00:00:02 Speaker 1: Bloomberg Audio Studios. 00:00:04 Speaker 2: Podcasts Radio News. 00:00:11 Speaker 3: Thank you. And as always, on the Bloomberg Terminal and the Bloomberg Business App. We begin this hour with stocks tumbling as a potential AI pullback rattles investors. The Anthropic CEO, Dario Mode, presenting a three-step plan with the goal of pacing the frontier. Laurie Calvacino of RBC joins us now for more. Laurie, good morning. 00:00:49 Speaker 1: Good morning. 00:00:49 Speaker 3: How much earnings risk is building here? 00:00:52 Speaker 4: So look, you know, one of the things we've been doing in our modeling is just taking the bottom-up consensus and haircutting it by 10%. And in previous versions, you know, earlier in the summer, we were baking in, you know, sort of a 5% haircut to account for sort of the non-AI stocks, you know, potentially having some pressures from the Iran war, inflation, etc., In our last couple of updates, we've expanded that to 10% to potentially account for some froth on the AI side of things. Not that we were pounding the table and saying it was going to happen, but there has been some concern building on that front for a few months now. So we wanted to sort of reflect that in their numbers to try to calm investors' nerves a bit. 00:01:26 Speaker 3: Do you think there is a slower build-out on the horizon here? 00:01:28 Speaker 4: So it's funny, if you look at CapEx data, and I will say this has been a set of charts in our deck that's been a bit more popular over the last few months, and it doesn't necessarily. 00:01:36 Speaker 1: Have big do this, do that conclusions. 00:01:39 Speaker 4: It's just interesting. But we look at CapEx growth in the S & P 500. The 2Q updates are actually showing it hitting new highs year over year. If you look at the top 10 market cap names, which is where you've got the kind of big AI behemoths, you've been hitting sort of peaks, essentially. If you look at the rest of the other 490 stocks, you're very, very early days in a CapEx build-out cycle. So you're up maybe third innings. You're showing some growth year over year. That became much more apparent in 2Q. We've been telling people, if you're concerned about the CapEx story going forward, take your attention off those top 10 market cap names. 00:02:12 Speaker 1: Look at the rest of the index. 00:02:13 Speaker 4: You're going to laugh, but I'll give you one example from the last reporting season. I got very excited reading insurance companies. I called up one of my healthcare analysts and our insurance analyst, and I said, this is really interesting stuff. I'm seeing companies, there was one company in particular that was sort of saying, we're not engaged in FOMO here. But then they went on to talk about how they were doing these upgrades or thinking about these upgrades. And AI was kind of prompting that. So that's been an element that we've been trying to focus people on. 00:02:41 Speaker 1: Are you starting to. 00:02:42 Speaker 4: Get some CapEx upgrades, IT upgrades? AI sparking it may be not the only thing that's happening, but that to me is sort of the more interesting part of the story is some of these derivative impacts. 00:02:53 Speaker 5: How immune is that story to the frontier models and more specifically to successful IPOs of the likes of Anthropic and next year of OpenAI? 00:03:01 Speaker 4: You know, I'm not sure I have the answer to that question, to be honest. I know that right now, though, kind of going back to the original issue we're dealing with, is that there's just a lot of jitters in the market. And we made a comment last week in our weekly that we were expecting a 5% to 10% pulldown. We thought that those risks had risen. We've got midterm elections. The last couple cycles, you've seen extreme volatility in both directions in the back half of the year. We've got interest rate risk, and I don't care what's going on. When the bond market and macro investors are worried about interest rates rising, everything else hits harder. 00:03:30 Speaker 1: So I think that's part of what we're doing. We've got a new Fed chair. 00:03:33 Speaker 4: You typically see volatility in markets when you're ushering in new leadership at the Fed. We've seen that in Warsh's three predecessors. And we've also got the war, frankly, which a lot of companies, you know, didn't really, frankly, talk that much about this last reporting season. But two reporting seasons ago, a lot of them were saying they expected it to be wrapped up by the summer or 2Q, and that hasn't happened. So you've got a lot weighing on this market right now. 00:03:57 Speaker 3: That's a pretty big laundry list. 00:03:58 Speaker 5: And somebody could say, I don't know that I want to come in and buy stocks after a 5% to 10% pullback. If you haven't resolved the war, you've got diesel prices over. 00:04:06 Speaker 3: $ 6 a gallon. 00:04:07 Speaker 5: You have existential questions around some of the frontier models of AI. And frankly, interest rates are going to challenge some of the multiples. Why should you pick that up given the fact that so many people come on and they're like. 00:04:18 Speaker 2: Yeah, buy it. 00:04:19 Speaker 1: I'm excited for this. 00:04:20 Speaker 4: Well, look, we're sort of believers of the idea that there's not just one thing that drives markets, right? There are many things that drive markets. And when we look at the GDP backdrop in particular, we've seen consensus. We've seen RBC economists over the summer kind of move up to a low 2% type number. 00:04:34 Speaker 1: And that's traditionally. 00:04:35 Speaker 4: a very favorable environment for the stock market. So I think we have to sort of get through this period and then look and see, do we still think the underlying economy is strong? Right now the numbers suggest yes. If you also look historically at what happens to markets when the Fed is hiking, If it's a 12-month time frame and you're doing like one to four hikes, traditionally the market's actually been pretty strong. But when you do more than four, right, if we start talking about six, seven, eight in a 12-month time frame, that's when the stock market tends to struggle. 00:05:04 Speaker 1: Blake Gwynn, our rate strategist. 00:05:05 Speaker 4: Last week, he had not been looking for hikes. 00:05:07 Speaker 1: He's changed his call now. He's looking for three. But he's calling them adjustment hikes. 00:05:12 Speaker 4: An adjustment height kind of world, that spells to me short-term volatility, but you can recover from that. But if we start talking about a different story, our modeling suggests we'll have bigger problems. 00:05:21 Speaker 6: What would you need to see potentially to bring down your price target? 00:05:24 Speaker 4: So we've moved to a rolling 12-month forward process, so we're constantly trying to use that 12-month forward target as a longer-term bogey. We're not trying to sort of adjust a December 31st number in the short term. We're trying to talk about sort of the short term through our four tiers of fear framework, which is where that 5% to 10% drawdown comes. And one of the things that's been coming up in conversations, if you look at the market last year around tariffs, we had, what was it, like an 18%, 19% drawdown, and we still had a pretty healthy year. And what I was astounded by at the time was I remember getting out on the road in June and talking to investors, and they're like, yeah, we're done with 2025. We're looking ahead to 2026, whatever damage happens this year because of tariffs. we already paid the price for it. So that's one thing that I think makes price targets very tricky when you're trying to sort through short-term issues. 00:06:11 Speaker 6: Tariffs are a lot different than $ 4. 30 a gallon nationally on gasoline, more than $ 6 a gallon on diesel. How much is this going to impact small companies? 00:06:22 Speaker 4: So, you know, what I've been a little more focused on, I do think, you know, consumers, I think, is one thing in the crosshairs of those oil price forecasts, but also just looking at inflation forecasts for the middle of next year. Because if you look at consensus numbers, they're for like 2% year, 2-ish percent and change. year over year on a headline basis. And as we've talked to some economists around the street, that seems to really be baking in some normalized gas prices coming in. 00:06:47 Speaker 1: The war threatens that, right? 00:06:48 Speaker 4: And so we're not really seeing those numbers move yet in the economics community, but I think it's something to pay attention to. 00:06:53 Speaker 3: Are you beginning to think about 2028? 00:06:56 Speaker 1: You have to. 00:06:56 Speaker 4: Think earlier and earlier at this point. I mean, we haven't done a 2027 year ahead forecast yet. 00:07:01 Speaker 3: Seems wild, I know, but you kind of took us there. 00:07:03 Speaker 4: But I will say, John, like moving to this 12-month forward price target has actually been very useful this year because it really does force us to separate the short-term issues from the longer-term issues. And longer-term... I'm still seeing a case for bounce back right now after we work through a period of angst. We constantly reevaluate this. We update all the models once a month. But right now, we're not seeing the longer-term story derailed. 00:07:26 Speaker 3: Stay with us. More Bloomberg surveillance coming up after this. Jennifer Huddleston of the Cato Institute writes the following. There is a significant difference between companies choosing to pause and a government mandate that could pause all that AI development. Jennifer joins us now for more. Jennifer, welcome. I've heard this over the weekend. I wonder what your perspective is on it. If they want to slow down, why don't they just slow down? 00:07:58 Speaker 7: I think that's exactly one of the options. 00:08:00 Speaker 8: If an individual company wants to not advance with their product, they have the right as an innovator, as an entrepreneur to say, this is where we're stopping. But what we will likely see in those cases is others in the market, this is a very competitive market, continue with some of those beneficial applications of more advanced AI. While a lot of the conversation around this has been about the potentially risky impacts of AI, we also have to consider what this means for many of the significant benefits of AI, whether it's the ability to respond to some of these same cybersecurity concerns or whether it's some of the amazing advancements we're seeing in fields like medical research. 00:08:37 Speaker 6: Also, of course, when it comes to the DOD, they find this research and AI to be just paramount to what they're doing right now. 00:08:44 Speaker 1: But Jennifer, when it comes to. 00:08:46 Speaker 6: These companies that all want an edge, for one of them to hold back, don't they all need to agree? 00:08:53 Speaker 8: Well, one of the things that we could see evolve on some of these very specific issues, some of these very specific concerns around things like cybersecurity, are the emergence of industry norms, are some forms of self-regulation as opposed to top-down government regulation. One of the advantages of that, particularly in a fast-moving space like AI, is that it can be much more adaptive as new risks emerge, but also as new potential benign or beneficial elements emerge. When we're looking at government regulation, government regulation is a very static element. It's something that takes quite a while to evolve as a technology evolves, while technology, particularly in the AI space, is very dynamic. And so you could end up with a sort of pacing problem where even if technology is good and beneficial, it's unable to go forward if a government regulation is particularly outdated. 00:09:46 Speaker 6: When it comes to government regulation and any sort of government involvement, does it come from Congress or is this going to be through the executive branch? 00:09:54 Speaker 8: When we're talking about this type of major issue, you're likely to need some sort of congressional framework at some point. What's also been concerning is the number of states that have started to act around AI issues. And that's also something to certainly consider in this scenario. What will this mean in various state legislatures. 00:10:13 Speaker 7: That have considered action on AI? 00:10:16 Speaker 8: How might an AI patchwork be disruptive to the industry and to the development of those norms? We have, of course, seen various executive orders around AI, and we've seen significant changes in different administrations around those executive orders. 00:10:32 Speaker 7: This didn't just start with the current Trump and Biden administrations. 00:10:35 Speaker 8: There have also been AI executive orders going all the way back to the Obama administrations. 00:10:41 Speaker 5: Jennifer, there are a lot of concerns here about artificial intelligence, from increasing costs of electricity to water usage to now the eradication of humanity. But I am wondering, these are very different risks, right? One of them is a quality of life one, questions about cybersecurity risks opening up to a lot of different companies versus this being compared to a nuclear weapon. 00:11:03 Speaker 1: How should we look at this? Should some of. 00:11:05 Speaker 5: The AI advancements be treated as nuclear products or more just as technology that needs to be regulated with growing pains clearly manifesting themselves? 00:11:15 Speaker 8: When we're talking about artificial intelligence, we're largely talking about concerns around specific applications. 00:11:21 Speaker 7: And so it's very relevant. 00:11:23 Speaker 8: Unlikely that in most cases we're going to be looking at any kind of regulation of the technology as a whole or that's something that should certainly give us pause because usually those concerns about the harms are more tied to a specific application of the technology. When it comes to a lot of those concerns, there are existing laws in play already around things like cybersecurity, around things like fraud, around any number of potential cases where a bad actor could use this technology to do a bad thing. When it comes to some of the other concerns we've seen recently arise as it relates to artificial intelligence, things that you mentioned like electricity costs or like growing demands on resources, this should actually serve as a good opportunity to have a broader policy discussion about those underlying issues, not just as they relate to artificial intelligence, but as they relate to things like our grid and our water usage more generally. 00:12:17 Speaker 5: I guess that what I'm getting at, Jennifer, is how much is this the normal growing pains of new technology? How much can this be likened to the advent or the birth and proliferation of the railroads versus, say, the nuclear treaties and different types of discussions that happened during the Cold War? I mean, there are two very different discussions. Which do you think is most appropriate? 00:12:41 Speaker 8: One of the things that makes artificial intelligence so unique is how general purpose of a technology it is. And that's why we often see what seem like very different conversations going on at once. Artificial intelligence is an incredible tool for access to information. And of course, there are a lot of different forms of information one can access. But I think that also has to be part of the thought and the conversation here, particularly when we're talking about potential regulation. What does it mean for the government to be the one that can dictate how this technology can evolve versus something that we could see emerge more from these industry norms? 00:13:17 Speaker 3: This is a bit of a thought exercise, of course, but I'd love your input on this. By the time we get to 2018, and the general in this country, the next presidential race. What do you think regulation looks like? How much do you think it's changed, if at all? 00:13:32 Speaker 8: I think it will be interesting to see particularly what happens at a state level. Do we see that kind of congressional framework, that U.S. approach to AI policy? And if so, is it an approach that continues to take the light touch that has really allowed the U.S. to excel in areas like the Internet? Or is it something that's much more regulatory, something that could make it much harder for some of those benign and beneficial applications of AI to go forward? 00:13:57 Speaker 7: I also think the other thing that will. 00:13:58 Speaker 8: Be interesting to see come 2028 is what do we even consider AI? Because as we get more and more used to certain technologies, we cease to think about them as AI. Very few of us think about the autocomplete on our emails as a form of artificial intelligence. We don't think about the customer service chatbot that we might interact with before getting connected to a human when we put in a request as artificial intelligence. 00:14:23 Speaker 7: How has that also changed by 2028? Stay with us. 00:14:27 Speaker 3: More Bloomberg Surveillance coming up after this. Let's turn to energy. Crude rising this morning as export risk continues to build in the Middle East. Iran and Gulf states delaying talks on a temporary shipping lane through the Strait of Hormuz. And Saudi Arabia closing a key alternative route. Joining us now to discuss is the U.S. Energy Secretary, Chris Wright. 00:14:56 Speaker 9: Mr. 00:14:56 Speaker 3: Secretary, thank you for your time this morning. We appreciate it. a critical juncture to have this conversation on Middle Eastern energy exports. What is your peers in the Middle East? What are the energy secretaries across the Middle East, including policymakers in Saudi Arabia, saying about what's going to happen to the East-West pipeline? 00:15:16 Speaker 9: Well, look, this is not new for strikes on this energy infrastructure. And, of course, unfortunately, Iran's done a ton of that. But they've proven resourceful in the past. I think you'll see the pipeline back running very soon. 00:15:27 Speaker 6: Have you spoken to your Saudi counterpart? Why do you think very soon? Can you give us a time frame? 00:15:34 Speaker 2: I might have more of a time frame tomorrow. 00:15:36 Speaker 9: But, yes, I've been in close contact from him since hours after the attack started. And so they've been very carefully assessing what the damage was, what needs to be done. And I think more clarity on that will come out very soon. 00:15:50 Speaker 6: As you know, Secretary Wright, that's 7 million barrels a day in terms of capacity. How much right now do you see oil flowing through the Red Sea, which with the Bab el-Mandeb Strait and the Houthis really asserting more of their power, how much do you see flow of energy through that passageway? 00:16:08 Speaker 9: Well, there's been a few million barrels a day going through, but most of it has not gone through the Bab el-Mandeb. Most of it has gone the other way, through the Suez Canal and the pipeline there in Egypt. 00:16:19 Speaker 2: So, look, energy gets to markets. 00:16:21 Speaker 9: I just got the latest data from last night and flows through the Strait. Over 12 million barrels of oil and oil products flowed through the Strait of Hormuz last night. The running seven-day average is over 10 million barrels a day and on a gradual upward trend. We will see continued increase and energy flows out of the Arabian Gulf region. That will not be stopped by any activity Iran does. Bumps on the road, of course, but those are temporary bumps. 00:16:48 Speaker 6: When it comes to the Strait of Hormuz, 12 million barrels a day is north of what you said just a few weeks ago of 10 million barrels a day. 00:16:54 Speaker 1: How are those vessels getting out? 00:16:57 Speaker 9: So just to clarify, I often give 12 million is yesterday. The running average is a little over 10 million barrels a day. But I think you'll see that running average continue to go up. So these ships are escorted by the U.S. 00:17:11 Speaker 2: Joint Force. They're defended. They're mostly done at night. 00:17:16 Speaker 9: Of course, all the transponders are turned off, which is why the commercial shipping monitors are just haven't had an ability to see it. And people think I give another opinion. Every morning I get a report of every single ship, the ship name, exactly what its cargo was, and then it transited. So ours aren't estimates or guesses or magic math. I've heard all sorts of just hilarious critiques. It's just a serious reporting of exactly what's happening. 00:17:41 Speaker 6: Does that report also give you a breakdown of what is crude and what is oil product? 00:17:46 Speaker 2: It does. It does. 00:17:47 Speaker 9: I combine crude and oil products. We also get reports on LNG and other products that are going out. I've confirmed my public disclosures to just oil and oil products. 00:17:56 Speaker 5: How much are you seeing the Middle East as the source of some of the increase that we've seen in diesel prices in the United States, up some 30 percent over. 00:18:04 Speaker 1: The past couple of months? 00:18:05 Speaker 5: Is that really coming from the Middle East? Or, as President Trump said yesterday, is that really due to Ukrainian attacks on Russian facilities? 00:18:14 Speaker 9: So it's a combination of all of the above, and that is one of our focuses in the Middle East, is to get more refined products out of the region. You'll see an upward trend on that. We are getting some, and it's not trivial, but we want to see even more come. 00:18:27 Speaker 2: Out of the Middle East. 00:18:29 Speaker 9: But yeah, obviously there's been a huge disruption in Russian diesel exports. They were a meaningful exporter of diesel. Today they're not exporting any. Russia was a small exporter of gasoline. Now they've become a meaningful importer of gasoline. So refining is tight in the Middle East. It's tight in Russia. Heck, Gavin Newsom managed to close two significant refineries in California in the last 12 months. So those are just own goals from Democrat climate policies. They think somehow hobbling our energy system does something good for the world. 00:19:02 Speaker 2: It doesn't. 00:19:02 Speaker 9: President Trump is just dead set on putting the American people and the American economy first. 00:19:08 Speaker 2: And we'll focus on energy addition. 00:19:10 Speaker 9: Even during these crises, you'll see progress in the production and ultimately progress on prices. 00:19:17 Speaker 5: Secretary Wray, how quickly could we see progress in prices, given the fact that we've seen a pretty rapid rise? And many analysts have come on this show and said they only see it going north, going further up ahead of the election. 00:19:29 Speaker 2: Yes. 00:19:29 Speaker 9: Well, obviously, Iran has turned up their attempts to disrupt energy flows, and they've got a lot of missiles and a lot of drones. So they have caused trouble in the short run. Certainly, they've spread fear in the short run. I'm pretty confident you will see increased flows of oil and oil products through the strait in the coming weeks and in the coming months, regardless of what Iran does. And, of course, we're working. We changed regulations for refiners in the U.S. to increase their throughput. We're past the summer driving season, so we'll see a natural decline in demand, and you'll see a rise in the throughput of American refineries. But we've got, you know, obviously we're fighting against headwinds in Russian refining sector. 00:20:11 Speaker 2: Chinese have held refining capacity off the market. 00:20:13 Speaker 9: I suspect we'll see some of that come back and we'll continue to get increased refined products out of the Middle East. 00:20:20 Speaker 3: Where does that confidence come from, Mr. Secretary? You said, I'm confident. Then the next few weeks, where does that confidence come from? 00:20:27 Speaker 2: That comes from talking to the U.S. 00:20:29 Speaker 9: Military and how our operations are running there and to all of the exporters in the area and what their plans are as far as getting ships and products ready to go to come out. So you look at the last eight weeks, we've had sort of a bumpy but steady. 00:20:45 Speaker 2: Increase in throughput. 00:20:46 Speaker 9: My suspicion is, and from what I hear, we'll see an even more rapid increase in throughput in the next two months than we saw in the last two months. 00:20:54 Speaker 2: So that's directly from the exporters on the ground. 00:20:57 Speaker 6: But at the same time, Gulf partners were set to meet with the Iranians to try to open up a waterway, and that meeting has been shelved. The rhetoric coming out of the region is actually not looking optimistic at all. 00:21:09 Speaker 2: So those are two different pathways. 00:21:10 Speaker 9: There's the pathway of Iran deciding they want to end being the world terrorists and they want to give life opportunities for their 90 million citizens. I don't know how to handicap that one. That's what you're reporting on there. What we're doing is using the U.S. joint force in collaboration with all our allies in the region to get flows to increase no matter. 00:21:31 Speaker 2: What Iran does. So two different pathways. 00:21:33 Speaker 9: President Trump prefers the peace approach, but we've got the military assets to drive flows even without peace. Hopefully all this brings Iran to the table. They don't have a card anymore. Maybe it's better to give up the ghost. 00:21:46 Speaker 6: Secretary Wright, the president promised lower gas prices. He promised oil would be flowing. We have gasoline north of $ 4. 30, diesel north of $ 6. 00:21:56 Speaker 1: At the same. 00:21:57 Speaker 6: Time, the current amount that we have of crude left in the SPR is basically above the mandatory baseline. At these levels, when can you start refilling our strategic petroleum reserve? 00:22:10 Speaker 9: Oh, it'll start being refilled in the next few months. Remember, the oil we released, none of it was sold. It was all swapped with delivery dates and delivery amounts agreed in those contracts. So that oil will start going in. The oil problem is going to fade away. The bigger problem is the refined products. It's turning oil into gasoline, diesel, and jet fuel. And, President Trump, you saw last year amazingly low inflation-adjusted prices for gasoline, for diesel, for home heating from natural gas. So, I think President Trump has delivered on his agenda to increase American energy flows. But, of course, he also thought, I'm not going to kick the can down the road and deliver a nuclear-powered Iran to whoever President Trump's successor is. 00:22:55 Speaker 2: So, yes, he took bold leadership there. 00:22:57 Speaker 9: I think the rest of the world is waking up to the fact that, oh, my gosh, this is Iran without nuclear weapons. Imagine a nuclear armed Iran. His leadership there does cause short term disruptions. But this is a far bigger question. Imagine long term energy prices where you have this regime in power in Iran and they're nuclear armed. 00:23:17 Speaker 2: That's unacceptable. 00:23:19 Speaker 3: This is the Bloomberg Savannah's podcast, bringing you the best in markets, economics, and geopolitics. You can watch the show live on Bloomberg TV weekday mornings from 6 a.m. to 9 a.m. 00:23:30 Speaker 2: Eastern. 00:23:30 Speaker 3: Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business App.