Stocks at Record Highs, The Bullish Case for Bonds, and NYC’s AI Safety Push 10/6/26

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0:56NYC Council Speaker: your podcasts. You're listening to The Exchange. Here's today's show.

1:03NYC Council Speaker: Thank you very much, Scott. The S &P hitting a new high for the first time in two months today. I'm Kelly Evans, and welcome to The Exchange. Falling oil prices and lower bond yields are helping to give the markets that lift, except for the Russells, by the way, but the S &P, I should say, and the Nasdaq, those are hitting new record highs. The S &P is currently up seven-tenths of 1%, paced by another new high-end shares of NVIDIA, by the way, along with a host of cybersecurity names. As NVIDIA keeps marching closer to a$6 trillion market cap, 5.758 is where we stand right now. The stock is at 240.

1:37NYC Council Speaker: And this pause in bond yields is certainly welcome news for the housing market. We'll talk to former HUD Secretary Sean Donovan about the affordability crisis. The home building ETF, by the way, is down 25 % from its February highs. And can the AI industry really self-regulate? A hearing in New York City casting some doubt on that yesterday. Council Speaker Julie Menon will join us with her plans to potentially rein in the technology. But let's begin with these new highs in the stock market. The S &P joining the Nasdaq in that territory today, shaking off of September where we saw 10 of 11 sectors trading lower.

2:10NYC Council Speaker: Ryan Dietrich is the chief market strategist at the Carson Group. Ryan, it's good to see you. As you called it, we didn't get that much of a September swoon. We got a little bit of one. Now we have earnings coming up. We have the midterms to contend with. But it looks like technology keeps leading the way and maybe now some relief from what's happening with oil and bonds.

2:30Nisha Patel: Oh, that's right. First off, thanks for being back, Kelly. I appreciate it. You know, we didn't expect a major sell-off. I mean, in September, we talked about that. Now, here we are in October. And I know other guests have pointed some of these things out. October is usually pretty strong in a midterm year. The fourth quarter of a midterm year is like one of the best quarters of the four-year cycle. But I want to take a step back for a second. Remember April and May, right? The S &P 500 gained about 16 percent. Huge two months. We've just simply gone sideways. We've really consolidated. Now, tech, tech was up 44 percent in those two months, one of the greatest two-month rallies ever.

3:00Nisha Patel: Then you look what tech's done, obviously, also gone sideways for the most part. I think, Kelly, we took our time, we caught our breath, and now the market wants to go higher in this fourth quarter.

3:08NYC Council Speaker: Let's talk a little bit about today's action. We see there's some pressure on the memory trade, as there is any time there's a headline about, I think it's Taiwan or somewhere we're adding more international capacity down the road. So is that a worry spot? But at the same time, look at the way the cybersecurity stocks have taken off. Look at the Mag 7. I see Wells Fargo this morning talking about how they would bet on kind of the application layer, I think is the way they described it, not necessarily the infrastructure play when it comes to AI. So what do you think about getting to that level of granularity?

3:39Nisha Patel: Exactly. You know, what have we heard for a couple of months now, how weak market breadth is? And there is some weakness under the surface, but tech was never weak. I mean, September, you mentioned it. Ten sectors down, tech up 5%, and S &P virtually flat when you do a total return basis because we have software and semiconductors higher. So tech has really been broadening out. I think that's a big positive when you kind of peel back that onion. Today specifically, though, look what's leading. It's the stuff that's gotten drilled. Utilities. I mean, utilities were as oversold as they've ever been.

4:06Nisha Patel: I think utilities having this strong bid here, along with real estate and some of the other, I mean, even industrials, which have been a dirty word lately, that's up a percent. So we're seeing some of the beaten down stuff come back. To me, that's a little bit of market breadth. Everyone said it was only tech. I like to see things, and specifically utilities, to see this. Maybe that's a clue that we are near at least an intermediate term peak in yields with the strength in utilities here the last couple days.

4:27NYC Council Speaker: I know you like to look back to look forward. So, you know, what predominates? Is it kind of looking at the quarterly returns we've had so far this year? Is it the moves in other asset classes? Is it the midterm calendar? What's the tell for you heading into Q4?

4:41Nisha Patel: Yeah, a combination of those. I think I'll point this out, though. Back to that second quarter. The S &P gained about 15%. Kelly's is really interesting. I came on to talk to you about this in the third quarter. Everyone told us how bad the third quarter is going to be. Well, when you gain 10 % in the third quarter, in the second quarter, third quarter is usually pretty strong. But the fourth quarter, again, when you gain 10 % in the second quarter, has never been lower, up like 6 % on average. Now, it's only a sample size of 9%, but still 9 for 9 is not too bad. Your average fourth quarter gains about 4%, so potentially a better gain.

5:11Nisha Patel: Now, one more quick one on this. You know, I know, again, market breadth, all everyone's talked about. We've been looking at things like high beta relative to low volatility, breaking out, staples underperforming by a wide margin. To us, there was always a clue there's a stillable market. It's simply catching its breadth. And now market breadth comes back here. I think that's a positive thing in this fourth quarter.

5:31NYC Council Speaker: Do you have a point of view, Ryan, on bond yields? Mm-hmm. And how does that – because it almost feels – when I talk to you, I feel like we can just ignore bonds. It just doesn't matter. You know, there are some sort of there's this kind of, you know, the stock market behaves the way it behaves for reasons that have nothing to do with whether the 10 years at four or five, six, seven or two percent.

5:53Nisha Patel: Well, good question there. And I will say this, the Carson Group, we were all year saying it's an inflationary growth environment. We put we manage billions of dollars. We position for a world of higher yields. We position for a world of little stickier inflation. But with nominal GDP growth between six to eight percent. I mean, Kelly, I wouldn't be shocked at all if we got to do this next year when this bull market, by the way, this bull market turns four next week. We're going to hear a lot more about that next week. But this bull market might turn five in a year. I wouldn't be shocked at all if the 10-year yield's up around 6 % by then.

6:21Nisha Patel: Again, in an inflationary growth environment, you want to be in stocks. You want to own something. If you drop it, hit your foot, it hurts. Those hard commodities, real assets, things like that. Not to say we don't own bonds. We own bonds. But we've had short duration, and we have not had nearly as many bonds as probably other RAs the size of us. I think that's probably still the way you want to be positioned here.

6:37NYC Council Speaker: Did you say you want to own things that hurt if you drop them on your foot?

6:41Nisha Patel: Yeah, it's an old joke. If you drop it, it hits your foot and it hurts. Things like hard assets, real assets, copper, gold. It's like commodity play. It's an old, it's a joke, I guess, a strategist used. But in place of bonds, absolutely.

6:52NYC Council Speaker: Real estate, that would hurt. That would really hurt. Ryan, thank you very much. Appreciate it. We'll check back in soon.

6:59Nisha Patel: Thanks, Kelly.

6:59NYC Council Speaker: Ryan Dietrich of the Carson Group. Meantime, Treasury yields are finally cooling off today. With the 10-year falling, it was five basis points earlier, still at 527. after hitting a 24-year high yesterday, is the worst now behind us? And are bonds a buying opportunity? Don't turn the channel. Nisha Patel is here on set with me. She's a fixed income portfolio manager at Parametric. It's good to see you. Good to see you. I'm teasing the audience because anyone who's been in bonds is, as you know, it's been painful. Like, yes, the yields are high, but right now you're losing because of the price moves.

7:30NYC Council Speaker: So what would you say about across asset classes? And people might say, OK, what if we go a little bit higher from here? Ryan said short duration. Just talk us through the playbook.

7:41Nisha Patel: Yes. So I think starting yields are such an important part of the conversation, right, because that improves the forward return profile for a client. So here we sit at yields, let's say roughly four and a half percent, five percent. If you see an uptick in rates from here, it really helps cushion that move. Very different than many investors that did get burned post-pandemic when yields were 1 % or 2%. Yields didn't have to rise all that much before you were in the red. So I do agree with the short duration play. I don't think you necessarily need to take on a lot of long duration here. I still think you have some systemic things here that will keep long-end yields, especially around treasuries and all their high-quality markets, a little bit higher for longer.

8:25Nisha Patel: We've seen energy prices come down a little bit. But we know this is not a story just about oil prices and that directly correlating to long term treasury yields. This is also about right kind of fiscal policy, debt and deficit here in the U.S. This is about a new Fed regime and Fed policy, treasury supply. So I think we're going to see some of these pressures in the long end. But we've seen kind of a complete repricing across the curve where if you are a long term fixed income investor, income oriented investor. And let's be honest, Kelly, I think in these markets over the past few years, many clients have just naturally been underexposed out of fixed income.

9:03Nisha Patel: Sure. Maybe rightfully so.

9:05NYC Council Speaker: We've heard, you know, forget about the 60-40 portfolio. Exactly. It's 60 equities, it's 20 in commodities, you know, that sort of thing.

9:11Nisha Patel: And look, looking back, the right call. But, and this is a whole other conversation, right, year over year of double-digit equity returns. What is it going to take for us to continue to earn that? And then when you look at certain fixed income markets without taking substantial credit risk, there's a very attractive opportunity, at least to think about stepping out of cash and adding some of that duration and rebalancing where clients have been underway.

9:33NYC Council Speaker: Well, what you said is interesting that if you start from here, you know, even let's just take the 10 years on the screen, 527. And this is a point I've seen Deutsche and others make as well. You know, yields would have to climb a lot from here for that to start, you know, for even more capital loss. Correct.

9:47Nisha Patel: That is correct. because you'd have to say, let's just say, very simply put, right, a five-year duration bond. If yields moved up 1 percent, now that is a massive move. That's a 5 percent, right, negative return. Now, if you have but five and a quarter income, you could still be, right, net positive. Wow.

10:06NYC Council Speaker: Even from going to 5 to 6 percent in 10 years. Correct.

10:09Nisha Patel: And that's a huge move, right? I think that it would take a lot for us to move there. Now, on the flip side, I think the biggest thing that maybe investors may not be positioned for is a pricing to the other side, right, for rates to come down. Now, what does it take for rates to come down? Of course, it's going to take, right, kind of the Middle East crisis, oil prices coming down. But it can also take a lot of things of inflation moderating, right? We can maybe perhaps see that just because rates are higher, that can do a lot of the Fed's work. Do we see a pullback in consumption and spending?

10:44Nisha Patel: That in and of itself could be disinflationary. So I think there's so many things here that could also point to the other side of the equation, that income is a big part of the story. But if we do see rates even come down 25, 50 basis points, having that duration is going to be so additive from a price appreciation standpoint.

11:02NYC Council Speaker: I have a new favorite segment idea, which is called bond math with Nisha. I like what you said. So let's take the flip side of it. If you, let's say, have the 10-year and it goes from 5 % to 4%, which is where we were in February, let's remember, this is not crazy to imagine. And you get a 5 % yield. How much upside is that kind of that we're talking?

11:20Nisha Patel: Yeah, we'll just make it very easy. So five-year duration, 100 basis point, correct, right downside. Now you have a 5%. This is just back of the envelope math making this very simple. 5 % price appreciation plus your income component, let's assume it's 5%, right? So that's almost a 10 percent total return that you'd be able to generate.

11:39NYC Council Speaker: But what's fascinating about that is that either way from 5 percent, whether you go up to six or down to four, which, to your point, are huge shockwaves through the financial system one way or the other. Yes. It's only a 5 percent move. Correct. And on the value kind of of your of your exposure there. So actually, it's it's not that huge of a deal for bondholders one way or the other.

11:56Nisha Patel: I think the asymmetric kind of risk, right, of adding duration here, the payoff is significantly greater, especially when the income component is doing so much of the work. And I think the biggest thing that we hear from our clients is, well, what if rates continue to rise from here? Right now, nobody knows kind of where this may end. Again, we can, I think, paint a very strong story that we could see rates stabilize. We could be on the higher end of yields. But again, we paint the picture of 25, 50 basis points, right? You're still looking at a positive total return. And now, again, income. I think bonds just beautifully have a finite maturity, right, which is just something that we remind a lot of our clients.

12:36Nisha Patel: So if you're buying a two-year bond, three-year bond, five-year bond across fixed income asset classes, you're locking in that income, right? So, I mean, no matter what happens.

12:45NYC Council Speaker: Quick final question then. Obviously, there's a lot of difference. You can go corporate. there's a little talk about high-yield spreads that are starting to move a little bit. Munis, obviously, on a tax-equivalent basis, are at like 10 % for some. Yes. Any last observation about where you see the most kind of value here?

13:01Nisha Patel: Yes. So a lot of our clients are in higher tax brackets, high net worth individuals. So one market that has been really sticking out to us has been municipal bonds, particularly because of the kind of makeup of this market. The treasury yield pressure has certainly caused a reset, along with higher supply in the market, along with secondary supply, secondary selling pressure that we've seen. So now we're looking at municipal bond yields. Now, remember, this is not a credit event, no credit deterioration, but just a massive reset to where high tax bracket earners across California, New Jersey, New York, if you're willing to take on some duration a little bit in the longer end, you're looking at 10 plus percent.

13:42Nisha Patel: Right. So I would say 10 to 20 years. Wow. So 10 percent plus tax. equivalent yields, which is just absolutely amazing. So we're looking at almost two decade highs in terms of where yields are. So this is something that, again, in this regime where we can't call tax policy, but with where deficits and debts are, I think when most investors are doing long-term planning around taxes and investing, the tax exemption value that munis provide is still here and very additive, could be even more additive over time.

14:10NYC Council Speaker: Nisha, great to have you here today. Good to be here. Good to see you. Thanks. Nisha Patel with Parametric. Coming up, a trio of former AI researchers sounding off at the New York City Council's hearing on AI safety yesterday. We'll speak with Council Speaker Julie Menon about what's on deck for regulation next in a first on CNBC interview. Plus, mortgage rates still above 7.5%. And new CNBC polling numbers show that housing costs are the top political issue for young voters. What former HUD Secretary Sean Donovan says we can do about that. That's coming up on The Exchange.

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16:02NYC Council Speaker: missile blower program third-party validation and more human oversight are among the big proposals from new york city's landmark council meeting yesterday on ai safety senior leaders from anthropic open ai google and meta testifying under oath about how they are assessing and managing the risks their tech could pose to the public but our next guest says the executives couldn't answer the most basic questions from the council and warns there could be legal trouble ahead for one company that was not in attendance. Let's bring in the leader of yesterday's hearing, New York City Council Speaker Julie Menon.

16:34NYC Council Speaker: Julie, it's great to have you here. Welcome. Great to be with you today. What were your big takeaways, disappointments, highlights, next steps?

16:42Nisha Patel: Well, I think what really came out of our city council hearing yesterday, when the committees were under oath for the first time since these new safety concerns has come to light, is that they really weren't able to answer some of the most rudimentary questions such as what is the risk of a cataclysmic event happening? What do they feel the risk is? Will they agree, for example, not to release a new model that hasn't passed an internal or third-party validator safety check? Basic questions like that. And I think what really came out of the hearing is the need for regulation. We have to remember that the pharmaceutical industry doesn't self-regulate.

17:20Nisha Patel: They have the FDA. The airline industry doesn't self-regulate. They They have the FAA. And similarly, we need to ensure that with artificial intelligence, we have smart safeguard rails in place.

17:32NYC Council Speaker: So we had the companies with the president not long ago. He asked them for what was it called? Morally binding. That's right. To kind of morally binding approach to artificial intelligence. What you look as much as you guys are kind of, you know, they had the world of the nation's attention yesterday. What can New York City really do in that respect?

17:55Nisha Patel: Well, I think, first of all, when the federal government is opting not to regulate, it's up to municipalities, cities and states to regulate. I've spent a large chunk of my career as a regulatory attorney and used to serve as commissioner of the Department of Consumer Affairs in New York. And it will be up to localities to legislate. And so that's what we're doing in New York City. We're the largest city, of course, in the country. These companies have significant offices here. And the legislation that we're putting in effect, we hope, could serve as a national paradigm for other jurisdictions to adopt.

18:30Nisha Patel: And look, hopefully the federal government will act. We certainly hope that they will take the types of bills that we are looking to pass that require third-party validators or that encourage whistleblowers to come forward. We have a first-in-the-nation bill that gives whistleblowers a percentage of fines and penalties. We certainly hope the federal government will opt to regulate. And I think one of the most important regulations is this issue of third party validation. You cannot have these companies self-select the validator.

18:58NYC Council Speaker: So so having kind of, you know, another research body or a governing body that can get access to these companies, what would be some other practical implementations based on what you heard or didn't hear?

19:11Nisha Patel: Well, first of all, for New York City, we want to make sure there's really an emergency plan for our city agencies. We know New York City is one of the top terror targets in the world. Obviously, risks of bioterror, effects to our water system. There are so many different risks at hand. And look, we are in no way trying to stifle innovation. Right now, New York City is the tech capital of the world. We have over 400 ,000 jobs in tech, more than the city of San Francisco, I might add. And so many startups are opting to locate in New York. We want to keep that innovation and growth happening. But with innovation growth comes responsibility.

19:47Nisha Patel: And I think it actually instills faith and confidence in the products that these companies are releasing, the new models that they're releasing, if we have smart and sensible safeguards in place.

19:58NYC Council Speaker: OK, so then finally, you know, is there any suggestion of penalty, financial or otherwise? Again, if you put together some more binding rules here for companies that that are in violation of that or don't comply. Absolutely.

20:15Nisha Patel: So one of the bills requires third-party validators. It requires these companies to basically agree that they will not release new models without independent third-party validators that are free from conflicts of interest. The penalties is$25 ,000 per agent, per incident. So in other words, in the Hugging Face incident where you had over 1 ,200 agents, When you have a swarm of agents, it would be$25 ,000 per rogue agent. These penalties will add up. It could ultimately be in the millions of dollars. And we think it's important because they have to have teeth. We can't pass bills that don't really have teeth.

20:53Nisha Patel: So that's important as well.

20:54NYC Council Speaker: I just quickly wanted to ask as well, I know that Elon Musk or the company SpaceX, I guess, which would own Grok and all that, they didn't show up. So what happens now?

21:06Nisha Patel: Well, we have issued a subpoena against them. And we believe that any company that has business in New York, that has an office in New York, that is selling its product in New York City, should want to come before our legislative body and testify. There should be no reason that they shouldn't. So we've issued a subpoena. We did hear from SpaceX. They sent us a letter that they want to work with us. But to work with us means to come before the body and testify, as the other companies did. So we are going to pursue legal action in terms of that to enforce our subpoena.

21:36NYC Council Speaker: Would there be another opportunity for them to do so, to appear?

21:40Nisha Patel: Absolutely. We would love to have them come. I mean, our goal is to hear directly for them. We want to hear from these companies. We are looking at doing a whole legislative package. We have 10 bills that we heard yesterday. So we want to hear directly from the companies. So, yes, we certainly hope that they will come forward and that it won't have to come to legal action. But right now we have issued this subpoena and we plan to enforce that.

22:02NYC Council Speaker: All right. Julie Speaker, Menon, I should say thank you for making the time. Minda, for coming on CNBC today. Really appreciate it. We'll be watching. Coming up, the Aerospace and Defense ETF ITA hitting a record high in August. But since then, it's been seven straight losing weeks. In fact, its longest streak on record. As the president heads to Baltimore today to address the Navy's new multi-billion dollar deal with a private defense company, we'll have all those details next.

22:32NYC Council Speaker: 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.

23:00Nisha Patel: 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. Still waiting in line? Again? That's time you'll never get back. Save time and money with Stamps.com. Over 4 million businesses have skipped the line with Stamps.com.

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24:01NYC Council Speaker: We are seeing record highs for the Nasdaq and the S &P today. First time for the S &P in two months. 7821 is your current level with a 6.10 % gain. And just shouting out the Russells, the small caps, despite the drop in rates today, those are trading lower. The S &P is up 14 % since January now. But as our data guru, Nick Wells, points out, if you remove AI from the picture, it would only be up 6 % year to date and would be down 4 % over the past month. The importance of investing in the theme of the rally. Coming up, housing affordability is the number one topic for young voters, and it could swing two key house races in the state of Pennsylvania.

24:38NYC Council Speaker: We'll head there for a live report and speak with former HUD Secretary Sean Donovan about what the government can do to jumpstart the housing market and improve affordability. That's next.

24:53NYC Council Speaker: Welcome back. Housing affordability is a top concern for voters, especially young voters. As we head into the midterms, Diana Olick is in Allentown, Pennsylvania, with a look at the impact it's having on some key races there, Diana.

25:07Nisha Patel: Well, Kelly, with mortgage rates rising along with the cost of everything else, housing is the sore point for consumers.

25:13NYC Council Speaker: In fact, one in five Americans who rent or have a mortgage spend half or more of their pre-tax income on housing. Half spend between 25 and 49 percent. And that's according to the CNBC and Survey Monkey quarterly money survey.

25:27Nisha Patel: Now, the standard guideline from banks and lenders is about 30 percent. Here in Allentown, 54 percent of renters are spending more than 30 percent of their income on rent. And home prices are up four percent compared with a year ago. For that person trying to get an apartment, person moving from an apartment to a starter home, starter home to a larger home. Each and every one of those cohorts is reporting that it's a challenge right now and it's something that is weighing on them in a very important political place. Now, this district ranks eighth nationally among House races where young voters could most to influence the midterms, and that's according to Tufts Index.

26:09Nisha Patel: 26-year-old Blake Fontaine is still living at home, even with a six-figure salary. When I started looking at the prices on houses, it really made me backtrack to the sense of it's like, I'm going to pay$500 ,000 for the same thing my mom paid$100 ,000 for. Makes no sense. Now over in Harrisburg, Republican incumbent Scott Perry is up against Democrat Janelle Stelzen. Perry was the only

26:37NYC Council Speaker: member of Congress from Pennsylvania to vote against the bipartisan housing affordability bill. He said for over 50 years, the federal government has thrown money at housing, which has caused the current housing crisis. Stelzen has a housing affordability plan that includes expanding small dollar home loans and cutting home construction regulation. Kelly. Yeah, those numbers are incredible. Where they get how many people are? No, they're spending half of their income on housing or rent? Yeah, I mean, it's a lot. And really, the people we talked to here in downtown Allentown, we looked for young people because they're, of course, most influenced by all this.

27:13NYC Council Speaker: It was just terrible how many of them said they didn't even want to vote because they didn't think that anything was going to change when it came to housing because it was so bad. And a lot of them, a surprising number, even over 25-year-olds were living with parents. I know. It's weird. That's kind of my dream for the kids, but that's a different story. Diana, thank you very much. Diana Olek, with housing potentially reshaping the political landscape, let's bring in someone who's familiar with both. Sean Donovan is the former HUD secretary under the Obama administration and the current CEO of Enterprise Community Partners.

27:43NYC Council Speaker: It's great to have you on the program. Kelly, great to be with you. So you actually were HUD secretary during what we thought was the worst period ever for housing, right after the housing bubble burst. How would you compare then with now?

27:55Nisha Patel: Well, Kelly, what's happened here is since that crisis, actually, since the Great Recession, we just haven't been building enough housing in the country. And that's led to shortages in just about every state. But then on top of that, after COVID, we had huge cost increases. Everything from construction materials, labor costs, insurance, all of those have risen. And what that's meant is that since COVID, we've seen the biggest increase in home prices, in rents that we've ever recorded. So we had a mortgage crisis, foreclosures, but right now we have a housing supply shortage that's different than we've ever seen.

28:36NYC Council Speaker: Yeah. And you do point out, and I think your organization was involved with the 21st Century Road to Housing Act, which did pass, right? It's the law now. What impact is this legislation going to have? Is it going to help address these issues that not just young voters, everybody knows the housing market is a little out of whack?

28:54Nisha Patel: Well, Kelly, not only did it pass, but more than 90 percent of members in both the House and the Senate voted for it at a moment when almost nothing is bipartisan in our country. Housing is at the center of bipartisanship. And what that act can do is start to attack the problems of supply. It can encourage local governments to reduce regulations, to change their zoning. It can encourage more innovation in housing. We build houses like we did more than 50 years ago. It hasn't gotten more productive, and we need to bring new technology into the process and a whole range of other ways. The important thing, though, is that Congress has acted.

29:37Nisha Patel: Now we need state and local governments. You were just focusing on Allentown. We need the councils in Allentown, state governments all over the country to really move on this in order to be able to make a difference.

29:49NYC Council Speaker: Can you explain in clearer terms what that means? I don't understand why changing the way we build houses has to do with local communities getting out of the way. Are we talking about kind of permit reform and building multifamily? You know, obviously, I live in New Jersey. This is a huge issue, all the affordable housing. Are we talking about that? What are we talking about? What is it that needs or is going to happen to address these supply issues?

30:16Nisha Patel: What it means is in a place where you have single family homes, maybe allowing what we call accessory dwelling units to build an apartment over your garage or a small building in your in your backyard. In more urban neighborhoods, what it means is allowing taller buildings, more more units to be built. It also means not requiring 17 steps to get a building built. Time is money, right? And so the regulatory reduction is really about limiting the number of reviews and making sure we can move with more certainty from the time that you buy a piece of land to be able to put the project up. Those are the kinds of things we're talking about when we talk about regulatory reform.

31:01NYC Council Speaker: So if I'm just a viewer watching this, does that mean if I kind of want to press my case? Because if this is law, it's not like my town can stand in the way. If I want to add an ADU or if I'm a developer and I want to build higher, are you saying that these people need to go challenge their localities? If they perceive them to be standing in the way, is the message try again because now they shouldn't be?

31:25Nisha Patel: Look, Congress did its job. Now state and local governments have to do their jobs. They need to move. And, you know, the power is in the ballot box. What we're seeing more and more in Allentown all over the country is that voters are frustrated. Affordability is at the center of our politics. Housing is at the center of affordability. And they are voting people out of office who aren't willing to move on changing the kinds of things that we've talked about. You know, we talk about nimbyism. That means not in my backyard. more and more voters are saying yes in my backyard. I want to make sure we can build more housing in my community.

32:06Nisha Patel: And that's what's going to make a difference.

32:08NYC Council Speaker: You know, if you can solve housing, which is hard enough, then we can talk about your time at OMB and whether your organization, you know, what would you say about the deficit? Seven percent. Does it matter? Does it not matter? Debt to GDP? Do we fixing that challenge could be the hardest thing so that maybe we don't do it? Why should we even try to fix it until there's a crisis?

32:32Nisha Patel: Look, there's no question that there's a connection between the deficit and interest rates. And interest rates are part of the challenge today, right? So the reason we're seeing or one of the reasons we're seeing inflationary pressures, one of the reasons we're seeing costs going up and not enough housing being built is the deficit problem. And at the center of our economy is also not just building more housing, more construction. It's also the ability of people to move to where the jobs are. Right. And one of the challenges with housing right now is businesses are having problems attracting workers because of housing affordability issues.

33:14Nisha Patel: So these issues are really interconnected. We're not going to grow our economy until we make progress on housing. and we're not going to get our deficit under control if we can both reduce costs but also grow our economy. And so that's where the connections come.

33:30NYC Council Speaker: I say it all the time because I hear it all the time, friends of mine who say, I'm going to die in this house. Like, I'm never moving. I'm here, me and my mortgage, my 3 % mortgage or whatever from 2021. So it is a real impact. Sean Donovan, thanks so much for joining us and making the time today.

33:45Nisha Patel: Great to be with you, Kelly.

33:46NYC Council Speaker: Good to speak with you. And don't forget to register for CNBC's Trading the Midterms Forum in Washington on October 14th. We'll look at why political risk remains one of the market's biggest blind spots and how tools like prediction markets are changing the way investors interpret uncertainty. For more, scan that QR code or go to cnbcevents.com slash trading the midterms. Coming up, it's finally official. Paramount Skydance and Warner Brothers Discovery is now just Skydance. You see it on your screen there. With the deal finally closed and the shares down 4 % today. We'll look at the road ahead for untested media mogul David Ellison next.

34:27NYC Council Speaker: Welcome back. Paramount Skydance's merger with Warner Brothers Discovery has closed. The company now simply called Skydance, but the street not allowing for much of a honeymoon period. The shares today are down 4.3%. Julia Borson has a look at what's next. Julia?

34:43Nisha Patel: Well, Kelly, with the deal closed, now comes the hard part for David Ellison and his new co-CEO, Enon Krizz, the former CEO of Mattel. The big challenge is how they'll achieve their promised$6 billion in cost-cutting and synergies within three years, while also adhering to the company's commitment to state attorneys general to produce and distribute more content, including 30 theatrical releases a year. A key concern for investors is how they'll pay down the nearly$80 billion in debt without weakening the value of the assets they've acquired, including HBO, Warner Brothers, a lot of sports rights, which all require meaningful investment to compete.

35:20Nisha Patel: And Paramount's debt has become about$400 million more expensive in terms of annual interest payment than it would have been had the company sold that debt just a few months ago when Treasury yields were about a percentage point lower. Now with a newly combined leadership team streaming run by Warner Brothers' HBO team, while the film side is run by Paramount execs, they face the challenge of integrating two companies and their products. Raymond James writing, quote, We also expect some near-term revenue pressure from overlapping streaming subscribers, where we estimate about 35 % of Paramount Plus subscribers overlap with HBO Max subscribers.

35:58Nisha Patel: Now my sources in the industry say employees are bracing for massive layoffs, So we're going to have to see how this all plays out.

36:04NYC Council Speaker: Well, for sure. With that kind of as unwieldy an organization as you're describing there. Julia, thanks. Let's bring in Tom Rogers for some more perspective on this. He's the executive chair of the AI film studio Fountain Zero and a senior advisor to Versant, our parent company, and the founder of CNBC. Perhaps most importantly, Tom, it's great to see you again. So can you prognosticate a little bit about Skydance right now? Look, I'm a new Paramount Plus subscriber because we wanted to watch the Raiders game on Sunday. But I think this could be a one-month dalliance.

36:34Nisha Patel: Well, first, you have to take your hat off to David Ellison. He closed the Paramount deal and the Warner deal within about 14 months to massive media companies. That is something that nobody else in the media industry has done, and most didn't think he was going to be able to do it, certainly not in that time frame. As Julia was saying,$80 billion in debt is quite a mountain of debt to have to deal with. And in there lies the huge challenge, because the cash flow needed to support that debt is largely being thrown off by cable networks, which are declining. Both Warner and Paramount's cable networks, in terms of advertising revenues, have been declining double digits.

37:28Nisha Patel: The subscriber fees coming from cable operators are declining on a combined basis, close to double digits. And having to stabilize that in some way looks like a daunting task while trying to, one, support the debt, and two, have to invest in growth in the company at the same time, which is going to be quite a balancing act.

37:52NYC Council Speaker: Right. I mean, if you just said to me,$80 billion in debt, I don't know what the current market cap is right now. But yeah, I can see why a$9 stock is trading down 4 % today. What other options do they have from just a balance sheet point of view alone? What are they going to do?

38:07Nisha Patel: Well, we have to recognize that this is going to be a massive company in terms of total television viewership across linear and streaming. It will probably edge out YouTube, which is now number one in terms of total household viewing share, to be the number one company in terms of overall viewership. And it's probably going to be close to neck and neck with YouTube in terms of total television revenue, something north of$60 billion. But where the company really has to excel is in streaming. And the challenges there are not small. You're going to probably combine Paramount Plus and HBO. Obviously, when you combine two streaming services, there's a real risk of revenue cannibalization as you do that.

38:59Nisha Patel: And when you think about where they have to grow, because they'll have probably when you deduplicate their subs in the United States, probably have close to 90 million U.S. subs. But where they really got to focus is international. And international is going to take a lot of increased programming expense to do the kind of local productions that penetrate the way Netflix has. But when you take Paramount Plus and HBO and even add in Disney Plus, Netflix has 50 million more international subs than all three of those combined, which gives you some sense of just how daunting the growth prospects are if their big growth upside is going to be in the streaming arena.

39:41NYC Council Speaker: Yeah, I mean, it gives me it makes me dizzy. You know, it's a tall. That's a challenge. And Netflix is struggling right now. And the shares are down 30, 40 percent from their highs. Is streaming imploding for everybody right now? I mean, I thought this was the future.

39:57Nisha Patel: Well, I don't think it's imploding. It's gotten certainly more challenging than than it was. And all these companies are facing the need to invest more in content. Now, Ellison has said technology and technology implementation is going to be a key savior of this company. When it comes to areas where that might really have impact, it's in the area of content spend and where AI can particularly reduce entertainment content spend. Obviously, sports is not an area where that's going to make any contribution. It's an area that I'm spending a lot of time in, and there is huge opportunity to bring content spend way down with the implementation of AI.

40:47Nisha Patel: Of course, though, movie studios and the unions, that is a real hot-button issue. And the question is, with the agreements those companies are under, just how much near-term opportunity there is for AI in the mainstream, not at the edges, but in terms of really reducing content spend. And are they going to be able to really make do with that?

41:08NYC Council Speaker: And there's the Paramount Skydance market cap is$10 billion against$80 billion in debt. So just to reiterate that final question, what did you think about Enon Kreitz's selection to help run this company?

41:21Nisha Patel: Well, he certainly has some background here, but I don't think anybody could have quite the background to undertake the integration challenge that this company presents against all that debt with the need for growth prospects while investing. And don't forget, they probably have an NFL football renewal to deal with because of the change of control with Paramount, where they've not figured out yet the NFL renegotiation. And that could cost them another billion. And probably another billion means another 8 % of costs that have to come out. So it's a daunting task for anyone. He certainly has an interesting background in terms of IP being turned into movies.

42:03Nisha Patel: They got a lot of IP here that they're going to have to develop into much more successful movie slates than Paramount has had to date.

42:12NYC Council Speaker: Yeah, well, it is a formidable content machine. That's for sure. It's kind of exciting to see, having cleared those hurdles that you mentioned, what they might do now and how this might shake things up. If they can make a run at YouTube, who knows? Tom, thanks so much. Great to have you on today. We appreciate it. Thanks for having me. Tom Rogers. A quick programming note, David Faber will have an exclusive interview with Skydance's David Ellison and Enon Kreitz. That's this Thursday at 8.45 a.m. Eastern. Looking forward to that. You don't want to miss it. And coming up, China is often mentioned as one of the biggest threats to American AI companies.

42:46NYC Council Speaker: But what happens when the challenge from a cheaper open source model, also backed by NVIDIA, starts right here at home? We'll discuss Maybe America's deep-seek moment next.

43:07NYC Council Speaker: Welcome back. The NVIDIA-backed AI startup called Reflection, unveiling a new open-source model looking to compete not just with OpenAI and Anthropic, but also maybe to fend off some of that cheaper competition coming from China. Kate Rooney has more in today's Tech Check. Kate? Hey, Kelly.

43:24Nisha Patel: Well, this startup reflection you mentioned, it's also founded by former Google DeepMind engineers. It's really being seen as the American answer to these popular low cost Chinese options that we've talked about and have surged in popularity lately. Unlike options from OpenAI or Anthropic, other companies, so think of a bank or a startup, for example, can take these models and then customize them with their own data. That route can be cheaper while keeping some of that sensitive information in-house. Alex Karp of Palantir has been among those arguing for that. Reflection CEO was on Squawk Box this morning.

43:59Nisha Patel: He compared it to owning versus renting. I kind of think about it from an AI rental market to an AI ownership market. Closed models is kind of like renting your AI, like renting an apartment. And as enterprises use AI more, they want to own it as much as possible

44:17NYC Council Speaker: because it becomes such a big line item. And so we see a big shift happening to open source and meeting this moment to produce a great American Western open model

44:26Nisha Patel: that enterprises can use for their most critical workloads. And Kelly, there is also a geopolitical factor here. Chinese companies have dominated this open source space, while banks and government agencies right now have a limited amount of Western alternatives if they did want to run AI themselves and go in that ownership model route. There is a similar trend coming out of Europe as well. AI startup Mistral this morning out with an even larger open-weight model. It does claim that it beats Reflection's version, although these are all internal benchmarks. All of it, though, could add some pressure to Anthropic and OpenAI at a pivotal time right now when it comes to margins, but both of those companies have filed confidentially to go public, Kelly.

45:05NYC Council Speaker: Right. There was a great piece the other day. It was in the Wall Street Journal, and it just kind of made the obvious point that companies are having a hard time figuring out what their AI budgets even are. Because if you go say, you know, token maxing was one thing. It was like, just go do all of it. It's incredibly expensive. Obviously, that was never sustainable. So now there's this era of, okay, well, if we try all these different models and we're trying to get a project done, we don't know if this project's going to cost us$1,$14, you know, more than that, because the outcome is more difficult to ascertain and the token.

45:39NYC Council Speaker: So as you're describing this cheaper option, I think, well, on the one hand, that could be more helpful for companies. But on the other hand, a lot of them are still having to spread these projects around right now, kind of just in order to get a good answer, you know, a good resolution. So it's a new entry into the mix. But for a lot of the higher tasks and, you know, things that Fable and everyone's favorite right now can do, I don't know if it can quite match those.

46:04Nisha Patel: And that's been the pushback, Kelly, from Anthropic and OpenAI, who have said the guarantee from these companies is that if you spend on the tokens, you're going to get a good outcome and that they can guarantee that theirs are powerful. And also the price per task is also potentially lower versus testing one of these new models that maybe doesn't work as well for what you're trying to do. It's more of a risk and therefore you might have to spend more tokens to get the same outcome. So that has been the argument from some of the big AI labs. There's also a question of sort of this ownership model.

46:34Nisha Patel: You have to have a lot of technical know-how to build your own internal AI model. There are companies out there who say, I don't want to deal with it. I just want to rent. I don't want to go ahead and go through the mortgage application, whatever it looks like in this analogy. They don't necessarily want to spend. To do that, you have to have the engineering talent in-house. That's another challenge here. And a lot of companies, I will say, are comfortable with that rent model. And we have not seen it eating into Anthropics revenue yet, although we'll see when this prospectus comes out eventually.

47:03NYC Council Speaker: It changes so quickly. And then you have, you know, do you want them to have your date or keep it in house? It's a tough, exciting, but tough time. Kate, thank you very much. Kate Rooney. That's it for us. Thank you for tuning in. I'll join Brian Sullivan for Power Lunch right after this quick break. You've been listening to The Exchange. Make sure you're subscribed to get each episode every day. Same time, same place.

47:27Nisha Patel: 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.