Government Shutdown Clouds Fed Outlook

Summary

Bloomberg Businessweek — "Government Shutdown Clouds Fed Outlook"

Date: October 8, 2025
Hosts: Carol Massar & Tim Stenovec
Key Guests: Kay Her (JP Morgan Asset Management, US CIO of Fixed Income, Currency, and Commodities), Stephen Carroll (Host, Bloomberg Daybreak Europe), Mandeep Singh (Global Head of Tech Research, Bloomberg Intelligence), Herman Chan (Senior Analyst, US Regional Banks, Bloomberg Intelligence)

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Episode Overview

This episode centers on the economic uncertainty created by the ongoing US government shutdown, its impact on Federal Reserve policy and data availability, and the broader ripples through markets, earnings, and global economies. The hosts and guests weigh in on monetary policy, fixed income markets, the AI investment phenomenon, French political turmoil, and the rumblings of a new wave of US regional bank consolidation.

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Key Discussion Points and Insights

1. The Federal Reserve’s Dilemma in a Data Vacuum

[02:16] — [11:46] Guest: Kay Her (JP Morgan Asset Management)

• Fed Minutes Reveal Little New

  • The latest Federal Reserve minutes did not provide much new insight; only minor debates appeared in the minutes, with just one dissent noted from the recent meeting.
  • "The short answer to your question is no, we didn't learn anything new...the market's really not giving US much of a reaction." — Kay Her [02:16]

• Government Shutdown Stalls Key Economic Data

  • The absence of government data like jobs numbers and upcoming CPI forces the Fed (and market participants) to turn to other indicators.
  • "We've got a government shutdown and we are in an absence of data...the Bureau of Labor Services did not release the employment data on Friday." — Kay Her [03:04]

• Earnings and the Beige Book Take Center Stage

  • Corporate earnings (starting Oct. 14) and the Beige Book (Oct. 15) are now crucial data sources for the Fed to gauge the economy’s health.
  • "The next major piece of data...is corporate earnings...The second...is the Beige Book." — Kay Her [03:04]

• Assessing Credit Quality: Eyes on the Banks

  • The fixated sectors during earnings will be banks (for credit quality and consumer health) and industrials (for margin preservation and cash flow).
  • "From the banks, what's the credit quality look at, what's the indication of the consumer? ...For the most part companies have very high margins, are they going to protect those?" — Kay Her [04:20]

• Pockets of Stress and the K-Shaped Economy

  • Recent surprises like the tree colour (tricolor) and First Brands blowups in auto lending signal stresses, especially among lower-income consumers, but there’s a growing focus on how prime consumers handle resumed student loan payments.
  • “It's not uncommon to see corporate malfeasance...We've been talking...about a K-shaped economy...lower income consumers...seemed to have stabilized. We're more focused and concerned about maybe more prime consumers starting to repay student loans.” — Kay Her [06:24]

• Trading Strategies: The Belly of the Yield Curve

  • In a context of low rates volatility and anticipation of Fed cuts, intermediate-duration, high-quality bonds are preferred.
  • "We still like the belly of the curve...We think that the rates are going to continue to be pretty rangebound here between 3.75 and 4.25%." — Kay Her [11:04]
  • "Spreads are tight, but yields are right, and that's really what the, what the driver is for investors." — Kay Her quoting Ian Steely [11:09]

• Gold’s Run: Demand vs. Macro Narrative

  • Gold has surged past $4,000/oz, driven primarily by ETF and central bank demand, not traditional macro “debasement” stories.
  • "I don't read anything different in gold pricing about, you know, US exceptionalism or the dollar flight to currency...It’s old fashioned supply and demand." — Kay Her [13:42]

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2. France’s Political Crisis and Market Implications

[17:47] — [22:12] Guest: Stephen Carroll (Bloomberg Daybreak Europe)

• Prime Minister Resigns, Macron to Appoint Replacement

  • France’s outgoing PM, Sebastian Le Cornu, believes Macron is ready to install a new technocratic PM after extensive political consultations.
  • "He now expects the president to name somebody else to take on the job to lead those discussions." — Stephen Carroll [17:47]

• Fiscal Crisis Delayed (for Now)

  • Despite political instability, markets have not panicked; bond spreads have widened but are not spiking.
  • "What we've seen so far is a little bit of tension in markets, but not something that ... would describe as a fiscal or financial crisis." — Stephen Carroll [20:01]

• Risks of Snap Elections

  • New legislative elections would unsettle investors more than continued negotiations or a technocratic arrangement; a presidential election is considered the biggest market risk.
  • "A presidential election would be very dramatic...A National Assembly election would be less dramatic, and getting a new prime minister, well, could produce another shrug from markets." — Stephen Carroll [21:45]

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3. The US AI Boom: Circular Funding & The Bubble Debate

[23:14] — [33:06] Guest: Mandeep Singh (Bloomberg Intelligence)

• Defining “Circular Funding” in AI

  • Complex deals (e.g., Nvidia funding OpenAI) are mutually reinforcing, but not all funding is secured.
  • "Nvidia is spending $10 billion and giving it to OpenAI for them to add up to 10 gigawatts of capacity...Out of that, Nvidia is going to put $100 billion. The rest, OpenAI still has to raise." — Mandeep Singh [23:14]

• Insatiable AI Infrastructure Demand

  • Capex requirements for AI are skyrocketing; compute for generative AI is about 10x costlier than traditional search.
  • “If Google generates $100 billion in operating cash flow, now they are talking about spending more than that...to add more capacity. And that's why the numbers are so big here.” — Mandeep Singh [25:35]

• Funding Flows and Bubble Fears

  • Despite concerns of a misallocation of capital, current demand is outstripping supply, especially as measured by Nvidia’s margins.
  • "When you see a trend like that, yes, there will be probably some misallocation of capital...But right now, it's very hard to question the pace of this build out." — Mandeep Singh [28:49]

• AI Rewards: Investors Seek Capex, Not Caution

  • Stocks outperforming are those companies aggressively investing in AI, not the conservative ones.
  • "The stocks that have outperformed are the ones that have spent their capex...If you have been conservative and just focused on margins, your multiple has shrunk." — Mandeep Singh [30:14]

• Index Concentration Risk: Not an Immediate Concern

  • The dominance of a few mega-cap firms persists, but secondary software players may be rerated based on successful LLM strategy adoption.
  • "The picks and shovels trade has carried on...The businesses that end up using LLM as an intelligence layer...you will see a rerating in their multiple." — Mandeep Singh [32:22]

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4. Regional Bank M&A Heats Up

[36:57] — [44:07] Guest: Herman Chan (Bloomberg Intelligence)

• Merger Wave Among Regional Banks

  • A recent $11B Fifth Third–Comerica deal follows deregulation and improved stock prices, fueling further consolidation.
  • "There's a bit of a crest right now...A lot of that is really driven by deregulation efforts under the Trump administration. That's encouraging more bank M&A." — Herman Chan [36:57]

• Post-Crisis Deposit Lessons Drive Deals

  • The SBB/First Republic failures reinforced the need for diverse, stable deposit bases. Fifth Third’s proficiency in branch/retail banking attracted Comerica.
  • "Deposits are the lifeblood...This deal with Comerica and Fifth Third is a direct reflection of that." — Herman Chan [38:01]

• Competition, Regulation, and Technology Push Consolidation

  • With 4,500 banks in the US, the pressure from big national banks, fintech competitors (Chime, SoFi), and heavy regulatory/compliance burdens drives continued M&A activity.
  • "There’s about 4,500 banks in the United States. And so is there really a need for that many? I would say no." — Herman Chan [41:04]
  • "Fintechs like Chime and sofi are really gaining a lot of new customers...it makes for a really tough operating environment." — Herman Chan [41:14]

• What to Watch for in Bank Earnings

  • Capital markets activity, strong commercial lending (especially to nonbank financials), and the impact of recent and future Fed rate cuts are under scrutiny.
  • "IPOs have been picking up...Commercial lending has been pretty strong...and the interest rate cut that happened in September should help on the deposit funding side as well." — Herman Chan [42:22]

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Notable Quotes & Memorable Moments

• "We are in an absence of data. ...It's unlikely that we're going to get CPI next week. So what are we looking at? Corporate earnings...the Beige Book." — Kay Her [03:04]
• "We still like the belly of the curve...Spreads are tight, but yields are right." — Kay Her [11:04], [11:09]
• "What we've seen so far is a little bit of tension in markets, but not something...would describe as a fiscal or financial crisis. In France, this is still a political crisis." — Stephen Carroll [20:01]
• "Circular funding is Nvidia spending $10 billion and giving it to OpenAI for them to add up to 10 gigawatts of capacity." — Mandeep Singh [23:14]
• "The stocks that have outperformed are the ones that have spent their capex...If you have been conservative and just focused on margins, your multiple has shrunk." — Mandeep Singh [30:14]
• "There’s about 4,500 banks in the United States. And so is there really a need for that many? I would say no." — Herman Chan [41:04]

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Timestamps for Key Segments

| Time | Topic / Segment | Key Participants | |------------|--------------------------------------------------|----------------------| | 02:16–11:46 | Fed uncertainty, data gaps, bond market, gold | Kay Her | | 17:47–22:12 | France’s political crisis and market risks | Stephen Carroll | | 23:14–33:06 | AI investment cycle, circular funding, bubble | Mandeep Singh | | 36:57–44:07 | Regional bank M&A wave and earnings outlook | Herman Chan |

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Summary in the Show’s Tone

Throughout, the discussion is brisk, filled with expert analysis but maintains Bloomberg’s practical-yet-engaged tone. Guests are candid about both risks and opportunities—whether it’s Kay Her’s wry take on the “belly of the curve” or Mandeep Singh’s pragmatic view on AI hype. Each segment offers actionable insights for market watchers and investors needing to keep a pulse on fast-moving financial, tech, and geopolitical dynamics.

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Transcript

[Mandeep Singh]

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[Kay Her]

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[Scarlett]

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[Host (possibly Nora or Scarlett)]

Bloomberg Audio Studios Podcasts Radio News this is Bloomberg Businessweek daily reporting from the magazine that helps global leaders stay ahead with insight on the people, companies and trends shaping today's complex economy. Plus global business, finance and tech news as it happens. The Bloomberg businessweek Daily Podcast with Carol Massar and Tim Stanweck on Bloomberg Radio. I want to bring in now Kay her. She is US CIO of Global Fixed Income, Currency and Commodities at J.P. morgan Asset Management. And Kate, do you think that we got anything new from this latest Fed minutes? I mean, we knew that Stephen Myron was an outlier and these minutes certainly showed that. But what did we learn in terms of the debate going on inside the Federal Reserve?

[Kay Her]

So Scarlett, first off, I'm glad to be here. Thank you for having me. Nora too. Second off, I think the short answer to your question is no, we didn't learn anything new. And I think one of the best ways to think about whether we've learned anything new is what the market's reaction is. And the market's really not giving US much of a reaction maybe at the margin the minutes are showing us that, that, that, that there was some discussion about maybe we didn't need to do anything, but it was pretty clear that we only had one descent when that was released September 17th. And not a lot of new information in the minutes today.

[Scarlett]

Hey, not a lot of new information. And of course as we're looking at the trade still green across the screen right now, all across the board here when we're looking at equities in particular. But what do you think the Fed should be focused on right now?

[Kay Her]

It's such a great question, Nora. As everybody knows, we've got a government shutdown and we are in an absence of data. So the Fed or the bill? The Bureau of Labor Services did not release the employment data on Friday. It's unlikely unless the government reopens, it's unlikely that we're going to get CPI next week. So what are we looking at? What's the Fed looking at? The next major piece of data that we think is two things I would say. The first is corporate earnings start on October 14th and I think that can be a great indication of what we're seeing from a bottom up perspective on the economy. The second one on a macro perspective that I'm sure the Fed will look at is the Beige Book. So we've got the Beige Book coming out on October 15th. Yeah.

[Host (possibly Nora or Scarlett)]

And I feel like the Beige Book has taken on greater importance in this period of uncertainty where we're not sure if companies are passing along higher cost to their customers or how they're dealing with it. We're kind of in uncharted territory and every company is doing things differently based on the experience of their executives when it comes to corporate earnings. K as someone who is in a fixed income market, what do you watch for? What do you look for? Is it the banks that will really tell you the most about what kind of credit quality we have in this economy?

[Kay Her]

Sure, that's a great thing to think about. I think first off, you know, we're not entirely in unprecedented territory. We have had government shutdowns before and when we take a step back and think about the overall impact to gross domestic product, it tends not to be that material in the grand scheme of life. So from an earnings perspective, I think we're going to be looking for a couple of things. Number one, from the banks, what's the credit quality look at what's the indication of the consumer? As we've seen in the macro data, we've seen some softening in employment. So is that going to flow through into reserves, into credit quality in banks and then from the broader companies in the industrials. What are we seeing in revenue growth versus EBITDA obviously or earnings before interest, taxes, depreciation, cash flow as it were. So what are we seeing in cash flow? I think for the most part companies have very high margins and are they going to protect those margins? Are they going to pass through costs onto consumers and then what's that going to do to demand? I think that's what we'll be looking to looking at.

[Scarlett]

So as we head into earnings season just around the corner here, what sectors in particular are giving you the most concern? Just based off of what you were saying.

[Kay Her]

I'm a bond portfolio manager, I'm paid to worry and lose sleep. So everything gives me concern. You never know where you might see a pocket of distress and it's the unexpected that are the real concerns.

[Host (possibly Nora or Scarlett)]

Well we've seen pockets of stress in the auto sector. When you look at first brands, when you look at tri color, what does that tell you about the state of the consumer, especially at the lower end? You know these were two credit blow ups that took people by surprise and a lot of people will say okay, there's, it's idiosyncratic. There are some maybe fraud issues that are particular to those companies and that may be the case. But these are also sectors that are very much affected by tariffs and they are not the only ones affected by tariffs either.

[Kay Her]

So I think there's a couple of things going on here Scarlett and yes, on a certain level, tree killure and apparently that's how it's pronounced. Oh, thank you. I didn't know that that's your pro tip. I've been saying tri credit for no.

[Host (possibly Nora or Scarlett)]

Thank you tree galore weeks. Really.

[Kay Her]

I think there's a couple of things going on, tree color in particular and I'm not going to talk about specific credits but I think we should take a step back and think about what's going on in the broader economy and broader financial markets. And the reality is there's a lot of cash sloshing around and when there's so much money sloshing around that tends to be the point late cycle where excesses happen. So that tends to be the point. If you went back to the 2000s you tend to see you, it's not uncommon to see corporate malfeasance and it may be in these types of instances where are seeing corporate malfeasance. To answer your question with regard to the consumer, you Know we had been talking for a while about what we referred to as a K shaped economy and that was high income consumers with a lot of exposure to stock markets and were doing very well. Lower income consumers had been hit with inflation. It actually that, that, that seems lower income consumers, he seemed to have stabilized some. We're more focused and concerned about maybe more prime consumers that are going to start repaying student loans, defaults and type of behaviors that we're going to see there.

[Scarlett]

So let's dig a bit deeper into the lack of data that you pointed out just a bit ago here. So we have traders that are really bracing for a range of Fed outcomes here. Some of them even hedging flows favoring outlier dovish scenarios and others focusing more on on the possibility that the Fed forgoes a move at one meeting. How are you thinking about all of this right now as it relates to the bond market?

[Kay Her]

Yeah, a couple of things. I think if you look at what the market is pricing in now, a 25 basis rate to 25 basis point rate cut is almost fully priced in to the market for the October meeting I think. Is it October 25th? So that's almost fully priced in October 29th. 29th. Sorry.

[Host (possibly Nora or Scarlett)]

No, no, no. I mean how could you not? How can anyone not.

[Kay Her]

Just kidding. So the market's pricing almost an entire rate hike in October and then on the December 10th meeting the market's pricing another, let's call it 20 basis points, something like that. But I think the other interesting aspect is that volatility in the rates market has been very low. So you get this base case that the Fed continues to ease and if we go back to the Fed minutes and what the Fed said on the last meeting on September 17 is that they are saying that they intend to do two more cuts this year and that's the base case I think in periods of economic uncertainty and the government shutdown is perpetuating that uncertainty because we're not getting regular economic data updates then I think that logically follows that people worry about tail risk outcomes and they look at unusual patterns in behaviors or in particular markets and worry about what they could glean from those.

[Host (possibly Nora or Scarlett)]

So we don't have any data right now. What we do have are the government auctions of U.S. treasuries because we need to raise money. So that continues is the risk of a tail event tapering off a little bit here. For a while people were monitoring every single auction with bated breath and it feels like we are excelling a little bit here.

[Kay Her]

We still monitor them with bated breath. And I think off the top of my head, Today's auction at 1 o' clock was something like 91% end users and something like a tail of 0.45 basis points. So you're right, that's a strong auction and I think that has settled down. I think concerns about the U.S. government, U.S. treasury as a safe haven have abated as people have gotten more comfortable with the macro environment and the geopolitical environment.

[Scarlett]

So safe haven here may be abating. But what do you think is the next story here?

[Kay Her]

Next story? Gosh, I don't know. I'm not the reporter on this. We're just, we're just. I want to leave that to you. In the markets, I think it's probably earnings. I think it's going to be. You've got earnings kicking off on. Look, as you all said, in the absence of any macroeconomic data being released by the federal government, I think people are going to obsess about every single earnings release and anything that they can glean from that Specifically in as you all know, there's been an extraordinary amount of investment and in AI and looking maybe starting to look for returns on that. Look at that investment cycle. So I think that's going to be important. I think to Scarlet's earlier question always credit quality, return of, of capital to shareholders, increases in dividends, looking at flows, I think that's, that's, that's the next story. But yeah, where do you want to.

[Host (possibly Nora or Scarlett)]

Be on the yield curve?

[Kay Her]

Yeah, we still like the belly of the curve.

[Host (possibly Nora or Scarlett)]

Everyone loves the belly of the curve.

[Scarlett]

Everyone loves the belly.

[Kay Her]

Isn't it just fun to say though, the belly of the curve. Right. We come geeks but yeah, I think we think that the, we think that the rates are going to continue to be pretty rangebound here between 375 and four and a quarter. And we continue to like high quality intermediate duration credit. You know, as my dear colleague Ian Steely says, spreads are tight, but yields are right. And that's really what the, what the driver is for investors. You know, they're not investors who are thinking about investing for pension funds, endowment funds, individual investors. They care more about what the yield is, not what the spreads are.

[Scarlett]

So of course as we mentioned, the belly is what everyone's talking about. But is there any sort of opportunity on the other end?

[Kay Her]

I mean there are always opportunities, but where we would are most comfortable in the yield curve is really in the belly.

[Host (possibly Nora or Scarlett)]

What about gold? I'm curious what you think about the relationship of gold to fixed income. These days gold continues to zoom higher. Now $4,061 an ounce and just pierced $4,000 this morning.

[Scarlett]

Insane.

[Host (possibly Nora or Scarlett)]

Yeah, so. And there seems to be very little that people can identify that's going to stop this momentum. It driven by inflows into gold ETFs and also central bank buying. How does that play off of what's happening in Treasuries or doesn't?

[Kay Her]

Yeah, so you've just hit on a key aspect of it, Scarlett. So there are obviously two components of any market, supply and demand. And you just hit the two main components of demand and that central bank buying and that's the ETF buying. I think the ETF wrapper is providing people with an easily accessible way to buy gold instead of buying bullion and storing it someplace. So you've got an increase in demand for gold. On the other side. If you look at the supply of gold, it's really been pretty constant. So you've got this mismatch between supply and demand. I think in terms of the relationship that we've seen historically, gold has been correlated with real yields. So when you see real yields come down, gold prices go back up. So why is that? The opportunity cost is lower. If you can't get a high rate in Treasuries or in risk free assets then maybe gold, gold becomes more attractive. But what we've seen really post pandemic that relationship has broken, has broken down. And I think it's really a function of the supply and demand. But I think the point would be that that's broken down really over the last five years. So I don't read anything different in gold pricing about, you know, US exceptionalism or the dollar flight to currency or anything like that. I think it's old fashioned supply and demand fundamentals.

[Host (possibly Nora or Scarlett)]

You don't see it as part of the debasement trade that everyone keeps talking about?

[Kay Her]

Not really, no.

[Host (possibly Nora or Scarlett)]

You don't buy into that. I guess someone who's the global head of fixed income, you know, probably doesn't see much value in that but had to ask it.

[Kay Her]

I mean, do you think we have more room to run here on gold? You know my only strong view on that is I like it as jewelry as you can see from my necklace. I don't, I'm not enough in the weeds on supply and demand to gold to have, have a, have a strong view on that. I think I've got a good handle on what's going on, the fundamentals and why we've seen prices going, but I'm not a technical analyst on gold and whether we've got more room to run.

[Host (possibly Nora or Scarlett)]

All right, Kay, always appreciate your joining us. Thank you much for coming into Studio K. Her is U.S. cIO of Global Fixed Income Currencies and Commodities at JP Morgan Asset Management.

[Herman Chan]

Stay with us.

[Mandeep Singh]

More from Bloomberg Businessweek Daily.

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Coming up after this.

[Scarlett]

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Hear her take on the real key.

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Us live on YouTube. All right, let's head over back to Europe because we now have some more details coming out of France, and I want to bring in Stephen Carroll. He is of course the host of Bloomberg Daybreak Europe. And Stephen is an expert on all things France. He's certainly my expert on all things France. We go to him constantly for the latest and there's been a lot to stay on top of here. Stephen Sebastian Le Cornu, who is the outgoing prime minister of France, says that Emmanuel Macron, the president of France, can name a new prime minister in the next 48 hours. He can do that. He may not do that. Where does that leave us? What does this mean for his government?

[Stephen Carroll]

Scarlet Things are a little bit clearer now than they were earlier today, but not much. What we know is that the theory that fresh elections could be called for the national assembly looks less likely than it did this morning. For example, we what Sebastian Cornu has just said on French television is that he believes there is now a political situation that allows Emmanuel Macron to name a new prime minister and take the next spin on this wheel that we've been on since June of last year of trying to build a minority coalition in Parliament that's able to pass a French budget. Now, he did this after the 48 hours of intense consultations with political leaders from across the political spectrum, not all parties, but most. And what he was trying to do was see if among those groups he could find enough support for central ideas that he believes that that could lead to a budget. Essentially, he wants somebody else to take the reins from here. That's what he's told the president, Emmanuel Macron. He came to this interview this evening on French television straight from the Elysee palace, where he spent an hour and 40 minutes with the president, briefing him on what he'd learned over the past two days. He now expects the president to name somebody else to take on the job to lead those discussions. He was asked repeatedly, should it be a candidate from the Left party. He said it's up to the president to decide should it be a technocratic prime minister? It's up to the President to decide. He has made it clear, though, is that nobody who's going to be in this government should have presidential ambitions for the 2027 presidential election. That looks like he's pointing towards a sort of technocratic arrangement, but very much involving the politicians who are in the national assembly now who are on the political scene to be able to put that compromise together, because they have some pretty big issues they have to decide. And the calendar on this budget is already running very, very tight. So the rush is to try and get something done in time that can be passed through Parliament and actually keep the public finances running over into next year, avoiding the sort of emergency measures that we saw at the end of last year, which, as we know, didn't go down very well on the bond markets.

[Scarlett]

Can investors force the hand of the centrist parties who must decide whether to play ball with Le Corno or for that matter, look around.

[Stephen Carroll]

Look. That's a really good question, because what we've seen so far is a little bit of tension in markets, but not something that our own economists or any of the market analysts that we've been speaking to would describe as a fiscal or financial crisis. In France, this is still a political crisis. We have seen the spread of bond deals between France and Germany widen, although it did actually tighten a little bit today when the Cornu signaled this morning that he had been making some progress in these talks. Realistically looking at it for markets right now, nothing's really changed in the past week, or really since the middle of the summer when the last Prime Minister, Francois Beirut, proposed his budget. They're still in this phase of negotiation. There are still signals that a compromise could be found. When markets will run out of patience with France is very much an open question. You don't have the cliff edge of a government shutdown in France in the way that you do in the United States, because the way it works is the system runs into sort of keeping the lights on measures where taxes are collected and public services operated. That's not a situation any politicians want to be happening. It's not a situation the public wants to happen either. But the cliff edge moment looks that little bit further away, at least for now. The situation that markets were most worried about is what fresh elections could produce. National assembly elections, or in an extreme case, a fresh presidential election. Both of those look off the cards this evening, but things are moving very quickly. And who Emmanuel Macron could pick in 48 hours time is going to be a very interesting question.

[Host (possibly Nora or Scarlett)]

So very quickly, if you know legislative elections would be unsettling to investors. I'm guessing that presidential elections, Macron actually resigning, as some in the opposition parties want him to do, is not something investors would welcome.

[Stephen Carroll]

No, indeed. I mean, that would be a much more dramatic shift in France's both fiscal approach and some of those big heavy issues like the pension reforms, which is the central thing politicians here are fighting over at the moment. If that were to be disrupted, that would change the fiscal perceptions of France. We've also got some ratings agency decisions in to look out for to a presidential election would be very dramatic. A National assembly election would be less dramatic. And getting a new prime minister, well, that could produce another shrug from markets.

[Host (possibly Nora or Scarlett)]

All right, thank you so much, Stephen Carroll. Fantastic context there. Stephen Carroll is host of Bloomberg Daybreak Europe, but he is at least my go to authority on all things in France. Certainly the political crisis that has been brewing for over a year now.

[Herman Chan]

This is the Bloomberg Businessweek Daily Podcast.

[Producer/Announcer]

Listen live each weekday starting at 2pm.

[Herman Chan]

Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app.

[Producer/Announcer]

You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg 1130.

[Interviewer/Co-host]

And now so many AI deals and so many questions. So to answer those questions, let's bring in Mandeep Singh, who is the global head of technology research for Bloomberg Intelligence, who can tell us all about whether we are in fact in an AI bubble. So Mandy, thank you so much for joining us today. Okay, let's talk about this concept of circular funding to start with. Why has it created such a fuss amongst market observers and what is it?

[Mandeep Singh]

Well, I guess the easiest way to frame it is a company like OpenAI doesn't have the balance sheet of Meta or a Microsoft or Google in terms of the huge AI infrastructure build out that they want to go ahead with. And so far they relied on Microsoft to consume all the data center capacity they needed for ChatGPT and the enterprise business they have. And now they feel the numbers and the demand is getting so big that they are planning ahead. They are looking two, three years ahead where they would need probably two or three times more capacity than they are consuming right now. And for that, first they did a deal with Oracle, $300 billion deal that spans almost five years. Then they did this deal with Nvidia actually to build 10 gigawatt of data center capacity. Now the interesting part, to answer your question on circular funding is Nvidia is spending, you know, $10 billion and giving it to OpenAI for them to add up to 10 gigawatts of capacity, and that investment could go up to 100 billion. So every gigawatt involves almost $40 billion of spend. That's a rough calculation. So you can imagine for 10 gigawatts, we are talking $400 billion in spending out of that. Nvidia is going to put $100 billion. So 1/4 of that is coming from Nvidia. The rest, OpenAI still has to raise it through a private vehicle or some other type of instrument. But that's the challenge. OpenAI has to grapple with and figure out the rest of the funding. And they feel they can do that in conjunction with. I mean, I'm not even talking about the AMD partnership, but that's essentially what they're trying to do, is to build out data centers on their own, as opposed to relying on hyperscalers.

[Scarlett]

And so we're going to get to the whole idea of an AI bubble here shortly. But do these companies have all the money to back it up? Do they have the financing to support these efforts? And we're throwing around a lot of big numbers here. And it feels like with the tech space, it doesn't matter what number you throw out. You could find some company that's saying that that's what they're going to spend. When we think about capex, so you're right.

[Mandeep Singh]

The traditional business used to be asset light. You needed capex spend of maybe 30 to 35 billion dollars if you're Google or a Metta, and that would suffice for the whole year, and it would stay, you know, around 5 to 10%, give or take. But now it's already, you know, two times larger than that, $35 billion. And next year it's going to cross $100 billion. It's going to be three times larger for existing companies that run data center assets. And the reason for that is the compute has gotten so expensive. Plus you need more compute for generative AI. So think of traditional search. It needed compute that equated to maybe 0.02 cents per query. Now, with generative AI, that chatbot query is almost 10 times more expensive than your traditional search query. So that's where the compute demand is coming from. And these companies have no choice but to invest in infrastructure because users are spending more time. I mean, Google's token Usage has grown 50x, so people are consuming a lot of these products. And if the pace continues at this level, then you have no choice but to add more capacity. And that's why the numbers are so big here.

[Interviewer/Co-host]

Well, you know, talking about it seems like it really is just an insatiable appetite for investment into the space. Right now we're talking about not just kind of the chips and the service, but also the physical space. But when you compare that with the flow of money and investment into the stock, whether it's from investors on the street or companies looking to get in on it, it seems like there are a lot of willing players still in the market. Do you think there really is such a mismatch between the flow of money coming out and also the demand for funding to create and further fuel this infrastructure situation?

[Mandeep Singh]

Yeah, everyone I think now realizes that this is a very long Runway in terms of both the build out of the infrastructure and how it will eventually monetize. I mean, look, there is a lot of upfront investment and that's where, you know, the hyperscaler capex guys, they were willing to invest money with their operating cash flow. They have the balance sheet, the Google, Metta, Microsoft, they have the balance sheet to put their operating cash flow in the form of capex. But now the numbers are getting even bigger. And so If Google generates $100 billion in operating cash flow, now they are talking about spending more than that hundred billion. And that's where the private guys come in. Everyone feels it's an attractive asset because you can rent it, you can generate a return over three or four years. And that's where I do think there will be a lot more of these deals. I mean, the whole new cloud space has come about literally because of this demand and you know, willingness to rent compute from someone else.

[Scarlett]

Right. Lots of activity happening in the AI space. Can't stop, won't stop. A lot of bubble allegations too. Anything that you can point to that would dispute that?

[Mandeep Singh]

Well, right now we are still in that phase where the demand far outstrips supply. And to me the biggest indicator of that is what Nvidia tells us on their earnings call in terms of their margins, their pricing. I mean right now they're in Blackwell architecture. Their hopper chip prices have started to go up because the demand is far outstripping supply. So when you see a trend like that, yes, there will be probably some misallocation of capital that we'll find out in retrospect that this capital was misallocated in some way. But right now it's very hard to question the pace of this build out because there's still that big gap between demand and supply. And until that narrows, it's hard to question why capital is going in this Domain because I mean it should.

[Interviewer/Co-host]

Well, thank you for mentioning the earnings season because that's exactly what we want to be asking you about. Obviously capex was such a big theme last season, especially for Nvidia. But really just in general, the magnificent seven companies and anyone involved in the space, I think that's still the big question for investors is, is what companies are spending on AI, does that justify the returns that they're getting now and in the future? What would you say to those investors kind of weighing that, that balance as we head into next season's earnings?

[Mandeep Singh]

I mean look at the year to date performance of MAG7. The stocks that have outperformed are the ones that have spent their capex that have increased their spending on AI, not the ones that have been conservative. Your Apple and Amazon haven't outperformed.

[Kay Her]

Right.

[Scarlett]

Nvidia the best performer.

[Mandeep Singh]

I mean Nvidia is not the one who is putting capex dollars. But look at, you know, Google, they I think so that's where I do think the market is still rewarding companies that are spending on AI. And if you have been conservative and just focused on margins, your multiple has shrunk and that's the sort of mood we are in. So my feeling is you will see this earnings season also reward companies that show higher revenue growth even if they have large businesses. If that AI component is accelerating, you will see multiples expanding and that's where there is scope to be positively surprised.

[Scarlett]

Are valuations too high though?

[Mandeep Singh]

I mean you could argue that, you know, in certain pockets for maybe the index as a whole.

[Producer/Announcer]

Okay.

[Mandeep Singh]

But when you look at individual companies, I go back to Mag7, these are wonderful businesses that are investing in AI, which is everyone deems, you know, will have high usage. The question is how will they monetize? And if they can answer that question in terms of, you know, how it monetizes over time, not in the next 12 to 24 months, but over time I think investors will be happy.

[Interviewer/Co-host]

Now of course part of the jitters around this, whether AI is in a bubble and, and all that is really this idea of concentration risk. Right. And the fact that more and more gains in the S&P 500 in the US equity market in general are being driven by such a small number of companies, is that something that investors really need to be worrying so much about when as you say, at the moment demand for these companies products and services is still far outstripping the supply.

[Mandeep Singh]

Yeah. So I mean again the picks and shovels trade has carried on now we are in that phase where the LLM frontier models are clear, which ones are those and which ones have the least. And now it's about how the other software companies adapt in terms of using these models as a distribution layer and making sure they can thrive in the world where LLMs are also part of the tech stack. So we'll start to see that pan out over time. Not every company will be as dominant as they used to be, but then the businesses that end up using LLM as an intelligence layer and continue to show positive surprises, I think you will see a rerating in their multiple well.

[Interviewer/Co-host]

Thank you so much Mandeep as always for providing us with your excellent insights into this space. Now for more insights from Mandeep and the Bloomberg Intelligence team, make sure to check out their Tech Disruptors podcast that features conversations with thought leaders and management teams on disruptive trends in the tech world, covering everything from AI to EVs to VR and beyond. Find it at Apple, Spotify or wherever you get your podcasts.

[Herman Chan]

Stay with us.

[Producer/Announcer]

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[Host (possibly Nora or Scarlett)]

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[Interviewer/Co-host]

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[Scarlett]

We need to move over into the land of banks. I mean, earnings season is just around the corner. You blink and here we are again. Let's talk about banks. Christine, I think that that would be such an interesting discussion here for our viewers. We're joined of course by Herman Chan. He's a senior analyst for U.S. regional banks at at Bloomberg Intelligence and he is here with us happily in the Interactive broker studio. Break down this deal that's going on right we've got fifth, third. This is an 11 $11 billion deal sparking hopes for a bank merger wave. Is there a wave?

[Herman Chan]

There's a bit of a crest right now. I would say that this deal with 5th, 3rd and Comergate comes on the heels of a few other large regional bank deals. PNC is buying first bank, which is mostly in Colorado and Arizona, and then Huntington's, also a smaller competitor to Comerica's in Texas as well, and Veritech. So you're seeing some percolating activity. A lot of that is really driven by deregulation efforts under the Trump administration. That's encouraging more bank M and A. And also the secondary factor is bank stock prices have improved so They've got the currency to do deals.

[Interviewer/Co-host]

Talk to us about this wave, right, of, of just mergers in particularly in the regional banking sector. It wasn't too long ago that, you know, we were having issues in this particular space. Talking about a couple of years ago. Now fast forward to the sort of environment where there are a lot of active deals. Do you think that this kind of helps mitigate some of the concerns that we got from that regional banking crisis from a few years?

[Herman Chan]

Right. So one of the key lessons from the SBB failures that also toppled First Republican signature was that deposits are the lifeblood of banks. And you really need to protect those deposits during events of uncertainty because the positive flight is real. That's really what took down svb. And this deal with Comerica and Fifth Third is a direct reflection of that. While Comerica really didn't have the same deposit flights as svb, they did have some and it really showed the need to have a more diversified deposit base that is more retail deposits that fall under the FDIC insurance. So there's no reason to take your money out of a bank bank. And that's really one of the third key expertises is their consumer banking and branch branch banking expertise. And that's, that's driving some of that merger activity that we're seeing today.

[Scarlett]

So taking a look at your report that you recently wrote, you say that Comerica's management missteps and structural weaknesses in its funding profile have hindered the top line trajectory and profitability here. Are these risks that Fifth Third can afford to be exposed to?

[Herman Chan]

Yeah, that's a good question. What's great is that through the magic of bank merger accounting, when these deals happen, you get to reset on day one. So the issues that affected Comerica are effectively less of an issue for Fifth Third. And so they start off with a clean slate and they can manage their rate sensitivity and asset management liability without some of the legacy issues that Comerica had, both on the funding side, as I mentioned earlier, but also on the swap side where, where they added some ill time swaps that really hindered them when rates were staying high.

[Interviewer/Co-host]

Yeah. And what do you make of the equity reaction or I guess like the investor reaction to this? Is this a deal that, you know, as you mentioned, you know, there are some synergies here, there are some benefits, particularly for Comerica, but what are we kind of gleaning from the immediate reaction industry to this?

[Herman Chan]

Yeah, I think the immediate reaction is is there going to be more ahead? I think the, the analyst community and the investor Community understood the reason why Comerica was sold and particularly why they chose Fifth Third as a partner. So it makes sense that that would happen really. Is there going to be more consolidation ahead? There are a number of regional banks around the same size as the third and PNC and Huntington banks like Regions and M and T and Citize. And that's going to be a big topic on the 3Q earnings calls over the next couple of weeks.

[Scarlett]

Is there more room for consolidation? I mean personally when I think I feel like we have so many regional banks here in the US and you can enlighten me as to how that compares globally. But we have so many regional banks here. Is there more room for mergers, some consolidation here?

[Herman Chan]

There is, there's about 4,500 banks in the United States. And so is there really a need for that many? I would say no.

[Scarlett]

End of the Street. Right.

[Herman Chan]

And so there's going to inevitably be consolidation. These smaller banks, they not only have to compete with these regionals that I'm talking about, but also the largest banks in the United States like Chase and B of A that are expanding organically and opening up branches in areas like Alabama and Mississippi and Pittsburgh and Washington D.C. and, and the fintech challenge is real. You've seen fintechs come in and really take share banks. Fintechs like Chime and sofi are really gaining a lot of new customers and to the, to the detriment of banks big and small. So it's harder to compete. And then you have the technology and compliance issues that all banks have to deal with because of the regulations that they have to adhere to. So it makes for a really tough operating environment. And so that's something that, that is pushing a lot of banks to sell.

[Interviewer/Co-host]

Yeah. Well, we're of course kicking off earnings season next week with the biggest Wall street banks reporting. What are you in particular looking out for when that starts?

[Herman Chan]

Yes, so the largest Wall street banks kick off next week. I think a lot of it will be what's happening in capital markets driving trading activity. Fixed income equity trading activity. IPOs have been really picking up over the past several months. So that's something that, that bodes well for, for the capital markets activity. And also on the lending side, commercial lending has been pretty strong, particularly lending to non bank financial institutions. And so it seems like there is some positives. And also the interest rate hike cut that happened in September should help on the deposit funding side as well.

[Scarlett]

And I mean you mentioned the rate cut that we just had. What about this October? I Mean are you if there is one right this October, does that change your thinking at all?

[Herman Chan]

Yeah, so it's interesting. Banks typically will be able to reduce their funding costs. They cut their deposit rates for their depositors so that's an immediate benefit. On the other hand there, there's still some, some juice left with, with a lot of the fixed rate assets that the banks added onto their balance sheet when rates were zero. So those are actually repricing still higher today. And so there is some really positive sort of dynamics going on for, for banks net interested income. So that will continue to flow through over the next several quarters.

[Interviewer/Co-host]

Yeah, well, I mean, yeah, given that we what we've seen from the Federal Reserve though and their potential further rate cuts this year, I mean just generally is the rate conversation still relevant for bank or has that been overtaken by just the deal bonanza that we've seen over the last quarter?

[Herman Chan]

Yeah, that's, that's a good question. Rain Banks are, are naturally reflecting the rate environment and how they're positioned for, for rate changes. A lot of the banks have really hedged their exposure so there's less of variability going forward for, for a lot of the banks that I cover. So that, that's helpful. They've already taken some of the hits on their net interest income by, by adding these swaps and insurance on their, on their balance sheets. And then I think the real, the real positive aspect of my coverage right now is just there's more M and A activity that really gets the juices flowing from analysts investors and it's really good to see after the Biden administration because it seemed like the prior administration really did not not have a positive view on bank M and A and it's been a real 180 from, from the current administration and that's why you're seeing more activity today.

[Scarlett]

I'm looking at the BKX index actually quickly. KBW regional banks down 1.2% at the closing bell. Christine.

[Interviewer/Co-host]

Wow. Yeah, well I mean a lot to look out for then when it comes to M and A deals. But thank you so much once again to Herman Chan who is our senior analyst for U.S. regional banks from Bloomberg Intelligence.

[Host (possibly Nora or Scarlett)]

This is the Bloomberg Business Week daily podcast available on Apple, Spotify and anywhere else you get.

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[Mandeep Singh]

About stuff related to money.

[Kay Her]

Well, today's your lucky day.

[Scarlett]

I'm Matt Levine.

[Kay Her]

And I'm Katie Greifeld.

[Scarlett]

And we are the hosts of Money Stuff, the podcast. Every Friday, we dive into the top stories about Wall street, finance and other stuff.

[Mandeep Singh]

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[Kay Her]

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[Scarlett]

You can listen to Money Stuff the Podcast on Apple Podcasts, Spotify, or wherever.

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