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Terminal and the Bloomberg Business app. Julian and Manuel, i've ever call writing the increased probability of a bubble scenario gives the S and P five hundred and thirty percent chance to rise to nine K by year end twenty twenty six. Judian joins us now for more. Julian, good morning, Good morning. It's going to see you, sir. Let's put some meat on those bones. Thirty percent chance of nine K next year on the SMP.
So if you think about it, actually going back to y two K right where all this sort of talk of bubbles originated. Over the course of this last twenty five years, you have had numerous bubbles, housing, global bond markets, Chinese equities in twenty fifteen, meme stocks, this, that, and the other, and frankly, when.
You add all that up.
First of all, academia would tell you that those many bubbles in twenty five years is absolutely impossible. But when you think about it, it really does speak to the fact that number one, each bubble was larger than the last. And from our point of view, when you think about Y twok a twenty eight times earnings peak, it's very reasonable to think about thirty times a three hundred dollars number getting you to nine thousand the s and P five hundred, But it's bigger, more grander every time.
Well, let's speak to this moment. They're our whists of vendor financing. We see a video investing in some of that companies and in some of that customers, and we know that money is going to come back.
To that company.
What's different about this moment It seems to be the strength of the balance sheets compared to where we were in the late nineties and the absence of leverage on those balance sheets are some of the major tech players. Does that give this more legs?
Is that?
How do you think about things.
Well, again, when you think about the late nineties, you were having companies that didn't have earnings, that had barely had revenues. That we're doing all the spending on capex. You don't have it this time. Most of the companies, to your point, have incredibly strong balance sheets. But when you think about what we've heard in the last couple of weeks, the memory for us is this Japanese phrase
koretsu cross shareholdings. You saw it in the nineteen eighties and the early nineteen nineties, which inflated valuations into the Japanese equity market bubble. And look, if you're not concerned about the potential knock on effects of all this kind of cross shareholder relationships, you're probably not paying sufficient attention.
So it is this bullish or bearish you're talking nine thousand, which sounds great, let's get in. And then you're talking about a bubble that's bigger than anything we've ever seen before.
So and you have to think about it in terms of cycles. Okay, what we have been very plain about in getting ourselves around the idea that you invest in a higher valuation environment is this notion that what end structural bull markets. And to be very clear of what we had in February to April was a cyclical bear market in a structural bull market. What end structural bull markets is a FED that's going to be hostile. If anything, the FED is going to be perhaps too friendly to
the point about stalking inflation. Higher yields on the long end. Amazing how quiescent the tenure yield has been. And then you know recession that doesn't seem to be in the cars. But the last thing, the fact that every one of these capital market cycles has ended with an incredibly robust corporate action pipeline and we're just starting to see that
form tells you that there's further to run. And as difficult as it is, and it is difficult to invest in these valuations, and we think that you need to stay.
Invested, You need to stay investor in the big tech players. Does it say anything about the rest of the market or is that just a completely different story in terms of the economic drivers the areas outside of AI.
Well, look and again when you think about the demographics and know that over the course of the coming decades, demographics are going to be ahead when and they already are in places like China. That's part of why AI has had the impact that it's had. And this year we're seeing other companies, the adopters and the adapters really start to talk about how they're essentially driving revenue. We always knew the cost saving story, but that is very,
very vital and for us. When you look at the internals of the market, what's different between now in the late nineteen nineties is that day to day the advancers are beating the decliners. The troops, the people in the field, the stocks that nobody talks about are going up day in and day out, Whereas in the late nineties it was all tech all.
The time, seeing billions of dollars being put towards AI, but we're not seeing billions of dollars being put towards electricity demand. What happens if the grid can't handle.
All of this, well, that's absolutely a concern, no question.
Nine thousand next year, if you can't even develop data.
Centers, that's a good question. And from our point of view, again, it's less about the synchronization of the build out then the fact that there is sufficient liquidity to you know, really expect the build out to occur over over a time, and again I go back to this idea, and frankly,
we're seeing it. This week was different. Not only did you have the largest LBO in history, but I took taxi cab rise and they started talking about the stock market and they started talking about AI And that's different. But that's part of every cycle, and that is how you get to valuations that go from rational exuberance where we are now to something more extreme.
I'm not thrown shade at all, but I think the camp driver over the past five years has been more dependable than the strategist on wolf straight in some ways. Is that fair?
We got cautious, like everyone. We got bullish in April, to be clear, but.
I don't know if that's been the country into kunda in quite the same way that they were in the nineteen twenties nineteen thirties.
Well, what's fascinating again is you go back to February through April, and the public got this right. Literally for the first time in the cycle. The public was the buyer the whole way down. And the reason that the market has been so unrelenting on the upside is because professionals have found themselves under invested.
It was a shoeshine boy in the twenties, remember all that stuff. The story is really different. The performance chase gun into year end is coming from Wolf Street. Wouldn't you agree I'm taking to clients that missed out in the move in April in the last.
Six months, I would, But I would also say this is that the dynamics of trading. They used to call it day trading in the nineteen nineties. Now you're looking at high frequency trading. But these zero dazed expiration options, the gamma effect that causes hedgers to have to hedge upside intra day is really unlike anything I've seen.
Stay with us more Bloomberg surveillance coming up after this. Let's turn to the Federal Reserve traders looking ahead to the FMC minutes due out at two pm Eastern time in Lincoln of BIMO writing twenty five basis point cuts in October and December are already a foregun conclusion as long as there isn't a more dramatic down to in risk assets in joints now for more income mornits.
So it's good to see you.
Happy to be here when a Federal reserve is in risk management mode. If they don't have the data, are they cutting or are they holding?
I think that they're going to continue to cut, simply because the data shift that we saw over the course of the summer, including the bitchmark revisions on the jobs front, suggests that we are cooling as an economy and getting back to normal policy rates. Seems to make sense in that With that background.
I just wonder what you think of this dissonance between a labor market that seems to be cooling, in GDP that seems to be going strong well.
As you've been discussing the AI investment capex, everything associated with that has not only been driving business spending so keeping up the momentum of the real economy, but we all faces we are also seeing upside inequities and that is fueling consumption because we know the top ten percent account for fifty percent consumption in the US, and I
think that that has been a key driver. And when I make the observation about a potential downturn in risk assets, if we are going to slip into a recession at some point, it's probably going to come from a repricing of risk assets. But that certainly is not onknow one's radar At this point.
I guess I'm trying to understand whether it makes sense for the FED to cut rights to protect jobs given the fact that there is clearly a sluggishness to the labor market. You're seeing peripheral spending data showing a slow down in September as while I was looking at Citigroup data this morning, I just wonder if it makes sense to do that if you potentially pose the risk of turbocharging. What some people are saying is bubblishest types of behavior in other sectors, AI be one of them.
Well, I think that that's what the FED needs to decide over the course of the rest of the year, whether they're going to get back to three percent or three point five, depending on what estimates you look at, or is there a risk that there's still more to be seen on the tariff side, Even setting aside the bubble issue, I still think that there's tariff passed through to inflation that has yet to be realized, and so we could see some sticky CPI prints when we finally
get them. And that's the big unknown is when does a government start publishing data again?
So what are you tracking right now?
Given the fact that we're not really getting anything official from a lot of the sources.
So I think that we do have ADP, and we have ISM, and we have some of the private data. But at the end of the day, we're really just looking at the day count of the shutdown because the longer it goes, the more uncertainty there'll be. And when the FED meets later this month, the one piece of information that they will really have is whether or not the government has been reopened or if we're going to push that record long thirty four day shutdown window.
Do you guys have a base case of how long you think the governershupdown will last.
I think that it will get through the end of next week and at the earliest before we start to see any movement, because at that point people will stop getting paychecks. I assume that there'll be more rhetoric and more headlines out of Washington. But it's also a question of how the Democrats are going to be polling as a result of this, going into what will be the run up to the midterm and the politics around that, and that's always difficult testamy.
So the FED will be walking in potentially with that base case, with a job report, but not inflation data. How concerning is that when the likes of Neil Koshkari are sounding alarms on two fastive interest rate cuts might be a problem, and there's stiflationary fears.
I do think that if they happen to have the jobs data in hand, that that will be part of the story that they can justify cutting because a weaker job market is disinflationary on a forward basis.
And that is again information.
I do think it would be ideal if they had a full set of information, but at the end of the day, they're going to adjust to the reality as it comes out.
And since the Fed last night mid September, two year bon yields are slightly higher, ten year bon yields a higher, The whole curve is shifted higher. What it think that speaks to.
I think we're just in an arrange consolidation mode for the market. I think that we now know the direction of travel of rates. We have some uncertainty associated with the shutdown and what that means more than likely for the beginning next year as opposed to the balance of this year, and we don't have enough convincing evidence to get back to three ninety five ten year yields, but also not to get back to four fifty. We're just in a range as we see how things play out.
Don't you think also that the rate story has stabilized, because subsequently after the FED meeting, we found out this FED is far more divided than was actually revealed in that news conference with Chairman Powell. That maybe for a lot of people they thought this was the start of a bigger rate cutting cycle, something down towards three and quickly.
And what I've heard subsequently since there's a bunch of FED speakers with very different views about the future mentioned Neil Kashgawi, there are some individuals that aren't ready to go again, never mind go another one hundred. Isn't that part of this story as well? How big a feature is that?
Well?
I think that what the future's market is telling us is we're comfortable with a glide path back to three percent sometime in the middle of next year. But as you point out, there are competing voices on the committee, and there do tend to be competing voices when we're at an inflection point, and we were at an inflection point. I think that Powell's comments in particular, were an effort to ensure that there was as much flexibility as possible, and he didn't want to pre commit to an October
or a December move. So I think it's more of a business as usual than it is something particularly frightening.
This is sort of a perverse question, but it looks like right now in polymarket it's only a twenty five percent chance that the shutdown ends before October fifteenth. You said that this is the one piece of data that the.
FED is going to have.
It's new which just how long the shutdown's going on.
Is that bond positive at the end of the day.
I think it is because it's more uncertain and we've spent a lot of the the last four or five months with a TREBUTI will related on uncertainty as well as now shut down related uncertainty, and that has led to a stalling out on the labor front, and until we have more clarity, I think people are going to be a lot more reluctant to hire, more reluctant to spend, and I think it's going to eventually be gone positive.
Stay with us. More Bloomberg surveillance coming up after this. The analyst David Deck Obama, TD Cow and covers some of the companies that Trump administration has invested in, and has this to say, Investors have to ask who's next. Stocks are moving fantastically on this news, no matter what the actual details are. David joins US Now for more. David Gomardick, morning, Thanks for having me. Your job has changed, It has changed. Indeed, sure the White House is now
picking the winners. How does that change your approach?
You know, similar to my comments before, it was interesting in their prior conversation here talking about, you know, what's the process behind all of this and what's the intention? And I think real really it's true for the administration one to some extent to make an investment on behalf of taxpayers, but also I think to raise the profile for the general investing public that these companies are a
priority and that these industries are a priority. And now everyone obviously has their hands out and you've seen companies openly talking about and disclosing. We're having conversations with the USDO Department of War, We're having conversations with the Pentagon, and I think it just sets the stage for what should be triggering a multi year investment process in the broader material sector.
Theoretically, a lot of people could get behind this, and it seems like it does make sense at least according to both sides of the aisle. And what they've put out there is the administration picking the right names.
So I would say, with their first investment, and I'm not going to speak on Intel, so let's look at them P Materials. They're the largest rare earth miner in the Western Hemisphere. I think that was a very logical chosen champion for this administration to get behind because it unlocks multiple parts of the supply chain for rare earth and ultimately magnets. You also saw a follow up deal with Apple right on the heels of that, So I
think all of these things were connected. In the context with lithium Americas, the government was already involved with a substantial loan that the DOE had approved under the Biden administration under the ATVM loan program, which sought to really propel the lithium supply chain in North America, largely around the proliferation of electric vehicles.
We've walked back.
A lot of the EV tax credits and incentives there, but I think there was still partly a recognition on the part of the government that were already in bed with this company from a loan process. Let's sort of rework some of the terms. Did it actually improve the outlook for Lithium America's I would argue perhaps, no, it really just diluted there, really deluted the equity holder at
that point. But it does obviously raise the profile and the stock moved up well over one hundred percent, you know, without really caring what the details were.
So can you just basically look at whoever the US is given a loan to and say that probably will be equitized.
Sure, you could certainly build. I mean, you've seen a lot of names already moving in anticipation that they're going to receive funding in some form, and logically you would anticipate that every single company in the material space that has a project at least on the whiteboard at this moment is having active conversations. So I think you can probably still make money that way, because at some point
you have to ask how does this all end? You know, is the government going to be trading out of these equity positions. It's not as though there's always a contribution that's coming with this, and at this point, I think it's safe to say that there.
Is no end in sight for this.
Well, some people think that this is just the beginning of potentially US sovereign wealth fund.
How you do it?
I mean, I think in some cases that's already very much the case, except you know, in theory, I suppose this is being done with tax payer money. And you've seen some funds reallocated from areas like the Chips Act and some other funding, and I think it's really just going to try to accelerate a lot of these investment opportunities.
One official was talking about, there's hundreds of deals that right now are being proposed. Could you see by the end of Trump's first term, hundreds of companies the US government has a stake.
In, And theory short, look look at all these stakes. And what's interesting about a five to ten percent stake because some of these are coming with board membership, right, so the government is becoming an active member of management oversight. They're not necessarily helping with execution, but they can help on the contracting side. And if you think about, you know, hundreds of companies out there, taking a five percent equity interest in some of these companies that's coming costless to
the government. Sure in theory, right and if you're an executive right now and you see the potential to re rate your equity by hundreds of percent and then on the back of that perhaps raise additional capital in the markets just by giving the company, you know, the government five percent of your company. That's a very difficult deal not to side long term. What does this do for competition in this space, Well, I think that it does welcome, at least in the United States, that everyone can get
involved in the supply chain. Look at rare Earth's for instance right now. Yes, they've championed MP they've given them a floor price, and you've seen actually the the NDPR market for rare earths, you've seen pricing move substantially higher up to ninety dollars a kilo. In August they gave them one hundred and ten dollars a heilo price floor.
I think that it provides opportunity for everyone within the within the United States and really allied nations to come forward with projects to try to re short of the supply.
Chain as quickly as possible.
Stay with US multiple IMPEX savidance coming up off to this right to that kind of ay Right and his right camp bat now expecting the Feds and low interests right back to back Masinx right rights in the following this, it's increasingly fragile backdrop, compounded by data vacuum and policy uncertainty. It's likely to tell the balance of FED policy makers correct joint just now for more. Greg and Mornik, Good morning, No data, no problem.
No data means more caution when it comes to how business leaders, how economists, how FED policy makers are going to react. I've been talking with a lot of business executives that are concerned about the fact that we're not getting a pulse on the economy, and as we were getting before this government shut down, a lot of mixed signals. There's growing uncertainty as to the underlying pace of the economy.
I think one thing that's key to remember is that there are three fragile pillars to the economy that all start with an A. You have essentially affluent workers that are supporting consumer spending. You have the AI investment boom and potentially a bubble there, and then you have the asset price increases. They're all correlated and they're all fragile. If you get any type of disruption to one of those three that could portend to a slower economic outlook and.
Then the need for morpheed easing. As we navigate into twenty twenty.
Six, when you talk about caution, it seems to be a deceleration in growth or euphoria in market. It's not necessarily the acceleration in inflation.
Why well, I think.
When you're thinking about the economy right now, what you're seeing is essentially the acceleration in inflation that is induced by terriffs. And the key question is whether this is an embedded acceleration in inflation or something that's likely to be transitory.
And you and I have talked about this in the past.
We are in an environment where labor market demand is softening. It's not because we're seeing slower payroll growth only. It's because we're seeing a hiring rate that's at a twelve year low. It's because we are seeing continuing claims for unemployment that have been gradually rising. It's because job cut announcements are up fifty five percent relative to last year.
So all these indicators indicate softening labor market demand, notwithstanding the massive negative shock that we've seen in terms of net migration, there is underlying weakness and softness in the labor market, which means there's unlikely to be this desire to raise wages, and so what we're seeing is essentially this increase in prices, which is eroding consumer spending power, and in turn, businesses that have to contend with these higher cost pressures are not going to be hiring more freely.
They're not going to be allowing for higher wages, and therefore that's going to continue to weigh on income and on consumer spending activey.
There's a lot to unpack there.
I just would ask, can I sound like a broken record should ask this a lot? Would really cutting rates help that picture in any way? Would it get people jobs? Given the fact that ultimately a lot of companies are turning to AI and they have every capital market opening that they possibly could imagine.
I think that's the broader question as to how the FED reacts to supply shocks. We are in this environment where what we're seeing is massive supply shocks to the economy, whether it's on the side of AI or on the side of net migration in the labor market. The FED has a limited number of tools to address any type of imbalance in the economy, and in this instance, it's a supply shockading to inflationary pressures and.
Reduce growth volumes.
Now, your question is very interesting because what we're seeing is essentially a growing spread between short term rates and long term rates. Short term rates are pricing more fed easing over the course.
Of the next twelve months.
Long term rates have to contend with higher inflation expectations, a fiscal situation that is concerning, even more so in the midst of a government shutdown, and then fed pressures from the administration. The three f's there are very important to contend with when it comes to the trajectory of where the economy is going to head.
When you look at tariff induced inflation, though we haven't really seen it yet.
Not broad base, not broad based.
But if you lift the hood and you look at the underlying drivers of inflation, if you look at grocery prices, if you look at apparel prices, if you look at car prices, if you look at furniture prices, all of these elements have been rising and lifting inflation by about a third, essentially a third of the inflation increase over the course of the past four months has been driven by these categories. What I would also note is that
you're also seeing that pass through to services. A lot of services that we consume are actually using goods and equipment. You think of medical care, you think of car or repair shops. There are services that use a lot of equipment that have an imported component into them, and that essentially see these upward pressures in terms of prices. We're not going to see the same type of increase that
we saw back in twenty one and twenty two. We're not going back to nine percent inflation, but we are going away from two percent inflation towards three three and a half percent inflation, which is hurting families across the country.
Will this haunt the FED next year because they seemed to be ignoring it completely in the bias is to labor market.
I think you may see the hints of this hurting the FED next year because the rotation of voters is going to be more hawkish. So if there is more easing this year, you're going to see more hawkish members next year that may be on the dockets saying, actually, we ease too much and we now need to either hold for longer or.
Tighten monetary policy.
That's going to be the twenty twenty six debate because the rotation of Fed palsy makers is going to become more hockey.
It's super hard to protect what the Fed's going to do a year out. The Federal Reserve has difficulty protecting what the Federal Reserve's going to do a year out. Given what you just said, you're going to have this mix, this collision between a hawkish rotation and that maybe a very douvish rotation at the very top of the Central Bank. How difficult will this committee be to lead beyond my next year?
Extreme polarization is going to be the situation when it.
Comes to the Fed. We're already seeing hints of that.
There's one hundred and fifty basis points spread between the most hawkish dot in the and famous dot plot of the Fed and the most douvish policy maker. So that polarization is going to remain firmly in place, and we're going to get a cacophany of speeches that go in different directions when it comes to interpreting the direction of the US economy next year, and that's going to be very hard to read from a policymakers standpoint, but also also from a business leader standpoint.
Let's not forget what we really are.
Concerned about is the direction of investment, the direction of employment, and the direction of consumer spending. If you have a lack of clarity as to what the Fed is going to be doing because it interprets conditions as EI either being extremely loose on the financial front, or because it sees that there's more of a drag from the labor demand side or labor supply side, whether there are different views,
diverging views, very divergent views. Potentially, that's going to confuse policy makers, it's going to confuse investors, and it's going to confuse business executives as to what decisions they should make.
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