This has not been reported until now. And the news does come after Sam Altman, CEO of OpenAI, Dario Amadei, the CEO of Anthropic, spoke to the UN Security Council, warning world leaders about this very risk of losing control of some of the more autonomous AI systems out there, both CEOs arguing that these systems need human oversight and called for international agreements.

37:12But it's now a political question, Kelly. The president has rejected some of those standards, international standards, and is very much against any sort of U.S. slowdown for AI development. Politico also now reporting that the White House asked OpenAI and Anthropic to hold their models from U.K. testers until the U.S. is able to review them first, Kelly. Right. And I guess that we become used to these incidents. There's probably a lot more of them happening. Might be a question of how of response, right? If I were Australia, I'd be annoyed as well. Does it escalate to something more with a country that's less friendly?

37:47I don't know. It's a great question. I mean, investigation could be so broad. I mean, if it got to the point where this there was some sort of criminal liability for open AI, that would be the major implication on the corporate side. And it's a big question you hear about when so many enterprises are using these AI agents. If something goes wrong, who has liability? You think about this in the context of a bank or a brokerage firm or any of these tech companies that interact with consumers. If there were an agent hack in this case or something went wrong, is it OpenAI's issue and is it their fault and what are the legal repercussions?

38:23And I think that's what a lot of enterprises are nervous about when they hear this news. They hear these headlines and think about, wait a minute, I'm integrating this technology. in my own company, what is it going to mean if something goes wrong? And that is still the unopened question from what I'm hearing. Absolutely. Kate, thank you for now. We appreciate it. Kate Rooney. Speaking of AI, don't miss the premiere of CNBC Innovation Lab this Saturday at 4 p.m. Eastern, a one-hour special with John Ford looking at how AI is reshaping the labor market and society, especially for younger workers.

38:51Again, that's Saturday at 4 p.m. Eastern here on CNBC. Coming up, why you should stick with housing and the builders. despite all the excitement about the AI trade. Bill Smead has that next.

39:15Welcome back to The Exchange. Mortgage rates continue to climb. The 30-year nearing 7.4 percent, up significantly since last week's Fed rate hike. Rising rates are putting pressure on the builders. D.R. Horton, Lennar, and Toll all sliding more than 10 percent this quarter, Toll down nearly 18 percent. But our next guest is bullish. He doesn't expect a rally, though, until what he calls tech mania breaks. Let's bring in Bill Smead. He's the chief investment officer at Smead Capital Management. Bill, it's good to see you. Welcome. Thanks for having me. You know, we could start with the builders.

39:48I mean, that's just interesting right now because the housing market doesn't feel so great and we hear more. I don't know, But what is it that you think is really compelling about owning them right now? Is this is this the bottom? Is this it? Are we going to look back in a year and say, wow, that was as bad as things got? Our first criteria for stock selection is meeting an economic need. And the average age of a first time home buyer is 38 over the next 10 to 15 years. More people in the United States will turn 38 than we've ever had by far. And the pace of home building right now divided by population is bumping along historic lows over the last 60 or 70 years.

40:30Secondly, the price of the shares on average are about eight tenths of book value, which historically has been an excellent time to look in. And then if you need any encouragement, it doesn't hurt to have Berkshire Hathaway. I'm sure with Warren Buffett's blessing, buying the fifth largest home builder, Taylor Morrison, two Japanese companies buying MDC and TriPoint. And then the 14th largest publicly traded home builder, DreamFinders, buying out the next in line Beezer Homes. So basically, long term investors who want low prices and want to meet an economic need over the next 10 years are moving aggressively.

41:14And we would be included in that camp. That's super interesting. And your point about what you call consolidation or kind of what's happening there is an important occurrence as well. Do you have thoughts about rates at these levels, just kind of how we got here, where we go next? What does it mean for, I guess, not just the builders, because you have a different kind of case to make for that, but are there any other impacts across the market? The thing I love about you, Kelly, is you always ask me my favorite question. And the answer is so much capital is being demanded to do the data centers and the AI build out and and and paying money to somebody that's going to buy your product in these circular deals.

41:59that capital is intensely being demanded and the federal government is demanding capital because they're borrowing money like drunken sailors on leave. So the price of money goes up because it's being demanded and there's not more of it being provided. Now, that will get cured. That will get cured when 55 to 80 year old investments get beat up in the stock market for a couple of years and get scared. and go dive in out of their S &P 500 index massive position and go earn interest. It's the reason that Willie Sutton robbed banks. It was because that's where the money was. That's where the money is.

42:46Yeah, go ahead. I've heard investors saying, like, hey, I've heard people buying tips at these yields. I've heard more people getting interested in munis at what could be a 10 percent tax equivalent on high tax states. It's, you know, I definitely hear that what you're talking about. So as those yields rise, you think it takes people out of out of equities? Well, yeah. So just think of it simply. We did this this morning. We said, what's the ten dollars that you earn as a company 10 years from now at six percent versus discounted at three percent? And the answer is that ten dollars is worth 33 percent less at six percent.

43:23Now, the stock market under the surface is starting to discount that. I saw a statistic a couple of days ago. The S &P made a new high. There were more stocks making a 52-week low than there was making a 52-week high. That's only happened twice at the end of 99 and in 29. OK, so what's happening is there's a competition for capital that that is driving up interest rates and that is making the benefit of owning the common stock future returns less valuable. At the same time, they're bidding up common stocks. And those circumstances never end well from historical standpoint. For those who are worried, you know, a lot of people are in just the S &P.

44:11It's like even this week, I think to myself, well, thank goodness the S &P, my retirement rate, we can't own individual stocks, but you own the index. And I'm like, look at Meta. Good thing I have exposure, right? But your concern is the other side of all of this, which may still be years off. Fine. But what is your tactical kind of advice in the meantime? And maybe we can wrap that in with your thoughts on Berkshire Hathaway these days as well. Yeah. So so remember, I'm 46 years in the investment business. I started out recommending Coca-Cola at six times earnings, paying a five percent dividend and having people say, Bill, what's the money market fund paying?

44:49And the answer was 14 percent because inflation was very high. And so they didn't want Coke at one fifth of the price that Warren Buffett paid in 88 and 89. They wanted bonds because why buy stocks when you can get equity like returns from the bond market? So the point is things change. That's what everyone forgets. Things will change. If too much capital is demanded, the price gets too high, people will get scared out of stocks at some point in time. And the next time it happens, it won't be a temporary thing. It won't be 2022. It won't be 60 days in 2020. It will be an elongated period like this late 60s into the 70s and early 80s where you don't make money for quite a while.

45:40And what happens in that environment, owning a home and having someone loan you money for 30 years and getting tax deductible interest ends up being a better way to accumulate wealth than trying to fight a long term bear market in the S &P 500 index. All right, Bill, always good to check in with you, especially when we're near these these times for the market. It's it's great. And I appreciate you making the time. Thank you, Bill Smead. That's it for us. Thanks for watching The Exchange. I'll go join Brian Sullivan for Power Lunch after this quick break, where we'll hear from China hawk Kyle Bass on what his thoughts are so far for the Trump Xi summit.

46:18Stay with us.

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