00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts Radio News. 00:00:11 Speaker 2: You're listening to Bloomberg. And as always, on the Bloomberg Terminal and the Bloomberg Business App. The president, of course, calling AI safety concerns a sick conspiracy, blaming Beijing. During a call with the NVIDIA boss, Jensen Wang. 00:00:44 Speaker 3: They're just playing right into the hands of a lot of people that don't want to see it happen. 00:00:49 Speaker 4: And that could be political people. 00:00:51 Speaker 1: It could also be China. And we're not going to let that happen. 00:00:54 Speaker 5: It's a hoax. 00:00:56 Speaker 2: Ted Morrison of Baird writing, the cloud titans, the Republican and Democratic parties are trying to control the future narrative to control global economic outcomes. This is a battle for regulated control. Ted joins us now for more. Ted, I feel like I'm facing down a psyop conducted by the leaders of technology, and I don't really know what to think anymore. What are you telling your PMs about what's happening here? 00:01:17 Speaker 4: I think, number one, everybody's got to take a deep breath. This is just in this hysteria phase. It reminds me a lot of, to some degree, what happened in COVID, where everybody is going to die and et. 00:01:32 Speaker 6: Cetera, et cetera. 00:01:33 Speaker 4: I think everybody's, like I said, has got to take a deep breath and actually deal in the facts. There are arguments, as Lisa said, on both sides here. But I think going forward, we've really got to look at the facts and react to the facts and have a strategy. I'm not a huge believer in the federal government regulating an industry. I think the cloud titans and even the VCs that have funded these companies really have to go forward and protect the industry and self-regulate. And and get away from this hysteria going into the midterms. 00:02:15 Speaker 2: Ted, do we not have liability rules already on the books that make the risks so large for these corporations that they should be self-regulating themselves anyway? 00:02:25 Speaker 6: That's exactly right. 00:02:26 Speaker 4: And I think Anthropic opened themselves up for a review of their IPO, quite frankly, on that point exactly. 00:02:37 Speaker 6: The industry has to stay within the guardrails. 00:02:40 Speaker 4: And if they can't, bringing in the politicians, I think, is probably one of the worst mistakes because, quite frankly, they're not equipped to understand this technology. So I think going forward, the CEOs better get together and refine their message and refine their strategy. 00:03:00 Speaker 7: Who do you think the frontier models are actually worried about? It's not necessarily open source that doesn't have the same kind of compute power. So the anthropics of the world, the open AIs, the XAIs, are they worried about China? Are they worried about each other? Are they worried about themselves? 00:03:17 Speaker 6: I think they actually are worried about open source. Open source, if. 00:03:22 Speaker 4: You look at what NVIDIA has done with Nemotron in conjunction with Palantir, that combination is impacting the frontier models pricing and availability. If you look at some of these open source models, whether you're using Gwen from Alibaba or Nemotron from NVIDIA, or any of the open source models, those token costs go right through the floor. And to some degree, that influences, to a great degree, what the frontier model's pricing model looks long term. So I would say it's a strategy to put open source in a box from a regulatory standpoint. 00:04:11 Speaker 6: And my personal opinion, that's very dangerous. 00:04:14 Speaker 7: So, Ted, how much is this an existential fight for a business model rather than an existential fight for humanity? 00:04:22 Speaker 6: It's both. I mean, listen, this is a very complex discussion. 00:04:28 Speaker 4: And the technology is moving so quickly that I think both sides of the coin have to be addressed. 00:04:37 Speaker 7: How much do you think also these tech executives are responding to the American backlash you see in polls and in states that want a moratorium on data centers? 00:04:46 Speaker 4: Yeah, I've been on your show before, and I think their message is not very good. 00:04:51 Speaker 6: And I think the tech titans, whether it be Microsoft, Amazon, Google, even Nvidia, they have. 00:05:01 Speaker 4: To convince the US population, the entire population, what AI could do for humanity versus self-enrichment that is viewed by, I think, most of the population. Number one, I think we have had massive strides in health care, massive strides in productivity. And they actually have to, I'd say, all buy in on how AI is going to enhance productivity. not only the workforce, but people distinctively and the quality of life. I don't think that message is getting out to, call it 80% of the population, if you look at some of the polling. 00:05:48 Speaker 2: Ted, many people just sitting here now just want to know what the trade is. Is it a headwind to hardware? Is it a gift to the hyperscalers? How are you thinking about things over at Baird? 00:05:58 Speaker 4: I think, number one, you have to let the falling knife hit the floor and stop spinning here. It's a degree of capital preservation in the near term as we get into the midterm elections. I think after we get through. 00:06:17 Speaker 6: The beginning of November, I think things will clear up a lot. 00:06:22 Speaker 4: My personal opinion is I think this infrastructure trade is going to go on for years. And the stock action you saw on the semiconductor index being down 5.8%-ish yesterday was a horrible reaction to what reality is. I sat on 70-plus conference calls last earnings season And this was one of the most robust earnings seasons in tech that I've seen probably in my entire career. And that's saying a lot because I've been around for a while. The bottom line here is things are not going to stop on a dime. And I think we again, we have to get past this hysteria phase. and get through the election and see what the government looks like on the midterms from a congressional and Senate standpoint and go from there. But my personal opinion is that I think rates and energy are pretty close to a peak and. 00:07:26 Speaker 6: I would get your shopping list. 00:07:30 Speaker 4: Ready very, very quickly because I think after yesterday, there's some incredible buys. 00:07:35 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Here's the latest this morning. The 10-year yield hitting a level not seen since 2007, ramping up pressure on the Fed to hike rates for the first time in more than three years. Ganeet Dhingra of BNP Paribas warning no relief is in sight, writing, quote, 5% 10-year yields are here to stay. Rate hikes are the necessary but not sufficient condition to prevent a rise in long-end yields. Ganeet joins us now for more. 00:08:08 Speaker 1: Ganeet, good morning. 00:08:09 Speaker 2: Good to see you. 00:08:10 Speaker 4: Good morning. 00:08:10 Speaker 2: I give you credit, and I often do whenever you come on the program now, because you talked about the 30-year a number of months ago, and you said five's not the ceiling. Do you feel the same way about tens this morning? 00:08:20 Speaker 3: Yeah, I do. I think the issue with the way the real prices happen so far is just a reflection of where the fundamental economy has been, right? We are just catching up. to where we need to be. I don't think the Fed is hiking just because they're concerned about the inflation problem. They're also hiking because they're concerned about being behind the curve when it comes to this AI build-out, the consumer strength, and the growth of the economy. You look at a world where small cap stocks are up 15% in a year when rates have gone up 100 basis points. That is unusual, and that's a sign of the economy really doing well. The other issue also is the economy is not very interest rate sensitive, right? You keep raising rates in the market, you keep raising rates from the Fed, and the AI build-out isn't going to stop based on a 50 basis point rise. The top leg of the key of the consumer isn't going to be affected just yet. And so I think my concern is you might need to see even higher yields from five percent tenure to have some slowdown at some point. 00:09:22 Speaker 2: Do you see the long end doing the work more so than the front end of the policy, right, the Fed? 00:09:26 Speaker 3: It typically always does. The economy always has been designed to be more sensitive to where the 10-year and the 30-year yields are. Mortgage rates are indexed of that. Corporate borrowing is indexed of that. So long-end does play a bigger role. In our outlook that we published a while back, we see long-end yields at 5% on the 10-year, here to stay. And we think just like three hikes is not the ceiling, we think 5% is not the ceiling for the 10-year. 00:09:56 Speaker 7: If the Fed does hike rates though, and hikes rates by 75 basis points over the next six months, Do you think that caps how much long-term yields can rise, that 10-year yields will stay more closer to 5%. 00:10:07 Speaker 1: Rather than 5.5? 00:10:07 Speaker 3: Yeah, so it's necessary but not sufficient, which means, yes, the hike is going to happen. 00:10:13 Speaker 1: That probably is a given. 00:10:15 Speaker 3: But I think the real question is the Fed needs to convince the bond market that there is a real plan to solve inflation. And that has to be through a sequence of hikes, not just a one-and-done, right? So the concern some people have is the Fed might do one hike and they think this is enough for credibility. But for now, maybe temporarily, but the need to make the market be assured that there's a plan of future hikes from this point on. 00:10:40 Speaker 7: At the same time, the market isn't concerned about long-term intractable inflation. That doesn't seem to be where bond yields really are deriving from. It's something else. So how do you factor in that yield term premium that keeps bringing back to fore the risk of Fed independence and some of these other sort of ambiguous factors in the sell-off that we've seen? 00:11:03 Speaker 3: Yeah, look, I think inflation's sort of underlying murmur in all these conversations. It's been sticky. It's been persistent. But so has been growth, right? Like growth has been going up and up. If you look at the economic surprises, the biggest economic and the most persistent economic surprise in the last 12 months has been growth. And AI build-out is a. 00:11:25 Speaker 1: Huge part of that. 00:11:26 Speaker 3: So is the fact that we had fiscal support this year. And so is the fact that the Fed's rate has been stimulative because they haven't been at neutral. They have been below neutral. And so that stimulation is only adding to the growth upside surprise. 00:11:40 Speaker 5: Yeah, but a hike is not going to stop AI spending and build-out, is it? 00:11:44 Speaker 3: Yeah, so this is the concern, right? Where why will 5% yields not be enough here? Because as the AI build-out continues, it won't be a 5% number that stops it, right? So my concern is that we might need to see even higher yields because the AI build-out is not stopping. The top leg of the care of the consumer isn't going to stop spending based on that. And fiscal spending, which also is supposed to be sensitive to interest rates, is not going to stop based on that desire. 00:12:10 Speaker 2: You had a killer line in there. You think it's been accommodative. Do you think they understand they're accommodative? 00:12:16 Speaker 3: So I think they are probably realizing this. And this has been a general issue sometimes where If you look at the way the Fed has talked about the so-called R star concept, they often figure this out after the fact. After they've seen the economy do well for a certain point of time. 00:12:33 Speaker 1: They uplift the R star. 00:12:34 Speaker 3: In fact, if you look at the last six years since COVID, the long-term R star dot has been playing catch up with the market. The market's been there all this while, but the Fed's long run dot has been playing catch up. So I think in some sense, especially in this case, the Fed has been a little bit behind the curve and they're just about catching up. 00:12:54 Speaker 2: Final question, just on the size of the rate hike and cycle you're anticipating, can you give me a spread? 00:12:58 Speaker 6: What's at the low end? 00:12:59 Speaker 1: What's at the high end? 00:12:59 Speaker 3: Yeah. So I think three is, in my view, the low end. The high end would probably be six. And I go back to the late 90s where they reversed the three cuts with three hikes first. Didn't seem to move the needle much. Then they went to hike number four, five and six. And that's what got the market talking. 00:13:17 Speaker 2: Stay with us. More Bloomberg surveillance coming up after this. Got to work through those threats in financial markets right now. We can do that with Bloomberg's Danny Berger. Joining us now from the Carlyle Group's annual Global Investor Conference in Washington with a special guest. 00:13:39 Speaker 3: Hey, Danny. 00:13:42 Speaker 5: Hey, John, thank you so much. That's right, I'm here at Carlisle's event and sitting down with the man of the hour. It is the CEO of Carlisle, Harvey Schwartz. 00:13:50 Speaker 1: Harvey, great to see you and thank you for having us. Great to be here and thanks for joining us. 00:13:54 Speaker 5: And look, you're convening hundreds of your investors here today and it's probably not lost on anyone that if we were to just walk about a mile away, we'd be at the Eccles Building where the Fed is starting their rate decision. If you were to give them advice, Harvey, because you see into the lens of hundreds of your companies What are you seeing? Are rates restrictive? Is inflation a problem? Is this a Fed that needs to be hiking rates tomorrow? 00:14:17 Speaker 1: Well, Danny, again, thanks for being here. 00:14:18 Speaker 8: As you said, we have 400 investors from all over the world have traveled here, some of the most sophisticated investors in the world. And these are questions that are front of mind. And we have a very— we' ve talked about this a lot. We have a very unique proprietary data set, as you mentioned. And 15 years ago, we started breaking down the data set and the insights into these portfolio companies. So it's several hundred portfolio companies that employ about 750,000 people around the world. What that data set says is amidst all the backdrop of noise, of structural change around the world, de-globalization, the conflict in Iran, the war in Europe, what that data tells us is the economy is doing quite well. GDP coming out of August looks like 2.25%, 2.5%. The consumer has been quite resilient. EBITDA is growing. And so really against a backdrop of uncertainty, the economic engine is doing quite well. Inflation has remained sticky, but it's not accelerating, but it's not decelerating. And so I think in terms of the Fed... Our folks are not that focused on what any one individual Fed decision means. I would say we're at a period where the Fed will continue to watch the data. The markets obviously are expecting a hike, but it doesn't feel like we're entering a hiking cycle. It doesn't feel like we're entering a cycle where we're going to be cutting rates aggressively. For those that are always wishing for rates to go back to zero, that generally is not consistent with an economy that's doing as well as ours is. So, I think the Fed's got their hands full, but I think the market's already made its prediction on what the Fed's going to do. 00:16:02 Speaker 5: Well, I remember in the last rate hiking cycle in 2023, you basically had said, look, we can handle higher rates. It's predictability that's important. Harvey, we're in a scenario now where you have a Fed chair who wants to give less forward guidance. You have an activist treasury. You have issuance from the hyperscalers that's moving around rates. You have an energy crisis. Do we have a predictability problem with rates right now? 00:16:25 Speaker 1: I don't know that we have a predictability problem. 00:16:28 Speaker 8: I think that the Fed chair has announced a series of initiatives which we think are welcomed by the markets over the long run. I think it's a question of the pacing of how those get implemented. I think that there was a series of policies for the past decade which really were anchored around lower rates, lower rates globally. We have for years now, for three years, been working under the assumption that rates would be structurally higher. 00:16:54 Speaker 3: Why? 00:16:55 Speaker 8: Because deficits are larger. The demand for capital around. 00:16:58 Speaker 1: The world is very high. 00:17:01 Speaker 8: De-globalization is really driving a complete reordering of priorities around the world in terms of how governments and companies think about economic growth. And these structural changes are not going away. And when you think about the priorities that countries have, companies have around security, whether it's national defense in a traditional sense or investing in economic growth, data security, energy security, all of this investment requires durable capital. And with deficits being as large as they are, we would expect rates to be structurally higher. But on any relative basis, historically, they're really not that high. For us, in working with our clients, it's about the cost of capital, being disciplined about deploying that capital, and that's how we're focused. 00:17:53 Speaker 5: You've been really active throughout this whole period. Presumably higher rates doesn't really curve that activity. If it's not higher rates, it's not oil at $ 100, it's not 10-year yields at 5%. Is there anything that can slow this train down at the moment, Harvey? 00:18:07 Speaker 8: Well, when you have economic growth like we're seeing in the United States. And when you talk about, for example, the stimulus that is being brought to the marketplace globally from the hyperscalers, if we were talking about fiscal stimulus on this order, we'd be talking about a massive fiscal stimulus. And we're seeing that across the economy. We're seeing it spread globally across the global economy. And so this massive period of investment does have a crowding out effect. So it puts pressure on bond spreads. It puts pressure on the cost of capital. That should be expected, not feared. But it's fueling economic growth in a very, very powerful way. And we're seeing very unique opportunities to deploy capital. And unlike a lot of other people in the industry, we've been returning a lot of capital. 00:18:54 Speaker 5: I was going to say, you've returned $ 37 billion over the past 12 months. 00:18:57 Speaker 1: It's a large amount. 00:18:58 Speaker 5: But Harvey, I do have to ask, because there does seem to be this disconnect. You're leading the market there, but shares of Carlyle itself are lagging your peers. You're down something close to 30% year-to-date. What do you think accounts for that? 00:19:10 Speaker 8: You know, the industry went through a period of really accelerated share growth. And then when there were all the, if we were sitting here a year ago, the whole conversation might've been about private credit. 00:19:19 Speaker 1: It seems like the private credit window's in the rear view mirror. 00:19:23 Speaker 5: You're probably happy about, by the way. 00:19:24 Speaker 8: I would be happy to talk to you about it. We had very strong views on it. They seem to have come to fruition. So at least we were right about that. So we feel good about that. But in terms of the industry, look, we are very focused on executing our plan. We announced a three-year plan Second quarter, we had record results. We just keep doing our job. The share price will follow. We're very active. Our board approved a $ 2 billion share buyback in the first quarter. We were very active in the second quarter. We like where the shares are priced. We'll keep buying back shares. 00:19:52 Speaker 1: We do our job. The share price will follow. 00:19:53 Speaker 5: By the way, you're also announcing today that you're joining MIT's AI Impact Consortium. Its explicit goal is to help deploy AI in a way that's good for society and industry. That's an interesting time for that. What exactly is this? Why are you joining it? What data are you giving them? And how does that impact your investment process? 00:20:13 Speaker 8: So as I said before, for 15 years we've been rolling up this proprietary data. When I joined Carlyle three and a half years ago, I got very lucky. One of the things that we were working on was how to think about using machine learning to make better investment choices. Taking a step back, We think about this transformative technology really most simply in three ways. How can we run Carlyle better? How can we make better investments? How can we improve the value of the portfolio of companies? 00:20:38 Speaker 1: Full stop, that's it. In terms of the data. 00:20:41 Speaker 8: We have, we have a huge history of proprietary data, which is unique to Carlyle. It's unique to being in D.C. 00:20:48 Speaker 1: For almost 40 years where David Rubenstein, the founder, has formed the firm. 00:20:51 Speaker 8: And so we've been working on how to harness that data, which really prior to the advancement of large language models wasn't achievable. 00:20:59 Speaker 1: And you couldn't do it in the way we can do it today. And we've been. 00:21:03 Speaker 8: Very focused on how to build out the ecosystem around the data, how to make better investment choices, how to really create alpha. 00:21:11 Speaker 1: Working with MIT, leading researchers in the world, it's a huge partnership. We're super excited about it. 00:21:17 Speaker 8: But we have partnerships around the world where we are working with the leaders in the space to see how we can best use our data to make the best investments at every opportunity across the entire platform. 00:21:29 Speaker 5: Well, Harvey, as someone who's, again, implementing AI, looking at how you use it among your portfolio companies, surely within Carlyle, too, helping finance AI, maybe not as much as your peers, but we've reached this fever pitch and concern about what AI means for humanity. As someone involved in this ecosystem, and frankly, just as a leader of thousands of employees, are you concerned? 00:21:49 Speaker 8: I think anytime you see transformative technology and we're in a step function change, I think questions should be raised. I think these are important questions. I don't think anyone knows the answers to these questions, but they're important questions to raise. And I think the debate that's happening today around the safety, the social awareness, I think is a healthy part of the process. I don't think it means that growth will stop. I don't think it means that anyone's saying we should put a halt to this. I think this is a really important technology. I truly do believe we will see breakthroughs in industry growth. We'll see breakthroughs in medical science. I think we'll see extraordinary opportunities here with this technology. As we go through this, there are going to be moments of growing pains and nervousness. I think it's important as policymakers and the leaders of the technology themselves, and you've seen them start to do this, make sure we have the proper guardrails. Hey, people figured out how to put airbags in cars. We can be able to do two things at once. We can grow one of the most important transformative aspects of technology ever. at the same time do it in a safe way. I'm very confident that can happen. 00:22:52 Speaker 5: Hey, Harvey, we have less than a minute here, and I have to ask you before we go. Exciting news for you all in your minority investment in the Seahawks, and perfect timing considering the Seahawks just won the opening game, too. 00:23:03 Speaker 1: Why do this? 00:23:04 Speaker 5: Your first franchise, why do it with the NFL? Why back Vinod Khosla's purchase of the Seahawks? 00:23:09 Speaker 1: Well, we're thrilled to support the Coastless in their purchase of the Seahawks. 00:23:14 Speaker 8: You know, for everything we just talked about, everything in the AI world, you can't walk anywhere without someone being on their phone. If you walk through the cities of New York or the streets of New York or you're walking through D.C., everybody's on their phone all the time. You know, one thing people crave, they crave content. They crave content. being together they like arguing with their friends about their teams and then being friends afterwards in a very polarized world and so we're big believers in um the opportunity to play capital in a space that brings people together and so. 00:23:46 Speaker 1: To come then it sounds like. 00:23:48 Speaker 8: So yeah sports mean entertainment is not something new for us we've been doing it for a long time um there are other investments we've made and announced um i won't go through those given i know we're short on time but but we're thrilled for the seahawks it was a fantastic game did you watch. 00:23:59 Speaker 5: It I caught part of it, yes. I'm not a big football person, but I had to watch one of the first games. 00:24:04 Speaker 1: We can cut that part out of the show. But we're thrilled to be part of the NFL. It is the world's leading sports franchise. 00:24:10 Speaker 5: I was rooting for the Seahawks for what it's worth. 00:24:12 Speaker 1: Okay, well, great. We'll get you some swag. 00:24:13 Speaker 6: Okay, perfect. 00:24:14 Speaker 2: 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. 00:24:25 Speaker 3: Eastern. 00:24:26 Speaker 2: Subscribe to the podcast on Apple, Spotify, or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business Hour.