00:00:02 Speaker 1: Bloomberg Audio Studios. Podcasts Radio News. This is the Bloomberg Surveillance Podcast. I'm Jonathan Farrow, along with Lisa Abramowitz and Anne-Marie 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 6 to 9 a.m. 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. We begin this out with elevated yields keeping the pressure on equity markets worldwide. Ed Yardeni of Yardeni Research writing, we suspect that the bond market has been hacked by bond vigilante algorithms. They respond to news headlines with huge trades that exacerbate volatility. Ed joins us now for more. Ed, welcome to the program, sir. It's good to see you. Do you believe we might be entering a little bit of a negative feedback loop in this bond market where high yields fuel deficit worries and that fuels high yields? Are we on the brink of that, Ed? 00:01:03 Speaker 2: I think we're on the brink of it. We're sort of in the midst of it. We've actually seen, I think, since the beginning of the year, a synchronized increase in bond yields that might actually have started last year. And I think a lot of that has to do with what we've previously discussed. The Bank of Japan is growing. raising interest rates, and that is causing an unwind of the global carry trade, which I think is affecting global bonds. And so a lot of that is kind of a knee-jerk mechanical event. But at the same time, I think we also have these algorithms that'll take any news whatsoever that's out there, and some of that's been bearish, and kind of blow it up so we get these rapid increases in bond yields. 00:01:51 Speaker 1: And at what point do you think it becomes self-limiting that the bike steps in because people start to worry about the damage? 00:01:58 Speaker 2: I think there's already a lot of worry about the damage. People are already kind of wondering what's going to break here. So I think we're already at that point. I think the best way to monitor that is to just keep watching where the bond yield is relative to short-term rates. Usually, you start to get bond yields going up less than short-term rates when bond investors become increasingly convinced that that as short-term rates continue to go up, that something will break. 00:02:28 Speaker 3: And of course, the two-year Treasury here. 00:02:31 Speaker 2: And around the world has been a very good leading indicator of what central banks are going to be doing. And right now, the two-year Treasuries in all the major countries in the world are pointing towards more tightening by central banks. 00:02:47 Speaker 3: So on September 15th, I kind of. 00:02:53 Speaker 2: concluded that we want to proceed with caution here when it comes to the equity market. Well, it turned out to be actually a good call, more of a good call for the bond market, though I was focusing on the equity market. 00:03:05 Speaker 4: So, Ed, you said it's a good time to proceed with caution. This morning, we were just talking, John mentioned that Aurora has postponed its IPO due to what it called uncertainty in the market, even as it reports a 90 percent revenue growth over the year of 2026. Is this potentially the sign of something breaking when it comes to the pipeline of deals that are trying to get done? 00:03:29 Speaker 2: Well, I kind of am watching Oracle more closely because of the Stargate deal where Oracle is... in a partnership with OpenAI and SoftBank to build data centers. And I think the total commitment is $ 500 billion. And just recently, one of those data centers was postponed rather significantly because a 19-mile gas pipeline in New Mexico was rejected by the state. So, yeah, there's starting to be some stresses there. 00:04:04 Speaker 3: In the AI trade as well. 00:04:06 Speaker 2: And of course, that's what has continued to hold the market up quite well near a record high for both the NASDAQ and the S & P 500. 00:04:16 Speaker 4: Does this mean that at this point, if something might break or there are signs that at least the broader risk appetite is waning at a pretty accelerating clip, does that make you bullish bonds? We heard from Jim Bianco yesterday that he is getting bullish for the first time in years just based on this technical retracement. 00:04:34 Speaker 2: I would say that bonds yielding 5.25% are very attractive, certainly on a 10-year basis. The good thing about bonds is if you just hold them, you get your money back and you get the yield. And I think, again, five and a quarter is a pretty good yield. But It doesn't feel like this is necessarily the peak in bond yields. I think even Bianco said that we might find that we can get even better yields if we just kind of wait here. So I'm not convinced that 5.25% is necessarily the top in yields. 00:05:10 Speaker 5: I was.... 00:05:15 Speaker 2: Thinking that that was the case, but I'm increasingly wondering whether the unwind of the yield curve trade is a big problem here. This kind of, I just recently wrote, actually last night, that this might be the revenge of the bond vigilantes. The bond vigilantes were suppressed from the great financial crisis to the great virus crisis with quantitative easing and zero interest rates. And now that they've been sort of liberated and free to express an opinion, they're saying, well, you know, you accumulated all that debt at near zero interest rates back then. Now you're going to have to refinance it at these yields. And that's concerning. 00:05:57 Speaker 1: I looked at it this morning. 00:05:58 Speaker 6: You called it invasion of the bond vigilante algorithm. So how high, Ed, do you think yields can actually go? 00:06:06 Speaker 2: Well, I know I think more and more people are thinking about the possibility of getting closer to 6%. 00:06:11 Speaker 3: I would say 5.5%. 00:06:13 Speaker 2: I'm not getting into the alarm stage here. I think we are going to find lots of buyers at these kind of levels. The same thing happened In 2023, when the bond yield got to 5% very quickly, we saw that the auctions actually started to go very well. And then bond yields actually declined because inflation moderated. This is not exactly the same scenario right now. One of the reasons I turned more cautious in mid-September is because of what's going on in the Middle East. 00:06:46 Speaker 3: Higher for longer oil prices. 00:06:48 Speaker 2: Means stickier inflation, means that central banks are not in a one-and-done mode, but are in a tightening mode, and that, in turn, is pushing up bond yields. So I think that the good and the bad news is that the repricing in the bond market is occurring pretty rapidly. That hurts in the short term, but to the extent that we get to where the terminal rate is for the bond yield, that will be helpful. 00:07:20 Speaker 1: Stay with us. More Bloomberg surveillance coming up after this. Let's send back to Anthropic, the company steamrolling ahead with huge AI spending plans going into its blockbuster IPO. Dan Ives of Yorkville Ives writing, investors will focus on its massive growth profile. This will be a watershed event for the tech sector and the market. Dan joins us now for more. Dan, welcome to the program. It doesn't come without controversy. Let's talk about the details. The customer concentration, Dan, how much of this company is built on just a handful of names? 00:07:59 Speaker 5: Yeah, I mean, look, the nature of the hyperscalers and just what we're seeing on the GPU. 00:08:03 Speaker 3: Side, it's going to be concentrated now. But I don't think that that's necessarily that much of an issue. 00:08:08 Speaker 5: I think investors understand in this AI build-out, it starts with a small group and it's going to expand. Because remember, we're still expanding. third inning of the AI revolution. Anthropic is in a unique position, but definitely, well, this is eye-opening in terms of for the market. And I think finally, investors, they've anticipated this watershed event because Anthropic's front and center in the AI race. 00:08:33 Speaker 1: It's certainly a unique proposition, Dan. How unusual is it to see a company in a perspective worn about existential risk to humanity? 00:08:42 Speaker 3: Yeah, I mean, that's definitely a first. And look, I think it speaks to. 00:08:45 Speaker 1: Is that a sales pitch or a warning, Dan? 00:08:49 Speaker 5: Again, that's a head-scratcher Saturday Night Live skit, right? I mean, look, I think part of the problem is that if they slow down. 00:08:58 Speaker 3: China wins. 00:08:59 Speaker 5: And I think that's sort of the problem here is that the safety guard rails that you could put in, you know, the genie's already out the bottle. And I think you've seen Jensen, Nadella and others kind of talk about it. You know, also part of the problem is you can't get to the top floor. 00:09:15 Speaker 3: And then pull the ladder up. 00:09:16 Speaker 5: So the regulatory capture is another issue that's playing out here. And I think the reality front and center today probably in the White House is that there needs to be safety guardrails. But you can't have politicians in two or two area code slowing down innovation, especially when China is accelerating. 00:09:32 Speaker 4: Dan, is that really true that this is going to just give China an upper hand if you put limits or guardrails around recursive AI, self-improving AI? That's something that the PBOC isn't particularly interested in engaging with and that ultimately potentially leaves a sort of authoritarian regime at the hands of a technology that could potentially go rogue. 00:09:58 Speaker 5: Yeah, Lisa, look, my view is for the first time in 30 years, the U.S. is ahead of China when it comes to tech. And I think part of this balancing act or quagmire is that the reality is that for the U.S., if you actually start to slow down the models, slow down innovation... China will narrow the gap. And that's just the reality. I think what Karp talks about, and I agree, sovereign AI, Jensen talks about this as well, I think that is much more of the focus. And that might be a focus today in terms of enterprises having control of their own data. 00:10:32 Speaker 3: But, look, in my view, the data center. 00:10:35 Speaker 5: Build-out, what companies are looking at when it comes to use cases, it's still early days. But you can talk out of both sides of the mouth, and I think that continues to be what investors need to glean through, talk versus action. 00:10:49 Speaker 4: Meanwhile, people are talking about just the scope of money that's being raised. I mean, the latest in this prospectus reported by Reuters of Anthropic talks about $ 518 billion of additional spending in the future on data sensors, cloud computing. At what point are we promising the financing of something that's bigger than any other industrial revolution in the United States with kind of an unproven return proposition? I mean, yes, we're seeing some returns on this, but the spending is incredibly robust and only accelerating from here. 00:11:17 Speaker 5: We're going to have, call it, $ 4 to $ 5 trillion being spent in the next three to four years. But you're building the Vegas Strip in 1955. I mean, that's where we are relative to what this is going to look like. We're going to talk about physical AI and data and ultimately space and where it all plays out. I think investors understand that these companies just can't. spend and see no returns. And I think that's something that we've seen with the public companies. For Anthropic, that will be the focus for investors, is that when you start to see the return, the growth is eye-popping relative to what they're seeing. But it's that balance. And then for investors, it's understanding what are the derivatives of this, the second, third, fourth derivatives. Because as Anthropic goes public and others... It's healthy for the overall tech space. These are public companies, transparency, just like we've seen with SpaceX. 00:12:10 Speaker 6: Hey, Dan, I have a question regarding this meeting this afternoon, the superintelligence. 00:12:14 Speaker 1: Luncheon with the president. 00:12:16 Speaker 6: Do you think he's trying to get the industry on board to some of the communication he has been using when it comes to AI? Or is it the other way around, where potentially you have the industry trying to get the president to sign up on maybe some regulation? 00:12:30 Speaker 5: Yeah. 00:12:31 Speaker 3: Yeah, I think it's the former. 00:12:32 Speaker 5: I think it comes down to you can't do a doomer. You can't scare people. Say AI is taking 50 percent of white collar jobs. Electricity bill is going to go higher. It's going to be an issue for mankind. And then all of a sudden, you know, talk about growth. 00:12:49 Speaker 3: I think the. 00:12:49 Speaker 5: Reality is that it's based on the data center issues, the midterm, such a political debate issues. Tech industries created the PR nightmare themselves. And I think there's definitely some sort of closing the door to understand getting everyone on the same page. Because if you do that, it just fuels the fire relative to try to close some of the data centers. 00:13:11 Speaker 3: Which is a negative for the industry. 00:13:13 Speaker 5: And then the winner for every data center that closes or doesn't happen is China. 00:13:19 Speaker 1: Stay with us. More Bloomberg surveillance coming up after this. As you all know, it's well documented voter frustration building over artificial intelligence heading into the November midterms. Joyce Chang of JP Morgan writing, populist pressure will rise regardless of the outcome with visible backlash to AI winners and neither party holding a clear economic trust advantage. Joyce joins us now for more. Joyce, good morning. Good to see you. 00:13:48 Speaker 7: Great to be here. 00:13:49 Speaker 1: What's the runway for policy? What does it look like heading into next year? 00:13:53 Speaker 7: Well, I think the midterm elections are underestimated as a risk right now. So there are three things we're really looking at. And affordability is a big issue. AI is a big issue. But there's also a possibility of higher tariffs here, greater re-escalation with Iran as well. But AI and affordability politics, I think those two things are here to stay, irrespective of what the midterm election outcomes are. 00:14:18 Speaker 6: We were talking yesterday how some Democratic candidates are a little bit too extreme for the mainstream. But at the same time, we have higher energy prices. Is that potentially going to shift some voters maybe into the red camp, the blue camp? 00:14:32 Speaker 7: Sorry. I really don't think that it does that, because when you look at the one big, beautiful bill, I mean, if you've got gas at the pump at $ 4. 50 and it stays there, you wipe away all the benefits of the one big, beautiful bill. And this is why I really see that neither party is really earning the economic trust right now. So, you know, the populist pressures are here to stay, but I wouldn't necessarily just say that it is going to be red versus blue. It is just the affordability issues in the last month because of gas at the pump have really seemed to me to have shifted a lot of the sentiment in the polls. 00:15:06 Speaker 6: Do you think that's going to push the president towards this populist policy of maybe an export ban? 00:15:11 Speaker 7: Well, the export ban is something that I think is very much on the table, and that could work for 30 days over the very short term. And then you're going to hit the refinery compressions, all of these other issues, which will just be another distortion that's not going to solve this issue. So I don't think it is policy that really makes much sense here, but it's certainly on the table now. 00:15:30 Speaker 4: You know, arguably one driver of some of the resilience that we're seeing in earnings was the one big beautiful bill and some of the tax cuts. And a lot of people have pointed to that as something that have really fueled the gains in corporate balance sheets. Do you see a chance that that could be revoked or that some of those taxes could go up? 00:15:47 Speaker 7: Well, I think for the personal income taxes, you had that benefit already, so that's passed. So right now, they're focused on gas at the pump, but inflation is still very sticky here. So the corporate benefits, many of those are phased in to stay as far as... just the business interests that benefit from it. But what I would look at more is that you're going to have more regulation that will have to be forthcoming on AI at some point, that some of these benefits will have some offsets going forward, just when you look at the issues that are going to be debated on technology and on tech sovereignty. 00:16:26 Speaker 1: Where would that. 00:16:27 Speaker 4: Actually show up in the tech sphere? Because right now in the tech stack, when you look at data center build-outs, they really haven't been affected. If you look at any kind of empirical data, it doesn't show any kind of restraint whatsoever on the build-out. 00:16:37 Speaker 1: A lot of lip service, but not actual restraint. 00:16:39 Speaker 4: Is there anywhere that you see real practical regulation that could crimp some of the AI trade? 00:16:45 Speaker 7: I don't think that it's going to happen in this administration. I think it's going to be a big issue in 2028. And I think you're going to see other countries also try to figure out the way in which they can engage with this. But these public-private partnerships, I mean, I don't know, just all of my background looking at emerging markets, they rarely end up lasting over a long duration of time. But I think you're absolutely right. I mean, right now there's been a lot of lip service on this. There's been a lot of concern and anxiety about And it's interesting, in other parts of the world, this is not the same political issue. But I think this is much more of a 2028 issue as far as what actually could be done. 00:17:22 Speaker 1: How dependent is your growth outlook for the next year on what happens here with SAC? 00:17:26 Speaker 7: Well, I mean, look, the tech CapEx into next year looks very good. I think your question becomes, you know, when do you hit a crunch point on this? You will have the Treasury funding, I think, by next August. They'll have to increase that. And then you'll be looking at CapEx for the next year, for 2028 and a presidential year. But for the next couple of quarters, the CapEx actually looks quite strong just given where the demand is at. So, I think this is much more, you know, you've got midterm mark. You have the fiscal deficit taking, I think, more space than even some of the tech numbers right now. 00:17:58 Speaker 1: Given the Federal Reserve's pursuit of 2%. Are they in a fight with those things? Are they in a fight with those forces? 00:18:04 Speaker 7: Well, look, the 2% has not been met for a long time. And I think what the markets feel is that the inflation here is sticky, but it hasn't been destabilizing. I mean, we're actually looking at one of the broadest-based growth recoveries we've seen in a long time. You have above potential growth in Japan and Europe. I mean, it's still only 1.5%, but also in the United States. And you've got China doing stimulus. So I think the higher rates are going to stay here, but the higher fiscal is also going to stay here. So it's not just the tech story. Everybody's going to keep an eye on Treasury soon. 00:18:38 Speaker 1: This is the Bloomberg Surveillance Podcast, bringing you the best in markets, economics and geopolitics. You can watch the show live on Bloomberg TV, weekday mornings from 6am to 9am Eastern. Subscribe to the podcast on Apple, Spotify or anywhere else you listen. And as always, on the Bloomberg Terminal and the Bloomberg Business Hour.