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Fed Rate Decision Looms as AI Spending Raises Market Concerns · The Financial Exchange Show

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  Speaker 1: is The Financial Exchange with Chuck Zotta and Mike Armstrong.
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  Speaker 2: It's Chuck, Mike, and Tucker with you here on The
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  Speaker 2: Financial Exchange. It is a busy day for us here.
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  Speaker 2: We've got a fantastic location. We're broadcasting remotely. From the
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  Speaker 2: Museum of American Finance in Boston's Seaport, it's a beautiful
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  Speaker 2: day out. The sun is shining. The birds have gone south,
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  Speaker 2: but hey, you can still come join us and pop
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  Speaker 2: in to say hi if you want if you happen
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  Speaker 2: to be in the Boston area. If not, there are
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  Speaker 2: plenty of flights into and out of Logan Airport on
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  Speaker 2: a daily basis, and maybe you can catch one. That
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  Speaker 2: gets you here in the next couple hours.
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  Speaker 3: Ten-minute walk from South Station. You can grab the commuter rail.
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  Speaker 3: This is kind of fun.
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  Speaker 2: You can maybe grab the commuter rail. You can definitely
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  Speaker 2: grab the commuter rail. It's a hard maybe depending on
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  Speaker 2: how it's running on any given day.
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  Speaker 3: This is a fun full circle for me, Chuck. I
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  Speaker 3: started my career working in the building or part of
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  Speaker 3: the building that this museum is inside of. When I
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  Speaker 3: worked here, I can probably count on one hand the
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  Speaker 3: number of buildings that were more than five stories. The seaport,
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  Speaker 3: if you have not been down here in the last
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  Speaker 3: 15 years, is pretty unrecognizable. And this whole area now,
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  Speaker 3: absolutely gorgeous after a good five years of renovation. And
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  Speaker 3: we're going to have some great guests today talk about
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  Speaker 3: the museum that we're broadcasting from, which if you happen
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  Speaker 3: to be in Boston.
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  Speaker 4: And you're a fan of history. This is a great,
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  Speaker 4: cool museum to check out.
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  Speaker 2: I mean, look, I got to tell you, just before
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  Speaker 2: we go further, David Cowan, who runs the place here,
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  Speaker 2: was nice enough to give us a tour beforehand. And
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  Speaker 2: I mean, look, I know that.
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  Speaker 4: I know that I have a predisposition.
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  Speaker 2: I know I'm a bit of a nerd when it
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  Speaker 2: comes to this stuff, but. When you're walking through a
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  Speaker 2: museum and you see bonds with George Washington's signature on it,
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  Speaker 2: and you're walking through the museum and you've got Alexander
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  Speaker 2: Hamilton's actual ledger for the U.S. government, you're looking through
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  Speaker 2: this stuff and you're like, okay, this is pretty cool.
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  Speaker 2: So I highly encourage anyone, whether it's today or any
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  Speaker 2: other day, if you haven't been... Here, again, it's the
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  Speaker 2: Museum of American Finance. It's in the Seaport in Boston.
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  Speaker 2: It's free entry. You don't have to pay anything to
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  Speaker 2: come in, which is kind of wild for a museum
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  Speaker 2: about American finance. Hey, come visit because it's free. But look,
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  Speaker 2: they want to spread the message, and it's fantastic. So
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  Speaker 2: join us today. Come by and say hi if you
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  Speaker 2: happen to be in the city. Otherwise, put it just
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  Speaker 2: on the calendar for some time in the next few
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  Speaker 2: months or so because it's a really cool spot. Speaking
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  Speaker 2: of Cool Spot, we've got a bunch of stuff that
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  Speaker 2: we're going to be seeing today that has market moving potential.
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  Speaker 2: Biggest thing that we'll start with, I guess we'll kind
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  Speaker 2: of go by the calendar. We've got a Fed meeting
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  Speaker 2: that closes today. So the Federal Reserve has been meeting
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  Speaker 2: since yesterday. And when we take a look at the
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  Speaker 2: Fed funds futures market right now, not much priced in
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  Speaker 2: in terms of action, about a 90% chance. that rates
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  Speaker 2: are held steady, only about a 9.4% chance that the
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  Speaker 2: Fed hikes today. And so, again, expectations are pretty heavily
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  Speaker 2: tilted in one direction. But you've got a new Fed
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  Speaker 2: chair with a resurgent inflation problem. And I think it's
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  Speaker 2: a real question as to, hey, is there the potential
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  Speaker 2: for any kind of surprise that we may see from
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  Speaker 2: Kevin Warsh and the rest of the gang at 2 p.m.
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  Speaker 4: This afternoon.
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  Speaker 3: Yeah, it seems unlikely to me that we will get
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  Speaker 3: that surprise. There's been a few members, not Kevin Warsh himself,
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  Speaker 3: but a few other members who don't follow that same
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  Speaker 3: rule of forward guidance in the same way, and they've
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  Speaker 3: indicated pretty clearly that there's no intent to raise rates
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  Speaker 3: at this meeting. I think what will be interesting, right,
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  Speaker 3: the last meeting, Chuck, we had a unanimous decision to
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  Speaker 3: hike rates. Might you get a unanimous decision to hold
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  Speaker 3: rates steady at this meeting here right before.
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  Speaker 4: The midterm elections? I would be surprised.
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  Speaker 3: But nonetheless, we very much are pricing in no hikes
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  Speaker 3: at this meeting.
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  Speaker 4: And the question will remain.
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  Speaker 3: Well, I think it'll remain. How do you justify that
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  Speaker 3: decision in the face of such high inflation? And I think, interestingly,
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  Speaker 3: you know, What is the evolving view on this new
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  Speaker 3: technology that Kevin Warsh has spoken pretty heavily about and
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  Speaker 3: how he views it and how he views its effects
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  Speaker 3: on future inflation and productivity? And, you know, there's been
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  Speaker 3: some calling into question as to what that might mean
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  Speaker 3: for debt markets, which is part of what the Fed
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  Speaker 3: ultimately controls here.
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  Speaker 2: And so I think that, again, I try not to
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  Speaker 2: get too hyper-focused on any particular meeting because the overall
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  Speaker 2: trajectory of what the Fed is doing is way more
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  Speaker 2: important than what they do at any particular meeting.
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  Speaker 4: I think it's the trajectory and the pace, Chuck.
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  Speaker 3: Those are two things that I think are crucially important,
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  Speaker 3: at least for equity markets, is which direction are you
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  Speaker 3: going and how quickly are you going.
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  Speaker 4: To get there?
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  Speaker 2: And this is why I don't understand... The idea behind
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  Speaker 2: not hiking today is... Okay, so you go back in
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  Speaker 2: time to mid-September. And the Fed says, hey, we're concerned
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  Speaker 2: enough about inflation to hike interest rates. And since then,
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  Speaker 2: we've gotten a jobs report that came out... What was it?
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  Speaker 2: Three weeks ago now. That was... perfectly fine. Again, for
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  Speaker 2: this labor market, about 30,000 jobs created. The unemployment rate
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  Speaker 2: is still at 4.2%. Again, there's nothing in there and
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  Speaker 2: nothing in weekly claims or anything that suggests any material
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  Speaker 2: weakness in the labor market relative to where it was
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  Speaker 2: in September. And so you look at that and you're like, okay,
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  Speaker 2: on the labor side, things are the same. And we
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  Speaker 2: got a CPI report that was hot when you looked
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  Speaker 2: at the headline number, the core number starting to get
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  Speaker 2: a little bit elevated as well. And you even had
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  Speaker 2: the Cleveland Fed's trimmed mean CPI, which trims off the
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  Speaker 2: edges of it so it gets rid of outliers. That
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  Speaker 2: showed an acceleration for the month as well. And so
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  Speaker 2: I think the place that I get to is, hey,
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  Speaker 2: we know that the Fed does not actually conduct policy
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  Speaker 2: just by saying, oh, we'll do one hike here, one
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  Speaker 2: cut there. They're typically part of bigger cycles. And so
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  Speaker 2: I guess my view is, look, if you were concerned
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  Speaker 2: enough to hike in September, there's nothing that's come out
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  Speaker 2: since then that suggests that you shouldn't be hiking today.
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  Speaker 2: And so... So why not?
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  Speaker 4: So why not?
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  Speaker 2: Just get it over with. I know the market's giving
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  Speaker 2: them a pass on this, but like.
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  Speaker 3: Yeah, and I'm curious where the press conference goes here
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  Speaker 3: if they indicate that... They're obviously not going to say this,
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  Speaker 3: but do they give the sense of being scared of
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  Speaker 3: their own shadow and the effects that they might have
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  Speaker 3: on this massive build-out right now. I think markets right now,
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  Speaker 3: arguably since their last meeting, are at a more fragile place.
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  Speaker 3: Cost of debt issuance, cost of insurance against debt for
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  Speaker 3: building data centers has gotten far more costly. And so
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  Speaker 3: I am curious to see if that is mentioned at
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  Speaker 3: all by Warsh himself during the press conference of fear
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  Speaker 3: of what a strong message of higher rates could do
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  Speaker 3: two markets overall and the effects there. Again, my opinion
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  Speaker 3: is that they shouldn't be worried about that, but I
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  Speaker 3: suspect that they might be.
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  Speaker 2: Yeah. In the last couple of days, we've seen a
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  Speaker 2: little bit of compression in terms of corporate bond spreads.
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  Speaker 2: We've seen a little bit of compression on credit default swaps, suggesting, look,
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  Speaker 2: the question that bond investors are asking on a lot
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  Speaker 2: of this debt issuance to fund this AI build-out is, okay,
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  Speaker 2: if you're going to have to raise this much via debt,
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  Speaker 2: how do I know I'm going to get paid? And
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  Speaker 2: then if you need to move interest rates on that
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  Speaker 2: debt to where they need to be, okay, this isn't
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  Speaker 2: really going to be viable if I have to pay
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  Speaker 2: 20% in order to issue a bond to build a
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  Speaker 2: data center. It doesn't work that way. But the last
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  Speaker 2: couple days now, remember, we had Meta come out last
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  Speaker 2: week and say, okay, we're going to potentially issue hundreds
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  Speaker 2: of billions of dollars of equity, not debt, in order
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  Speaker 2: to do this. and Meta stock has taken it on
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  Speaker 2: the chin. It's fallen from 713 at one point on
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  Speaker 2: October 21st to 618, so it's down 13, 14% percent
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  Speaker 2: during that time. But what Meta has kind of done,
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  Speaker 2: in my opinion, is they've said, OK, you don't want
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  Speaker 2: us to finance this using debt anymore. Fine, we're going
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  Speaker 2: to finance it using equity. We will sacrifice the equity
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  Speaker 2: price in order to save the debt.
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  Speaker 3: Which is certainly a statement of confidence. It might be misplaced,
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  Speaker 3: but it's certainly a statement of confidence.
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  Speaker 2: The question that we've needed to answer over the last
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  Speaker 2: week or two is, how do we finance this? And
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  Speaker 2: what is now being put together between what Met has
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  Speaker 2: done and some of these alternative financing vehicles that Broadcom
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  Speaker 2: and the banks have put together in the last couple
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  Speaker 2: days is, hey, here's how we're going to do it,
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  Speaker 2: and here's how we're going to try to manage this.
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  Speaker 2: Whether it works is still going to be something that's
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  Speaker 2: answered in the next 12 to 18 months, as we've
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  Speaker 2: talked about. But the debt markets were absolutely screaming, guys,
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  Speaker 2: we're tapped out. You cannot borrow $ 500 billion next year
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  Speaker 2: to build data centers.
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  Speaker 1: Yeah.
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  Speaker 3: And look, Chuck, I think this is part of the
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  Speaker 3: question that the Fed is clearly struggling with.
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  Speaker 4: They don't want to answer to this.
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  Speaker 3: But the interest rate scenario that we are in right
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  Speaker 3: now is heavily restrictive to a large portion of the
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  Speaker 3: real economy. It's just not restrictive to AI companies. And
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  Speaker 3: I think that probably weighs heavily on them right now, right?
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  Speaker 4: Sure. Yes, we see inflation as a problem.
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  Speaker 3: Yes, we think that our policy is restrictive to some areas,
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  Speaker 3: such as home building and any small business out there,
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  Speaker 3: but it's clearly not enough to restrict inflation.
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  Speaker 2: Let's take a quick break here. When we come back,
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  Speaker 2: we'll talk about the latest out of the Middle East next.
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• 12:39
  Speaker 2: All right, we've got a piece in the Wall Street
• 12:42
  Speaker 2: Journal today. It's titled, U.S. warns Gulf of possible short,
• 12:45
  Speaker 2: intense renewal of Iran war after midterms. And there are
• 12:50
  Speaker 2: questions that I have based on the piece.
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  Speaker 4: I have one question for you, Chuck.
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  Speaker 3: What is the last thing you would do if you
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  Speaker 3: were planning an increase in hostilities in the Middle East
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  Speaker 3: post-midterm elections?
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  Speaker 2: I probably wouldn't tell everyone about it. But the counter
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  Speaker 2: to that is if you are an ally in the region...
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  Speaker 2: You're probably not thrilled with how this year has gone
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  Speaker 2: for you.
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  Speaker 4: Yep.
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  Speaker 2: And so there might be some additional diplomacy and notification
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  Speaker 2: that needs to go on here.
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  Speaker 3: Agreed, but I think if that were the case, I
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  Speaker 3: don't think we'd be reading about it in the Wall
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  Speaker 3: Street Journal.
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  Speaker 2: Well, here's the thing. The first thing is that the U.S.
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  Speaker 2: is warning the Gulf of a possible short, intense renewal.
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  Speaker 2: So here are the questions that I have. Number one,
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  Speaker 2: what does possible mean? You don't warn someone that you're
• 13:39
  Speaker 2: going to possibly do something. Even an ally. That doesn't
• 13:45
  Speaker 2: really make sense.
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  Speaker 4: Feeling cute, might lob a missile later.
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  Speaker 2: It doesn't make sense. The second piece. That word short
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  Speaker 2: really is doing some work here. Because did anyone think
• 13:59
  Speaker 2: on February 27th that eight months later on... October 28th,
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  Speaker 2: we would be sitting here still talking about the situation being.
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  Speaker 4: What it is. I'm sure some did, but no.
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  Speaker 2: Got to be honest, if you pull some of our
• 14:16
  Speaker 2: early tapes from our show, one of the things that
• 14:20
  Speaker 2: we said is, look, this can evolve very unpredictably, and
• 14:23
  Speaker 2: it might not be something that's over in short order. So, again,
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  Speaker 2: just because the United States may plan for a short
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  Speaker 2: renewal of hostilities... It doesn't tell you anything about how
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  Speaker 2: other actors in the region may decide to respond. And
• 14:39
  Speaker 2: when I say other actors in the region, I'm not
• 14:40
  Speaker 2: just talking about Iran. Iran could very well say, OK, fine,
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  Speaker 2: it's a short thing and we're not going to retaliate
• 14:49
  Speaker 2: with any major response, which, by the way, is what
• 14:52
  Speaker 2: they did during the 2025 strikes that we saw. Given
• 14:56
  Speaker 2: the way things have played out this year, I doubt that.
• 14:58
  Speaker 2: But look, do you know how Israel is going to
• 15:01
  Speaker 2: respond to this? Are they going to necessarily follow suit
• 15:07
  Speaker 2: with a short, targeted campaign, or do they engage in
• 15:11
  Speaker 2: something longer? The Houthis down there in Yemen, do they
• 15:16
  Speaker 2: look at this and say, you know what, let's lob
• 15:19
  Speaker 2: some more stuff at the Saudis? There are a million
• 15:23
  Speaker 2: different ways that this can unfold, and so, as I've
• 15:27
  Speaker 2: said since the beginning, And I think what Mike was
• 15:30
  Speaker 2: kind of alluding to on this when he was talking about, like,
• 15:32
  Speaker 2: are you going to tell someone and publish it in
• 15:34
  Speaker 2: the Wall Street Journal? Stop paying attention to what people
• 15:38
  Speaker 2: are saying and start paying attention to what people are doing.
• 15:41
  Speaker 2: Because you're not going to be able to get a
• 15:44
  Speaker 2: good read based on the public pronouncements. And we're not
• 15:48
  Speaker 2: going to know if the situation in the Middle East
• 15:51
  Speaker 2: has actually improved or Until well after, because the durability
• 15:55
  Speaker 2: of it's going to be questioned after the memorandum of
• 15:58
  Speaker 2: understanding truths from earlier this summer broke down. That thing
• 16:02
  Speaker 2: lasted not even a month. And then it broke down.
• 16:06
  Speaker 2: So even if you do get some new pact that
• 16:10
  Speaker 2: ends up being signed that ends this, are you really
• 16:12
  Speaker 2: going to trust it right away? Are you going to
• 16:15
  Speaker 2: know that that's the one? No, you're only going to
• 16:18
  Speaker 2: know afterwards. Now, what I can tell you about energy
• 16:22
  Speaker 2: markets over the last couple weeks. Let's take a look
• 16:27
  Speaker 2: at oil. Oil, you've seen a little bit of upward
• 16:30
  Speaker 2: drift in front month pricing, so like a little bit
• 16:32
  Speaker 2: of upward movement on oil prices. The curves have gotten
• 16:37
  Speaker 2: a little bit steeper in the last month overall, but
• 16:40
  Speaker 2: have shallowed off in the last couple days, which to
• 16:44
  Speaker 2: me suggests maybe a little bit of moderation in the
• 16:47
  Speaker 2: last couple days on how tight these markets are for crude.
• 16:51
  Speaker 2: When we take a look at diesel, diesel prices up
• 16:54
  Speaker 2: modestly over the last month. Not month, last couple weeks.
• 16:58
  Speaker 2: Maybe five, six cents a barrel, I'm sorry, a gallon
• 17:01
  Speaker 2: on diesel. It's not too much movement there. But we
• 17:05
  Speaker 2: are continuing to see very, very tight markets there that
• 17:10
  Speaker 2: have loosened a little bit in the last couple days again,
• 17:12
  Speaker 2: but are still up over the course of the month. Gasoline,
• 17:16
  Speaker 2: we've seen gas futures prices front month come down, which
• 17:19
  Speaker 2: is good. And you've seen the backwardation come down on
• 17:23
  Speaker 2: the curve as well. So gasoline markets loosening up the
• 17:26
  Speaker 2: most out of any of these. But overall, this still
• 17:29
  Speaker 2: remains a very dodgy situation because a small improvement can
• 17:34
  Speaker 2: result in meaningfully lower prices just because of, again, how
• 17:38
  Speaker 2: tight these products still are. And a slight worsening can
• 17:44
  Speaker 2: really move prices up in a hurry as well. So
• 17:46
  Speaker 2: I advise people on this. be open to things moving
• 17:49
  Speaker 2: in either direction because there really isn't anything out there
• 17:54
  Speaker 2: right now that is conclusively suggesting an improvement or a worsening.
• 17:59
  Speaker 2: We've kind of been just treading water for the last
• 18:01
  Speaker 2: two to three weeks, and these are still very tight
• 18:04
  Speaker 2: markets with a high risk of things going in either direction,
• 18:09
  Speaker 2: depending on how the Middle East evolves.
• 18:11
  Speaker 3: As folks head to early voting at the moment, and
• 18:15
  Speaker 3: I don't know how many states do early voting, we
• 18:16
  Speaker 3: have National average for a gallon of gas sitting just
• 18:19
  Speaker 3: shy of $ 4.
• 18:20
  Speaker 4: 25 here.
• 18:20
  Speaker 3: And, you know, obviously not the focus of our program,
• 18:28
  Speaker 3: but everything in politics does affect markets in one way,
• 18:32
  Speaker 3: shape or form. And we have, I think it's nine
• 18:36
  Speaker 3: Senate seats that are polling within the margin of error
• 18:38
  Speaker 3: right now. So it is going to be an interesting
• 18:41
  Speaker 3: few weeks here. And as we've talked about, Inflation is
• 18:45
  Speaker 3: one thing. CPI printing is certain numbers of interest. There
• 18:49
  Speaker 3: is no single price point that matters to the psyche
• 18:54
  Speaker 3: of the American public more than the price of a
• 18:56
  Speaker 3: gallon of gas. And it's been sitting up above $ 4
• 18:59
  Speaker 3: a gallon now for, oh gosh, I would think now
• 19:04
  Speaker 3: six months.
• 19:05
  Speaker 2: Let me take a look. I have a chart on this, actually. No,
• 19:09
  Speaker 2: we got back below $ 4 briefly in the summer.
• 19:12
  Speaker 4: Okay.
• 19:12
  Speaker 2: We had that memorandum of understanding period that went from
• 19:16
  Speaker 2: kind of late May through early July that we got
• 19:19
  Speaker 2: below four. Other than that, we've basically been above it
• 19:22
  Speaker 2: since April. So about six months or so above $ 4
• 19:26
  Speaker 2: a gallon.
• 19:27
  Speaker 4: Yeah. So we will see.
• 19:29
  Speaker 2: Let's take a quick break. When we return, we are
• 19:32
  Speaker 2: joined by former CNBC Senior Markets Correspondent Bob Pisani. We've
• 19:37
  Speaker 2: also got Wall Street Watch coming up.
• 19:39
  Speaker 1: Like us on Facebook and follow us on Twitter at TFEShow.
• 19:43
  Speaker 1: Breaking business news is always first, right here on the
• 19:46
  Speaker 1: Financial Exchange Radio Network. Time now for Wall Street Watch.
• 19:52
  Speaker 1: Tracking the stocks, the data, and the headlines driving markets
• 19:55
  Speaker 1: so far today, right here on the Financial Exchange Radio Network.
• 19:59
  Speaker 5: Markets are quite ahead of the conclusion of the Fed's
• 20:01
  Speaker 5: meeting this afternoon where interest rates are expected to remain unchanged.
• 20:05
  Speaker 5: Wall Street will also closely monitor markets Fed Chairman Kevin
• 20:08
  Speaker 5: Walsh's press conference at 2.30. Right now, the Dow is
• 20:11
  Speaker 5: up a tenth of a percent, or two-tenths of a percent,
• 20:13
  Speaker 5: excuse me, S & P 500 up over a tenth
• 20:16
  Speaker 5: of a percent. NASDAQ is completely flat. Russell 2000 is
• 20:20
  Speaker 5: up two-tenths of one percent. Ten-year treasury yield up two
• 20:23
  Speaker 5: basis points at 5.02 percent. And crude oil up two
• 20:27
  Speaker 5: and a half percent, trading at $ 102 a barrel. Brent
• 20:29
  Speaker 5: at $ 115 a barrel. And big tech earnings are on
• 20:35
  Speaker 5: the way this afternoon, where Google's Alphabet and Microsoft will
• 20:39
  Speaker 5: post their anticipated third quarter results. Amazon will follow tomorrow afternoon.
• 20:45
  Speaker 5: I'm Tucker Silva, and that is Wall Street Watch.
• 20:48
  Speaker 3: As a reminder, folks, we are broadcasting live from the
• 20:50
  Speaker 3: Museum of American Finance here down in the Seaport area
• 20:54
  Speaker 3: of Boston, and would love for you to come join us.
• 20:57
  Speaker 3: It is a really, really cool spot. And speaking of which...
• 21:02
  Speaker 3: Bob Bassani joins us now. In addition to his great
• 21:08
  Speaker 3: career at CNBC reporting from the New York Stock Exchange
• 21:12
  Speaker 3: and guiding Americans through big moves in markets for most
• 21:17
  Speaker 3: of my adult life, he's also been a member of
• 21:19
  Speaker 3: the Museum of American Finance's Board of Trustees since 2021
• 21:23
  Speaker 3: and joins us now to talk. a bit about what
• 21:25
  Speaker 3: we're seeing this week in a busy week for economic
• 21:29
  Speaker 3: data and markets.
• 21:29
  Speaker 4: Bob, thank you so much for joining us. Appreciate it.
• 21:32
  Speaker 6: Mike and Chuck, great to be here. I'd be happy
• 21:34
  Speaker 6: to be up there with you in Boston. Unfortunately, or fortunately,
• 21:38
  Speaker 6: I'm in South Carolina for the annual meeting of the
• 21:40
  Speaker 6: South Carolina Financial Planning Association. And a lot of things
• 21:44
  Speaker 6: you're talking about, like inflation and AI, is a very
• 21:48
  Speaker 6: big topic among financial planners today. So I'm in South
• 21:52
  Speaker 6: Carolina and But I'm glad you're up there in Boston.
• 21:54
  Speaker 6: I've been on the board for a number of years,
• 21:56
  Speaker 6: and it's a wonderful organization. And we've got a physical
• 21:59
  Speaker 6: museum there in Boston, right on the seaport, right in
• 22:03
  Speaker 6: Fidelity's world headquarters, essentially. And so I hope everybody will
• 22:07
  Speaker 6: somehow find a way to get up there and see
• 22:09
  Speaker 6: the exhibit. It's a wonderful exhibit.
• 22:11
  Speaker 4: It is.
• 22:12
  Speaker 3: We got a brief tour this morning. It is fantastic,
• 22:15
  Speaker 3: a truly interesting exhibit. And as much as you wish
• 22:18
  Speaker 3: you were here, Bob, we woke up to 29 degree
• 22:22
  Speaker 3: temperatures this morning.
• 22:23
  Speaker 4: So enjoy it down there.
• 22:25
  Speaker 3: So we do have a press conference this afternoon. Kevin
• 22:28
  Speaker 3: Warsh going to be walking us through what they've decided
• 22:32
  Speaker 3: at this meeting. 90% probability that they don't move at
• 22:36
  Speaker 3: all on interest rates.
• 22:38
  Speaker 4: What do you think the commentary is going to look like?
• 22:40
  Speaker 3: I assume you're of the opinion that they probably won't
• 22:43
  Speaker 3: move as well. Not that you're into predicting Kevin Warsh
• 22:46
  Speaker 3: and the Fed board's next decision. But what do you
• 22:49
  Speaker 3: think they really have to say at this press conference?
• 22:52
  Speaker 6: Well, look, at a quarter point in September, I think
• 22:56
  Speaker 6: you're right. Everybody's expecting them to sort of stand pat
• 22:58
  Speaker 6: at this point. I still think there's a good likelihood
• 23:02
  Speaker 6: of another hike in December just because of the inflation outlook.
• 23:06
  Speaker 6: So I don't know. It's really after the announcement that matters.
• 23:11
  Speaker 6: I covered these things for many, many years.
• 23:13
  Speaker 4: It's really.
• 23:13
  Speaker 6: after what happens that matters. Is he going to describe
• 23:17
  Speaker 6: this as a pause before further tightening, or does he
• 23:21
  Speaker 6: leave the next move genuinely open? He's been trying to
• 23:23
  Speaker 6: project this idea of, I'm not making any decisions. But
• 23:27
  Speaker 6: he's under a lot of pressure now. Is inflation really
• 23:31
  Speaker 6: primarily just an energy problem? I mean, it does look
• 23:35
  Speaker 6: like energy is the primary source of inflation, but there
• 23:37
  Speaker 6: are other sources as well. And I'm not sure there
• 23:43
  Speaker 6: is a strong argument that interest rates are actually high
• 23:47
  Speaker 6: interest rates are restraining growth, for example. I mean, the
• 23:50
  Speaker 6: economy is looking pretty well here. They may have room
• 23:53
  Speaker 6: to hike here without causing a pullback in the economy.
• 23:58
  Speaker 6: So I think Warsh will hold today and deliver a
• 24:02
  Speaker 6: message that he's still open and we'll follow wherever the
• 24:06
  Speaker 6: data goes.
• 24:07
  Speaker 4: So a hawkish hold at the next meeting.
• 24:10
  Speaker 6: We could see rates move up just on that. Unchanged
• 24:15
  Speaker 6: does not necessarily mean things are not going to move
• 24:17
  Speaker 6: in the market.
• 24:18
  Speaker 3: You pointed out that policy does not seem extremely restrictive
• 24:21
  Speaker 3: right now. We are still seeing AI data centers built.
• 24:25
  Speaker 3: It does seem restrictive in some areas of the market. Certainly,
• 24:29
  Speaker 3: home builders are not rushing to build anything new. And
• 24:32
  Speaker 3: I think plenty of sectors surrounding that area are struggling
• 24:34
  Speaker 3: because of high rates right now.
• 24:37
  Speaker 4: How do you judge the state of the bond market?
• 24:39
  Speaker 3: We had Meta really pivoting this week and last to
• 24:43
  Speaker 3: issuing more equity, seemingly out of concern for what they're
• 24:46
  Speaker 3: seeing on their own bonds and cost of borrowing.
• 24:49
  Speaker 4: And, you know, they would be towards the top of
• 24:51
  Speaker 4: the credit quality.
• 24:52
  Speaker 3: Are you seeing any concerns when we cover stories about
• 24:55
  Speaker 3: the cost of CDS for some of these build-outs skyrocketing
• 25:00
  Speaker 3: over the course of the last few months?
• 25:02
  Speaker 6: Well, you mentioned two topics here. You mentioned the bond
• 25:04
  Speaker 6: market and AI, and AI having an impact on the
• 25:07
  Speaker 6: bond market. But you first mentioned mortgage rates. This is
• 25:11
  Speaker 6: dear to my heart because I was the original real
• 25:14
  Speaker 6: estate correspondent for CNBC, and I'm going back to 1990 now.
• 25:17
  Speaker 6: We covered this extensively. People are very unhappy about mortgage
• 25:22
  Speaker 6: rates 30 years at 7%. That is not historically unusual,
• 25:26
  Speaker 6: and I'm not saying that's a good thing. But remember,
• 25:29
  Speaker 6: we had interest rates much, much higher than that. I
• 25:31
  Speaker 6: think the problem is people got used to 2% 30-year
• 25:34
  Speaker 6: mortgage rates during COVID. That's what was an anomaly. The
• 25:39
  Speaker 6: six or seven percent is not. It may be higher
• 25:42
  Speaker 6: than it was a few years ago, but I'm not
• 25:44
  Speaker 6: worried about that being an anomaly or something that has
• 25:48
  Speaker 6: to change dramatically. That historically is roughly where it's been.
• 25:52
  Speaker 6: I am a little concerned about the bond market. I mean,
• 25:55
  Speaker 6: it's great that bonds are offering meaningful yields this year.
• 25:58
  Speaker 6: I love that. But most people's bond funds are underwater
• 26:01
  Speaker 6: this year, particularly when you adjust for price and inflation.
• 26:04
  Speaker 6: And a lot of people fail to do that, thinking that, oh,
• 26:08
  Speaker 6: my gosh, I'm getting 4.5%, you know, on my three-year
• 26:11
  Speaker 6: or close to 5% on a five-year. And this is fantastic.
• 26:16
  Speaker 6: But if inflation is 3.7% and the CPI is 3.7%
• 26:20
  Speaker 6: and prices are down to reflect some of these concerns,
• 26:25
  Speaker 6: you're underwater. The net amount you have from the start
• 26:28
  Speaker 6: of the year is actually lower. I actually went out,
• 26:32
  Speaker 6: a personal comment, for the first time ever in my
• 26:35
  Speaker 6: 35-year history of investing, I bought five-year tips this year
• 26:40
  Speaker 6: for the first time because I do think there's a
• 26:42
  Speaker 6: likelihood inflation will be higher for longer. So the problem
• 26:48
  Speaker 6: here is not just inflation. As you mentioned here, there's
• 26:52
  Speaker 6: enormous competition for money coming from the build-out of the
• 26:56
  Speaker 6: AI infrastructure markets. That has nothing to do with inflation,
• 26:59
  Speaker 6: but that's definitely driving up. That competition for dollars with
• 27:03
  Speaker 6: treasuries is definitely driving yields up. Then there's higher geopolitical risk.
• 27:08
  Speaker 6: And then we have this very disconcerting movement here where
• 27:12
  Speaker 6: foreign governments are not buying as much of our debt
• 27:15
  Speaker 6: as they used to. The Chinese aren't, but even the
• 27:18
  Speaker 6: Japanese aren't. This means we've got to find more buyers
• 27:21
  Speaker 6: for debt, for our debt out there, And we've got
• 27:25
  Speaker 6: $ 32 trillion of it floating around, government debt floating around here,
• 27:29
  Speaker 6: public government debt. So all of these here, people think
• 27:34
  Speaker 6: that the only thing moving interest rates around are inflation,
• 27:37
  Speaker 6: but it's not. That competition for other money, for the
• 27:40
  Speaker 6: build-out of the AI infrastructure, higher geopolitical risk, less foreign
• 27:45
  Speaker 6: governments or fewer foreign governments buying fewer bonds, that all
• 27:48
  Speaker 6: factors into the interest rate story here. So it's really complicated.
• 27:52
  Speaker 6: I see a lot of pressure to get.
• 27:57
  Speaker 6: To keep yields down by the government, obviously to keep
• 28:00
  Speaker 6: borrowing costs down, but on the inflation front, the demand front,
• 28:05
  Speaker 6: the international geopolitical front, there's a lot of pushing against
• 28:09
  Speaker 6: the lower yields at this point. That's worrisome to me.
• 28:15
  Speaker 6: I'm not a bond vigilante. I covered those people for
• 28:20
  Speaker 6: 30 years. They're fairly dour, and most of the time
• 28:22
  Speaker 6: they've been wrong, but I have been paying more attention
• 28:26
  Speaker 6: to the bond market than I used to. I'm an
• 28:28
  Speaker 6: equity guy, but the bond market's a little worrisome at
• 28:31
  Speaker 6: this point.
• 28:32
  Speaker 3: Bob, I don't want to keep you for too long,
• 28:33
  Speaker 3: but you mentioned right at the beginning that you're at
• 28:35
  Speaker 3: a conference down in South Carolina. Everyone's talking about AI.
• 28:39
  Speaker 3: I'm attending a conference across the street hosted by Charles
• 28:41
  Speaker 3: Schwab for registered investment advisors.
• 28:44
  Speaker 4: Guess what?
• 28:45
  Speaker 3: Everyone wants to talk about AI.
• 28:47
  Speaker 4: Anthropic filed their S-1 this Monday. What are your expectations?
• 28:52
  Speaker 3: Are people excited enough to send this thing soaring if
• 28:58
  Speaker 3: and when they do.
• 28:58
  Speaker 4: Get to market?
• 28:59
  Speaker 3: And is it enough to change any of the narrative
• 29:02
  Speaker 3: of concern there has been out there on the hyperscalers
• 29:06
  Speaker 3: and the neoclouds and the build-out of the data centers?
• 29:09
  Speaker 6: Look, I'm a public equity guy. I have been chagrined
• 29:13
  Speaker 6: by the fact that there are so many companies that
• 29:15
  Speaker 6: are staying private for so long. Back in the 90s
• 29:19
  Speaker 6: when I started doing this, companies usually came public after
• 29:22
  Speaker 6: about five years. There maybe wasn't as many venture capital
• 29:27
  Speaker 6: backing all these companies, but the goal was to get
• 29:29
  Speaker 6: them public within about five, six years. Now we have
• 29:33
  Speaker 6: companies sitting around for 10 years before they go public
• 29:36
  Speaker 6: because people are happy staying private. They don't want to
• 29:39
  Speaker 6: expose themselves to the public market. They don't want to
• 29:41
  Speaker 6: expose themselves to potentially lower valuations. There's a real tension
• 29:47
  Speaker 6: between public valuations and private valuations. And a lot of
• 29:53
  Speaker 6: companies are happy to stay private for longer. There's liquidity
• 29:56
  Speaker 6: out there. There's secondary market, there's endless rounds of private fundraising.
• 30:01
  Speaker 6: I have found this very depressing because what happens is
• 30:05
  Speaker 6: companies go public now that are around for 10 years,
• 30:07
  Speaker 6: and the average investor who doesn't have access to the
• 30:10
  Speaker 6: private market is deprived of the ability to invest when
• 30:15
  Speaker 6: companies are having their biggest growth spurt, which is when
• 30:17
  Speaker 6: they're younger. So what my gain here is I want
• 30:21
  Speaker 6: companies to go public, and I don't care if they
• 30:23
  Speaker 6: have to take a lower valuation. I think we need
• 30:26
  Speaker 6: to be exposed more to the public market, and I
• 30:29
  Speaker 6: want more companies going public. Now, you want to talk
• 30:32
  Speaker 6: about the valuation? Okay, look, from what I saw, I
• 30:36
  Speaker 6: was just at a private investor conference last week. They
• 30:40
  Speaker 6: were very nervous about the anthropic IPO. They were nervous
• 30:44
  Speaker 6: because they felt the fate of the AI trade for
• 30:47
  Speaker 6: the rest of the year kind of rested on how
• 30:49
  Speaker 6: well this thing did. And I think they have reason
• 30:51
  Speaker 6: to be concerned about not just about the shakiness of
• 30:56
  Speaker 6: the AI build-out, but also about the real pushback from
• 31:00
  Speaker 6: the public on the valuation. Look at SpaceX, okay? Let
• 31:03
  Speaker 6: me ask you something, guys. Is SpaceX a successful IPO?
• 31:07
  Speaker 6: Just ask that question. Well, okay, so the 135, but
• 31:11
  Speaker 6: they really went public. They started trading at 150. It's
• 31:13
  Speaker 6: 143 now. I will ask you a simple question. Would
• 31:18
  Speaker 6: you call that a successful IPO? Well, you know, on
• 31:21
  Speaker 6: one level, listen to what I just said. It got out.
• 31:24
  Speaker 6: That's the important thing. It got out, and I think
• 31:27
  Speaker 6: that's the single most important thing. That's what I want
• 31:29
  Speaker 6: Anthropic to do. If you ask me, are you making
• 31:31
  Speaker 6: a lot of money on SpaceX than your average person?
• 31:34
  Speaker 1: No, duh.
• 31:35
  Speaker 6: It started at $ 150, opened at $ 150. It's now $ 143.
• 31:39
  Speaker 6: But it is out there now, and it has potential
• 31:42
  Speaker 6: in the future. So is Anthropic going to trade up
• 31:45
  Speaker 6: on the first month? I don't know. If you watch
• 31:47
  Speaker 6: the history of these things that I have for 35 years,
• 31:50
  Speaker 6: cover this stuff. It is shocking how many times these
• 31:53
  Speaker 6: big IPOs trade down after several months. That is the trend.
• 31:57
  Speaker 6: That's because these companies get high valuations from their underwriters.
• 32:01
  Speaker 6: That's what these people are supposed to do, their underwriters.
• 32:05
  Speaker 6: But that doesn't mean the public necessarily agrees with them
• 32:08
  Speaker 6: on the long term. So here's the bottom line on this.
• 32:10
  Speaker 6: We need to get the anthropic IPO out the door.
• 32:13
  Speaker 6: We have no idea what the numbers are going to be.
• 32:17
  Speaker 6: They didn't tell us what was going on here, so
• 32:19
  Speaker 6: we don't know exactly what the numbers are going to be.
• 32:22
  Speaker 6: And I'm not that worried about it. I believe in
• 32:24
  Speaker 6: the AI build-out. I believe in the whole concept. You
• 32:27
  Speaker 6: want to argue about valuations? So do I. It does
• 32:30
  Speaker 6: get down to that nitty-gritty. But we are in the
• 32:32
  Speaker 6: midst of the biggest technological boom that we've seen since
• 32:36
  Speaker 6: the Internet. This is going to change a lot of things.
• 32:39
  Speaker 6: And we need to keep pushing forward on this idea.
• 32:41
  Speaker 6: And if some people have to take a haircut, I'm
• 32:44
  Speaker 6: fine with that. If you ask me, did I buy SpaceX?
• 32:47
  Speaker 6: The answer is no, I did not. But that doesn't
• 32:50
  Speaker 6: mean I don't believe in the concepts of what they're
• 32:53
  Speaker 6: doing necessarily. Again, as an investor, it gets down to
• 32:56
  Speaker 6: a valuation question. But I want to see it succeed.
• 32:58
  Speaker 6: I do.
• 33:00
  Speaker 3: Bob Bassani is a former CNBC senior markets correspondent, current
• 33:04
  Speaker 3: trustee of the Museum of American Finance's Board of Trustees.
• 33:08
  Speaker 3: Thank you so much for joining us, Bob. Appreciate it,
• 33:11
  Speaker 3: and hope we can talk again soon.
• 33:12
  Speaker 4: Thank you, Chuck.
• 33:13
  Speaker 6: Good talking with you.
• 33:15
  Speaker 4: Thank you, Bob. We're going to take a quick break.
• 33:16
  Speaker 4: We'll be right back with more here on The Financial Exchange.
• 33:19
  Speaker 1: Your business day moves fast. Keep up with The Financial
• 33:22
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• 33:47
  Speaker 2: All right, we got a couple big tech earnings that
• 33:54
  Speaker 2: are on tap for later today. We got Microsoft and
• 34:00
  Speaker 2: the company formerly known as Google. And what are we
• 34:06
  Speaker 2: looking for, Mike? What are we expecting to see?
• 34:08
  Speaker 3: Well, we're looking for data center spend, plain and simple.
• 34:11
  Speaker 3: How big is it going to be this year and
• 34:13
  Speaker 3: next year? Where is the cash flow coming from to
• 34:17
  Speaker 3: cover it? And are you accelerating it or decelerating it?
• 34:23
  Speaker 3: We're going to get much more into the weeds. We
• 34:25
  Speaker 3: know what the predictions were as of last quarter. But
• 34:28
  Speaker 3: these two have gone in very different directions since their
• 34:30
  Speaker 3: last earnings call. Microsoft is up 36% from their last earnings.
• 34:34
  Speaker 3: Google's down 6% since their last earnings. And I think
• 34:39
  Speaker 3: investors are, again, starting to differentiate, I guess, more on
• 34:44
  Speaker 3: the build-out of this stuff, who can afford it, who cannot,
• 34:47
  Speaker 3: and who is seeing a positive return on investment from
• 34:49
  Speaker 3: it early on.
• 34:51
  Speaker 2: I think the place that I get to is for
• 34:54
  Speaker 2: this quarter... it's unlikely you see any red flags. Because
• 34:58
  Speaker 2: from what we can tell, just from the publicly available
• 35:01
  Speaker 2: data on this, rental rates for the chips used in
• 35:05
  Speaker 2: data centers remain high. There still is an overall shortage
• 35:10
  Speaker 2: of computing power available based on current demand. And so
• 35:14
  Speaker 2: you wouldn't expect to see anything that's problematic. The questions
• 35:18
  Speaker 2: that I have and that I think everyone has are,
• 35:22
  Speaker 2: when you look out over the next few years, the
• 35:23
  Speaker 2: next three years, you're going to have almost $ 4 trillion
• 35:26
  Speaker 2: in computing capacity coming online. Is there enough demand for that? Because, like,
• 35:31
  Speaker 2: this year, if you look at, again, just the overall
• 35:36
  Speaker 2: numbers on an annual basis in terms of, like, hey,
• 35:39
  Speaker 2: how much computing capacity is coming online over, you know,
• 35:43
  Speaker 2: any particular point in time, the fact is, to this point.
• 35:50
  Speaker 2: I know this is going to sound weird, but not
• 35:52
  Speaker 2: much has actually come online relative to what is going
• 35:56
  Speaker 2: to in the next several years. We're talking, again, last
• 36:02
  Speaker 2: year you had somewhere around $ 485 billion in CapEx. This
• 36:09
  Speaker 2: year you're around, again, this is if it all finishes. Remember,
• 36:12
  Speaker 2: we're not even through this year. Almost a trillion. Yeah.
• 36:15
  Speaker 2: And then the next two years, you've got, again, like
• 36:19
  Speaker 2: when you look at the total spend, you're talking about
• 36:23
  Speaker 2: like almost $ 3 trillion in the next couple of years.
• 36:26
  Speaker 2: And so it's just something where, okay, it's one thing
• 36:30
  Speaker 2: to say, yep, like we've got the capacity from last
• 36:32
  Speaker 2: year online and like that's, you know, accounted for. It's
• 36:35
  Speaker 2: another to say, okay, and now here's how we're going
• 36:37
  Speaker 2: to pay for like, 10 times that that's coming online
• 36:40
  Speaker 2: in the next three to four years.
• 36:42
  Speaker 3: I have to reiterate, the projected costs that we're talking about,
• 36:46
  Speaker 3: trillions of dollars just don't mean anything to anyone. It
• 36:49
  Speaker 3: doesn't mean anything to me. It doesn't mean anything to
• 36:51
  Speaker 3: anybody listening. When you adjust for inflation, this spend that
• 36:54
  Speaker 3: we are talking about, over the course of a couple years,
• 36:58
  Speaker 3: adjusted for inflation is more than the build out of
• 37:01
  Speaker 3: the US highway system. It's far bigger than the dot-com bubble.
• 37:05
  Speaker 3: It's bigger than anything that we've seen. And remember, the
• 37:07
  Speaker 3: highway system took 35 years to build. It's bigger than that.
• 37:11
  Speaker 3: And we're trying to do it in two, three, four years.
• 37:15
  Speaker 3: No wonder we are seeing supply chain and inflation disruptions.
• 37:19
  Speaker 3: No wonder we are seeing difficulty in funding it in
• 37:23
  Speaker 3: the bond market. It is incomparable to anything we have
• 37:27
  Speaker 3: ever seen before. It's driving a lot of excitement, most certainly.
• 37:32
  Speaker 3: But when you put it in that way, I needed
• 37:37
  Speaker 3: something like that to compare it to. And it's really
• 37:41
  Speaker 3: difficult to understand how significant this is when you compare
• 37:44
  Speaker 3: it to anything in our nation's history.
• 37:45
  Speaker 2: The other piece that's challenging here, and again, when you
• 37:48
  Speaker 2: look at, again, just trying to understand it at a
• 37:50
  Speaker 2: micro level, the price of the input and output from this,
• 37:53
  Speaker 2: the tokens, keeps falling even as rental rates keep rising.
• 37:57
  Speaker 2: There's a world where, look, Right now, most of the
• 38:00
  Speaker 2: big players, they're offering $ 20 a month subscriptions. What if
• 38:04
  Speaker 2: because of additional competition, those have to go down to $ 10?
• 38:06
  Speaker 2: What if their revenue projections are completely off as well?
• 38:12
  Speaker 2: We're going to take a quick break. We've got Hour
• 38:13
  Speaker 2: 2 coming up in just a little bit.