WEBVTT - Second Half Economic Outlook 0:00:02.529 --> 0:00:13.780 Bloomberg Audio Studios Podcasts Radio News This is the Bloomberg 0:00:13.820 --> 0:00:17.889 Surveillance Podcast. Catch us live weekdays at 7 a.m. Eastern 0:00:18.290 --> 0:00:21.930 on Apple CarPlay or Android Auto with the Bloomberg Business app. 0:00:22.329 --> 0:00:25.680 Listen on demand wherever you get your podcasts or watch 0:00:25.739 --> 0:00:26.980 us live on YouTube. 0:00:27.320 --> 0:00:30.000 Joining us here in studio right now is a real treat, 0:00:30.380 --> 0:00:32.159 James Eggehoff, Chief U.S. 0:00:32.300 --> 0:00:35.810 Economist, BNP Paribas, the BNP Paribas offices in Paris. 0:00:36.170 --> 0:00:36.470 Awesome. 0:00:36.510 --> 0:00:37.810 Been there many times. 0:00:38.210 --> 0:00:40.250 James, thanks so much for joining us here. Talk to 0:00:40.290 --> 0:00:44.870 us about what you're seeing in this U.S. economy right now. 0:00:45.070 --> 0:00:47.089 Seems pretty darn solid. 0:00:47.229 --> 0:00:49.320 Look, we've been optimistic on the U.S. all year. I 0:00:49.420 --> 0:00:51.440 think the economy is doing really well and it's staged 0:00:51.460 --> 0:00:53.880 to keep doing well. We think it's benefiting from stimulative 0:00:53.920 --> 0:00:58.040 monetary policy, stimulative fiscal policy, stimulative wealth effects from all 0:00:58.060 --> 0:01:02.380 the equity rally. and stimulative effects on investment demand from AI. 0:01:02.800 --> 0:01:04.740 We think that that's poised to continue. We think the 0:01:04.840 --> 0:01:07.750 Fed's rate hike last week was really good news. It 0:01:07.790 --> 0:01:11.090 shows that the Fed is embracing this optimistic narrative. Walsh 0:01:11.190 --> 0:01:14.009 used the word optimism in his press conference. And we're 0:01:14.050 --> 0:01:16.570 seeing that the Fed is prepared, it's willing and able 0:01:16.610 --> 0:01:19.450 to use its tools to keep the expansion. 0:01:18.990 --> 0:01:21.759 Healthy and balanced. And I do get your notes that 0:01:21.780 --> 0:01:23.679 you send out to clients. So I saw last week 0:01:23.740 --> 0:01:26.200 after the Fed's decision that you were sticking with an 0:01:26.240 --> 0:01:29.340 expected another hike in December and January. But this week, 0:01:29.390 --> 0:01:31.770 we get more than a half dozen Fed speakers. We 0:01:31.790 --> 0:01:34.350 did hear from Austin Goolsbee earlier this morning saying the 0:01:34.390 --> 0:01:37.030 road to 2% inflation may not be painless. So you 0:01:37.050 --> 0:01:39.730 were talking about how you might potentially add a hike 0:01:39.950 --> 0:01:42.790 for that October meeting, depending on what you hear throughout 0:01:42.830 --> 0:01:45.770 this week. What did you view with Goolsbee's comments this morning? 0:01:45.810 --> 0:01:47.870 And what else are you watching for from these Fed 0:01:47.890 --> 0:01:48.550 speakers this week? 0:01:48.730 --> 0:01:50.470 Look, we agree that the road might not be painless. 0:01:50.530 --> 0:01:53.800 And we think ultimately the risks to our Fed path, 0:01:53.840 --> 0:01:54.760 we have the pack we just had. 0:01:54.780 --> 0:01:55.360 We have two more. 0:01:55.400 --> 0:01:57.300 We have one in December, one in January. We think 0:01:57.320 --> 0:01:59.980 the risks are to a more concerted, a longer and 0:02:00.000 --> 0:02:02.980 a stronger tightening cycle, just because the growth impulse in 0:02:03.000 --> 0:02:05.540 the economy is so strong, because inflation has gotten a 0:02:05.560 --> 0:02:08.970 little bit sticky, and because it's important to build credibility. 0:02:08.990 --> 0:02:12.710 So we see those features of the economy as meaning 0:02:12.730 --> 0:02:14.510 that it's going to be a bit harder to fight 0:02:14.550 --> 0:02:16.549 inflation than maybe the Fed had thought the past few 0:02:16.570 --> 0:02:18.410 years and that it might think now. So there's the 0:02:18.440 --> 0:02:19.390 risk that they have to do a bit more. 0:02:19.910 --> 0:02:22.510 So on the underlying inflation, I mean, we've got WTI 0:02:22.790 --> 0:02:25.450 crude oil at or near 100 bucks a barrel. 0:02:25.650 --> 0:02:26.990 That's not good for inflation. 0:02:27.380 --> 0:02:30.579 John Tucker's paying 450 a gallon at the Wawa Route 0:02:30.580 --> 0:02:33.890 36 in Jersey. Talks about underlying inflation. What are you 0:02:33.910 --> 0:02:34.450 seeing out there? 0:02:34.510 --> 0:02:35.150 How do you feel about it? 0:02:35.350 --> 0:02:37.889 Look, and it's worse if you're a truck driver. You 0:02:37.930 --> 0:02:40.600 can pay $ 6. 57 for diesel, and we're starting to talk 0:02:40.620 --> 0:02:43.320 about being over $ 200 a gallon. So one of the 0:02:43.380 --> 0:02:45.419 risks to the economy that we see is that we 0:02:45.440 --> 0:02:47.940 can get continued rises in energy prices. Our view has 0:02:47.990 --> 0:02:50.570 been that the economy is going to be resilient to that. 0:02:51.100 --> 0:02:53.320 So long as we don't get back to a price 0:02:53.380 --> 0:02:55.800 in inflation adjusted level like we got in 2008, which 0:02:56.200 --> 0:02:58.320 would be something like well over 200. And look, we 0:02:58.380 --> 0:03:00.950 could get there. If things get worse, we're not there now. 0:03:01.070 --> 0:03:03.050 So we think we're in good shape now. But that's 0:03:03.090 --> 0:03:05.450 a risk to monitor. We think ultimately inflation in the 0:03:05.510 --> 0:03:08.350 US is driven by momentum. And so we've had now 0:03:08.510 --> 0:03:11.930 over five years of high inflation, including the big surge 0:03:11.950 --> 0:03:15.190 in inflation during the pandemic reopening. We think it's just 0:03:15.830 --> 0:03:19.130 accumulated inertia. In order to fight that inertia, the Fed 0:03:19.169 --> 0:03:21.960 might just have to push push harder into it. The 0:03:22.000 --> 0:03:24.239 Fed's been hoping that inflation would just sort of peter 0:03:24.300 --> 0:03:27.480 out by itself without the need for having to push 0:03:27.500 --> 0:03:29.540 back on the labor market. And that might not work. 0:03:29.560 --> 0:03:30.670 The Fed's coming to terms with that. 0:03:30.930 --> 0:03:32.930 What do you think is the biggest risk to your call? 0:03:34.150 --> 0:03:36.070 Look, we think that if you're an economist and you're 0:03:36.110 --> 0:03:38.190 worried about the risk, you're mostly worried about some kind 0:03:38.210 --> 0:03:40.700 of imbalance. And for us, for most of you, the 0:03:40.740 --> 0:03:42.650 risk was that the Fed wouldn't act. And the Fed 0:03:42.670 --> 0:03:45.330 would let the economy overheat. We get the late unemployment 0:03:45.350 --> 0:03:47.410 rate to fall too much. And then the Fed would 0:03:47.470 --> 0:03:49.610 have to sort of like you jump like it had 0:03:49.630 --> 0:03:53.670 been hit by cattle prod and respond excessively. And when 0:03:53.690 --> 0:03:56.210 you start seeing these big amplifying moves, that's when you 0:03:56.250 --> 0:03:59.190 worry about something having a recession. The fact that we're 0:03:59.230 --> 0:04:02.570 seeing the Fed respond more timely now and showing that 0:04:02.590 --> 0:04:04.510 they're on the path to stabilize and the economy reduces 0:04:04.560 --> 0:04:06.970 that risk. We're worried about the war. We also think 0:04:07.010 --> 0:04:10.900 that AI is primarily driven by optimism right now. That's fine. 0:04:11.060 --> 0:04:13.390 That's a normal part of this phase of the technology cycle. 0:04:13.790 --> 0:04:17.010 But if something happens that causes people to somehow lose 0:04:17.029 --> 0:04:19.690 some of that optimism about the commercialization of AI, that 0:04:19.710 --> 0:04:21.430 could be a problem too. But right now, we think 0:04:21.450 --> 0:04:22.289 these risks are manageable. 0:04:22.830 --> 0:04:28.919 And the consumer seems really strong, resilient. How do you 0:04:29.000 --> 0:04:31.840 view the consumer here? We know there's this K-shaped economy, 0:04:31.880 --> 0:04:34.010 but the It just seems like the upper end of 0:04:34.029 --> 0:04:36.710 the K is kind of driving the bus here at 0:04:36.730 --> 0:04:37.090 the moment. 0:04:37.470 --> 0:04:40.109 There's a lot of debate about how K-shaped the economy 0:04:40.150 --> 0:04:42.630 really is or whether it's any more K-shaped than it 0:04:42.650 --> 0:04:45.100 always has been. There is wealth and income inequality in 0:04:45.120 --> 0:04:47.180 this country, but that's not new. We think the wealth 0:04:47.500 --> 0:04:49.900 gains that are coming from the stock market do accrue 0:04:50.020 --> 0:04:52.620 to more affluent people, but that it seems to be 0:04:52.680 --> 0:04:54.920 working through to the rest of the economy. So, so 0:04:54.960 --> 0:04:57.539 long as people have a job, they're comfortable that their 0:04:57.560 --> 0:05:00.690 job's going to be stable and the market remains resilient, 0:05:01.050 --> 0:05:02.930 we think the consumer will remain resilient as well. 0:05:03.730 --> 0:05:07.630 When you're viewing the direction for, especially how much the 0:05:07.770 --> 0:05:12.310 AI prospects are contributing to GDP, if a lot of 0:05:12.330 --> 0:05:15.130 those companies are obviously tapping the debt markets to spend more, 0:05:15.190 --> 0:05:17.750 if they're pulling back on that potentially, depending on where 0:05:17.800 --> 0:05:20.560 the rate cycle is for hiking, how does that then 0:05:21.020 --> 0:05:23.480 potentially slow economic growth? 0:05:23.779 --> 0:05:26.000 So first of all, I talked to quite a few 0:05:26.040 --> 0:05:28.520 clients in the data center and the hyperscaler space, like 0:05:28.540 --> 0:05:29.540 we're a big institution. 0:05:29.900 --> 0:05:30.800 And I'm not hearing that. 0:05:30.860 --> 0:05:33.339 So what I'm hearing is that people are very optimistic 0:05:33.480 --> 0:05:35.840 on the demand for compute, on the commercial demand for 0:05:35.920 --> 0:05:38.260 AI applications. And yes, rates are going up. 0:05:38.310 --> 0:05:38.960 They see that. 0:05:39.270 --> 0:05:40.849 They've been trying to get ahead of that the past 0:05:40.870 --> 0:05:43.340 few months with supply, with issuance. but that that's not 0:05:43.360 --> 0:05:45.820 going to derail their plans. So ultimately, we think that 0:05:45.860 --> 0:05:48.520 the AI cycle is robust to this. That may be 0:05:48.560 --> 0:05:50.640 a reason the Fed has to do more, because if 0:05:50.670 --> 0:05:53.070 the Fed's objective actually is to sort of take a 0:05:53.089 --> 0:05:54.930 little bit of the punch bowl away, sort of the 0:05:54.990 --> 0:05:58.450 old Lou McKesney Martin quote, that they may have to 0:05:58.490 --> 0:06:00.330 take a little bit more of the punch bowl away 0:06:00.750 --> 0:06:02.420 to get people to chill out a little bit. So 0:06:02.450 --> 0:06:05.240 that's more the risk is that there's not enough response 0:06:05.260 --> 0:06:05.720 and the Fed. 0:06:05.640 --> 0:06:06.060 Has to do more. 0:06:06.940 --> 0:06:11.490 The 10-year Treasury yield, 4.95%, 5%. Is that kind of 0:06:11.510 --> 0:06:13.190 the new normal? And is that OK? 0:06:13.910 --> 0:06:15.930 So our view for a while has been that we 0:06:15.970 --> 0:06:19.289 are going into a period of prolonged high growth. And 0:06:19.770 --> 0:06:22.390 that means that the neutral rate, the rate that the 0:06:22.450 --> 0:06:24.330 Fed has to maintain on average over time, is going 0:06:24.350 --> 0:06:25.570 to be higher. And that means that we're going to 0:06:25.589 --> 0:06:26.589 be in a higher rate environment. 0:06:26.980 --> 0:06:27.789 Another way of putting it is. 0:06:27.770 --> 0:06:29.800 If you want 90s type growth, you might have to 0:06:29.839 --> 0:06:32.680 have 90s type rates. And some of that is getting 0:06:32.720 --> 0:06:35.200 priced in. I think some of my buy-side clients are 0:06:35.220 --> 0:06:36.900 starting to think about where should the 10-year, where should 0:06:36.940 --> 0:06:39.380 the 30-year be in a world where productivity growth is 0:06:39.400 --> 0:06:41.980 going to be really high. So look, there's some room 0:06:42.020 --> 0:06:43.660 for a rally here, here and there. We think the 0:06:43.720 --> 0:06:46.710 Fed is showing some credibility. We might have some stabilization 0:06:46.730 --> 0:06:49.089 in the war at some point, hopefully. Those things would 0:06:49.110 --> 0:06:50.870 be good for the 10-year. But ultimately, we don't think 0:06:50.970 --> 0:06:53.690 going back to a much lower level of rates. We 0:06:53.710 --> 0:06:54.770 think we're in a high-growth environment. 0:06:55.050 --> 0:06:58.760 James, undergraduate degree, Cornell, computer science. Then you go get 0:06:58.800 --> 0:06:59.760 the NBA Chicago. 0:06:59.779 --> 0:07:03.040 Dude, that is a lot of math over that period 0:07:03.060 --> 0:07:03.300 of time. 0:07:03.540 --> 0:07:04.900 I mean, you like math, I guess. 0:07:05.060 --> 0:07:06.620 I do like math, but I find in this job 0:07:06.670 --> 0:07:10.470 I'm mostly reading Truth Social at times. It isn't always helpful, 0:07:10.610 --> 0:07:15.190 but I do aspire to it being useful. 0:07:15.690 --> 0:07:16.290 Stay with us. 0:07:16.590 --> 0:07:19.810 More from Bloomberg Surveillance coming up after this. 0:07:27.080 --> 0:07:30.680 You're listening to the Bloomberg Surveillance Podcast. Catch us live 0:07:30.760 --> 0:07:33.940 weekday afternoons from 7 to 10 a.m. Eastern. Listen on 0:07:34.040 --> 0:07:37.310 Apple CarPlay and Android Auto with the Bloomberg Business app 0:07:37.510 --> 0:07:39.250 or watch us live on YouTube. 0:07:40.250 --> 0:07:42.570 Let's talk the bond market. Let's talk credit. 0:07:43.370 --> 0:07:45.270 And, you know, the story of 2026, one of the 0:07:45.350 --> 0:07:48.960 main themes has been all the new issuance from the 0:07:49.220 --> 0:07:51.520 AI players. A lot of tech companies who you don't 0:07:51.800 --> 0:07:54.740 normally see in the bond market because you have such 0:07:55.240 --> 0:07:56.900 tons of cash on their balance sheet, lots of free 0:07:56.920 --> 0:07:59.160 cash flow. They didn't need the bond market. Now they 0:07:59.200 --> 0:08:01.830 do for all this AI capex. What's it mean for 0:08:02.110 --> 0:08:05.150 the investment grade bond market for that return to Amanda Linem? 0:08:05.310 --> 0:08:08.330 She's a chief credit strategist at a little shop called 0:08:08.370 --> 0:08:12.060 Goldman Sachs. Amanda, how do you guys think about all 0:08:12.100 --> 0:08:14.900 the AI issuance that has come into the market and 0:08:14.920 --> 0:08:17.000 that is expected to come into the market over the next, 0:08:17.200 --> 0:08:18.120 I don't know, 18 months or so? 0:08:19.180 --> 0:08:19.740 Good morning. 0:08:20.020 --> 0:08:22.070 Thank you for having me. So I think there are 0:08:22.090 --> 0:08:23.590 a couple of ways to think about this, Paul. One 0:08:23.670 --> 0:08:26.250 is to just frame the scale and scope. And you 0:08:26.310 --> 0:08:29.370 rightly point to the group of hyperscalers that have been 0:08:29.770 --> 0:08:32.880 in focus for the markets. But actually, our work suggests 0:08:32.940 --> 0:08:36.420 that as sizable as those CapEx needs are from the hyperscalers, 0:08:36.720 --> 0:08:40.320 they represent just 40 percent of the AI related issuance 0:08:40.360 --> 0:08:43.689 that's coming through the global corporate credit markets. So given 0:08:43.730 --> 0:08:46.900 that swift acceleration, which actually started in 2025, it's intensified 0:08:46.920 --> 0:08:54.350 through 2026. We've counted nearly 600 billion of global AI-related 0:08:54.390 --> 0:08:57.390 debt issuance so far this year, and we think it's 0:08:57.470 --> 0:09:01.090 poised to accelerate even further in 2027. What that means 0:09:01.150 --> 0:09:05.010 is that the diversification value of sectors outside of that theme, 0:09:05.050 --> 0:09:09.210 so banks, healthcare, energy, food and beverage, it's all the 0:09:09.250 --> 0:09:11.910 more important for investors. And so that's really, I think, 0:09:12.030 --> 0:09:15.920 a key driver of the increased focus on sector diversification 0:09:15.940 --> 0:09:16.220 from here. 0:09:16.740 --> 0:09:17.880 Talk to us more about. 0:09:17.700 --> 0:09:21.050 The bifurcation between AI-related spreads and the rest of the 0:09:21.130 --> 0:09:23.670 market and how you view kind of the trajectory of 0:09:23.710 --> 0:09:25.860 this in the midst of the Fed beginning to hike 0:09:25.900 --> 0:09:26.300 rates again. 0:09:27.140 --> 0:09:28.140 Sure. Thank you, Jess. 0:09:28.179 --> 0:09:31.550 It's a great question. I think the bifurcation has persisted. 0:09:31.570 --> 0:09:33.910 And as you noted, it's really between AI and the 0:09:33.970 --> 0:09:35.050 broader rest of the market. 0:09:35.350 --> 0:09:37.670 I think what it has driven. 0:09:37.230 --> 0:09:39.830 In our view is almost a shift in the way 0:09:39.910 --> 0:09:43.130 that we think investors should think about quality and being 0:09:43.190 --> 0:09:45.730 defensive in the credit market. And that's true in both 0:09:45.929 --> 0:09:48.450 IG and high yield. And so one of the views 0:09:48.510 --> 0:09:51.580 that we have is to selectively move down in credit 0:09:51.640 --> 0:09:56.220 quality from in IG were overweight BBBs against the higher 0:09:56.280 --> 0:09:59.690 rated cohorts of the market. And in high yield, for example, 0:09:59.710 --> 0:10:02.380 in the US, were overweight single Bs versus double Bs. 0:10:02.880 --> 0:10:05.090 it's really driven by two factors and it speaks to 0:10:05.130 --> 0:10:09.890 this bifurcation. While the reflex historically to be more defensive 0:10:09.929 --> 0:10:12.750 or move up in quality was to move up in ratings, 0:10:13.230 --> 0:10:15.290 if you do that in this environment, what you do 0:10:15.370 --> 0:10:18.650 is you subject yourself to two more pronounced headwinds. The 0:10:18.670 --> 0:10:21.180 first is the supply angle that we mentioned and the 0:10:21.240 --> 0:10:22.760 second is a duration headwind. 0:10:23.400 --> 0:10:25.819 On the supply angle, the higher end of the. 0:10:25.920 --> 0:10:30.199 IG and high yield rating cohorts have generated a disproportionately 0:10:30.260 --> 0:10:33.610 large share of supply relative to prior years. And again, 0:10:33.630 --> 0:10:36.809 that's driven largely by the AI theme, even in high yield. 0:10:37.250 --> 0:10:39.990 And then two, by moving up in ratings and moving 0:10:40.030 --> 0:10:42.929 into tighter spread bonds, what you do is... you lose 0:10:42.970 --> 0:10:46.179 that spread cushion to buffer total returns from higher rates. 0:10:46.580 --> 0:10:49.920 And so for that reason, we actually like being selectively 0:10:49.960 --> 0:10:53.160 down in credit quality, of course, very mindful of kind 0:10:53.200 --> 0:10:56.120 of that left tail of the credit market that seems 0:10:56.160 --> 0:10:59.370 to persistently lag. But growth is good enough in our view. 0:10:59.640 --> 0:11:02.410 Credit fundamentals are solid. And really, it just fits with 0:11:02.450 --> 0:11:04.390 our view that if you're allocating to credit, you should 0:11:04.410 --> 0:11:07.010 be doing that for yield and income, not for a 0:11:07.110 --> 0:11:10.069 potential total return boost from tighter spreads or lower rates. 0:11:10.630 --> 0:11:13.819 Amanda, you have some of the best tech research analysts 0:11:14.160 --> 0:11:15.960 on Global Wall Street there at Goldman Sachs. What are 0:11:15.980 --> 0:11:20.120 they telling you about, I guess, the need for more CapEx? 0:11:20.160 --> 0:11:22.370 How long does this cycle last? How long is your 0:11:22.410 --> 0:11:24.690 investment grade mark? You're going to be asked to kind 0:11:24.730 --> 0:11:25.949 of fund a lot of this stuff. 0:11:26.720 --> 0:11:28.979 We sure do have the best equity research tech analysts. 0:11:29.540 --> 0:11:33.400 So our debt issuance forecast for 2027 and even through 0:11:33.420 --> 0:11:36.710 the outer years, they're directly informed in large part by 0:11:36.780 --> 0:11:39.630 the CapEx estimates of our equity team. And then we 0:11:39.690 --> 0:11:42.330 assume a share of that CapEx spend that will be 0:11:42.370 --> 0:11:45.470 debt financed. As you know, Paul, this is a multi-year trend. 0:11:46.050 --> 0:11:48.329 This is something that it's not going to be kind 0:11:48.350 --> 0:11:49.390 of a one and done. 0:11:49.230 --> 0:11:50.010 Wave of issuance. 0:11:50.190 --> 0:11:53.020 We expect this to be a present theme in the 0:11:53.059 --> 0:11:56.880 corporate credit markets through 2030, even 2031. 0:11:56.880 --> 0:11:59.000 Based on the CapEx trajectory that we see. 0:11:59.020 --> 0:12:03.050 I think the key angle, though, is that over time, 0:12:03.290 --> 0:12:07.610 as that market issuance pattern extends further, We think that 0:12:07.770 --> 0:12:11.050 other markets, in particular other financing channels, will need to 0:12:11.110 --> 0:12:13.829 play a larger role in financing some of this need, 0:12:14.270 --> 0:12:18.480 specifically the private credit markets, private infrastructure, private real estate, 0:12:18.750 --> 0:12:22.459 where there's a collective $ 4. 5 trillion of dry powder across 0:12:22.600 --> 0:12:26.460 all private market strategies, even including private equity. We see 0:12:26.500 --> 0:12:29.040 a greater role for those markets to step in. That's 0:12:29.059 --> 0:12:32.000 not to say that there's not additional runway in the 0:12:32.080 --> 0:12:34.200 traditional financing corporate bond markets. 0:12:34.240 --> 0:12:34.920 There for sure is. 0:12:35.720 --> 0:12:39.280 At least $ 500 billion by our estimates in US IG alone. 0:12:39.750 --> 0:12:41.709 But just given the scale and scope of this need, 0:12:41.730 --> 0:12:44.270 we believe a wide range of financing channels will need 0:12:44.290 --> 0:12:48.309 to participate across structures, markets, and even currencies. 0:12:48.750 --> 0:12:51.650 Amanda, any particular red flags you're beginning to see within 0:12:51.970 --> 0:12:53.490 the AI-related debt issuance? 0:12:54.630 --> 0:12:57.590 Well, I just think it's not necessarily a red flag, 0:12:57.650 --> 0:13:00.860 but it's a recognition of what is different this time 0:13:00.980 --> 0:13:04.060 versus prior periods of active re-leveraging. And if I had 0:13:04.100 --> 0:13:07.320 to put it very simply, the credit market works best 0:13:07.440 --> 0:13:11.500 in funding periods of active re-leveraging when the need is quantifiable, 0:13:11.900 --> 0:13:14.520 when there's an end in sight, And ideally, when there's 0:13:14.559 --> 0:13:17.100 a period of debt reduction on the back of any 0:13:17.160 --> 0:13:21.660 debt issuance, for a variety of reasons, this multi-year period 0:13:21.860 --> 0:13:26.000 of AI-related debt issuance, where CapEx estimates have been moving higher, 0:13:26.040 --> 0:13:28.670 by the way, it's just a different phenomenon than what 0:13:28.710 --> 0:13:30.329 the corporate credit market is used to. 0:13:30.730 --> 0:13:32.290 That's why you see in some. 0:13:32.150 --> 0:13:37.630 Cases that we expect larger markets in the private financing channels, 0:13:37.670 --> 0:13:41.490 for example, to play a more meaningful role as it extends. So, 0:13:41.890 --> 0:13:44.930 I think it's important to realize that typically when the 0:13:44.980 --> 0:13:49.160 corporate credit market sees these large jumbo debt deals, it's for, 0:13:49.200 --> 0:13:51.699 for example, a debt-funded M & A transaction. 0:13:52.000 --> 0:13:53.560 That's kind of the end of the issuance. 0:13:53.780 --> 0:13:56.970 And then the corporate borrower is focused on debt reduction 0:13:57.070 --> 0:13:59.829 following that. This is just a very different backdrop. 0:13:59.850 --> 0:14:01.530 And so I think it's important to acknowledge that. 0:14:02.070 --> 0:14:06.709 Amanda, one of the questions I have is, it feels 0:14:06.730 --> 0:14:10.080 like maybe this AI spending level This is the new normal. 0:14:10.480 --> 0:14:13.590 I'm not sure once you build whatever you need to build, 0:14:13.790 --> 0:14:16.490 whether it's a data center or whatever, does it go 0:14:16.530 --> 0:14:19.220 back to pre-AI CapEx levels? 0:14:19.440 --> 0:14:20.160 I'm not so sure. 0:14:21.490 --> 0:14:23.530 I think it's hard to know, and it's probably out 0:14:23.570 --> 0:14:25.729 of my wheelhouse. I'll defer to the tech experts on 0:14:25.790 --> 0:14:27.890 that one. But I think the key question for corporate 0:14:27.910 --> 0:14:32.330 credit investors is, is there a financing runway to accommodate 0:14:32.390 --> 0:14:35.530 this spend? And I certainly think that from the corporate 0:14:35.550 --> 0:14:38.200 credit investor side, there's a lot of demand for this paper. 0:14:38.340 --> 0:14:40.740 Tech is actually still a pretty small share of the 0:14:40.820 --> 0:14:44.060 overall corporate credit market, despite the issuance numbers that I 0:14:44.100 --> 0:14:46.720 mentioned at the start, which is pretty astounding. And as 0:14:46.740 --> 0:14:50.380 we move forward, I think investors will pick their spots 0:14:50.420 --> 0:14:52.960 in terms of where they might want to participate more fully. 0:14:53.020 --> 0:14:55.000 But in general, the message from our side is that 0:14:55.260 --> 0:14:58.440 we are not concerned about access to capital for the 0:14:58.540 --> 0:15:01.180 AI theme from a corporate credit side. We just expect 0:15:01.240 --> 0:15:04.540 more nuanced conversations about where exactly to take this risk 0:15:04.680 --> 0:15:08.250 and at what price as the multi-year issuance cycle moves 0:15:08.370 --> 0:15:09.670 on from the investor perspective. 0:15:10.530 --> 0:15:13.110 Amanda, thank you so much. Appreciate it. As always, Amanda Lanham, 0:15:13.150 --> 0:15:14.830 Chief Credit Strategist at Goldman Sachs. 0:15:19.090 --> 0:15:22.670 You're listening to the Bloomberg Surveillance Podcast. Catch us live 0:15:22.750 --> 0:15:25.940 weekday afternoons from 7 to 10 a.m. Eastern. Listen on 0:15:26.040 --> 0:15:29.300 Apple CarPlay and Android Auto with the Bloomberg Business app 0:15:29.520 --> 0:15:31.220 or watch us live on YouTube. 0:15:31.240 --> 0:15:33.840 Let's check in with our next guest, Nancy Lazar, chief 0:15:34.000 --> 0:15:37.540 global economist at Piper Sandler. Nancy, thanks so much for 0:15:37.600 --> 0:15:39.920 joining us here. I love and I think our listeners 0:15:39.940 --> 0:15:41.570 would love to get your thoughts on what we heard. 0:15:42.260 --> 0:15:46.230 From the Federal Reserve last week, the hike started, came in. 0:15:46.270 --> 0:15:48.750 We had a 25 basis point hike as the market 0:15:48.770 --> 0:15:51.050 was anticipating. What else did you take away from the 0:15:51.090 --> 0:15:51.550 Fed meeting? 0:15:52.790 --> 0:15:55.810 Well, it's to listen seriously to what Chair Warsh says. 0:15:56.190 --> 0:15:58.790 He said one of the key indicators, economic indicators he's 0:15:58.850 --> 0:16:04.010 watching are weekly unemployment claims. It's a hard statistic, great 0:16:04.050 --> 0:16:08.010 historical relationship with the labor market. And claims are down 10% 0:16:08.010 --> 0:16:12.660 on a year-over-year basis, which means the labor market is 0:16:12.760 --> 0:16:16.600 healing really quickly. Layoffs are down. And that also implies 0:16:16.800 --> 0:16:19.620 employment is indeed going up. So listen to what he 0:16:19.680 --> 0:16:22.970 says and watch what he's watching, which is the labor 0:16:22.990 --> 0:16:26.930 market along with inflation. And there's maybe more truth than 0:16:26.990 --> 0:16:30.510 fiction to the relatively strong payroll employment report we had 0:16:30.590 --> 0:16:34.380 for the month of August. So claims, I think, were 0:16:34.480 --> 0:16:36.790 a mirror into what he was thinking, which is the 0:16:36.850 --> 0:16:39.890 economy's on solid footing, labor market is healing. 0:16:40.370 --> 0:16:43.820 And inflation is sticky. He has a diffusion index. We 0:16:43.860 --> 0:16:45.920 have our inflation diffusion index. 0:16:46.260 --> 0:16:50.040 It tells you there's too many prices that are increasing 0.3% 0:16:50.040 --> 0:16:52.840 or more. And that just highlights that we are now 0:16:52.900 --> 0:16:56.310 seeing sticky inflation. And then third, and then I'll stop, 0:16:56.730 --> 0:16:59.030 is that does this strength in the labor market then 0:16:59.070 --> 0:17:02.630 imply that, say, in 2027, we could actually see even 0:17:02.670 --> 0:17:07.230 a further broadening out of inflation into wage inflation. And 0:17:07.270 --> 0:17:09.770 we think that's going to become more of a story 0:17:09.869 --> 0:17:13.280 indeed as we see this stronger labor market then leading 0:17:13.300 --> 0:17:15.100 to stronger wage inflation in 2027. 0:17:15.100 --> 0:17:18.300 Hey, Nancy, we didn't hear too much from Kevin Warsh 0:17:18.460 --> 0:17:21.000 about the Fed's balance sheet. What are you watching there? 0:17:22.420 --> 0:17:25.340 Well, we watch the balance sheet closely. It's still very, 0:17:25.380 --> 0:17:29.070 very elevated. We also watch money supply. He is a monetarist. 0:17:29.090 --> 0:17:31.350 He made that clear in the monetary policy report. 0:17:31.369 --> 0:17:32.030 He made that. 0:17:31.930 --> 0:17:36.210 Clear at Jackson Hole. And we watch the banking system. 0:17:36.260 --> 0:17:38.800 We watch bank lending. Bottom line is there's a lot 0:17:38.840 --> 0:17:42.010 of liquidity in the economy. And that helps explain, one, 0:17:42.109 --> 0:17:45.889 why economic activity is solid and getting stronger, and two, 0:17:46.630 --> 0:17:50.670 why inflation is indeed sticky. So the balance sheet, although 0:17:50.710 --> 0:17:53.450 it's off its peak, is still very elevated. It provides 0:17:53.490 --> 0:17:55.980 a lot of liquidity to Wall Street. Therefore, it provides 0:17:56.020 --> 0:17:58.440 a lot of liquidity for financial markets and is a 0:17:58.480 --> 0:18:01.500 contributor to the strength in the economy. More simply, though, 0:18:01.960 --> 0:18:06.660 watching money supply M2 growth, which is what classically monetarists 0:18:07.200 --> 0:18:08.919 me included, have watched. 0:18:08.960 --> 0:18:10.740 It's growing 7% right now. 0:18:11.260 --> 0:18:15.640 And 7% money supply growth, 7% bank loan growth, very 0:18:15.700 --> 0:18:19.050 strong government spending right now led by defense. That all 0:18:19.090 --> 0:18:22.250 suggests nominal activity is going to stay strong, which is very, 0:18:22.270 --> 0:18:26.770 very supportive of corporate revenue, corporate revenue growth. So balance sheet, money, 0:18:26.869 --> 0:18:30.070 bank loans, government spending all point to a lot of 0:18:30.090 --> 0:18:33.450 liquidity helping to support the economy and cushion it, quite frankly, 0:18:33.869 --> 0:18:37.620 from this backup in interest rates For now. 0:18:38.100 --> 0:18:40.320 Hey, Nancy, I guess I should not be, but I 0:18:40.359 --> 0:18:43.830 continue to be, I guess, pleasantly surprised by the resilience 0:18:44.460 --> 0:18:45.310 of the U.S. 0:18:45.430 --> 0:18:47.450 Consumer here. How do you view the U.S. 0:18:47.490 --> 0:18:52.570 Consumer who is facing inflation. 0:18:50.630 --> 0:18:53.050 Issues, particularly at the gas pump and some other places? 0:18:53.130 --> 0:18:56.190 But boy, the U.S. consumers more than hanging in there. 0:18:57.430 --> 0:18:59.510 Well, well said. Totally, totally agree. 0:18:59.830 --> 0:19:04.040 Nominal consumer spending, which is what drives revenue for all 0:19:04.060 --> 0:19:06.240 these big retailers, are growing. 0:19:05.940 --> 0:19:07.780 Right now 6%. 0:19:07.780 --> 0:19:11.040