00:00:02 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 00:00:11 Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along with Lisa Bromwitz and Amrie Hordern. Join us each day for insight from the best in markets, economics, and geopolitics from our global headquarters in New York City. We are live on Bloomberg Television weekday mornings from six to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app. 00:00:36 Speaker 1: To begin this hour with stocks kind of looking for direction as the flood of big tech debt keeps upward pressure on treasure yields. Marvin Low of State Street writing, well, recent data has thrown a bit of cold water on the strength of the economy. The strong demand for capital has created strong need for tighter financial conditions. Marvin joins us now for more and Marvin, great to see you. Thank you so much for being with us. Can you explain that why all of the tech issuance is actually a requirement for tighter financial tighter monetary conditions in and of itself. 00:01:07 Speaker 3: Yeah, absolutely, I mean aery mentioned kind of the supplying demand aspect of it, and you know, there is a supply issue that is arising ultimately with all of this AI build out. You know, ultimately, you know, we look at inflation through the oil lens and that and that makes clear sense, but also we have to look at inflation through the chip lens, which is UH, the demand for chips, and the supply for chips is being affected by this, UH, this capital raise in all of this data center buildouts. So it is it is ultimately interrelated. Ultimately, growth out performance this year has very much been predicated on the fact that we've got all of this investment within the GDP stack, if you will, and there is no let up in that demand at this point. 00:01:54 Speaker 1: So you're saying that, regardless of what happens with the underlying economy or core inflation away from some of these key components, that monetary policy makers should be looking at the rapid record pace of issuance in the debt markets and frankly increasing activity in the equity markets as a sign that they are not restrictive enough that this inflationary impact from AI has legs and is going to last for a longer period of time. 00:02:21 Speaker 3: Yeah, absolutely. I mean, I wouldn't say that we can ignore the data, but I think that we have to take the data within the context of everything that we're saying. In terms of the capital demand in this environment, you know, there's economic theories which say that, you know, interest rates are supposed to be set where the amount of capital is equal to the availability of savings, and from that perspective, the demand for capital certainly are at levels that we haven't seen in quite some time. 00:02:47 Speaker 4: Obviously, when it comes to the data, it's backwards looking. And for someone like Beth Hammock, and if you listen to her speak, it doesn't really matter what tomorrow's CPI print brings in terms of where she sees the trajectory and what needs to be done to really try to tamper inflation. How are you are you viewing tomorrow's CPI print? 00:03:07 Speaker 3: Yeah, I mean, you know, we're still going to be above targets for the sixty third, sixty fourth month, if you will. There are questions as to whether or not the disinflation is going to get us to that two percent, and in an environment where you've got again kind of this economic tail wind from this investment balloon, that we have. You know, you've you've got to look at it holistically, and you know, and parts the fact that we're still above those targets and the shape of the curve and how long yields are responding are saying that there are concerns that you're not taking it seriously enough. 00:03:45 Speaker 4: Given all of this money flooding into AI, given the fact that it is costing a lot more in terms of having compute. Do you think it's going to be much harder for FED chair Kevin Walsh to have that argument that ultimately AI is disinflationary. 00:04:01 Speaker 5: Certainly in the short term. 00:04:03 Speaker 3: You know, Jackson Hole is coming up. He's going to talk about the big items that he that you know, he referenced during the last FMC meeting. Uh, you know, will get a sense on kind of when that productivity can actually make its way into policy. But in the short term, it is going to be really really difficult to calibrate the potential for productivity gains five years down the line, within the environment that we have right now. 00:04:26 Speaker 1: What would raising rates actually do on the front end of the yield curve? Marvin, I mean, ultimately, we've seen that even with rates materially higher priced in by the market, with the market doing the work. As Kevin Worsh was saying, it hasn't really had a material effect. And where equities are. 00:04:41 Speaker 3: No, it hasn't, which which ultimately is a tell wind four kind of equity story. 00:04:46 Speaker 5: This isn't. 00:04:47 Speaker 3: This isn't like prior investment cycled around technology where you know, certainly the technology itself has to be proven, but it's being embarked upon by companies that are in incredibly cash ful a positive and that is somewhat sustainable. I think ironically, showing that you've got this board inflation fighting mentality is going to help the long end. It's really the fact that the long end, whether it's driven by term premiums, whether it's driven by real yields, are being unhinged by concerns that you're not taking it seriously enough. I'd look at that for the biggest win in raising rates kind of at the short end, if you will, When do. 00:05:30 Speaker 1: You see long ends reach the long end of the yield curve reaching a point where it does constrain some of the enthusiasm that we're seeing inequities and frankly, the ambitious capital expenditures that we're seeing from AI and frankly even other companies as well. 00:05:44 Speaker 3: Yeah, so, you know, five percent on the ten years always kind of that magic number that we're looking at if it's driven by real yields, you know, certainly getting real yields into this one hundred and twenty five hundred and fifty basis point range. You know, we're we're closer to you know, eighty if you will perspective from a term premium a viewpoint that really starts to I think tamper the enthusiasm of how much you can throw at these long duration models. 00:06:11 Speaker 2: Stay with us, multiple impax Savanna's coming up off to. 00:06:15 Speaker 5: This as broke, totally broke. They asked for reparations, you might say, or they asked for money for the damage that we've done. And I said, that's a good idea. Well, we're going to ask for money for the damage they've done over a fifty year period. If there's damages to be paid, I think Auran should pay those damages. 00:06:42 Speaker 1: Here's the latest to oil gaining as President Donald Trump makes new demands for Iran, saying reparations for past attacks will be part of any future negotiations with Tehran. General Karen Gibson of Academy Securities writing, Iran is substantially weaker today than before the war began. However, it has gained considerable course of leverage. Ran benefits when the dispute is framed as an issue between Iran and the US. General Gibson joins us Now for more, General Gibson, I want to get your take just of the lay of the lead, if you can zoom out and give us a sense of what has actually changed over the past couple of weeks as people reassessed whether talks were on or versus now where it seems like increasingly they're pretty far away. 00:07:23 Speaker 6: Yes, So that's a great question, Lisa, I think you know one. The talks are proceeding on two axes simultaneously. One is between Oman and Iran, and that's the mechanism by which the strait would be administered, the potential for either voluntary payments or some form of tool to assist with administration. And then the second tack is the more important one, frankly, the one between the US and Iran, which is not about how it will be administered but when it will open, with Iran insisting that the strait will not actually open until the United States makes some major concessions. And as we've just heard from Taylor and has been widely reported, these are concessions that are simply not acceptable to the United States, some of them like you know, removing US military forces from the region or reparations, and then others. It's just unwise to agree to the entirety of this package when really many elements of it, particularly some of those economic aspects, are leverage that the United States will also need in follow on negotiations that we hope will occur to look at Araanian nuclear curves. 00:08:30 Speaker 4: What's going to be the response from this White House if they do not go forward with opening up the Strait of removes and inking this deal with them on. 00:08:37 Speaker 6: Yes, well, so, as Taylor just highlighted, the Arabian economy, which was already weak before this war began, is really being hammered by this. The block hate doesn't help, the sanctions don't help. Additional pressure that could be applied, It's unfortunate it's not a broader multilateral effort, but the economic pressure and sustained military pressure on or on would eventually compel them, perhaps to shift their strategy. The issue is time and domestically, and I'm not a domestic political analyst, but domestically there are constraints that make it difficult for the United States, whether it's gas or oil pressures, or mid terms or pledges not to engage in a forever war, that make it more challenging for the US to wait this out, which really, I think is what it will require. 00:09:24 Speaker 4: Amidst all of this, there was really a stunning story last night from the Washington Post about the President and his departure from NATO. I was with him in NATO in Alcora, and after he boarded Air Force one, the Washington Post reports that he was shuttled via an airport catering truck typically used to load meals into another aircraft, so as a decoy so he could secretly leave Turkey. Is there a real threat on the President's life that you would be concerned about at this point? 00:09:56 Speaker 6: Well, I think we've seen, even domestically at people who've attempted to assassinate the President, that there are real threats, and he's been on Iran's fot well lists for some time. I'm not aware, certainly of whatever classified intelligence information may have been available to lead the Secret Service to believe that there was a potential imminent threat, a very viable threat in Turkey. Obviously that's not something that should be disclosed if that were the case. But I would say escaping in a food truck that nobody noticed is a pretty successful evasive measure. 00:10:28 Speaker 4: Yeah, absolutely, and general I would just love to understand from you. Have you ever seen or heard of anything like this in the past, Oh. 00:10:35 Speaker 6: Of a president in a food truck? No, or you know, it's a very it's a very deceptive measure. Creative, certainly seemed to have been effective, but yes, unprecedented, probably, and. 00:10:49 Speaker 1: Something that can get slipped into the next spy movie or movie about Washington, d C. 00:10:53 Speaker 5: I'm sure. 00:10:54 Speaker 1: I am curious about your point that you're making that it's beneficial for Iran when this conflict is framed as Iran versus the US, versus Iran versus the world, which is kind of how a lot of people are seeing it when it comes to closing the Strait of Rmus. What's your take on why it has been framed so much as Iran versus the US and how that could be changed. 00:11:15 Speaker 6: Well, I think it's unfortunate. One of the anomalies of this conflict is that we did not build a broad base of support from allies beyond the Gulf, and even in that points there's some question as to how much they were in on this plan. To begin with, previous conflicts across the Middle East and elsewhere, there's been more international support for what the United States has been doing. I think it certainly doesn't help us the erosion of some of the trust with our allies, But a broader multilateral effort, I mean, as you point out repeatedly, this is very global impacts. In fact, the United States, aside from inflationary pressures, suffers less from the closure of the strait of ourmuse than the Asian oil consumers or Europe, and so having broader buy in broader economic pressures, kind of like we had with JCPOA, A more multilateral effort would certainly speed the timeline I think of potentially compelling Iran to change its strategy. 00:12:17 Speaker 1: How much more are the Saudi Arabians getting involved, given the fact that the Huthis seemed to be repeatedly targeting them in the Red Sea. We saw that again overnight. It seemed to be more proactive in terms of a response. 00:12:30 Speaker 6: Yeah, so I would say the Saudi threat, the Houthi threat to the Saudis is certainly more proximate to them than Iran has not been recently attacking Saudi oil infrastructure, although they've certainly threatened to do that previously. I think that's why Operation Freedom, the military escort mission only lasted one day, was due to Iranian threats against the East West Pipeline. But the Houthy threat is more approximate, and the Hoothy threat is long standing, and the Hoo thieves have bought two wars previously, and those conflicts pre date the hou Thi's relationship with Iran is one of their proxies. That's a very thorny, perpetual security issue that the Saudis have faced, which again, unfortunately does not steam to have an imminent solution. 00:13:18 Speaker 2: Stay with US multile IMPEG Savannah's coming up off to this. 00:13:31 Speaker 1: Libby Kendrell of PIMCO, writing our base case for the November midterm elections. Continues to be a split Congress. Regardless of the outcome, neither party is likely to have a real governing majority come twenty twenty seven. Yay mor Grid Luck Livy joins us. Now it seems like markets like that, so maybe that isn't positive. 00:13:48 Speaker 2: We do like it. 00:13:49 Speaker 1: So what are you expecting in terms of gleaning insight for the fight for the democratic soul and parties a sort of direction going forward. 00:13:57 Speaker 7: Yeah, we're seeing I think a lot of interesting trends almost converging. It's this really sort of anti incumbent, anti establishment sentiment that's been played out across both parties, both Republicans and Democrats, and then of course within the Democratic Party this is also being kind of woven into this democratic socialist, the sort of far left ideology versus the more kind of mainstream establishment Democrats. It really hasn't actually had major implications for what the midterm election results have been so far, at least before last week, in that many of these fights are being played out and kind of blue, if not very sapphire blue districts, you know, New York City, Denver, Colorado. Whether the Democrats is going to be liberal or very liberal, it doesn't really matter in terms of sort of their electability in those districts because they're sort of overwhelmingly democratic. However, last week it really changed in terms of the Michigan Senate race, and now you have the Wisconsin gubernatorial race and also the potential men in Minnesota set a race as well today. So in terms of the primary, so I think that this has been sort of a an intra a few intro family spat that has really had very little few implications for the midterms. However, again last week has changed that, and again I do think that it probably puts this Michigan Senate seat, maybe Minnesota depending on how that turns out today, and then of course the Wisconsin gubernatorial seat, which is going to be important for the certification of the election. In terms of twenty twenty eight, this is going to have implications for not only the mid terms, but potentially for twenty twenty. 00:15:25 Speaker 4: This family fight with the Democratic Party that's going to play out now in the midterms, we saw it happened last week. How much is that going to set the tone for twenty twenty eight and the candidate that they end up choosing. 00:15:35 Speaker 7: Yeah, and I think this is going to be I mean, obviously what happens you know today will be interesting, particularly in Wisconsin and Minnesota. But I think what is going to be more important is obviously what happens in November, and so you know these people, can you know they are Their rhetoric is obviously resonating with a group of the Democratic Party, But can they then pivot and have a more sort of centrist message that then can actually make them electable for a general election come twenty twenty six. If these folks lose, if l Sau loses in terms of November, if you know, Francesca hang wins today and then loses in November, in terms of the manatorial race in Wisconsin, I do think that's going to sort of take some wind out of the progressive left sales going into the general election and twenty twenty eight, if, however, they win, then you're going to really see this fight, I think, really play out in terms of the primary big picture. 00:16:26 Speaker 4: What kind of numbers are you looking at for after the midterms in terms of the composition of walling. 00:16:31 Speaker 7: Yeah, I mean, honestly, even if this is a wave election for Democrats and there are some inklings of that in terms of the generic ballad, in terms of the enthusiasm gap, Democrats are much more enthusiastic about voting this election. Those are sort of two indicators that we are monitoring that have sort of suggested wave environments before. In terms of the House, the sort of there's a much lower ceiling for how many seats Democrats can win because of the redistricting that has happened. So honestly, a great night for them would be a kind of a plus ten majority, plus fifteen majority. We're not talking about the sort of plus forty majority that we have seen in other sort of midterm elections. And that is just even if that comes to pass, and I think more likely is that Democrats, you know, have a five seat majority in the House, and then maybe Republicans have a fifty to fifty Senate, and that is like neither party. Don't think it's done to have a governing majority. I mean, I think it may be sort of this quixotic world. You could say those are the ingredients for actually compromise if President Trump wanted to do something, say on immigration, for instance, or maybe on healthcare. You know, those are narrow majorities or split Congress have given way to settle compromise in different political environments. I don't think we should fool ourselves. I think this means more gridlock. It means that, you know, I think we've seen kind of past peak President Trump. I think there's obviously much more oversight and what have you on him, But in terms of stuff that's getting done, it's going to be very, very minor. 00:17:57 Speaker 1: Is gridlock still good when people can't even be in the same oray together and talk. I mean, it's one thing to have Democrats and Republicans, say ten or fifteen years ago, when people would have you know, salons together and they would go out together. Now when you go to washingt DC, it's very different. People don't talk to one another, they don't congregate together. 00:18:14 Speaker 5: Is gridlock still as good for markets. 00:18:16 Speaker 1: As it used to be? 00:18:17 Speaker 7: Yeah, I think that's a great question. And I think that when the rubber meets the road for markets is when they really need Congress and they really need the fiscal authorities to do something right. And we did see, of course during COVID that a lot of this partisanship fell fell by the wayside, and they were able to spend a lot of money, which is a much easier The harder task, obviously for Congress is to do the really hard things politically, which of course we've talked about in terms of reducing the deficit. Something an audible laugh. I henory, but honestly it's yeah, I mean think it's warranted. I mean, it's just in terms of actually doing the really hard work, whether it's going to be raising revenues, raising taxes difficult to do obviously, reforming social security, reforming healthcare, things we all know are going to have are going are coming. Honestly, they have to. In terms of our fiscal picture now, whether it's going to be in the next three years, probably not. But you know that twenty thirty one Social Security Trust Fund and flection point. Do you think that's going to be a foresing mechanism And that will be sort of when the rubber meets the road, and I think the markets will be focusing more on this kind of you know, dysfunction in Congress. 00:19:23 Speaker 1: So thirty seconds, how much do hire interest rates really challenge this that much more? Given how much more the interest expense is right now for you? 00:19:30 Speaker 7: I think you know, mortgage rates of obviously are much higher than they were, not their highest obviously, not during you know what we saw during the Biden administration. Gas though, I have to say, gas is still the thing. It's gas in groceries, housing sort of healthcare shore. But gas, the price of gas really does get into the zeitgeist of voters. And so with that above four dollars you know, a gallon, I do think that's going to be a headwind for the president and the president's party. 00:19:55 Speaker 2: This is the Bloomberg Semendents podcast, bringing you the best in market economics, a geopolitics. You can watch the show live on Bloomberg TV weekday mornings from six am to nine am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and as always on the Bloomberg Terminal and the Bloomberg Business app.