A very good afternoon. We are across Bloomberg platforms, Carol Massar, Tim Stenovec. So busy I didn't put my hand cream on. That is what kind of a day it is. What kind of market?
Got a resurgence in oil prices dragging down the equity. A little bit lower on the S&P 500, down for two days in a row. Slightly lower on the Nasdaq 100. Some concerns still about what the Fed does next week, or at least what we hear in the commentary when it comes to interest rates.
The Nasdaq ever so slightly in the green. Those chipmakers rebounding just a little bit. What does next week look like and what will the Fed do?
Most names are lower. So let's get to it. We are getting ready to ramp up, certainly the trading week, not really the week overall. With us to talk about the trade, the big narratives, the big themes that are out there, Joe Weisenthal. We are going to dig into the markets for you in just a moment.
Today's big take: Blackstone has a bet on chips that is driving a debt boom that is upending credit. Plus, another story when it comes to Jane Street.
Jane Street and rivals now fighting for AI power as they compete for an edge in the AI era, increasing the intersection between the AI build, the spend, the investment and the financial sector. Surprise, surprise, it's happening.
Also, talking about PHP. If you don't know what it is, we are going to explain it.
We should be worried about everything. Joe is going to tell us not to be worried. Someone who I know thinks everything is good is Charlie Pellett. Charlie:
Good afternoon. Here's what is going on. The Dow and the S&P, they do remain lower. Nasdaq 100 index a bit higher. President Trump said to be likely to remove some tariffs on Canada agricultural products, according to the Wall Street Journal. The scope and timing of U.S.-Canada action could change. President Trump likely to remove some tariffs on Canadian agricultural products. S&P lower now by just about 28 points, around four-tenths of 1%. The Dow lower by 1.1%. Nasdaq holding onto a gain barely.
Three of the Bloomberg Mag 7 index names will report earnings next week. Right now the index is down 1%. The Philadelphia Stock Exchange Semiconductor Index up nine-tenths of 1%. The backdrop of a two-year at 4.68% and the 30-year 5.31%. Gold below $4,000 an ounce today. That is a drop of six-tenths of 1%. Big move higher for crude on West Texas Intermediate. Brent up by about 2.9%. The energy ETF is advancing now by 2.7%. Just about a quarter of that ETF made up of Exxon Mobil. Exxon Mobil shares 2.4%, Chevron at 2.6%, ConocoPhillips up by 4.1%.
Thank you, Charlie Pellett. Let's get to it. We've got a couple things on the radar as we get ready to talk with Joe Weisenthal. A gauge of the inverse relationship between government bonds and AI-focused stocks has strengthened as the deepening tech selloff has been sending investors for safety. Investors continue to stress and raise questions about the AI trade, the war in the Middle East, Fed meeting next week, and investors of course watching earnings, really the outcome of the midterms, all of which could impact the business and regulatory environment. We know Elon is likely watching them very closely, right? We know he is watching.
Always with an interesting take on the markets, one of the hosts, Joe Weisenthal, is here in studio. Good to have you here.
I think they are having a party in the studio next to us.
They are excited I'm here.
A lot of newsletters. I want to get to the headlines. A big shift in the AI buildout zeitgeist and how we've reached a new and much more difficult funding stage. Talk to us about how you are thinking about the AI trade and the businesses you've been looking to and talking to.
One of the things that is so fascinating right now is how we can simultaneously go up and to the right. We all know there's going to be more demand for AI next year than this year. We are certain it's going to be much bigger than the year after. There's no question about this. And what is remarkable is that even with all this uncertainty, there are so many different theoretical speed bumps that we could fall into. Execution risk. Everyone talking about CoreWeave and the financing.
One issue is just how good are they — not any specific company — how good are they going to be at delivering on time? Let's take another one. We all know the AI models are going to continue to get rapidly better. Do we know for sure that there is going to be a lot of demand for extreme frontier intelligence? I don't know. Do we really need PhDs to do a job? I don't think so.
A lot of the economically productive jobs in the economy for which PhD-level intelligence is totally unnecessary. Who is using them exactly, for what? Pharmaceutical design, semiconductor design. It's not obvious to come up with a list of how many different things the economy actually needs PhD-level intelligence and beyond. Maybe the demand will be at the lagging edge, the non-frontier, but that is when you get this super competition.
Then of course there is the pure leverage, going back to the CoreWeave example. Real estate companies in large part. They acquire, they rent or they buy land and then they rent out their capacity. You know the rising rate environment, they are a landlord. Even if we stipulate that AI is going to get better and better and that AI demand is going to be, there are still so many ways that things could go wrong for certain parts of the ecosystem.
One thing I didn't hear you address is the question of the productivity payout. Billions of dollars in are going to pay off in this economy. Where could that happen?
It's a great question. We know that companies are spending a fortune on tokens, and have we ever heard of a company that said, you know what, we spent a fortune on tokens this year and now we are a much more productive company? No one is ever enthusiastic about layoffs. One of the classic signs that a company is really getting juice out of AI is that they could shrink their workforce. We haven't seen that at all.
I know it is a soft job market for new grads. It is not like there is pain in the labor market. People spending hundreds of billions of dollars on tokens, and where is the payoff? It's not clear yet, and nobody knows, and everybody intuits that there might be. It's important to remember, he got knocked for that famous quote saying that the internet is going to have no more of a difference than the fax machine. Do we know how much the internet contributed to greater productivity? Talk to an economist. Half of 1%. There has been no productivity boom measurable from the internet. We assumed that mobile devices changed our lives, but has it made the economy more productive? Not entirely obvious.
Before we get to this question of where are the productivity breakthroughs from AI going to be, why don't we start with why we never saw any productivity breakthroughs from the internet and mobile technology?
One last question then. The AI spend is really contributing to GDP. So without it, and if it starts to lag, is that something that kind of brings this economy to a halt, or is there enough out there?
It's really worrisome. If you pull up a chart of any non-tech that is a household name, pull up a chart of Nike, pull up a chart of whatever, any retail company, they are not looking good. Now, there's two possibilities. One is that maybe they haven't constrained inflation or got them back to target as we would like, maybe they are too high for the non-tech part of the economy. Maybe a lot of the non-AI part of the economy is just buckling under the weight. Or another possibility is that these companies are not operated well, they are not competing well with competitors out of China. Part of the story with Nike is that people are buying other sneakers.
That is even more worrisome because then you start to wonder who are the industrial behemoths that we have in the United States carrying the torch for the overall economy if we don't have these big tech companies?
Exactly. Look elsewhere and see what is going on. So appreciate it. Go have lunch.
Love the podcast. Thank you, Joe.
We wanted someone who was going to tie it all together, and Joe did that. She has been a frequent guest who obviously focuses on the currency markets, but I want to get into the conversation we just had. Talking about the AI stress that we've seen, still concerns, geopolitics. We've seen investors once again talking about the U.S. market as the safe haven trade. We've seen a bid in U.S. Treasuries. Take a look at where we are seeing the 10-year continuing to trade. We see that playing out. I'm curious what she is seeing when she looks across the markets and what else we are seeing that maybe the U.S. once again increasingly as that safe haven trade.
It was a real reversal of what we saw just a few weeks ago. The fact that people are starting to see the U.S. bond market as a safe haven finally.
I turn around and Joe is gone.
It was AI. Good to have you here. We are curious what you are seeing when it comes to the safe haven trade. Tell us about what this week was like for you and what stood out.
Absolutely, I think that is the question of the hour. Is Treasury a safe haven again? I think the answer is not as easy as it used to be before. We think the answer lies in the nature of the shock. Yes, U.S. assets are safe havens, but this time they behaved not so much like safe haven assets. What is happening right now is that the U.S. is the cleanest white shirt in the dirty laundry again, given what is happening in France, given the bond spreads. So the U.S. is appearing to be the safe haven asset again, but interestingly, the dollar is behaving a little bit like a safe haven that you can see in the last couple of days it has actually underperformed the Japanese yen and the Swiss franc.
Does the bond market tell us anything about what happens in the midterms in the U.S.?
For the majority of the year, the rates selloff continued. Part of that was led by growth expectations, inflation concerns, the Fed being more aggressive on the hiking cycle. But in the last months, we've dealt with more inexplicable reasons, which you can't really pinpoint to any macro data. So that risk premium is being a bigger driver of global bond markets, and unfortunately, while it does require fiscal consolidation, you cannot say with conviction that midterm elections are going to get fiscal consolidation. If there is a blue sweep, hopefully you get a little of that, but unfortunately, politicians are spending more, especially with debt to GDP everywhere getting worse.
You've also spent a long time looking at emerging markets. You really look at the world. When you think about investment opportunities or healthy markets, healthy governments, healthy fiscal positions, what are investors increasingly looking at? Where do they want to have exposure to?
I'm glad you asked me that question because I was on the road the last 10 days speaking to clients, and what is actually a very unique thing is that clients are increasingly, obviously in the AI trade, they think if they cannot lose out on that trade. But more and more of the conversations are centered around concerns about the concentration in the trade and looking for a parallel strategy approach. Yes, we have all of this U.S. exposure, but we want to increasingly diversify and hedge away from that. That is where they are looking for exposure in the non-tech space, non-U.S. space, into other economies which have still been resilient to shocks.
The world has been dealt with two big shocks: trade tariffs and oil. The U.S. economy is not really alpha. The U.S. economy was engineered to be resilient to the shocks. It is largely enclosed and energy independent. What is fascinating is how Asia and Europe held up in a resilient fashion. Crude holds up, investment holds up. Other parts of Asia benefiting from the AI trade. They are earning hard revenue because it's coming from exports of chips.
In the U.S., you were discussing how with the U.S. AI trade is mostly contained valuations. Not too much productivity. You have not seen the macro variables move in the U.S. trend. For Korea and Taiwan, it's hard revenue because their exports have quadrupled. All that local money is being recycled into the currency.
You talked about the shock we are in the midst of now. I'm wondering where we are in that shock.
We clearly are in the new regime that is higher for longer. Commodity prices remaining elevated. Every client and investor wants to be — that will remain to be the flavor of the season. The next question investors are asking themselves is, if you see a correction in the valuation cycle, will the dollar be a safe haven or not? In answering, we think this time around, if you see a global equity market getting nervous coming from the U.S. AI cycle, the dollar will behave like any high-beta currency. It will underperform the alternative safe havens like the Japanese yen, Swiss franc, and maybe the euro, depending on where we are with the French parliamentary budget discussions and if we have put that in the rearview mirror.
If there is an AI bubble that pops, is the U.S. more vulnerable than China or Europe because of the spend? 40 seconds.
The U.S. is more vulnerable. Global money management hoarding of U.S. equities have ballooned. Repatriation. People reduce U.S. tech exposure, and the second thing is people increase their hedge ratios on U.S. asset holdings because they can become more concerned about the exposure and negative dollar inklings.
It is a shame it is so quiet. Next week will be big. Also reads on hyperscalers and more on the AI trade. What a great way to wrap up on our Friday.
Jayati Bharadwaj, director for FX studies at TD Securities.
Continuing to build on the AI discussion, how we reached a more difficult funding stage, next when Bloomberg Businessweek Daily continues.
It is 2:21 on Wall Street. We have West Texas Intermediate crude pushing higher, up 3.8%. The Dow, S&P, Nasdaq very much in the red. Stocks falling as the oil rally keeps a lid on Treasuries. The S&P does remain lower, down 29 points, 0.4%. Dow Industrials down 1.1% with Nasdaq lower by less than one-tenth of 1%. Little changed. Nasdaq holding on to a gain of 59 points. It is up by about 0.2%. Three of seven Mag 7 names reporting next week. The index lower today by 0.4%. The Philadelphia Stock Exchange Semiconductor Index trading higher by just about 0.8%. 10-year, 4.90%. Two-year, 4.68%. Gold falling below $4,000 an ounce today. Crude remains in the driver's seat. WTI up 3.8%. Brent up 3%.
The Trump administration is expanding the exemptions of tariffs on some Canadian products, a move that might help boost Susan Collins' reelection campaign in Maine. She said the exemptions will apply to certain paper, plastics, machinery and food products, saying it will help Maine's role in the coastal economy. Cruise line shares lower after J.P. Morgan downgraded the stock to underweight from neutral and reduced the price target to a street-low $11 a share from $13 a share. Not just Norwegian Cruise Lines, but also rivals including Carnival and Royal Caribbean down as well. Norwegian down 4.2%, Carnival down by 3.9%. Tim and Carol, that is a Bloomberg Business Flash.
Thank you so much. The financial world's exposure to AI, we have been hitting on some of that as we started getting going on this Friday. The massive build and increasingly a lot of debt on the build. Top names in finance. We have seen a battle about whether or not there is an AI bubble out there. Dani Burger on that. She caught up with Jon Gray, the president and CEO of Blackstone. She talked with him on Thursday and they talked about that debate.
When you think about a bubble, you think about building capacity and then hoping the demand comes. With AI, you are building capacity and hoping you can keep up with the demand. Today there is an indisputable shortage of compute, and it's hard to deliver that compute. That is what is preventing some of the excesses we have seen in past bubbles.
Jon Gray, president and CEO of Blackstone, with Dani Burger. Ken Griffin earlier in the week of Citadel talking about the possibility or potential for a bubble.
Let's rewind to our conversation with Lee. When I asked if we were in a bubble in the context of AI, he looked at me like it was the dumbest question ever asked. Of course we are in a bubble. His book is about the bubble with the railroads and the Panic of 1873 and the parallels with today. Just a little history going back last week.
It is good to study history. It is good to study some of the stories on the Bloomberg. Our next reporter has been looking into a Blackstone bet on chips driving a debt boom that is upending credit. The Bloomberg Big Take today. Jane Street fighting for AI power as they compete for an edge in the AI era. Let's get into it with Dina Bass joining us from Seattle. So much to get to with you. The intersection of tech and finance. Blackstone doubling down. Tell us about your story when it comes to their bet on chips.
It is not just Blackstone. Blackstone, Apollo, the U.S.-based investors, alternative asset managers. It is fascinating you brought up the railroads because people look back to the railroads as an effective analog. There are not that many. That is why we are here.
For the longest time they were talking about cloud for more than a decade, but what was going on was a large investment-grade hyperscalers, Amazon, Microsoft, Google, they were paying for this buildout and for these chips with their own cash or investment grade so they could borrow on their own balance sheets. Now that we have this massive buildout that involves neo-clouds who either don't have credit ratings or are not investment grade. We have OpenAI and Anthropic who don't have credit ratings. How are you going to enable those people to pay for the AI chips they need for their business and for the AI buildout? Those chips are more expensive than the data center builders they go in.
What we are writing about is the industry that has grown up around chip financing through SPVs. Four years ago, they pretty much did not exist. There was one deal done for CoreWeave by Blackstone in 2023 at $2 billion. Now the market is tracking towards $1 trillion.
This is a long way from the story you did when Blackstone executives asked CoreWeave's leadership, what is a GPU? Is AI real? That was a few years ago. It still works.
